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Chapter 20. Budgeting. Financial and Managerial Accounting 8th Edition Warren Reeve Fess. Objectives. 1. Describe budgeting, its objectives, and its impact on human behavior.

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slide1
Chapter 20

Budgeting

Financial and Managerial Accounting

8th Edition

Warren Reeve Fess

slide2
Objectives

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

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

3.Describe the master budget for a manufacturing business.

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

5.Prepare balance sheet budgets for a manufacturing business.

slide3
Feedback

DIRECTING

CONTROLLING

Nature and Objectives of Budgeting

Objectives of Budgeting

  • Establishing specific goals
  • Executing plans to achieve the goals
  • Periodically comparing actual results to the goals

PLANNING

slide4
Nature and Objectives of Budgeting

Human Behavior and Budgeting

Setting budget goals too tightly

Setting budget goals too loosely

Setting conflicting budget goals

slide5
Nature and Objectives of Budgeting

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

A student’s question, “Will this be on the test?” is evidence of goal conflict.

slide6
Static Budgets

Description:A budget that does not reflect potential changes in volume or activity level

Strength:It is simple—all expenses are budgeted as fixed costs

Weakness:It does not reflect changes in revenues and expenses that occur as volumes change

Typical usage:Service organizations or administrative departments of retailers and manufacturers

slide7
Static Budgets

Colter Manufacturing Company

Assembly Department Budget

For the Month Ending July 31, 2006

Direct labor $40,000

Electric Power 5,000

Supervisor salaries 15,000

Total department costs $60,000

slide8
Flexible Budgets

Description:A budget that shows revenues and expenses for a variety of volumes or activity levels

Strength:Provides information needed to analyze the impact of volume changes on actual operating results

Weakness:Requires greater research into costs—must differentiate fixed and variable costs

Typical usage: Operational departments of retailers and manufacturers whose costs change with sales and production

slide9
Flexible Budgets

Cost per unit is $5.50 at all levels of activity

Colter Manufacturing Company

Assembly Department Budget

For the Month Ending July 31, 2006

Variable cost:

Direct labor $40,000 $45,000 $50,000

Electric power 4,000 4,500 5,000

Total variable cost $44,000 $49,500 $55,000

Fixed cost:

Electric power $ 1,000 $ 1,000 $ 1,000

Supervisor salaries 15,000 15,000 15,000

Total fixed cost $16,000 $16,000 $16,000

Total department costs $60,000 $65,500 $71,000

Units of production 8,000 9,000 10,000

static and flexible budgets
Over budget by $12,000

Actual Results

Static Budget

Static and Flexible Budgets

Manufacturing Costs

$60,000

$72,000

Based on 8,000 units

Based on 10,000 units

slide11
Over budget by only $1,000

Actual Results

10,000 units

8,000 units

9,000 units

Static and Flexible Budgets

Manufacturing Costs

Flexible Budget

10,000 units

$60,000

$65,500

$71,000

$72,000

master budget
Master Budget

Budgeted Income Statement requires

Budgeted Balance Sheet requires

  • Sales budget
  • Cost of goods sold budget:
    • Production budget
    • Direct materials purchases budget
    • Direct labor cost budget
  • Selling and administrative expense budget
  • Cash budget
  • Capital expenditure budget
slide15
Production Budget

Sales

Budget

Expected units of sales

+ Desired units in ending Finished goods inventory

– Estimated units in beginning Finished goods inventory

= Total units to be produced

slide16
Production Budget

Materials needed for production

+ Desired ending materials inventory

– Est. beginning materials inventory

= Direct materials to be purchased

Sales

Budget

Direct Materials

Purchases Budget

slide17
Production Budget

Cost of Goods

Sold Budget

Sales

Budget

Direct Materials

Purchases Budget

Direct Labor

Cost Budget

Selling & Administrative

Expenses

Budget

Factory Overhead

Cost Budget

slide18
Elite Accessories Inc.

