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Internal Planning and Measurement Tools. Chapter 10. Learning Objective 1. Discuss some of the benefits of the operating budget. Operating Budget. It is the plan for a firm’s operating activities for a specified period of time. Forecasted or pro forma financial statements

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Learning objective 1
Learning Objective 1

  • Discuss some of the benefits

  • of the operating budget.


Operating budget
Operating Budget

It is the plan for a firm’s operating

activities for a specified period of time.

Forecasted or pro forma financial statements

estimate what may happen in the future.


Benefits of budgeting
Benefits of Budgeting

Budgeting serves as a guide.

It assists in resource allocation.

It fosters communication and coordination.

Budgeting establishes performance standards.


Learning objective 2
Learning Objective 2

  • Compare and contrast various

  • approaches to the preparation

  • and use of the operating budget.


Different approaches to budgeting
Different Approachesto Budgeting

Perpetual budgeting (rolling budgeting):

As one month ends, another month

is added to the end of the budget.

Incremental budgeting is the process

of using the prior year’s budget to

build the new operating budget.


Different approaches to budgeting1
Different Approachesto Budgeting

Zero-based budgeting is an

alternative to incremental budgeting.

Managers must start from scratch,

or zero, when preparing a new budget.

In top-down budgeting, the top

executives prepare the budget.

Imposed budget


Different approaches to budgeting2
Different Approachesto Budgeting

In bottom-up budgeting, lower-level

managers and employees

prepare the initial budget.

Bottom-up budgeting is always a

participative budgeting process.

To empower employees means to give

them the authority to make decisions

concerning their job responsibilities.


Learning objectives 3 4
Learning Objectives 3 & 4

  • Construct the three budgeted

  • financial statements contained

  • in the operating budget and

  • the other budget schedules.

Demonstrate the role

of the sales forecast in

the budgeting process.


The sales forecast

Other budgets

Cost of goods

sold budget

Production

budget

Sales

budget

The Sales Forecast

Sales forecast


Different budgets
Different Budgets

Sales budget

Production or purchases budget

Cost of goods sold or

cost of services budget

Selling and administrative

expense budget

Cash budget


Budgeted financial statements
Budgeted Financial Statements

Budgeted income

statement

Budgeted

balance sheet

Budgeted cash

flow statement


Interrelationship among the budgets

Budgeted income

statement

Sales budget

Production (purchases)

budget

Budgeted

balance sheet

Cost of goods sold

(Cost of services) budget

Budgeted

statement

of cash flows

Selling and administrative

expense budget

InterrelationshipAmong the Budgets

Sales forecast

Cash budget


Learning objective 5
Learning Objective 5

  • Prepare the budgets included

  • in the operating budget.


Elevation sports inc sales budget for the year ended may 31 2006

Quarter

First

Second

Third

Fourth

Total

Budgeted unit sales:

Wholesale S 50 250 1,000 600

Selling price $ 95$ 95$ 95$ 95

Subtotal $ 4,750 $ 23,750 $ 95,000 $ 57,000 $ 180,500

Retail S 80 300 1,500 1,200

Selling price $ 135$ 140$ 140$ 140

Subtotal $ 10,800 $ 42,000 $210,000 $168,000 $ 430,800

Wholesale M 500 300 200 250

Selling price $ 120$ 120$ 120$ 120

Subtotal $ 60,000 $ 36,000 $ 24,000 $ 30,000

Retail M 550 400 225 400

Selling price $ 180$ 180$ 180$ 180

Subtotal $ 99,000 $ 72,000 $ 40,500 $ 72,000 $ 283,500

Budgeted sales ($):

Retail goods $ 10,500 $ 18,300$ 34,600$ 13,700$ 77,100

Total $185,050 $192,050 $404,100 $340,700 $1,121,900

Elevation Sports, Inc.Sales BudgetFor the Year Ended May 31, 2006


Elevation sports inc cost of goods sold budget for the year ended may 31 2006
Elevation Sports, Inc.Cost of Goods Sold BudgetFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Total

Budgeted unit sales:

Wholesale S 50 250 1,000 600

Retail S 80 300 1,500 1,200

Total S 130 550 2,500 1,800

Mfg. cost $ 65$ 65$ 65$ 65

Subtotal $ 8,450 $ 35,750 $162,500 $117,000 $323,700

Wholesale M 500 300 200 250

Retail M 550 400 225 400

Total M 1,050 700 425 650

Mfg. cost $ 90$ 90$ 90$ 90

Subtotal $ 94,500 $ 63,000 $ 38,250 $ 58,500 $254,250

Budgeted sales ($):

