Budgeting ACG 2071 Chapter 21 Module 9 Fall 2007.

Budgeting

ACG 2071Chapter 21

Module 9Fall 2007

Budgets

Charts a course for a business by outlining the plans of the business in financial terms

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2030

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6070

8090

1stQtr

3rdQtr

East

West

North

Budgets

Objectives• Establishing specific goals

• Executing plans to achieve goals

• Periodically comparing actual results with goals

Management meets objectives

Planning Directing Controlling

Budgeting Systems Continuous Budget Static budget Flexible budget Zero Based Budgeting

Master Budget Manufacturing Company Parts

• Budgeted income statement• Sales budget

• Cost of goods sold budget• Production budget

• Direct materials purchases budget

• Direct labor cost budget

• Factory overhead cost budget

• Selling and administrative expense budget

• Budgeted balance sheet• Cash budget • Capital Expenditure Budget

Sales Budget

Indicates for each product the quantity of sales and expected selling price

Example 1: Brite Lite sells two products in United States and Canada. Product A is estimated to sell 5,000 units in the United States and 10,000 units in Canada at $100 per unit. Product B sells 20,000 units in United States and 6,000 units in Canada at $50 per unit

Sales Budget

Product A Product B

Units sold:

United States 5,000 20,000

Canada 10,000 6,000

Total units sold 15,000 26,000

Sales price per unit

X $100 X $50

Total sales $1,500,000 1,300,000 $2,800,000

Brite Lite

Sales Budget

For year 2008

Production Budget

Coordinates with sales budget to ensure that production and sales are kept in balance during the period

Number of units manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.

Production Budget Formula

Expected units to be sold+ Desired Ending Inventory

-Estimated Beginning InventoryTotal units to be produced

Production budget

Brite Lite expects to have beginning inventory of 3,000 units of Product A and 5,000 units of Product B. The company would like its ending inventory to be 10% of estimated sales

Production Budget

Brite LiteProduction BudgetFor year 2008

Product A Product B

Expected sales (in units) 15,000 26,000

Plus desired ending inventory + 1,500 + 2,600

Minus estimated beginning inventory

- 3,000 - 5,000

Total production 13,500 23,600

Example 2 Class problem

Geo produces three products X, Y, and Z. Sales:

• 10,000 units to X,

• 15,000 units to Y

• 25,000 to Z. B Beginning inventory is estimated at

• 3,000 to X,

• 5000 to Y,

• 2,500 to Z. Ending inventory is estimated at

• 1,500 to X,

• 4,000 to Y

• 4,000 to Z. Complete production budget.

Direct Materials Budget

The production budget is the starting point for determining the estimated quantities of direct materials to be purchased.

Estimates purchase levels for the next year and costs.

Formula:

Direct Materials Budget Formula

Materials required for production+Desired Ending Materials Inventory

-Estimated Beginning Materials InventoryDirect materials to be purchased

X Cost per unitTotal Direct Materials Cost

Direct Materials Purchases Budget

Estimates purchase levels for the next year and costs

Materials required for production plus ending inventory minus beginning inventory

Direct Materials

Product A uses 2 lbs. of plastic and 3 lbs. of aluminum. Product B uses ½ lb. of plastic, 1 lb. of aluminum, and 2 lbs. of paper. Aluminum sells for $5 per lb. Plastic sells for $10 per lbs, and paper sells for $2 per lbs.

Ending Invent

ory (lbs)

Beginning

inventory

(lbs.)

Plastic 4,000 7,300

Aluminum 6,000 3,600

Paper 8,000 5,200

AL Plastic Paper Total

Product A (13,500 units)

13,500 x 3 lbs. 40,500

13,500 x 2 lbs. 27,000

13,500 x 0 lbs. 0

Product B (23,600 units)

23, 600 x 1lbs. 23.600

23,600 x ½ lbs. 11,800

23,600 x 2 lbs. 47,200

Total needed for production 64,100 38,800 47,200

+ Desired Ending inventory

4,000 6,000 8,000

Total units needed 68,100 44,800 55,200

- Beginning Inventory -7,300 -3,600 -5,200

Total direct materials purchased

60,800 41,200 50,000

Unit cost for material X $5 X $10 X $2

Total costs $304,000 $412,000 $100,000 $816,000

Direct Labor Budget

Production budget also provides the starting point for preparing the direct labor cost budget.

Example: Department 1 has a labor cost of $10 per hour. Product A uses 6 hours in Department 1 and Product B uses 4 hours. Department 2 has a labor cost of $7 per hours. Production A uses 2 hours of Department 2’s labor and Product B uses ½ hour. Prepare a direct labor budget.

ExampleDepartment 1 Department 2 Total

Product A (13,500 units)

6 hours per unit x 13,500

81,000

2 hours per unit x 13,500

27,000

Product B (23,600 units)

4 hours x 23,600 units 94,400

½ hour x 23,600 units 11,800

Total hours per department

175,400 38,800

Labor cost per hour X $10 X $7

Total $1,754,000 $271,600 $2,025,600

Factory Overhead Budget

Indirect labor $25,000, utilities $45,000, maintenance$40,000 and insurance $60,000

Indirect labor 25,000.00$ Utilities expense 45,000.00$ Maintenance expense 40,000.00$ Insurance expense 60,000.00$ Total factory overhead 170,000.00$

Cost of goods sold budget:

Is composed of the budgets for production, direct materials, direct labor and factory overhead

Selling and Administrative Budget:

Sales budget is often used as the starting point for estimating the selling and administrative expenses.