Sales Budget

For the Year Ending December 31, 2006

Unit Sales Unit Selling Total

Product and Region Volume Price Sales

Wallet:

East……………….. 287,000 $12.00 $ 3,444,000

West………………. 241,000 12.00 2,892,000

Total……………. 528,000$ 6,336,000

Handbag:

East……………….. 156,400 $25.00 $ 3,910,000

West………………. 123,600 25.00 3,090,000

Total……………. 280,000$ 7,000,000

Total revenue from

Sales……………….. $13,336,000

slide19
Elite Accessories Inc.

Production Budget

For the Year Ending December 31, 2006

From Sales Budget

Units

Wallet Handbag

Expected units to be sold…………. 528,000 280,000

Plus desired ending inventory, December 31, 2006……………. 80,000 60,000

Total………………………………. 608,000 340,000

Less estimated beginning inventory, January 1, 2006…………………. 88,000 48,000

Total units to be produced………… 520,000 292,000

slide20
Elite Accessories Inc.

Direct Materials Purchases Budget

For the Year Ending December 31, 2006

Direct Materials

Leather Lining Total

Square yards required for production:

Wallet (Note A)………………….. 156,000 52,000

Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.

Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.

slide21
Elite Accessories Inc.

Direct Materials Purchases Budget

For the Year Ending December 31, 2006

Direct Materials

Leather Lining Total

Square yards required for production:

Wallet(Note A)……..……..…….. 156,000 52,000

Handbag (Note B)……………….. 365,000 146,000

Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.

Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.

slide22
Elite Accessories Inc.

Direct Materials Purchases Budget

For the Year Ending December 31, 2006

Direct Materials

Leather Lining Total

Square yards required for production:

Wallet(Note A)……....………….. 156,000 52,000

Handbag (Note B).………………. 365,000 146,000

Plus desired inventory, Dec. 31, 2006 20,000 12,000

Total……………………………… 541,000 210,000

slide23
Elite Accessories Inc.

Direct Materials Purchases Budget

For the Year Ending December 31, 2006

Direct Materials

Leather Lining Total

Square yards required for production:

Wallet (Note A) …………………. 156,000 52,000

Handbag (Note B) ………………. 365,000 146,000

Plus desired inventory, Dec. 31, 2006 20,000 12,000

Total……………………………… 541,000 210,000

Less estimated inventory, Jan. 1, 2006 18,000 15,000

Total square yards to be purchased.. 523,000 195,000

slide24
Elite Accessories Inc.

Direct Materials Purchases Budget

For the Year Ending December 31, 2006

Direct Materials

Leather Lining Total

Square yards required for production:

Wallet (Note A)………………….. 156,000 52,000

Handbag (Note B).………………. 365,000 146,000

Plus desired inventory, Dec. 31, 2006 20,000 12,000

Total……………………………… 541,000 210,000

Less estimated inventory, Jan. 1, 2006 18,000 15,000

Total square yards to be purchased 523,000 195,000

Unit price (per square yard)…………. x $4.50x $1.20

Total value of materials to be purchased. $2,353,500 $234,000 $2,587,500

slide25
Elite Accessories Inc.

Direct Labor Cost Budget

For the Year Ending December 31, 2006

Cutting Sewing Total

Hours required for production:

Wallet (Note A)………….52,000 130,000

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.

Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

slide26
Elite Accessories Inc.

Direct Labor Cost Budget

For the Year Ending December 31, 2006

Cutting Sewing Total

Hours required for production:

Wallet (Note A)………….52,000 130,000

Handbag (Note B)……….. 43,800 116,800

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.

Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

.

Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs

slide27
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.

Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

.

Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs

Elite Accessories Inc.

Direct Labor Cost Budget

For the Year Ending December 31, 2006

Cutting Sewing Total

Hours required for production:

Wallet (Note A)………….52,000 130,000

Handbag (Note B)……….. 43,800 116,800

Total……………………... 95,800 246,800

slide28
Elite Accessories Inc.

