21. Budgeting. Describe budgeting, its objective, and its impact on human behavior. 1. Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. Describe the master budget for a manufacturing company. 2. 3.
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Describe budgeting, its objective, and its impact on human behavior. 1 Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. Describe the master budget for a manufacturing company. 2 3 Learning Objective 1 Learning Objective 1 Budgeting 3-1 3-1 After studying this chapter, you should be able to: Insert Chapter Objectives Describe the nature of the adjusting process. Describe the nature of the adjusting process. 21-2
Prepare the basic income statement budgets for a manufacturing company. Prepare balance sheet budgets for a manufacturing company. 4 5 Budgeting (continued) 21-3
1 Describe budgeting, its objectives, and its impact on human behavior. 21-4
1 Budgets Budgets play an important role for organizations of all sizes and forms. Budgets are used in managing the operations of government agencies, churches, hospitals, and other nonprofit organizations.
1 Estimated Portion of Your Total Monthly Income That Should Be Budgeted for Various Living Expenses
1 Objectives of Budgeting • Planning involves setting goals as a guide for making decisions. Directing involves decisions and actions to achieve budgeted goals. Controlling involves comparing actual performance against the budgeted goals.
Exhibit 1 1 Planning, Directing, and Controlling
1 Responsibility Centers A budgetary unit of a company is called responsibility center. Each responsibility center is led by a manager who has the authority and responsibility for achieving the center’s budgeted goals.
1 Controlling Through Feedback 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.
Exhibit 2 1 Human Behavior Problems in Budgeting Human behavior problems can arise if— • the budget goal is too tight and very hard for the employee to achieve. (continued)
Exhibit 2 1 Human Behavior Problems in Budgeting (continued) Human behavior problems can arise if— • the budget goal is too loose and very easy for the employee to achieve. (continued on Slide 14)
1 Budgetary Slack Although it is desirable to establish attainable goals, it is undesirable to plan lower goals than may be possible. Such budget “padding” is termed budgetary slack.
Exhibit 2 1 Human Behavior Problems in Budgeting (concluded) Human behavior problems can arise if— • the budget goals of a business conflict with the objectives of the employees.
1 Goal Conflict Goal conflict occurs when individual self-interest differs from business objectives or when different departments are given conflicting objectives.
2 Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. 21-16
2 Continuous Budgeting A variation of fiscal-year budgeting, called continuous budgeting, maintains a twelve-month projection into the future.
Exhibit 3 2 Continuous Budgeting
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.
2 Static Budget A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change even if the activity changes.
2 A static budget is used by many service companies and for some administrative functions of manufacturing companies.
Exhibit 4 2 Static Budget
2 Weakness of the Static Budget A static budget does not adjust for changes in revenues and expenses that occur as volumes change.
2 Flexible Budget Flexible budgets show the expected results of a responsibility center for several activity levels. • A flexible budget is, in effect, a series of static budgets for different levels of activity.
Exhibit 5 2 Flexible Budget
2 Static and Flexible Budgets If Colter Manufacturing Company’s Assembly Department spent $70,800 to produce 10,000 units, how much over or under budget would the department manager be when using a static budget? $10,800 (refer to Slide 22)
Exhibit 6 2 Static and Flexible Budgets
2 Example Exercise 21-1 Flexible Budgeting 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. 21-28
Follow My Example 21-1 For Practice: PE 21-1A, PE 21-1B 2 Example Exercise 21-1 (continued) Variable cost: Direct labor (6,000 hours × $9.00* per hour)……………………………… $54,000 Fixed cost: Supervisor salaries…………………. 30,000 Total department costs………………… $84,000 *45,000/5,000 hours 21-29
2 Computerized Budgeting Systems Integrated computerized budget and planning systems speed up and reduce the cost of preparing the budget.
3 Describe the master budget for a manufacturing company. 21-31
3 Master Budget The master budget is an integrated set of operating, investing, and financing budgets for a period of time.
3 Budgets That Are Linked Together in a Master Budget Operating Budgets Sales budget Cost of goods sold budget: Production budget Direct materials purchases budget Direct labor cost budget Factory overhead cost budget Selling and administrative expenses budget Financing Budget Cash budget Investing Budget Capital expenditures budget Budgeted Income Statement Budgeted Balance Sheet
Exhibit 7 3 Income Statement Budgets
4 Prepare the basic income statement budgets for a manufacturing company. 21-35
4 Sales Budget The sales budget begins by estimating the quantity of sales. Once sales quantities are estimated, the expected sales revenue can be determined by multiplying the volume by the expected unit sales price.
4 Factors expected to affect future sales include— • Backlog of unfilled sales orders • Planned advertising and promotion • Productive capacity • Projected pricing changes • Findings of market research studies • Expected industry and general economic conditions
Exhibit 8 4 Sales Budget
4 Production Budget The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.
Exhibit 9 Production Budget
Production Budget Expected units of sales + Desired units in ending inventory – Estimated units in beginning inventory Total units to be produced 4 Sales Budget
Production Budget From Exhibit 8 (Slide 38) 528,000 + Desired units in ending inventory – Estimated units in beginning inventory Total units to be produced 4 Wallets Sales Budget
Production Budget From Exhibit 8 528,000 + Desired ending inventory 80,000 – Estimated units in beginning inventory Total units to be produced 4 Wallets Sales Budget
Production Budget From Exhibit 8 528,000 + Desired ending inventory 80,000 – Est. beginning inventory (88,000) Total units to be produced 4 Wallets Sales Budget
Production Budget From Exhibit 8 528,000 + Desired ending inventory 80,000 – Est. beginning inventory (88,000) Total units to be produced 520,000 4 Wallets Sales Budget
Production Budget From Exhibit 8 280,000 + Desired ending inventory 60,000 – Est. beginning inventory (48,000) Total units to be produced 292,000 4 Handbags Sales Budget
4 Example Exercise 21-2 Production Budget Landon Awards Co. projected sales of 45,000 brass plaques for 2010. The estimated January 1, 2010 inventory is 3,000 units, and the desired December 31, 2010 inventory is 5,000 units. What is the budgeted production (in units) for 2010? 21-47
Follow My Example 21-2 For Practice: PE 21-2A, PE 21-2B 4 Example Exercise 21-2 (continued) Expected units to be sold………………… 45,000 Plus desired ending inventory, December 31, 2010………………...…… 5,000 Total…………………………………………... 50,000 Less estimated beginning inventory, January 1, 2010…………………………. 3,000 Total units to be produced……………….. 47,000 21-48
Production Budget 4 Direct Materials Purchases Budget Sales Budget Direct Materials Purchases Budget Materials needed for production + Desired ending materials inventory – Estimated beginning materials inventory Direct materials to be purchased
Exhibit 10 4 Direct Materials Purchase Budget Note A: 520,000 units × 0.30 sq. yd. per unit = 156,000 sq. yds. (continued)