Retail goods$ 10,500 $ 18,300 $ 34,600 $ 13,700

Purchase cost 60% 60% 60% 60%

Subtotal $ 6,300$ 10,980$ 20,760$ 8,220$ 46,260

Total $109,250 $109,730 $221,510 $183,720 $624,210


Elevation sports inc selling and admin expense budget for the year ended may 31 2006
Elevation Sports, Inc.Selling and Admin. Expense BudgetFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Total

Selling expenses:

Advertising $ 8,300 $17,000 $18,000 $12,000 $ 55,300

Discounts 2,800 2,400 5,300 3,900 14,400

Rent 900 900 900 900 3,600

Sales salaries 7,500 11,500 15,000 11,800 45,800

Internet expenses 900 900 900 900 3,600

Utilities 1,000 1,000 1,000 1,000 4,000

Depreciation 300 300 300 300 1,200

Other expenses 600 920 1,200 944 3,664

Total $22,300 $34,920 $42,600 $31,744 $131,564

Administrative exp.:

Officers’ salaries $48,000 $48,000 $48,000 $48,000 $192,000

Employee benefits 6,000 6,000 6,000 6,000 24,000

Insurance 2,050 2,050 2,050 2,050 8,200

Utilities 600 600 600 600 2,400

Depr. and amort. 706 706 706 706 2,824

Other expenses 6,350 6,350 6,350 6,350 25,400

Total $63,706 $63,706 $63,706 $63,706 $254,824


Elevation sports inc budgeted income statement for the year ended may 31 2006
Elevation Sports, Inc.Budgeted Income StatementFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Total

Sales $185,050 $192,050 $404,100 $340,700 $1,121,900

Cost of goods sold 109,250 109,730 221,510 183,720 624,210

Gross profit $ 75,800 $ 82,320 $182,590 $156,980 $ 497,690

Selling expense 22,300 34,920 42,600 31,744 131,564

Admin. expense 63,706 63,706 63,706 63,706 254,824

Taxable income $(10,206) $(16,306) $ 76,284 $ 61,530 $ 111,302

Income taxes (4,082) (6,523) 30,514 24,612 44,521

Net income $ (6,124) $ (9,783) $ 45,770 $ 36,918 $ 66,781


Elevation sports inc production budget for the year ended may 31 2006
Elevation Sports, Inc.Production BudgetFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Total

Snowboards:

Forecasted sales 130 550 2,500 1,800 4,980

Desired ending inv. 220 1,000 480 60 60

Total units needed 350 1,550 2,980 1,860 5,040

Beg. inventory (80) (220) (1,000) (480) (80)

To be produced 270 1,330 1,980 1,380 4,960

Cost per unit $ 65$ 65$ 65$ 65$ 65

Cost of production $ 17,550 $ 86,450 $128,700 $ 89,700 $322,400

Mountain boards:

Forecasted sales 1,050 700 425 650 2,825

Desired ending inv. 280 170 260 440 440

Total units needed 1,330 870 685 1,090 3,265

Beg. inventory (150) (280) (170) (260) (150)

To be produced 1,180 590 515 830 3,115

Cost per unit $ 90$ 90 $ 90$ 90$ 90

Cost of production $106,200 $ 53,100 $ 46,350 $ 74,700 $280,350

Total prod. cost $123,750 $139,550 $175,050 $164,400 $605,750


Elevation sports inc purchases budget for the year ended may 31 2006
Elevation Sports, Inc.Purchases BudgetFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Total

Forecasted sales $10,500 $18,300 $34,600 $13,700 $77,100

Cost of sales $ 6,300 $10,980 $20,760 $ 8,220 $46,260

Desired ending inv. 4,392 8,304 3,288 2,600 2,600

Inventory needed $10,692 $19,284 $24,048 $10,820 $48,860

Beg. inventory 5,600 4,392 8,304 3,288 5,600

Inventory to

be purchased $ 5,092 $14,892 $15,744 $ 7,532 $43,260


Elevation sports inc partial cash receipts schedule for the year ended may 31 2006
Elevation Sports, Inc.Partial Cash Receipts ScheduleFor the Year Ended May 31, 2006

Quarter

Prior

First

Second

Total forecasted sales $185,050 $192,050

Credit sales (30%) $80,000 55,515 57,615

Forecasted cash sales (70%) $129,535 $134,435

Credit sales collected:

From accounts receivable

at 5/31/05: (20% of $80,000)

From new credit sales: $ 16,000

First quarter credit sales:

Collected – first quarter (80%) 44,412

Collected – second quarter (20%) $ 11,103

Second quarter credit sales:

Collected – second quarter (80%) 46,092

Budgeted receipts from credit sales 60,412 57,195

Total budgeted cash receipts $189,947 $191,630


Elevation sports inc partial cash payments schedule for the year ended may 31 2006
Elevation Sports, Inc.Partial Cash Payments ScheduleFor the Year Ended May 31, 2006

