Budgetary Planning Managerial Accounting, Fifth Edition.

Budgetary Planning

Managerial Accounting, Fifth Edition

Budget

A formal written statement of management’s plans for a specified future time period, expressed in financial terms.Primary way to communicate agreed-upon objectives to all parts of the company.Promotes efficiency.Control device - important basis for performance evaluation once adopted.

Historical accounting data on revenues, costs, and expenses help in formulating future budgets.

Accountants normally responsible for presenting management’s budgeting goals in financial terms.

The budget and its administration are, however, entirely management’s responsibility.

Requires all levels of management to plan ahead and formalize goals on a recurring basis.

Provides definite objectives for evaluating performance at each level of responsibility.

Creates an early warning system for potential problems.

LO 1: Indicate the benefits of budgeting.LO 1: Indicate the benefits of budgeting.

Facilitates coordination of activities within the business.

Results in greater management awareness of the entity’s overall operations and the impact of external factors.

Motivates personnel throughout organization to meet planned objectives.

LO 1: Indicate the benefits of budgeting.LO 1: Indicate the benefits of budgeting.

May be prepared for any period of time.Most common - one year.Supplement with monthly and quarterly budgets.Different budgets may cover different time periods.

Long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations.

Short enough for reliable estimates.

Continuous twelve-month budget .Drop the month just ended and add a future month.Keeps management planning a full year ahead.

LO 2: State the essentials of effective budgeting.LO 2: State the essentials of effective budgeting.

LO 2: State the essentials of effective budgeting.LO 2: State the essentials of effective budgeting.

Three basic differences between Budgeting and Long Range Planning:

Time period involved, Emphasis, and

Detail presented,

Budgeting is short-term – usually one year.

Long range planning - at least five years.

A set of interrelated budgets that constitutes a plan of action for a specified time period.

Contains two classes of budgets:

Operating budgets:Individual budgets that result in the preparation of the budgeted income statement – establish goals for sales and production personnel.

Financial budgets:The capital expenditures budget, the cash budget, and the budgeted balance sheet – focus primarily on cash needs to fund operations and capital expenditures.

LO 3: Identify the budgets that comprise the master budget.LO 3: Identify the budgets that comprise the master budget.

First budget prepared.

Derived from the sales forecast.

Management’s best estimate of sales revenue for the budget period.

Every other budget depends on the sales budget.

Prepared by multiplying

expected unit sales volume for each product by

anticipated unit selling price.


Mussatto Company estimates that unit sales will be 10,000 in quarter 1; 12,000 in quarter 2; 14,000 in quarter 3 and 18,000 in quarter 4. Sales price: $80 per unit.Prepare the sales budget for quarters for the year ending Dec 31, 2011


Example – Mussatto CompanyExample – Mussatto Company

Illustration 9-3

Mussatto CompanySales Budget

For the year ending Dec 31st, 2011

1 2 3 4 Year

Expected unit

Sales

10,000 12,000 14,000 18,000 54,000

Unit Selling price

X 80.00 X 80.00 X 80.00 X 80.00 X 80.00

Total Sales

800,000 960,000 1,120,000

1,440,000

4,320,000

Trusler Electronics Inc. produces and sells two models of pocket calculators, XQ -103 and XQ -104. The calculators sell for $12 and $25, respectively. Because of the intense competition Trusler faces, management budgets sales semi-annually. Its projections for the first 2 quarters of 2011 are as follows:

Unit Sales per QuarterProduct Qrt 1 Qrt 2

XQ -103 20,000 25,000XQ -104 12,000 15,000

No changes in selling prices are anticipated.Instructions: Prepare a sales budget for the 2

quarters ending June 30th 2011. List the products and show for each quarter and for the 6 months, units, selling price and total sales by product and in total.

Quarter 1 Quarter 2 Six Months

Product Units Price Total Sales

Units Price

Total Sales

Unit totals

Total Sales

XQ 103 20,000 $12 $240,000 25,000 $12 $300,000 45,000 540,000

XQ 104 12,000 $25 $300,000 15,000 $25 $375,000 27,000 675,000

Total $540,000

$675,000 72,000 1,215,000

Shows the units that must be produced to meet anticipated sales.

Derived from sales budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units).

Required production in units formula:

Essential to have a realistic estimate of ending inventory.


