Chapter 21

Learn why managers use budgets

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Forces managers to plan

Promotes coordination and communication

Provides a benchmark

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Understand the components of the master budget

Three types:
Operating Capital expenditures Financial

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Sales budget Purchases and cost of goods sold budget Operating expenses budget Budgeted income statement
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Inventory budget

Budgeted income statement

Capital expenditures budget

Cash budget

Budgeted balance sheet

Budgeted statement of cash flows

Financial budget
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Prepare an operating budget

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Forecast of sales revenues Cornerstone of master budget

Budgeted total sales

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Cost of goods sold = Beginning inventory + Purchases Ending inventory

Purchases = Cost of goods sold + Ending inventory Beginning inventory

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SALES BUDGET Quarter ended March 31 June 30 Cash sales 30% Credit sales 70% Total sales $30,000 70,000 $100,000 $45,000 105,000 Sept. 30 $37,500 87,500 Nine-month total $112,500 262,500 $375,000

$150,000 $125,000

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Inventory, Purchases and Cost of Goods Sold Budget

March 31 Cost of goods sold (60% of total sales) + Desired ending inventory ($25,000 plus 10% next quarters cost of goods sold) Total inventory required - Beginning inventory = Budgeted purchases 34,000 32,500 37,000 112,000 $60,000 $90,000 $75,000 $225,000 June 30 Sept. 30 9-month total

94,000 122,500

(11,000) (34,000) (32,500) $83,000 $88,500 $79,500

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Expenses can be either fixed or variable

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Prepare a financial budget

Cash Budget

Budgeted Balance Sheet

Budgeted Statement of Cash Flows

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Details how the business expects to go from the beginning cash balance to the desired ending balance

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Cash collections from customers Cash payments for purchases

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Payments for operating expense Payments for capital expenditures

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Cash Budget Beginning cash balance $ 10 Cash collections 8 Cash available 18 Cash payments: Purchases of inventory 10 Operating expenses 2 Capital expenditures 4 Total cash payments 16 Ending cash balance before financing 2 Less: minimum cash balance (4) Cash excess (deficiency) (2) Financing of cash deficiency Borrowing 2 Payments Total effects of financing 2 Ending cash balance $ 4 $ 4 12 16 8 2 1 11 5 (4) 1

(1) (1) 4
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(a)

Book value of equipment: Cost Less: Accumulated depreciation Book value Plus: Gain Expected cash receipt $22,000 (7,000) $15,000 4,000 $ ?

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August Expected sales in units Selling price Expected sales Cash sales (30%) Credit sales (70%) 7,800 $13 $101,400 30,420 70,980

September 9,100 $13 $118,300 35,490 82,810

Cash sales September credit sales collected August credit sales collected 82,810 x 70,980 x

$35,490 62,108 17,745 $ ?

Expected cash collections in September

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Sales commissions & selling expenses August 25% of sales $25,350 September $29,575

Rent and property taxes Sales commissions & selling expense: September: (9100 x 13 x 25%) x 2/3 August: (7800 x 13 x 25%) x 1/3 Expected cash payments for expenses

$4,000 19,717 8,450 $ ?

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Use sensitivity analysis in budgeting

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Actual results often differ from budgeted amounts Sensitivity analysis

What if technique that determines the result if predicted amounts differ from those budgeted

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Companywide budget

Department A Budget

Department B Budget

Department A1 Budget

Department A2 Budget

Department Sub B Budget

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` `

Companys individual operating units roll up budgets to prepare company-wide budget Budget management software used Software allows managers to spend more time analyzing data

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Prepare performance reports for responsibility centers

Subunit of organization whose manager is accountable for specific activities

Cost center Profit center

Revenue center Investment center

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Cost center Revenue center Profit center

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Investment center
Managers accountable for investments, revenues and costs

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Performance reports compare budgeted and actual amounts Management by exception

Shows variances between actual and budgeted amounts

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