budgeting. advantages of budgeting advantages communicate plans think about and plan for the future...
TRANSCRIPT
Advantages of Budgeting
Advantages
Communicateplans
Think about andplan for the future
Allocateresources
Uncover potentialbottlenecks
Coordinateactivities
Define goalsand objectives
Budget Planning and Control
• Planning -- involves developing objectives and preparing various budgets to achieve these objectives.
• Control Control -- involves the steps taken by management that attempt to ensure the objectives are attained.
Choosing the Budget Period
Operating BudgetOperating Budget
2011 2012 2013 2014
The annual operating budget may be divided into quarterly
or monthly budgets.
The Basic Framework of Budgeting
DetailBudget
DetailBudget
DetailBudget
MasterBudget
Summary ofa company’s
plans.
Sales
Pu
rchases
SG
&A
The Master Budget-Manufacturer
DirectMaterialsBudget
EndingInventoryBudget
ProductionBudget
Selling andAdministrative
Budget
DirectLabor
Budget
ManufacturingOverhead
Budget
SalesBudget
The Master Budget-Manufacturer
DirectMaterialsBudget
EndingInventoryBudget
ProductionBudget
Selling andAdministrative
Budget
DirectLabor
Budget
ManufacturingOverhead
Budget
CashBudget
SalesBudget
Budgeted Financial Statements
The Master Budget-Merchandiser
DirectMaterialsBudget
EndingInventoryBudget
PurchasesBudget
Selling andAdministrative
Budget
ManufacturingOverhead
Budget
SalesBudget
The Master Budget-Merchandiser
DirectMaterialsBudget
EndingInventoryBudget
PurchasesBudget
Selling andAdministrative
Budget
DirectLabor
Budget
CashBudget
SalesBudget
Budgeted Financial Statements
The Budgeted Income Statement
Cash Budget
BudgetedIncome
Statement
Complete
d
After we complete the cash budget, After we complete the cash budget, we can prepare the budgeted income we can prepare the budgeted income
statement.statement.
Cashpaymentsfor S & A
Cashpayments
for inventory
Inventorypurchases
budget
Incomestatement
S & Aexpensebudget
Balancesheet
Cashreceipts
Salesbudget
Cashbudget
Statement ofcash flows
Cash Receiptsand Payments
Schedules
OperatingBudgets
Pro formaFinancial
StatementsStartStart
The Sales Budget
Detailed schedule showing expected Detailed schedule showing expected sales for the coming periods expressed sales for the coming periods expressed
in units and dollars.in units and dollars.
Budgeting ExampleRoyal Company is preparing budgets for the Royal Company is preparing budgets for the
quarter ending June 30.quarter ending June 30.Budgeted sales for the next five months are:Budgeted sales for the next five months are:
April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.
The selling price is $10 per unit.The selling price is $10 per unit.
Royal Company is preparing budgets for the Royal Company is preparing budgets for the quarter ending June 30.quarter ending June 30.
Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.
The selling price is $10 per unit.The selling price is $10 per unit.
The Sales Budget
April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unitTotal sales
The Sales Budget
April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10$ 10$ 10$ 10$ Total sales 200,000$ 500,000$ 300,000$ 1,000,000$
Expected Cash Collections• All sales are on account.All sales are on account.
• Royal’s collection pattern is:Royal’s collection pattern is: 70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% is uncollectible.5% is uncollectible.
• The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.
• All sales are on account.All sales are on account.
• Royal’s collection pattern is:Royal’s collection pattern is: 70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% is uncollectible.5% is uncollectible.
• The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.
Expected Cash Collections
From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.
Expected Cash Collections
From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.
The Production Budget
ProductionProductionBudgetBudget
Sales Sales BudgetBudget
andandExpectedExpected
CashCashCollectionsCollections
Complete
d
Production must be adequate to meet budgetedProduction must be adequate to meet budgetedsales and provide for sufficient ending inventory.sales and provide for sufficient ending inventory.