Quarter

Prior

First

Second

Purchases $ 6,500 $ 5,092 $ 14,892

Production costs 150,000 123,750 139,550

Total $156,500 $128,842 $154,442

Amount paid: (35% of prior) 54,775

First quarter:

Paid in first quarter (65%) 83,747

Paid in second quarter (35%) 45,095

Second quarter:

Paid in second quarter (65%) 100,387

Less: Depreciation (3,700) (3,700)

Total paid for production costs and purchases $134,822 $141,782

Total paid for selling and

administrative expense 85,000 97,620

Total paid for other expenses 15,000 0

Budgeted cash payments $234,822 $239,402


Elevation sports inc cash budget for the year ended may 31 2006
Elevation Sports, Inc.Cash BudgetFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Total

Beg. cash balance $124,000 $ 79,125 $ 40,000 $123,150 $ 124,000

Add: Cash receipts 189,947 191,630 391,377 344,504 1,117,458

Cash available $313,947 $270,755 $431,377 $467,654 $1,241,458

Less: Cash pmts. 234,822 239,402 299,580 423,890 1,197,694

Balance before

borrowing $ 79,125 $ 31,353 $131,797 $ 43,764 $ 43,764

Borrowing/

(repayment) -0- 8,647 (8,647) -0- -0-

Ending cash

balance $ 79,125 $ 40,000 $123,150 $ 43,764 $ 43,764


Elevation sports inc budgeted balance sheet
Elevation Sports, Inc.Budgeted Balance Sheet

Assets

Aug. 31,

2005

Nov. 30,

2005

Feb. 28,

2006

May 31,

2006

Current assets:

Cash $ 79,125 $ 40,000 $123,150 $ 43,764

Accounts receivable 11,103 11,523 24,246 20,442

Mdse. inventory 4,392 8,304 3,288 2,600

Mfg. inventories 59,500 100,300 74,600 63,500

Tax refund due 4,082 10,605 -0- -0-

Prepaid expenses 45,000 45,000 45,000 45,000

Total current assets $203,202 $215,732 $270,284 $175,306

Equipment:

Equip. and furniture $103,100 $103,100 $103,100 $223,100

Less: Acc. depreciation 75,650 80,100 84,550 89,000

Total equipment $ 27,450 $ 23,000 $ 18,550 $134,100

Intangible assets $ 8,756$ 8,500$ 8,244$ 7,988

Total assets $239,408 $247,232 $297,078 $317,394


Elevation sports inc budgeted balance sheet1
Elevation Sports, Inc.Budgeted Balance Sheet

Liabilities and

Stockholders’ Equity

Aug. 31,

2005

Nov. 30,

2005

Feb. 28,

2006

May 31,

2006

Current liabilities:

Accounts payable $ 45,095 $ 54,055 $ 66,778 $ 60,176

Note payable -0- 8,647 -0- -0-

Total current liabilities $ 45,095 $ 62,702 $ 66,778 $ 60,176

Stockholders’ equity:

Paid-in capital:

Common stock $ 60,000 $ 60,000 $ 60,000 $ 60,000

Paid-in capital 40,000 40,000 40,000 40,000

Total paid-in capital $100,000 $100,000 $100,000 $100,000

Retained earnings 94,313 84,530 130,300 157,218

Total stockholders equity $194,313$184,530$230,300$257,218

Total liabilities and

stockholders’ equity $239,408 $247,232 $297,078 $317,394


Elevation sports inc budgeted statement of cash flows for the year ended may 31 2006
Elevation Sports, Inc.Budgeted Statement of Cash FlowsFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Cash flows from

operating activities:

Net income $ (6,124) $ (9,783) $45,770 $36,918

Add: Depreciation 4,450 4,450 4,450 4,450

Amortization 256 256 256 256

Changes in working capital:

Accounts receivable 4,897 (420) (12,723) 3,804

Mdse. inventory 1,208 (3,912) 5,016 688

Mfg. inventories (20,800) (40,800) 25,700 11,100

Tax refunds due (4,082) (6,523) 10,605 -0-

Accounts payable (9,680) 8,960 12,723 (6,602)

Net cash flow from

operating activities $(29,875) $(47,772) $91,797 $50,614


Elevation sports inc budgeted statement of cash flows for the year ended may 31 20061
Elevation Sports, Inc.Budgeted Statement of Cash FlowsFor the Year Ended May 31, 2006

Quarter

First

Second

Third

Fourth

Cash flows from

investing activities:

Cash paid for equipment $(120,000)

Net cash used by

investing activities $(120,000)

Cash flows from

financing activities:

Borrowing $ 8,647

Loan payments $(15,000) $ (8,647)

Dividends paid $(10,000)

Net cash flow from

financing activities $(15,000) $ 8,647 $ (8,647) $(10,000)

Increase/(decrease) in cash $(44,875) $(39,125) $ 83,150 $(79,386)

Budgeted beg. cash balance 124,000 79,125 40,000 123,500

Budgeted ending cash balance $ 79,125 $ 40,000 $123,500 $ 43,764


Learning objective 6
Learning Objective 6

  • Integrate the operating

  • budget into the overall

  • management process.


