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Budgeting
ACG 2071Chapter 21
Module 9Fall 2007
Budgets
Charts a course for a business by outlining the plans of the business in financial terms
010
2030
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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
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
Less cash portion ( 10% of sales) $ 124,000.00
Credit sales $ 1,116,000.00
Credit sales $ 1,116,000.00
Collections in February $ 669,600.00
Remainder collected in March $ 446,400.00
Calculations
March Sales
Sales $ 970,000.00
Less cash portion ( 10% of sales) $ 97,000.00
Credit sales $ 873,000.00
Credit sales $ 873,000.00
Collections in February $ 523,800.00
Remainder collected in March $ 349,200.00
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
Total manufacturing costs owed $ 816,000.00
'75% paid in month incurred X 75%
Payment in January $ 612,000.00
Total manufacturing costs owed $ 816,000.00
Less payment in January $ 612,000.00
Payment in February $ 204,000.00
February Manufacturing Costs
Total manufacturing costs for month $ 780,000.00
Less depreciation expense $ 24,000.00
Total manufacturing costs owed $ 756,000.00
Payment in February
Total manufacturing costs owed $ 756,000.00
'75% paid in month incurred 75%
Payment in February $ 567,000.00
Total manufacturing costs owed $ 756,000.00
Less payment in February $ 567,000.00
Payment in March $ 189,000.00
March Manufacturing Costs
Total manufacturing costs for month $ 812,000.00
Less depreciation expense $ 24,000.00
Total manufacturing costs owed $ 788,000.00
Payment in March
Total manufacturing costs owed $ 788,000.00
'75% paid in month incurred 75%
Payment in March $ 591,000.00
Total manufacturing costs owed $ 788,000.00
Less payment in March $ 591,000.00
Payment in April $ 197,000.00
Schedule of Cash Payments
January February March
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
January February March
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)
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