Budgeted Income Statement:Budgeted Income Statement

Revenue from sales $ 13,336,000.00

Cost of goods sold $ 9,047,780.00

Gross profit $ 4,288,220.00

Selling and administrative expenses $ 1,885,000.00

Income from operations $ 2,403,220.00

Other income

Interest revenue $ 98,000.00

Other expenses

Interest expenses $ 90,000.00 $ 8,000.00

Income before income tax $ 2,411,220.00

Income tax $ 600,000.00

Net income $ 1,811,220.00

Balance Sheet Budgets

Cash Budget Capital Expenditure Budget

Capital Expenditures Budget

Lists dollar amounts to be both received from plant asset disposals and spent to purchase additional plant assets to carry out the budgeted business activities

Cash Budget Is one of the most important

elements of budgets Presents the expected receipts

and payments of cash for a period of time

Three parts of the budget”• Cash receipts• Cash payments• Other items

We prepare a schedule for cash receipts and cash payments

Schedule of Cash Receipts

: Magna Corporation has estimated sales of January $1,080,000, February $1,240,000, and March $970,000. Accounts receivable has a balance on January 1 of $370,000. The company expects that 10% of its sales will be in cash and the remainder in credit. Of the credit sales, 60% will be collected in the next month and the remainder the following month.

Required: Prepare a schedule of cash receipts..

CalculationsJanuary Sales

Sales $ 1,080,000.00

Less cash portion ( 10% of sales) $ 108,000.00

Credit sales $ 972,000.00


Collections in February $ 583,200.00 *

Remainder collected in March $ 388,800.00

* 60% of Credit sales = $972,000 x 60%

Calculations

February Sales

Sales $ 1,240,000.00


Credit sales $ 1,116,000.00

Credit sales $ 1,116,000.00

Collections in February $ 669,600.00


Calculations

March Sales

Sales $ 970,000.00




Collections in February $ 523,800.00


Schedule of Cash Receipts

January February March

Receipts of Cash Sales $108,000 $124,000 $97,000

Receipt from collections:

Collection from last month’s sales

$370,000 $388,800 $446,400

Collection from current month’s

583,200 669,600 523,800

Total receipts 953,200 1,058,400 970,200

Schedule of Cash Payments Reduction in cash from manufacturing, selling and

administrative, capital expenditure, and other expenses

Example: Magna Company has manufacturing costs of $840,000 in January, $780,000 in February, and $812,000 for March. The beginning balance in accounts payable is $190,000. Depreciation expense is $24,000 per month which is included in manufacturing costs. Manufacturing costs payments are allocated at 75% in month incurred and remainder the next month.

January Manufacturing Costs

Total manufacturing costs for month $ 840,000.00

Less depreciation expense $ 24,000.00

Total manufacturing costs owed $ 816,000.00

Payment in January


'75% paid in month incurred X 75%

Payment in January $ 612,000.00


Less payment in January $ 612,000.00

Payment in February $ 204,000.00

February Manufacturing Costs




Payment in February


'75% paid in month incurred 75%

Payment in February $ 567,000.00


Less payment in February $ 567,000.00

Payment in March $ 189,000.00

March Manufacturing Costs




Payment in March


'75% paid in month incurred 75%

Payment in March $ 591,000.00


Less payment in March $ 591,000.00

Payment in April $ 197,000.00

Schedule of Cash Payments


Payments of prior month’s manufacturing costs

$190,000 $204,000 $189,000

Payments of current month’s manufacturing costs

612,000 567,000 591,000

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

Completing the Cash Budget

After preparing the schedule of cash receipts and the schedule of cash payments, we review additional items and prepare the formal cash budget.

Completing the Budget Cash balance on January 1 - $280,000 Quarterly tax due on March 31 - $150,000 Quarterly interest paid to creditors on January 10 - $22,500 Selling and administrative expenses:

• January $160,000• February $165,000• March $145,000

Interest revenue to be received on March 21 - $24,500 Capital expenditures on equipment payable on February 28 -

$274,000 Minimum cash balance of $340,000 is required by the

corporation’s Board of Directors

Cash Budget


Estimated cash receipts

Cash receipts $ 108,000.00 $ 124,000.00 $ 97,000.00

Collections of accounts receivables

$ 953,200.00 $ 1,058,400.00 $ 970,200.00

Interest revenue $ 24,500.00

Total cash receipts $ 1,061,200.00 $ 1,061,200.00 $ 1,091,700.00

Estimated cash payments

Manufacturing costs $ 802,000.00 $ 771,000.00 $ 780,000.00

Selling and administrative $ 160,000.00 $ 165,000.00 $ 145,000.00

Capital expenditures $ 274,000.00

Interest expense $ 22,500.00

Tax payment $ 150,000.00

Total cash payments $ 984,500.00 $ 1,210,000.00 $ 1,075,000.00

Cash increase $ 76,700.00 $ (148,800.00) $ 16,700.00

Cash balance at beg of month $ 280,000.00 $ 356,700.00 $ 207,900.00

Cash balance at end of month $ 356,700.00 $ 207,900.00 $ 224,600.00

Minimum cash balance $ 340,000.00 $ 340,000.00 $ 340,000.00

Excess $ 16,700.00 $ (132,100.00) $ (115,400.00)

Budgeting ACG 2071 Chapter 21 Module 9 Fall 2007.

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