Direct Labor Cost Budget

For the Year Ending December 31, 2006

Cutting Sewing Total

Hours required for production:

Wallet (Note A)………….52,000 130,000

Handbag (Note B)……….. 43,800 116,800

Total……………………... 95,800 246,800

Hourly rate…………………… x $12.00x $15.00

Total direct labor cost………… $1,149,600 $3,702,000 $4,851,600

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.

Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs

slide29
Elite Accessories Inc.

Factory Overhead Cost Budget

For the Year Ending December 31, 2006

Indirect factory wages……………………... $ 732,800

Supervisory salaries………………………... 360,000

Power and light…………………………….. 306,000

Depreciation of plant and equipment……… 288,000

Indirect materials…………………………… 182,800

Maintenance………………………………. 140,280

Insurance and property taxes………………. 79,200

Total factory overhead cost……………… .. $2,089,080

slide31
Elite Accessories Inc.

Cost of Goods Sold Budget

For the Year Ending December 31, 2006

Finished goods inventory, January 1 ,2006….. $ 1,095,600

Work in process inventory, January 1, 2006… $ 214,400

Direct materials:

Direct materials inventory, January 1, 2006

(Note A)…………………………………. $ 99,000

Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd $81,000

Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000

Direct materials

inventory,

January 1, 2006 $99,000

slide32
Elite Accessories Inc.

Cost of Goods Sold Budget

For the Year Ending December 31, 2006

Finished goods inventory, January 1 ,2006….. $ 1,095,600

Work in process inventory, January 1, 2006… $ 214,400

Direct materials:

Direct materials inventory, January 1, 2006

(Note A)…………………………………. $ 99,000

Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd $ 90,000

Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400

Direct materials inventory, December 31, 2006 $104,400

slide33
Elite Accessories Inc.

Cost of Goods Sold Budget

Finished goods inventory, January 1 ,2006…. $ 1,095,600

Work in process inventory, January 1, 2006... $ 214,400

Direct materials:

Direct materials inventory, January 1, 2006

(Note A)…………………………………. $ 99,000

Direct materials purchases (Slide 24)……..2,587,500

Cost of direct materials available for use…. $2,686,500

Less direct materials inventory,

December 31, 2006 (Note B)……………. 104,400

Cost of direct materials placed in production $2,582,100

Direct labor (Slide 28)……………………….4,851,600

Factory overhead (Slide 29)………………….. 2,089,080

Total manufacturing costs……………………. 9,522,780

Total work in process during period…………. $9,737,180

Less work in process inventory, December 31, 2006 220,000

Cost of goods manufactured………………………... 9,517,180

Cost of finished goods available for sale…………... $10,612,780

Less finished goods inventory, December 31, 2006.. 1,565,000

Cost of goods sold………………………………….. $ 9,047,780

slide34
Elite Accessories Inc.

Selling and Administrative Expenses Budget

For the Year Ending December 31, 2006

Selling expenses:

Sales salaries expense…………………………. $715,000

Advertising expense…………………………... 360,000

Travel expense…………………………………. 115,000

Total selling expenses………………………... $1,190,000

Administrative expenses:

Officers’ salaries expense………………………. $360,000

Office salaries expense…………………………. 258,000

Office rent expense……………………………... 34,500

Office supplies expense…………………………. 17,500

Miscellaneous administrative expense………….. 25,000

Total administrative expenses………………… 695,000

Total selling and administrative expenses………… $1,885,000

slide35
Elite Accessories Inc.

