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C H A P T E R 5
Operational BudgetsOperational Budgets
What are the Purposes of Budgeting ?
OVERALL PURPOSE:
To quantify a general plan so that performance in relation to a goal can be carefully monitored.
TWOFOLD PURPOSE
FIRST:To allow individuals or companies to develop a plan to meet a specified goal.
SECOND:To allow ongoing comparison between actual results and the plan in order to control operations or activities.
Describe Two Types of Planning
Long-run planning includes strategic planning and capital budgeting
Short-run planning includes production process prioritizing and operational budgeting or profit planning
List Reasons for Budgeting
1. Planning and setting objectives
2. Communication and coordination
3. Authorization
4. Motivation
5. Conflict resolution
6. Evaluation
Budgeting Process
Who or what is the budget committee?
A management group responsible for establishing budgeting policy and for coordinating the preparation of budgets.
What are two issues of the budgeting process?
Behavioral considerations
Involvement in preparingthe budget
List Behavioral Considerations
1. Top management support
2. Employee participation
3. Addressing budget deviations
Describe the Top-Down Approach to Budgeting
TopManagement
Manager ManagerManager
Top management prepares the entire budget and distributes it to division managers.
Describe the Bottom-Up Approach to Budgeting
TopManagement
Manager ManagerManager
Each manager prepares a budget request, from which management creates an overall budget.
Master Budget—Manufacturing
Sales Budget*
Selling/Admin.Expense Budget*
Production Budget
Direct Labor
Budget*
ManufacturingOverhead Budget*
Direct Materials Budget*
Budgeted Income Statement
BudgetedBalance Sheet
BudgetedCash Flows
Cash BudgetCapital Expenditures Budget
Operating Budget
Capital Project Plans
Short-TermObjectives
Strategic Goalsand Plans
BudgetedProduct Sheet
* These budgets all flow into the cash budget below.
Planning Process
Financial Budgeting* ***
Sales Budget
Master Budget—ManufacturingDefine each budget.
A schedule of projected sales over the budget period.
A schedule of projected sales over the budget period.
Example: Sales Budget
Selling price per bike . . . . . . $ 100
Expected sales (units). . . . . x 100
Expected revenues . . . . . . . $10,000
Selling price per bike . . . . . . $ 100
Expected sales (units). . . . . x 100
Expected revenues . . . . . . . $10,000
Sales Budget
Production Budget
Master Budget—ManufacturingDefine each budget.
A schedule of production requirements for the budget period.
A schedule of production requirements for the budget period.
Example: Production Budget
Expected sales. . . . . . . . . . . . . . . 100
Add desired ending inventory. . . . 105
Total number of bikes needed . . 205
Less beginning inventory . . . . . . . 70
Bikes to be produced . . . . . . . . . . 135
Expected sales. . . . . . . . . . . . . . . 100
Add desired ending inventory. . . . 105
Total number of bikes needed . . 205
Less beginning inventory . . . . . . . 70
Bikes to be produced . . . . . . . . . . 135
Note: Ending inventory is estimated at 80% of the next period’s sales.
Sales Budget
Production Budget
Direct MaterialsBudget
Master Budget—ManufacturingDefine each budget.
A schedule of direct materials to be used and purchased during the budget period.
A schedule of direct materials to be used and purchased during the budget period.
Example: Direct Materials Budget
Direct materials usage:
Direct Amount Unit TotalMaterials Required Cost Cost
Metal 2,700 lbs. $2.00/ft. $5,400
Plastic 405 lbs. $1.00/ft. $ 405
Direct materials usage:
Direct Amount Unit TotalMaterials Required Cost Cost
Metal 2,700 lbs. $2.00/ft. $5,400
Plastic 405 lbs. $1.00/ft. $ 405
Example: Direct Materials Budget
Direct materials purchases: Metal Plastic
Desired ending inventory. . . . . 2,100 315
Needed for production. . . . . . . 2,700 405
Total needed . . . . . . . . . . . . . . 4,800 720
Less beginning inventory. . . . . 2,800 210
Materials to be purchased . . . . 2,000 510
Unit cost. . . . . . . . . . . . . . . . . . x $2 x $1
Total cost . . . . . . . . . . . . . . . . $4,000 $ 510
Direct materials purchases: Metal Plastic
Desired ending inventory. . . . . 2,100 315
Needed for production. . . . . . . 2,700 405
Total needed . . . . . . . . . . . . . . 4,800 720
Less beginning inventory. . . . . 2,800 210
Materials to be purchased . . . . 2,000 510
Unit cost. . . . . . . . . . . . . . . . . . x $2 x $1
Total cost . . . . . . . . . . . . . . . . $4,000 $ 510
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Master Budget—ManufacturingDefine each budget.
A schedule of direct labor requirements for the budget period.
A schedule of direct labor requirements for the budget period.
