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0. 21. Budgeting. 0. After studying this chapter, you should be able to:. Describe budgeting, its objectives, and its impact on human behavior. Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. 0.

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21

Budgeting


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After studying this chapter, you should be able to:

  • Describe budgeting, its objectives, and its impact on human behavior.

  • Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.


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After studying this chapter, you should be able to:

  • Describe the master budget for a manufacturing business.

  • Prepare the basic income statement budgets for a manufacturing business.

  • Prepare balance sheet budgets for a manufacturing business.


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Objective 1

Describe budgeting, its objectives, and its impact on human behavior.


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21-1

Budget

A budget charts a course for a business by outlining the plans of the business in financial terms.


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Estimated Portion of Your Total Monthly Income That Should Be Budgeted for Various Living Expenses

21-1

Savings

8%

Entertainment

Housing

6%

30%

Transportation

15%

Clothing

Utilities

7%

5%

Other

4%

Food

Medical

6

5%

20%


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Establishing specific goals

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21-1

Objectives of Budgeting

  • Executing plans to achieve the goals

  • Periodically comparing actual results to the goals


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21-1

Planning

Budgeting supports the planning process by requiring all organizational units to establish their goals for the upcoming period. These goals motivate individuals and groups to perform at high levels. Planning also motivates employees to attain goals andimprove overall decision making.


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21-1

Directing

The budget can be used to direct and coordinate operations in order to achieve the stated goals.


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21-1

Responsibility Centers

The budgetary units of an organization are called responsibility centers. Each responsibility center is led by a manager who has the authority over and responsibility for the unit’s performance.


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21-1

Controlling

As time passes, the actual performance of an operation can be compared against the planned goals. This provides prompt feedback to employees about their performance. If necessary, employees can use such feedback to adjust their activities in the future.


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21-1

Human Behavior and Budgeting

Human behavior problems can arise if—

  • the budget goal is too tight and very hard for the employee to achieve.

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21-1

Human behavior problems can arise if—

  • the budget goal is too loose and very easy for the employee to achieve.

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21-1

It is undesirable to plan lower goals than may be possible. Such budget “padding” is termed budgetary slack.


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21-1

Human behavior problems can arise if—

  • the budget goals of a business conflict with the objectives of the employees.

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21-1

Goal conflict occurs when individual self-interest differs from business objectives.

A manager pushing for maximum production (to increase his/her bonus) may not have the same production goals as the company’s (trying to control the size of its inventory).


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21-2

Objective 2

Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.


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21-2

Budgeting Systems

A variation of fiscal-year budgeting, called continuousbudgeting, maintains a twelve-month projection into the future.


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One-Year Budget

Add February 2009

Delete on February 28

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21-2

Continuous Budgeting

Feb. 2008

Feb. 2008

Mar. 2008

Apr. 2008

May 2008

June 2008

July 2008

Aug. 2008

Sep. 2008

Oct. 2008

Nov. 2008

Dec. 2008

Jan. 2009

Feb. 2009

20


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One-Year Budget

Feb. 2008

Feb. 2008

Mar. 2008

Apr. 2008

May 2008

June 2008

July 2008

Aug. 2008

Sep. 2008

Oct. 2008

Nov. 2008

Dec. 2008

Jan. 2009

Feb. 2009

Add February 2009

Delete on February 28

21

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21-2

Continuous Budgeting


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21-2

Zero-Based Budgeting

Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.


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21-2

Static Budget

  • A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change as the activity increases or decreases.

  • A static budget is used by many service companies and for some administrative functions of manu-facturing companies.


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21-2

Strength:A static budget is simple—all expenses are budgeted as fixed costs.

Weakness:A static budget does not adjust for changes in revenues and expenses that occur as volumes change.


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Static Budget

Colter Manufacturing Company

Assembly Department Budget

For the Year Ending July 31, 2008

Direct labor $40,000

Electric power 5,000

Supervisor salaries 15,000

Total department costs $60,000

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21-2

Flexible Budget

  • A flexible budget shows the expected results of a responsibility center for several activity levels.