Connecting the budget to the strategic plan
Connecting the Budgetto the Strategic Plan

One of the most important budgeting

functions is for top management to

ensure that each budget aligns with the

goals and objectives of the strategic plan.

The strategic plan and the master budget

control the allocation of resources.

They must be in conformity with one another.


Learning objective 7
Learning Objective 7

  • Analyze budget variances.


The budget performance report
The Budget Performance Report

The difference between the

actual and budgeted amounts

for a budget category is known

as a budget variance.


The budget performance report1
The Budget Performance Report

Elevation Sports, Inc.

Budget Performance Report for Sales

For the Year Ended May 31, 2005

Description

Budget

Actual

Variance

Snowboard sales – retail $350,000 $372,600 $22,600

Snowboard sales – wholesale 180,000 170,100 (9,900)

Mountain board sales – retail 240,000 225,000 (15,000)

Mountain board sales – wholesale 150,000 120,000 (30,000)

Other merchandise 60,000 63,400 3,400


The budget performance report2
The Budget Performance Report

Possible causes of variances:

The number of units of product

remained the same but the

price increased or decreased.

The price remained the same,

but due to uncontrollable

forces, the number of units sold

varied from the budgeted amounts.


Appendix snowboards standard cost
Appendix:Snowboards Standard Cost

Direct materials:

Wood 3.00 sq. ft. × $2/sq. ft. = $ 6.00

Binding set 1.00 × $4 each = 4.00

Direct labor 2.5 × $10.00 = 25.00Variable overhead 2.5 × $6.20 = 15.50

Fixed overhead 2.5 × $7.80 = 19.50Total $70.00

Budgeted monthly direct labor hours = 1,000


Appendix snowboards actual results
Appendix:Snowboards Actual Results

Quantity

Actual

cost

Standard

cost

Units produced 250

Materials used:

Wood 600 sq. ft. $ 1,200 $ 1,500

Bindings 252 756 1,000

Direct labor: 750 hrs. 7,500 6,250Variable overhead 3,600 3,875

Fixed overhead 7,800 4,875Total $20,856 $17,500


Direct material quantity variance wood

Standard

quantity

per unit:

3 sq. ft.

×

Number

of units

produced:

250

=

Standard quantity

of direct material

allowed:

750 sq. ft.

Standard

quantity

allowed:

750 sq. ft.

Actual

quantity

used:

600 sq. ft.

=

Quantity

variance in

square feet:

150 favorable

Direct Material Quantity Variance: Wood


Direct material quantity variance wood1

Quantity

variance in

square feet:

150 F

×

Standard

price per

square foot:

$2.00

=

Quantity

variance

in dollars:

$300 F

Direct Material Quantity Variance: Wood

How much is the variance in dollars?


Material price variance bindings
Material Price Variance: Bindings

252 AQ × $4 SP = $1,008 AQ at SP

$1,008 – $756 = $252 favorable


Direct labor efficiency variance
Direct LaborEfficiency Variance

2.5 SH × 250 units = 625 SH

625 SH – 750 AH = 125 hours unfavorable

125 × $10 SR = $1,250 unfavorable


Variable overhead variances
Variable Overhead Variances

125 × $6.20 SR = $775

unfavorable efficiency variance

750 AH × $6.20 SR = $4,650 SV for AH

$4,650 SV for AH – $3,600 = $1,050

favorable spending variance


Fixed overhead volume variance
Fixed OverheadVolume Variance

400 plant production capacity

– 250 actual units = 150 units under

150 × $2.5 hours/unit = 375 hours

375 × $7.80 = $2,925 unfavorable


Elevation sports inc performance report for october 2005
Elevation Sports, Inc.Performance ReportFor October 2005

Direct material quantity variance:

Wood $ 300

Bindings 8

Direct material price variance:

Wood -0-

Bindings 252 F

Direct labor efficiency variance 1,250 U

Direct labor rate variance -0-

Variable overhead efficiency variance 775 U

Variable overhead spending variance 1,050 F

Fixed overhead budget variance -0-

Fixed overhead volume variance 2,925 U

Total $3,356 U



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