Example: Direct Labor Budget
Number of bikes to produce. . . . 135
Direct labor hours per bike. . . . .x 3
Total hours required. . . . . . . . . 405
Rate per hour. . . . . . . . . . . . . . . .x $5
Total direct labor cost. . . . . . . . $2,025
Number of bikes to produce. . . . 135
Direct labor hours per bike. . . . .x 3
Total hours required. . . . . . . . . 405
Rate per hour. . . . . . . . . . . . . . . .x $5
Total direct labor cost. . . . . . . . $2,025
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
A schedule of production costs other than those for direct labor and direct materials.
A schedule of production costs other than those for direct labor and direct materials.
Example: Manufacturing Overhead Budget
Variable costs:Indirect materials costs. . . . . . . . . $ 220Indirect labor costs . . . . . . . . . . . . 600 Total variable costs. . . . . . . . . . . $ 820
Fixed costs:Insurance expense. . . . . . . . . . . . $ 200Depreciation expense. . . . . . . . . . 600 Total fixed costs . . . . . . . . . . . . . $ 800
Total manufacturing overhead . . . $1,620
Variable costs:Indirect materials costs. . . . . . . . . $ 220Indirect labor costs . . . . . . . . . . . . 600 Total variable costs. . . . . . . . . . . $ 820
Fixed costs:Insurance expense. . . . . . . . . . . . $ 200Depreciation expense. . . . . . . . . . 600 Total fixed costs . . . . . . . . . . . . . $ 800
Total manufacturing overhead . . . $1,620
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
Budgeted Product
Cost Sheet
Selling and Administrative
Expense Budget
A schedule to accumulate all the budgeted production cost to produce each bike
A schedule to accumulate all the budgeted production cost to produce each bike
Budgeted Product Cost Sheet
Input Required Cost Cost Inputs per Bike
Metal $2.00/ft. 20 $40.00
Plastic $1.00/ft. 3 3.00
Direct labor $5.00/hr. 3 15.00
Fixed OH $1.98/hr. 3 5.94
Variable OH $2.02/hr. 3 6.06
Total variable cost per bike . . . . . $70.00
Total fixed MOH $1,620Divide by Production Volume 135 bikes
Fixed MOH cost allocated per bike 12.00
Total $82.00
Input Required Cost Cost Inputs per Bike
Metal $2.00/ft. 20 $40.00
Plastic $1.00/ft. 3 3.00
Direct labor $5.00/hr. 3 15.00
Fixed OH $1.98/hr. 3 5.94
Variable OH $2.02/hr. 3 6.06
Total variable cost per bike . . . . . $70.00
Total fixed MOH $1,620Divide by Production Volume 135 bikes
Fixed MOH cost allocated per bike 12.00
Total $82.00
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
Selling and Administrative
Expense Budget
A schedule of all non-production spending expected to occur during the budget period.
A schedule of all non-production spending expected to occur during the budget period.
Example: Selling and Administrative Budget
Variable expenses:Sales commissions . . . . . . . . . . . . . . $ 400 Total variable expenses. . . . . . . . . . $ 400
Fixed expenses:Salaries expense . . . . . . . . . . . . . . . $1,000Depreciation . . . . . . . . . . . . . . . . . . . 100Advertising expense. . . . . . . . . . . . . 200 Total fixed expenses. . . . . . . . . . . . $1,300Total selling and administrative expenses. . . . . . . . . $1,700
Sales Budget
PurchasesBudget
BudgetedIncome
Statement
Master Budget—MerchandisingDefine each budget.
Selling and Administrative
Expense Budget
A schedule of projected purchases over the budget period.A schedule of projected purchases over the budget period.
Master Budget—ServiceDefine each budget.
Pro-Forma IncomeStatement
Revenue Budget
Wages andSalaries Budget
Production Budget
Cash Budget
Pro-FormaBalance Sheet
Selling/Admin.Expense Budget
OverheadBudget
SuppliesBudget
Pro-Forma Statementof Cash Flows
A service entity’s budget that identifies how much revenue will be generated during a period.
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
Cash Budget
Selling and Administrative
Expense Budget
A schedule of expected cash receipts and disbursements during the budget period.
A schedule of expected cash receipts and disbursements during the budget period.
Example: Cash Budget
Cash balance, beginning . . . . . . . . . $ 4,900Add collections from customers . . . . 10,100(1)Total cash available. . . . . . . . . . $15,000Less disbursements for: Direct materials . . . . . . . . . . . . . $ 3,000 Direct labor. . . . . . . . . . . . . . . . . 2,000 Equipment purchase . . . . . . . . . 2,000(2)Total disbursements. . . . . . . . . . $ 7,000Minimum cash balance desired. . . . . 6,000Total cash needed. . . . . . . . . . . . . . . $13,000Excess (or deficiency) of cash available before financing. . . . . $ 2,000(3) Financing needed . . . . . . . . . . . 0
Ending cash balance [(1) – (2) + (3)] $ 2,000
Define Static versusFlexible Budgeting
•Static Budgeting:
• A quantified plan that projects revenues and costs for only one level of activity.
• Not useful for controlling costs and measuring performance because the actual level of activity may have differed significantly from the planned level.
•Flexible Budgeting
• A quantified plan that projects revenues and costs for varying levels of activity.
• More useful for control and performance evaluation because it is not confined to one level of activity.
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