Chapter 10Budgetary Planning and Control

Presentation Outline

I. An Overview of Budgeting

II. The Master Budget and Selected Budget Formats

I. An Overview of Budgeting

A. The Stages of Budgeting

B. Developing the Budget

A. The Stages of Budgeting

1. Planning

2. Control

1. Planning

The budget process forces managers to consider carefully

their goals and objectives and to specify means of achieving them.

2. ControlBudgets provide a means of

evaluating performance. Potential causes of significant

deviations from budgets include:Budget was poorly conceived.Conditions have changed since

the budget was prepared.Managers have done a

particularly good or poor job.

B. Developing the Budget

1. The Budget Committee

2. The Budget Time Period

3. Zero Base Budgeting

1. The Budget CommitteeVarious budgets are approved by a budget

committee that is composed of senior

managers such as the president, CFO, VP of

operations, and the controller. Budgets may be developed with either a top-down or bottom-up

approach.

2. The Budget Time Period

Budgets may cover a variety of time periods

including a month, quarter, year, or even

longer. Generally, longer budget periods

provide less detail.

3. Zero Base BudgetingBudgets are often adjusted up

or down on the basis of a previous period adjusted for

current conditions. Zero base budgeting requires that

all budget amounts be currently justified even if

they were supported in prior budgets. Due to the cost of the process, this zero base budgeting is often not used

in business.

II. The Master Budget and Budget Formats

A. A Formal Summary of Company Plans

B. Selected Budget Formats

The master budget

coordinates the organization’s

activities.

A. A Formal Summary of Company Plans

It sets specific targets for sales, production, selling and admin.,

and capital acquisitions.

It culminates a budgeted income

statement, balance sheet, and cash receipt

and disbursement summary.

III. Selected Budget Formats

A. Sales Budget

B. Production Budget

C. Direct Materials Budget

D. Direct Labor Budget

E. Overhead Budget

F. Cash Receipts and Disbursements Budget

A. Sales Budget

Projected sales

x Selling price per unit

= Budgeted sales revenue

B. Production Budget

Budgeted sales in units

+ Desired ending inventory of finished goods

= Total needs- Beginning inventory of finished goods

= Units to be produced

C. Direct Materials Budget Units to be produced

x Cost of parts per unit

= Cost of parts needed for production

+ Desired ending inventory of parts

= Total needed

- Beginning inventory of parts

= Cost of purchases

D. Direct Labor Budget

Direct labor hours per unit

x Labor rate per hour

= Direct labor cost per unitx Units to be produced

= Total direct labor cost

E. Overhead Budget

Units to be produced

x Variable costs per unit

= Total variable overhead

+ Budgeted fixed overhead

= Total budgeted overhead

- Noncash expenses

= Cash disbursements for overhead

F. Cash Receipts and Disbursements Budget

Cash receipts

- Cash disbursements

= Excess (deficiency) of cash available over disbursements

+ Beginning cash balance

= Ending cash balance

IV. Static v. Flexible Budget

A. Static Budget

B. Static Budget Illustration

C. Flexible Budget

D. Flexible Budget Illustration

A. Static Budget

A budget designed for only one level of

activity. Differences from the budget can be

misleading when an organization actually operates at a different

level of activity.

Why are we so

off from budget?

B. Static Budget Illustration

Standardcost per Original

unit Actual Budget VarianceUnits produced and sold 8,000 10,000 2,000 U

Variable Overhead Costs: Maintenance 0.60$ 4,500$ 6,000$ 1,500$ F Indirect materials 1.40 12,000 14,000 2,000 F Utilities 1.00 9,500 10,000 500 F

26,000 30,000 4,000 F

Fixed Overhead Costs: Depreciation 40,000 40,000 -$ Supervision 49,000 50,000 1,000 F Insurance 10,000 10,000 - Total fixed overhead 99,000 100,000 1,000 FTotal overhead costs 125,000$ 130,000$ 5,000$ F

C. Flexible Budget

A budget designed to cover a range of

activity. Can be used to compare actual costs incurred to

budgeted costs around that level of activity.

D. Flexible Budget IllustrationStandard

cost per unit UnitsUnits produced and sold 5,000 10,000 15,000

Variable Overhead Costs: Maintenance 0.60$ 3,000$ 6,000$ 9,000$ Indirect materials 1.40 7,000 14,000 21,000 Utilities 1.00 5,000 10,000 15,000

3.00$ 15,000 30,000 45,000

Fixed Overhead Costs: Depreciation 40,000 40,000 40,000 Supervision 50,000 50,000 50,000 Insurance 10,000 10,000 10,000 Total fixed overhead 100,000 100,000 100,000 Total overhead costs 115,000$ 130,000$ 145,000$

Summary

Planning and control stages of budget

Budget committees, time periods, zero based budgeting

Formal plan culminating in projected financial statements

Budget formats

Static and flexible budgets