Inventory Purchases Budget The total amount of inventory needed for each
month is equal to the amount of the cost of budgeted sales plus the desired ending
inventory.
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Inventory Purchases BudgetHH’s policy is that ending inventory should be HH’s policy is that ending inventory should be equal to 25% of next month’s projected cost of equal to 25% of next month’s projected cost of goods sold. At HH, cost of goods sold normally goods sold. At HH, cost of goods sold normally
equal 70% of sales.equal 70% of sales.
Suppliers require HH to pay 60% of inventory Suppliers require HH to pay 60% of inventory purchases in the month goods are purchased purchases in the month goods are purchased and the remaining 40% in the month after the and the remaining 40% in the month after the
purchase.purchase.
Let’s prepare the inventory purchases budget Let’s prepare the inventory purchases budget and the schedule of cash payments for and the schedule of cash payments for
inventory purchases.inventory purchases.
January’s cost of goods sold is budgeted at January’s cost of goods sold is budgeted at $140,000.$140,000.
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Selling and Administrative Expense Budget
The details of the Selling and Administrative (S&A) Budget are shown on the next screen. It
is important to note that sales commission (based on 2% of sales) is paid in the month following the sale, while supplies expense
(based on 1% of sales) is paid in the month of the sale. The utility expense is paid in the
month following the usage of the electricity, gas, and water.
The details of the Selling and Administrative (S&A) Budget are shown on the next screen. It
is important to note that sales commission (based on 2% of sales) is paid in the month following the sale, while supplies expense
(based on 1% of sales) is paid in the month of the sale. The utility expense is paid in the
month following the usage of the electricity, gas, and water.
The Cash BudgetThe cash budget is divided into The cash budget is divided into fourfour sections: sections:1.1. Cash receipts listing all cash inflows excluding borrowingCash receipts listing all cash inflows excluding borrowing
2.2. Cash disbursements listing all payments excluding repayments of principal Cash disbursements listing all payments excluding repayments of principal and interestand interest
3.3. Cash excess or deficiencyCash excess or deficiency
4.4. The financing section listing all borrowings, repayments and interestThe financing section listing all borrowings, repayments and interest
The cash budget is divided into The cash budget is divided into fourfour sections: sections:1.1. Cash receipts listing all cash inflows excluding borrowingCash receipts listing all cash inflows excluding borrowing
2.2. Cash disbursements listing all payments excluding repayments of principal Cash disbursements listing all payments excluding repayments of principal and interestand interest
3.3. Cash excess or deficiencyCash excess or deficiency
4.4. The financing section listing all borrowings, repayments and interestThe financing section listing all borrowings, repayments and interest
Cash BudgetHH plans to purchase, for cash, store fixtures HH plans to purchase, for cash, store fixtures
with a cost of $130,000 in October. HH with a cost of $130,000 in October. HH borrows or repays principal and interest on the borrows or repays principal and interest on the last day of each month. Any money borrowed last day of each month. Any money borrowed from the bank bears interest at an annual rate from the bank bears interest at an annual rate of 12% (1% per month). The management at of 12% (1% per month). The management at
HH wants to maintain a cash balance of at HH wants to maintain a cash balance of at least $10,000 at the end of every month. least $10,000 at the end of every month. Borrowings must be in $1000 increments.Borrowings must be in $1000 increments.
HH plans to purchase, for cash, store fixtures HH plans to purchase, for cash, store fixtures with a cost of $130,000 in October. HH with a cost of $130,000 in October. HH
borrows or repays principal and interest on the borrows or repays principal and interest on the last day of each month. Any money borrowed last day of each month. Any money borrowed from the bank bears interest at an annual rate from the bank bears interest at an annual rate of 12% (1% per month). The management at of 12% (1% per month). The management at
HH wants to maintain a cash balance of at HH wants to maintain a cash balance of at least $10,000 at the end of every month. least $10,000 at the end of every month. Borrowings must be in $1000 increments.Borrowings must be in $1000 increments.