Chapter 22. Operational Budgeting. Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. Budgeting: The Basis for Planning and Control.
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Steps taken by management to ensure that objectives are attained.
Developing objectives for acquisitionand use of resources.
A budget is a comprehensive financialplan for achieving the financial andoperational goals of an organization.
Assignment of decisionmaking responsibilities
Perceived unfair or unrealistic goals.
Poor management-employee communications.
Reasonable and achievable budgets.
Employee participation in budgeting process.
Flow of Budget Data
C a p i t a l B u d g e t s
The annual operating budget may be divided into quarterly or monthly budgets.
A continuous budget is usually a twelve-month budget that adds one month as the current month is completed.
Cost of goodssold and endinginventorybudgets
That’s enough talkingabout budgets, nowshow me an example!
Analysis of economic and market conditions+Forecasts of customer needs from marketing personnel
Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for the next four months are:
April20,000 magnets @ $10 =$200,000May50,000 magnets @ $10 =$500,000June30,000 magnets @ $10 =$300,000July25,000 magnets @ $10 =$250,000
The Sales Budget
July is needed for June ending inventory computations.
Ellis wants ending inventoryto be 20 percent of the next month’s budgeted sales in units.
4,000 units were on hand March 31.
Let’s prepare the production budget.
Production must be adequate to meet budgeted sales and to provide sufficient ending inventory.
The material purchases budget is based on production quantity and desired material inventory levels.
Five pounds of material are needed for each unit produced.
Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs.
The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units.
Materials used in production cost $.40per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month.
No discount terms are available.
The accounts payable balance onMarch 31 is $12,000.
Each unit produced requires 3 minutes (.05 hours) of direct labor. Ellis employs 30 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour.
Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is $50,000 per month.
Fixed manufacturing overhead includes $20,000 indepreciation which does not require a cash outflow.
Selling expense budgets contain both variable and fixed items.
Variable items: shipping costs and sales commissions.
Fixed items: advertising and sales salaries.
Administrative expense budgets contain mostly fixed items.
Executive salaries and depreciation on company offices.
Variable selling and administrative expenses are $.50 per unitsoldand fixed selling and administrative expenses are $70,000 per month.
Fixed selling and administrative expenses include $10,000 in depreciation which does not require a cash outflow.
I have seen a lot of cashpayments but no cashreceipts. Show me somecash receipts!
All sales are on account.
Ellis’s collection pattern is:
70 percent collected in month of sale
25 percent collected in month after sale
5 percent will be uncollectible
Accounts receivable on March 31 is $30,000, all of which is collectible.
With just a little more information we will be able to prepare a comprehensive cash budget.
$50,000 × .16 × 3/12 = $2,000
Computation of unit cost follows
Total mfg. OH for quarter $251,000
Total labor hours required 5,050 hrs.
= $49.70 per hr.
Manufacturingoverhead is appliedbased ondirect labor hours.
Ellis reports the following account balances on June 30, prior to preparing its budgeted financial statements:
Land - $50,000
Building (net) - $174,500
Common stock - $200,000
Equipment (net) - $192,500
Retained earnings - $148,150
25% of June
11,500 lbs. @ $.40 per lb.
@ $4.99 each
50% of June
Let’s change topics.
Performance evaluation is difficult when actual activitydiffersfrom the activity originally budgeted.
Hmm! Comparingcosts at differentlevels of activity is like comparingapples with oranges.
Consider the followingcondensed examplefrom the CheeseCompany . . .
U = Unfavorable variance – Cheese Company was unable to achieve the budgeted level of activity.
F = Favorable variance: actual costs are less than budgeted costs.
Since cost variances are favorable, havewe done a good job controlling costs?
I don’t think I can answer the question using the originalbudget.
To answer the question, we must
the budget to the actual level of activity.
I don’t think I can answer the question using the originalbudget.
If you can tell me what your activity wasfor the period, I will tell you what your costs and revenue should have been.
Show expenses that should haveoccurred at the actual level ofactivity.
May be prepared for any activity level in the relevant range.
Reveal variances due to good cost
control or lack of cost control.
Improve performance evaluation.
Toa budget for different activity levels, we must know how costs behave with changes in activity levels.
Total variable costschangein direct proportion to changes in activity.
Total fixed costs remainunchangedwithin therelevant range.
Let’s prepare budgets for the Cheese Company.
Variable costs are expressed as a constant amount per hour.
In the original budget, indirect labor was $40,000 for 10,000 hours resulting in a rate of $4.00 per hour.
Total variable cost = $7.50 per unit × budget level in units
Fixed costs are expressed as a total amount that does not change within the relevant range of activity.
Now let’s prepare a budget performance report at 8,000 actual machine hours for the Cheese Co.
Indirect labor and indirect material have unfavorablevariances because actual costs are more than the flexible budget costs.
Power has a favorable variance because the actual cost is less than the flexible budget cost.
I would be happy to assist you with your cash budget!