  • A flexible budget is especially useful in estimating and controlling factory costs and operating expenses.


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Strength:Flexible budgeting provides information needed to analyze the impact of volume changes on actual operating results.

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21-2

Weakness:Flexible budgeting requires greater research into costs. There must be a differentiation between fixed and variable costs.


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21-2

Flexible Budget

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21-2

Static and Flexible Budgets

If Coulter Manufacturing Company’s Assembly Department spent $72,000 to produce 10,000 units, how much over or under budget would the department manager be using a static budget? A flexible budget?

(Continued)


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$12,000

Over Budget

Static Budget

Actual Results

$60,000

$72,000

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21-2

Static and Flexible Budgets

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(Continued)


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$1,000

Over Budget

8,000 units

9,000 units

10,000 units

Actual Results

$72,000

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21-2

Static and Flexible Budgets

Flexible Budget

$60,000

$65,500

$71,000

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(Concluded)


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Example Exercise 21-1

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21-2

At the beginning of the period, the Assembly Department budgeted direct labor of $45,000 and supervisor salaries of $30,000 for 5,000 hours of production. The department actually completed 6,000 hours of production. Determine the budget for the department, assuming that it uses flexible budgeting?

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Follow My Example 21-1

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21-2

Variable cost:

Direct labor (6,000 hours x $9.00* per hour) $54,000

Fixed cost:

Supervisor 30,000

Total department cost $84,000

*45,000/5,000 hours

33

For Practice: PE21-1A, PE21-1B


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21-3

Objective 3

Describe the master budget for a manufacturing business.


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Budgeted Income Statement

Budgeted Balance Sheet

Sales budget

Cost of goods sold budget:

Production budget

Direct materials purchases budget

Direct labor cost budget

Factory overhead cost budget

Selling and administrative expense budget

Cash budget

Capital expenditures budget

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21-3

Budgets That Are Linked Together in a Master Budget


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21-3

Income Statement Budgets

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21-4

Objective 4

Prepare the basic income statement budgets for a manufacturing business.


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21-4

Sales Budget

The sales budget normally indicates for each product—

(1) the quantity of estimated sales and

(2) the expected unit selling price.


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21-4

Factors Expected to Affect Future Sales include—

  • backlog of unfilled sales orders

  • planned advertising and promotion

  • expected industry and general economic conditions

  • productive capacity

  • projected pricing policy

  • findings of market research studies


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21-4

Sales Budget

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21-4

Production Budget

The number of units to be manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.


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Production Budget

Expected units of sales

+ Desired units in ending inventory

– Estimated units in beginning inventory

Total units to be produced

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21-4

Sales

Budget

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Example Exercise 21-2

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21-4

Landon Awards Co. projected sales of 45,000 brass plaques for 2008. The estimated January 1, 2008 inventory is 3,000 units, and the desired December 31, 2008 inventory is 5,000 units. What is the budgeted production (in units) for 2008?

43


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Follow My Example 21-2

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21-4

Expected units to be sold 45,000

Plus: desired ending inventory, December 31, 2008 5,000

Total 50,000

Less estimated beginning inventory, January 1, 2008 3,000

Total units to be produced 47,000

44

For Practice: PE21-2A, PE21-2B


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Production Budget

Materials needed for production

+ Desired ending materials inventory

– Estimated beginning materials inventory

Direct materials to be purchased

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21-4

Direct Materials Purchases Budget

Sales

Budget

Direct Materials

Purchases Budget

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21-4

Direct Materials Purchases Budget

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Example Exercise 21-3

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21-4

Landon Awards Co. budgeted production of 47,000 brass plaques in 2008. Brass sheet is required to produce a brass plaque. Assume 96 square inches of brass sheet is required for each brass plaque. The estimated January 1, 2008 brass sheet inventory is 240,000 square inches. The desired December 31, 2008 brass sheet inventory is 200,000 square inches. If brass sheets costs $0.12 per square inch, determine the materials budget for 2008.