Budgeted Income Statement

For the Year Ending December 31, 2006

Revenue from sales (slide 18) $13,336,000

Cost of goods sold (slide 33) 9,047,780

Gross profit $ 4,288,220

Selling & administrative expenses:

Selling expenses (slide 34) $1,190,000

Administrative expenses (slide 34) 695,000

Total sell. & Admin. Expenses 1,885,000

Income from operations $ 2,403,220

Other income:

Interest revenue $ 98,000

Other expense:

Interest expense 90,000 8,000

Income before income tax $ 2,411,220

Income tax 600,000

Net income $ 1,811,220

slide36
Budgeted Balance Sheet

The cash budget is one of the most important elements of the budgeted balance sheet. We’ll begin with a schedule of collection from sales.

slide39
Elite Accessories Inc.

Schedule of Collections from Sales

For the Three Months Ending March 31, 2006

January February March

Receipts from cash sales:

Cash sales (10%)(see

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%

slide40
Elite Accessories Inc.

Schedule of Collections from Sales

For the Three Months Ending March 31, 2006

January February March

Receipts from cash sales:

Cash sales (10%)(see

Note A)……………………... $108,000 $ 124,000 $ 97,000

Receipts from sales on account:

Collections from prior month’s

sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400

Note B: $370,000, given as January 1, 2006 Accounts

Receivable balance

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

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

slide41
Elite Accessories Inc.

Schedule of Collections from Sales

For the Three Months Ending March 31, 2006

January February March

Receipts from cash sales:

Cash sales (10%)(see

Note A)……………………... $108,000 $ 124,000 $ 97,000

Receipts from sales on account:

Collections from prior month’s

sales (40%)(see 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%

slide42
Elite Accessories Inc.

Schedule of Collections from Sales

For the Three Months Ending March 31, 2006

January February March

Receipts from cash sales:

Cash sales (10%)(see

Note A)……………………... $108,000 $ 124,000 $ 97,000

Receipts from sales on account:

Collections from prior month’s

sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400

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

C)…………………………… 583,200 669,600 523,800

Total receipts from sales on account……………………... $953,200 $1,058,400 $970,200

slide43
Elite Accessories Inc.

Schedule of Payments for Manufacturing Costs

For the Three Months Ending March 31, 2006

January February March

Payment of prior month’s

manufacturing costs (25%) (see 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 25%

slide44
Elite Accessories Inc.

Schedule of Payments for Manufacturing Costs

For the Three Months Ending March 31, 2006

January February March

Payment of prior month’s

manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000

Payment of current month’s

manufacturing costs (75%)

(see 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%

slide45
Elite Accessories Inc.

Schedule of Payments for Manufacturing Costs

For the Three Months Ending March 31, 2006

January February March

Payment of prior month’s

manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000

Payment of current month’s

manufacturing costs (75%)

(see Note B)…………………. 612,000 567,000 591,000

Total payments………………. $802,000 $771,000 $780,000

slide46
Elite Accessories Inc.

Cash Budget

For the Three Months Ending March 31, 2006

January February March

Estimated cash receipts:

Cash sales (Slide 42)………….. $ 108,000 $ 124,000 $ 97,000

Collections of accounts

receivable (Slide 42)………... 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 45).. $ 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

Total cash payments…………. $ 984,500$1,210,000$1,075,000

slide47
Elite Accessories Inc.

Cash Budget

For the Three Months Ending March 31, 2006

January February March

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

Estimated cash payments for:

Manufacturing costs (Slide 45).. $ 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

Total cash payments…………. $ 984,500$1,210,000$1,075,000

Cash increase (decrease)…………. $ 76,700 $ (27,600) $ 16,700

Cash balance at beginning of month 280,000 356,700 329,100

Cash balance at end of month……. $ 356,700 $ 329,100 $ 345,800

Minimum cash balance…………… 340,000 340,000 340,000

Excess (deficiency)………………. $ 16,700 $ (10,900) $ 5,800

software
Software

Spreadsheet software for personal computers

is a powerful and flexible tool for budgeting.

Sensitivity analysis is the systematic varying

of budget data input to determine the effects

of each change on the budget.

Class Example

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