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1. Profit Planning
2. Learning Objectives Understand budgeting objectives
Understand “things you need to know & do” before starting a budget (not in book)
Prepare a master budget (sales, cash receipts, production, direct materials, cash disbursements, direct labor, manufacturing overhead, selling administration, cash budget, income statement and balance sheet)
3. Planning and Control Planning – Where do we want to go and how do we get there? or “involves developing objectives and preparing various budgets to achieve these objectives.”
New business ventures?
Maintain during a recession?
4. Planning and Control Control – Are we keeping to our plan? Or “involves the steps taken by management that attempt to ensure the objectives are attained.”
Are your managers staying within budget?
Do you care?
5. Advantages of Budgeting
6. What is a Budget?
7. Types of budgets Sales budget through Gross Margin
Cost of Goods Sold – all costs
Ending balances: cash, inventory, etc.
Complete set of Financial Statements
Long term budgets (Capital budgets – chapter 14)
8. Things YOU need to know: What are the company’s goals?
What are its assumptions?
New product development
New stores, offices
What is your company’s culture?
9. Things you NEED to do before planning your departmental budget Plan your Income & Expenses as a TEAM—
No one on your team is going to buy in to a budget (especially one with CUTS) that they didn’t get to give input on.
10. Things you NEED to do before planning your departmental budget Include some CUSHION in your plan—
Be prepared to have your first budget slashed (it’s their way of adding value. . . .)
11. Things you NEED to do before planning your departmental budget Consider pre-sales—who is the decision maker on your budget?
How can you pre-sell it before the BIG MEETING?
12. Things you NEED to do after you have your final departmental budget Regularly REVIEW, COMPARE, ANALYZE:
Actual Income and Expenses
To Planned (budgeted) Income and Expenses
Make ADJUSTMENTS as necessary
Watch for timing issues. . . . (just like those outstanding checks)
13. Techniques Percent increase/decrease from prior year, (or most recent quarter)--e.g., 10% growth assumption
Competition comparison--what are they doing? Robert Morris, Hoovers, Valueline
Task oriented (or zero based budgeting)--more work, but easiest to defend
14. CONCLUSIONS. . . . Budgeting can help you manage your business. . .better
15. Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent.
16. Human Factors in Budgeting The success of budgeting depends upon:
The degree to which top management accepts the budget program as a vital part of the company’s activities.
The way in which top management uses budgeted data.
17. The Master Budget
18. The Master Budget Using a 8 page (or so) handout. . . .let’s walk through the Master Budget
Might take a few days
Different example (but similar) to book
Within all the number crunching don’t ever lose sight of the things you need to know and do. . .
19. The Sales Budget Detailed schedule showing expected sales for the coming periods expressed in units and dollars.
20. Budgeting Example Royal Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units.
The selling price is $10 per unit.
21. The Sales Budget
22. The Sales Budget
23. Expected Cash Collections All sales are on account.
Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% is uncollectible.
The March 31 accounts receivable balance of $30,000 will be collected in full.
24. Expected Cash Collections
25. Expected Cash Collections
26. Expected Cash Collections
27. Expected Cash Collections
28. The Production Budget
29. The Production Budget The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.
On March 31, 4,000 units were on hand.
Let’s prepare the production budget.
30. The Production Budget
31. The Production Budget
32. The Production Budget
33. The Production Budget
34. The Direct Materials Budget At Royal Company, five pounds of material are required per unit of product.
Management wants materials on hand at the end of each month equal to 10% of the following month’s production.
On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Let’s prepare the direct materials budget.
35. The Direct Materials Budget
36. The Direct Materials Budget
37. The Direct Materials Budget
38. The Direct Materials Budget
39. The Direct Materials Budget
40. Expected Cash Disbursement for Materials Royal pays $0.40 per pound for its materials.
One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month.
The March 31 accounts payable balance is $12,000.
Let’s calculate expected cash disbursements.
41. Expected Cash Disbursement for Materials
42. Expected Cash Disbursement for Materials
43. Quick Check ? What are the total cash disbursements for the quarter?
b. $ 68,000
c. $ 56,000
44. Quick Check ? What are the total cash disbursements for the quarter?
b. $ 68,000
c. $ 56,000
45. Expected Cash Disbursement for Materials
46. The Direct Labor Budget At Royal, each unit of product requires 0.05 hours of direct labor.
The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.
In exchange for the “no layoff” policy, workers agreed to a wage rate of $10 per hour regardless of the hours worked (No overtime pay).
For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.
47. The Direct Labor Budget
48. The Direct Labor Budget
49. The Direct Labor Budget
50. The Direct Labor Budget
51. Manufacturing Overhead Budget Royal Company uses a variable manufacturing overhead rate of $1 per unit produced.
Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets).
Let’s prepare the manufacturing overhead budget.
52. Manufacturing Overhead Budget
53. Manufacturing Overhead Budget
54. Manufacturing Overhead Budget
55. Ending Finished Goods Inventory Budget Now, Royal can complete the ending finished goods inventory budget.
At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.
Let’s calculate ending finished goods inventory.
56. Ending Finished Goods Inventory Budget
57. Ending Finished Goods Inventory Budget
58. Ending Finished Goods Inventory Budget
59. Ending Finished Goods Inventory Budget
60. Selling and Administrative Expense Budget At Royal, variable selling and administrative expenses are $0.50 per unit sold.
Fixed selling and administrative expenses are $70,000 per month.
The fixed selling and administrative expenses include $10,000 in costs – primarily depreciation – that are not cash outflows of the current month.
Let’s prepare the company’s selling and administrative expense budget.
61. Selling and Administrative Expense Budget
62. Selling and Administrative Expense Budget
63. The Cash Budget Royal:
Maintains a 16% open line of credit for $75,000.
Maintains a minimum cash balance of $30,000.
Borrows on the first day of the month and repays loans on the last day of the month.
Pays a cash dividend of $49,000 in April.
Purchases $143,700 of equipment in May and $48,300 in June paid in cash.
Has an April 1 cash balance of $40,000.
64. The Cash Budget
65. The Cash Budget
66. The Cash Budget
67. Financing and Repayment
68. The Cash Budget
69. Financing and Repayment
70. The Cash Budget
71. The Cash Budget
72. Financing and Repayment
73. The Budgeted Income Statement
74. The Budgeted Income Statement
75. The Budgeted Balance Sheet Royal reported the following account balances prior to preparing its budgeted financial statements:
Land - $50,000
Common stock - $200,000
Retained earnings - $146,150
Equipment - $175,000