47


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Follow My Example 21-3

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21-4

Square inches required for production: Brass plaque (47,000 x 96 sq. in.) 4,512,000

Plus: desired ending inventory, December 31, 2008 200,000

Total 4,712,000

Less estimated beginning inventory, January 1, 2008 240,000

Total square inches to purchase 4,472,000

Unit price (per square inch) x $0.12

Total direct materials to be purchased $ 536,640

48

For Practice: PE21-3A, PE21-3B


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21-4

Direct Labor Cost Budget

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Production Budget

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21-4

Direct Labor Cost Budget

Sales

Budget

Direct Materials

Purchases Budget

Direct Labor

Cost Budget

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Example Exercise 21-4

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21-4

Landon Awards Co. budgeted production of 47,000 brass plaques in 2008. Assume that 12 minutes are required to engrave each plaque. If engraving labor costs $11.00 per hour, determine the direct labor budget for 2008.

51


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Follow My Example 21-4

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21-4

  • Hours required for engraving:

  • Brass plaque (47,000 x 12 min.) 564,000 min.

    • Convert minutes to hour / 60 min.

Engraving hours9,400 hrs.

Hourly rate x $11.00

Total direct labor cost $103,400

52

For Practice: PE21-4A, PE21-4B


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21-4

Factory Overhead Cost Budget

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Production Budget

0

21-4

Factory Overhead Cost Budget

Sales

Budget

Direct Materials

Purchases Budget

Direct Labor

Cost Budget

Factory Overhead

Cost Budget

54


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21-4

Cost of Goods Sold Budget

Direct materials purchase budget

Direct labor cost budget

Factory overhead cost budget

55


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Production Budget

Cost of Goods

Sold Budget

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21-4

Factory Overhead Cost Budget

Sales

Budget

Direct Materials

Purchases Budget

Direct Labor

Cost Budget

Factory Overhead

Cost Budget

56


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Example Exercise 21-5

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21-4

Prepare a cost of goods sold budget for Landon Awards Co. using the information in Example Exercise 22-3 (Slide 47) and 22-4 (Slide 51). Assume the estimated inventories on January 1, 2008 for finished goods and work in process were $54,000 and $47,000, respectively. Also assume the desired inventories on December 31, 2008 for finished goods and work in process were $50,000 and $49,000, respectively. Factory overhead was budgeted for $126,000.

Go to Slide 47

Go to Slide 51

Type “57” and press “Enter” to return to this slide.

57


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Follow My Example 21-5

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21-4

Finished goods inventory, Jan. 1, 2008 $ 54,000

Work in process inventory, Jan. 1, 2008 $ 47,000

Direct materials:

Direct materials inventory, Jan. 1, 2008 (240,000 x $0.12) $ 28,800

Direct materials purchases (EE 21-3) 536,640

Cost of direct materials available for use $565,440

Less direct materials inventory, Dec. 31, 2008 (200,000 x $0.12) 24,000

Cost of direct materials placed in production $541,440

Direct labor (EE 21-4) 103,400

Factory overhead 126,000

Total manufacturing costs 770,840

58

(Continued)


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Follow My Example 21-5

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21-4

Total work in process during period $817,840

Less work in process inventory, December 31, 2008 49,000

Cost of goods manufactured 768,840

Cost of finished goods available for sale $822,840

Less finished goods inventory, December 31, 2008 50,000

Cost of goods sold $772,840

(Concluded)

59

For Practice: PE12-5A, PE21-5B


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21-4

Selling and Administrative Expense Budget

60


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Production Budget

Cost of Goods

Sold Budget

0

21-4

Selling and Administrative Expense Budget

Sales

Budget

Direct Materials

Purchases Budget

Direct Labor

Cost Budget

Selling & Administrative

Expenses

Budget

Factory Overhead

Cost Budget

61


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21-4

Budgeted Income Statement

Sales budget

Cost of goods sold budget

Selling and administrative expenses budget

62


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21-5

Objective 5

Prepare balance sheet budgets for a manufacturing business.


