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21

Budgeting

Student Version

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

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1. Planning involves setting goals as a guide for making decisions.

Objectives of Budgeting

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2. Directing involves decisions and actions to achieve budgeted goals.

3. Controlling involves comparing actual performance against the budgeted goals.

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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.

Responsibility Centers

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Controlling Through FeedbackAs 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.

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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.

Budgetary Slack

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Goal conflict occurs when individual self-interest differs from business objectives or when different departments are given conflicting objectives.

Goal Conflict

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2

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

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Continuous BudgetingA variation of fiscal-year budgeting, called continuous budgeting, maintains a twelve-month projection into the future.

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Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.

Zero-Based Budgeting

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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.

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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.

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3

Describe the master budget for a manufacturing company.

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Master BudgetThe master budget is an integrated set of operating, investing, and financing budgets for a period of time.

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4

Prepare the basic income statement budgets for a manufacturing company.

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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.

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Production BudgetThe production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.

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Production Budget

Expected units of sales+ Desired units in ending inventory– Estimated units in beginning inventory

Total units to be produced

SalesBudget

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Production Budget

From Exhibit 8 528,000+ Desired units in ending inventory– Estimated units in beginning inventory

Total units to be produced

SalesBudget

Wallets

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Direct Materials Purchases Budget

Production BudgetDirect Materials

Purchases Budget

Materials needed for production + Desired ending materials inventory – Estimated beginning materials inventory

Direct materials to be purchased

SalesBudget

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Direct Materials Purchase Budget

(continued)

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Exhibit 10

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

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Direct Materials Purchase Budget (continued)

Note A: 520,000 units × 0.10 sq. yd. per unit = 52,000 sq. yds.

(continued)

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Exhibit 10

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(continued)

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Direct Materials Purchase Budget (continued)Exhibit 10

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

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Note B: 292,000 units × .50 sq. yd. per unit = 146,000 sq. yds.

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Direct Materials Purchase Budget (concluded)Exhibit 10

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Direct Labor Cost BudgetThe direct labor cost budget estimates the direct labor hours and related cost needed to support budgeted production.

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Production BudgetDirect Materials

Purchases Budget

Direct LaborCost Budget

SalesBudget

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Direct Labor Cost Budget

Note A: 520,000 units × 0.10 hr. per unit = 52,000 hrs.

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Exhibit 11

(continued)

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Direct Labor Cost Budget (continued)

(continued)

Note A: 520,000 units × 0.25 hr. per unit = 130,000 hrs.

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Exhibit 11

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(continued)

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

4Direct Labor Cost Budget (continued)Exhibit 11

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4Direct Labor Cost Budget (concluded)Exhibit 11

Note B: 292,000 units × 0.40 hr. per unit = 116,800 hrs.

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Factory Overhead Cost Budget

The factory overhead cost budget estimates the cost for each item of factory overhead needed to support budgeted production.

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Factory Overhead Cost Budget

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Exhibit 12

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Cost of Goods Sold Budget

Direct materials purchases budget

Direct labor cost budget

Factory overhead cost budget

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Exhibit 13

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Selling and Administrative Expenses Budget

The sales budget is often used as the starting point for the selling and administrative expenses budget. This budget is normally supported by departmental schedules.

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Production BudgetProduction BudgetDirect Materials

Purchases Budget

Direct LaborCost Budget

Factory Overhead

Cost Budget

Cost of Goods

Sold Budget

Selling & Administrative

ExpensesBudget

SalesBudget

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Selling and Administrative Expenses Budget

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Exhibit 14

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Budgeted Income Statement

Sales budget

Cost of goods sold budget

Selling and administrative expenses budget

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Exhibit 15

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Prepare balance sheet budgets for a manufacturing company.

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Schedule of Collections from Sales

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Exhibit 16

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Schedule of Payments for Manufacturing Costs

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Exhibit 17

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Cash Budget

Schedule of collections from sales

Schedule of cash payments for manufacturing costs

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Exhibit 18

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Capital Expenditure Budget

The capital expenditure budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out or become obsolete.

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Budgeted Balance SheetThe budgeted balance sheet is prepared and based on the operating, financing, and investing budgets of the master budget. It is similar to a normal balance sheet except that estimated amounts are used.

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