Illustration 9-4

Sales Budget data Mussatto Company are given in the last example (BE 9-2). Management desires to have an ending finished goods inventory equal to 20% of the next quarter’s expected unit sales. Prepare a production budget by quarters for the first 6 months of 2011


ExampleExample – Mussatto Company– Mussatto Company

Illustration 9-5

Mussatto CompanyProduction Budget

First two quarters in 2011

1 2 6 Month Totals

Expected Unit Sales

10,000 12,000

ADD:

Desired Finished Goods Units

2,400 2,800

Total Required Units

12,400 14,800

LESS:

Beginning Finished Goods Inventory

2,000 2,400

Required production units

10,400 12,400 22,800

Shows both the quantity and cost of direct materials to be purchased.

Derived from the direct materials units required for production (from the production budget) plus the desired change in ending direct materials units.

Budgeted cost of direct materials to be purchased = required units of direct materials × anticipated cost per unit.


Illustration 9-6

Hannon Company has 1,600 pound of raw materials in its December 31,2011 ending inventory. Required production for January and February 2012 are 4,000 and 5,500 units respectively. Two pounds of raw materials are needed for each unit, and the estimated cost per pound is $6. Management desires an ending inventory equal to 20% of month’s material requirements. Prepare the direct material budget for January.

Hannon CompanyDirect Materials BudgetFor the Month Ending January 31st, 2012

Units to be produced 4,000

Direct materials per unit X 2

Total pounds required for production 8,000

Add: Desired ending inventory(20% X 5,500 X 2) 2,200

Total materials required 10,200

Less: Beginning materials inventory 1,600

Direct materials purchases 8,600

Cost per pound X $6

Total cost of direct materials purchases

$51,600

On January 1, 2012 the Lovell Company budget has reached agreement on the following data for the 6 months ending June 30th 2010

Unit Sales First Qtr 5,000; Second Qtr 6,000; Third Qtr 7,000;

Ending Raw Materials inventory: 50% of the next quarters production requirements

Ending finished goods inventory: 30% of the next quarter’s expected sales units

Third Quarter Production: 7,250

The ending raw materials and finished goods inventories at Dec 31, 2011, follow the same percentage relationships to production and sales that occur in 2012. Three pounds of raw materials are required to make each unit of finished goods. Raw materials purchased are expected to cost $4 per pound.

QRT 1 QRT 2 Six Months

Expected unit sales

5,000 6,000

Add: Desired ending finished goods units

1,800 2,100

Total required units

6,800 8,100

Less: Beg finished goods units

1,500 1,800

Required production units

5,300 6,300 11,600

Instructions:a)Prepare a production budget by quarters for the 6 – month period ended June

30th 2012.

QRT 1 QRT 2 Six Months

Units to be produced X Direct Materials per unit = total pounds needed for production

5,300X 315.900

6,300X 318,900

Add: Desired ending direct materials (pound) = total pounds

9,45025,350

10,87529,775

Less: Beginning direct materials (pounds) = Direct materials purchased

7,950

17,400

9,450

20,325

Cost per pound X $4 X $4

Total cost of direct material purchased

$69,600

$81,300 $150,900

Instructions:b.Prepare a direct materials budget by quarters for the 6 – month period ended June 30th 2012

Shows both the quantity of hours and cost of direct labor necessary to meet production requirements.

Critical in maintaining a labor force that can meet expected production.

Total direct labor cost formula:


Illustration 9-8


Example – Cobb Company BE9-Example – Cobb Company BE9-5 5

For Cobb Company, units to be produced are For Cobb Company, units to be produced are 5,000 in quarter 1 and 6,000 in quarter 2. It 5,000 in quarter 1 and 6,000 in quarter 2. It takes 1.5 hours to make a finished unit, and takes 1.5 hours to make a finished unit, and the expected hourly wage rate is $14 per the expected hourly wage rate is $14 per hour. Prepare a direct labor budget by hour. Prepare a direct labor budget by quarters for the 6 months ending June 30, quarters for the 6 months ending June 30, 20112011


Example – Cobb Company BE9-Example – Cobb Company BE9-5 5 Cobb Company

Direct Labor BudgetQuarters 1 and 2 Ending June 30, 2011

Quarters

1 2 Six MonthsUnits to be produced 5,000 6,00011,000DL time/unit X 1.5 hrs X 1.5 X 1.5hrsTotal DL hours 7,500 9,00016,500Direct Labor/hour $14.00 $14.00$14.00Direct labor cost $105,000 $126,000 $231,000

Shows the expected manufacturing overhead costs for the budget period.