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21-5

Cash Budget

The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget presents the expected receipts (inflows) and payments (outflows) of cash for a period of time.


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21-5

Estimated Cash Receipts

January February March

Receipts from cash sales:

Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000

Note A: $108,000 = $1,080,000 x 10%

$124,000 = $1,240,000 x 10%

$ 97,000 = $ 970,000 x 10%

65


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21-5

January February March

Receipts from cash sales:

Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000

Receipts from sales on account:

Collections from prior month’s

sales (40% of previous month’s

credit sales—Note B)……….. $370,000 $388,800 $446,400

Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance

$388,800 = $1,080,000 x 90% x 40%

$446,400 = $1,240,000 x 90% x 40%

66


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21-5

January February March

Receipts from cash sales:

Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000

Receipts from sales on account:

Collections from prior month’s

sales (40% of previous month’s

credit sales—Note B)………... $370,000 $388,800 $446,400

Collections from current month’s sales (60%) (see Note

C)…………………………… 583,200 669,600 523,800

Note C: $583,200 = $1,080,000 x 90% x 60%

$669,600 = $1,240,000 x 90% x 60%

$523,800 = $ 970,000 x 90% x 60%

67


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21-5

Schedule of Collections from Sales

68


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21-5

Estimated Cash Payments

January February March

Payments of prior months’ manu-

facturing costs {[25% x previous

month’s manufacturing costs

(less depreciation)]—Note A}….. $190,000 $204,000 $189,000

Note A: $190,000, given as January 1, 2006 Accounts

Payable balance

$204,000 = ($840,000 – $24,000) x 25%

$189,000 = ($780,000 – $24,000) x 75%

69


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21-5

January February March

Payments of prior months’ manu-

facturing costs {[25% x previous

month’s manufacturing costs

(less depreciation)]—Note A}….. $190,000 $204,000 $189,000

Payments of current month’s

manufacturing costs {[75% x

current month’s manufacturing

costs (less depreciation)]—

Note B}…………….…………… $612,000 $567,000 $591,000

Note B: $612,000 = ($840,000 – $24,000) x 75%

$567,000 = ($780,000 – $24,000) x 75%

$591,000 = ($812,000 – $24,000) x 75%

70


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21-5

Schedule of Payments for Manufacturing Costs

71


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Example Exercise 21-6

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21-5

Landon Awards Co. collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. If sales on account are budgeted to be $100,000 for March and $126,000 for April, what are the budgeted cash receipts from sales on account for April?

72


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Follow My Example 21-6

April

Collections from March sales (75% x

$100,000) $ 75,000

Collections from April sales (25% x

$126,000) 31,500

Total receipts from sales on account $106,500

0

21-5

73

For Practice: PE21-6A, PE21-6B


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21-5

Completing the Cash Budget

January February March

Estimated cash receipts from:

Cash sales (Slide 68) $ 108,000 $ 124,000 $ 97,000

Collections of accounts

receivable (Slide 68). 953,200 1,058,400 970,200

Interest revenue —— 24,500

Total cash receipts $1,061,200$1,182,400$1,091,700

Estimated cash payments for:

Manufacturing costs (Slide 71).. $ 802,000 $ 771,000 $ 780,000

Selling and administrative expenses 160,000 165,000 145,000

Capital additions 274,000

Interest expense 22,500

Income taxes 150,000

74


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21-5

Cash Budget

Schedule of collections from sales

Schedule of cash payments for manufacturing costs

75


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21-5

Capital Expenditure Budget

The capital expenditure budget summarizes plans for acquiring fixed assets.

76


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21-5

Budgeted Balance Sheet

The budgeted balancesheet estimates the financial condition at the end of a budget period.


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