Distinguishes between fixed and variable overhead costs.

BE9-6 For Eckert Inc., variable manufacturing overhead costs are expected to be $20,000 in the first quarter of 2011, with $4,000 increments in each of the remaining three quarters. Fixed overhead costs are estimated to be $35,000 in each quarter. Prepare the manufacturing overhead budget by quarters and in total for the year.



Illustration 9-10

Quarter

1 2 3 4 Year

Variable costs

Fixed costs

Total manufacturing overhead

$20,000

35,000

$55,000

$24,000

35,000

$59,000

$28,000

35,000

$63,000

$32,000

35,000

$67,000

$104,000

140,000

$244,000

BRIEF EXERCISE 9-6ECKERT INC.

Manufacturing Overhead BudgetFor the Year Ending December 31,

2011

Important end-product of the operating budgets.

Indicates expected profitability of operations.

Provides a basis for evaluating company performance.

Prepared from the operating budgets:Sales Budget,Production Budget,Direct Materials Budget,Direct Labor Budget,Manufacturing Overhead Budget, and

Selling and Administrative Expense Budget.

LO 4: Describe the sources for preparing the budgeted income statement.LO 4: Describe the sources for preparing the budgeted income statement.

Paige company has completed all of its operating budgets. The sales budgets for the year shows 50,000 units and total sales of $2,000,000. The total unit cost of making one unit of sales is $22. Selling and administrative expenses are expected to be $300,000. Income taxes are estimated to be $150,000. Prepare a budgeted income statement for the year ending December 31, 2011

PAIGE COMPANYBudgeted Income Statement

For the Year Ending December 31, 2011

Sales $2,000,000Cost of goods sold (50,000 X $22) 1,100,000Gross profit 900,000Selling and administrative expenses 300,000Income before income taxes 600,000Income tax expense 150,000Net income $ 450,000

Shows anticipated cash flows.

Often considered to be the most important output in preparing financial budgets.

Contains three sections: Cash Receipts, Cash Disbursements, and Financing.

Shows beginning and ending cash balances.

LO 5: Explain the principal sections of a cash budget.LO 5: Explain the principal sections of a cash budget.

Cash Receipts Section:Includes expected receipts from the principal sources of revenue – usually cash sales and collections on credit sales.Shows expected interest and dividends receipts as well as proceeds from planned sales of investments, plant assets, and capital stock.

Cash Disbursements Section:Includes expected cash payments for direct materials and labor, taxes, dividends, plant assets, etc.

Financing Section:Shows expected borrowings and repayments of borrowed funds plus interest.

LO 5: Explain the principal sections of a cash budget.LO 5: Explain the principal sections of a cash budget.

Sales Budget: Starting point and key factor in developing the master budget.

Use a purchases budget instead of a production budget.

Does not use the manufacturing budgets (direct materials, direct labor, manufacturing overhead).

To determine budgeted merchandise purchases:

LO 6: Indicate the applicability of budgeting in nonmanufacturing companies.

Critical factor in budgeting is coordinating professional staff needs with anticipated services.

Problems if overstaffed:Disproportionately high labor costs,Lower profits due to additional salaries, and / orIncreased staff turnover due to lack of challenging work.

Problems if understaffed:Lost revenues because existing and future client needs for services cannot be met, and / orLoss of professional staff due to excessive work loads.

LO 6: Indicate the applicability of budgeting in manufacturing companies.

Just as important as for profit-oriented company.However, budget process differs significantly from that of a profit-oriented company.Budget on the basis of cash flows (expenditures and receipts), not on a revenue and expense basis.The starting point is usually expenditures, not receipts.Management’s task is to find receipts needed to supportplanned expenditures.Budget must be strictly followed,overspending often illegal.

LO 6: Indicate the applicability of budgeting in nonmanufacturing companies.

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Budgetary Planning Managerial Accounting, Fifth Edition.

Documents

budget period

master budget

budget prepared

financial budgets

cash budget

different budgets

quarterly budgets

classes of budgets