re Staenen + ep e aes sesh achndes chs Sever pe Duioe Review ano Practice: WileyPLUS with ORION1006 23 eudgerary tanning One of management's major responsibilities is planning, As explained in Chapter 19, planning i the process of establishing company-wide objectives A ‘successful organization makes both long-term and shorttenm plans. These plans esta plishing them, budget isa formal writen statement of management’ plas fr a specified ‘aire time period, expressed in nancial tems. t represents the primary method of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance. T Promotes efficiency and serves as. deterrent to waste and infficeney. We com sider the role of budgeting asa control device in Chapter 24 the objectives of the company and the proposed way af accom [Budgeting and Accounting Accounting information makes major contributions to the budgeting process. ‘From the accounting records, companies ean obtain historical data on revenues, ‘costs, and expenses. These data are helpful in formulating fusire budget ke ‘Normally, accountants have the responsibility for presenting management’ ‘budgeting goals in financial terms. In this role, thay translate managements plans and communicate the budget to employees throughout the company. ‘Ther prepare periodic budget reports that provide the basis for measuring performance and comparing actual results with planned abjectives The budget ‘tse and the administration of the budget, however are entirely management responsibilities, ‘The Benefits of Budgeting “The primary benefits of budgeting areas follows. 1. Icrequlzes al levels of management to plan ahead and to formalize goals on a recurring bass. 2. It provides definite objectives for evaluating performance at each level of responsibility. 3. Itcreates an early warning system for potemial problems so that nanagement ‘can make changes before things get out of hand. “4.1 facilitates the coordination of activites within the business. Idoos this by Correlating the goals ofeach segment with overall company objectives. Thus, the company ean integrate production and sales promotion with expected sles. ‘5 ILveslls in greater management awareness ofthe eniy’s overall operations ‘and the impact on operations of external factors, such as economic tends ‘6.1 motivates personnel throughout the ergendzation {0 meet planned objectives. ‘A budget is an ald to management; isnot a substitute for management. A Iuget cannot operate or enforce itself. Companies can realize the benefits of ‘usigting only shen managers carefully administer budgets. Effective budgeting depends on a sound organizational structure, In such a siucture, authority and responsibility forall phases of operations are clearly Sefined. Budgets based on research and analysis are more likely to result infecive Budgeting and the Master Budget realistic goals that wil contsibute tothe growth and profitability of a company. UAnd, the effectiveness of a budget program is directly related to its acceptance Ince adopted, the budget isan important too! for evaluating performance, Managers should systematially and periodically review variations between dctual and expected results {o determine their cause(). However, individuals should nt beheld responsible for variations that are beyond thelr contro LENGTH OF THE BUDGET PERIOD “The budget period is not necessarily one year in length. A buddget may be pre- pared for any period of time. Various factors inluence the legth ofthe budget period. These factors inchide the type of budge, the nature ofthe organization, the need for periodic appraisal, and prevaling business conditions. ‘The budget period should be long enough to provide an attainable goal under normal business conditions Ideally the time period should minimize the impact OF seasonal or cyclical fluctuations. On the other hand, the Budget period should not beso long that reliable estimates are impossible ‘The most common budget period is one year. The annual budget. in turn, Is ofen supplemented by monthly and quarely budges. Many companies use continuous 12-month budgets. These budgets drop the month just ended and Sd a future month, One benefit of continuous budgeting is that it Keeps manage- ‘ment planning afl ear ahead. Reet hcrrkaoreuteen 1007 Businesses Often Feel ‘oo Busy to ian for the Future 1 study by Groupie found thet fener than of bu thans00 may Dodge cr have ® writ business THE BUDGETING PROCESS sal Bune the base sumo that, ASong 351 fet much at | an. and keen my emlovees pad im ‘doing OX" A few smal basins mers evensay hat hey Se no need for budgeting an planning. Mast ml bu ‘es ners, hough #8) tit they undetstund that bos {8tng ad panning ae ea for suvial and row But gven the long hous that thy ready work adres ing day to-day hatianger, ray 20339 tat heya st ‘oo buy to plan forte future Describe» sation in hich business sb as much 35 inean” but cannot “keep is employes paid" (Goto Wales for saver and atonal questions) “The development of the budget for the coming year generally stats several months before the end oF the current year The budgeting process usually begins ‘vith the collection of data from each organizational unit othe company. Past. performance fs often the starting point from which future budget goals are Formulated, "The budget is developed within the framework ofa sales forecast. This fore. cast shows potential sales for the industry andthe companys expected share oF ‘such sales. Sales forecasting involves a consideration of various factors: (1) gen- {ral economic conditions, (2) ladasty trends, (3) market research studies, {@)antieipated advertising and promotion, () previous marketshare, (6) changes1908 23 wudgetay Parning stusteation 23-4 Fw bulge tur Faria In prices, and (7) techacagienl developments The input of sles personnel and Top management ts essential 10 the sales Forecast, In small companies like BabCakex NYC, the budgeting process is often informal. In larger companies, a budget committee has responsibility for coor ‘inating the preparation of the budget. The commits ordinarily includes the Presiden, treasure, chief secountant (controller), and management personnel from each of the major areas of the company, such as sales, production, and ‘research. The budget committee serves asa review board where managers can ‘defend their budget goals and reyuests, Differences ate reviewed, moxlified i nec. fessor, and reconeiled. The budget is then putin ils final form by the budget ‘committe, approved, and distributed BUDGETING AND HUMAN BEHAVIOR A\toadget can have a significant impact on human behavior. If done well it can inspire managers to higher levels of performance. However, if done poorly, bud sgetscan discourage additional effort and pul down the morale of managers. Why ‘do tase diverse effects occur? The ansoter fs found in ow the budget is devel- ‘opedand administered in developing the budget, cach level of management should be invited to participate. This “bottom-top" approach is refered to-s participative bud ‘geting. Onc benefit of participative budgeting is that lowerevel managers have ‘moredetiled Knowledge of thelr specific area and thus ave able to provide mare accurate budgetary estimates. Abo, when lowerlevel managers paticipate in the budgeting process, they are more likely to percelve the resuiking budget as fair The overall goal i o reach agreement on a budget thatthe managers con. siuer fair and achievable, but which also meets the corgorate goals set by top ‘management. When this goal ismet, the bldget wil provide postive motivation for the managers. In contra, f managers view the budget a= unfair and un esl istic they may Teel discouraged and uncommitted to bulget goals. The rsk of having unrealiste budgets is gencrally greater when the budget Is developed from iop management down tolower management than vce versa stration 23-1 graphically displays the flow of budget data from bottom fo top under partic: fpative budgeting ey For example, atone time, in an effort (o revive its plummeting stock price, ‘Time Warner top management determined and publicly amnouneed bold new finaxcial goals for the coming year: Unortunately. these gosle were not reachedEtecve Budgeting and the Marte Budget 1009 “The next year, the company gota new CEO who said the company would now {ctually set reasonable goals that it could meet. The new budgets were devel: ‘oped with each operating unit setting what it elt were optimistic bu attainable fgals, Inthe words of one manager, using this approach created a sense of teamwork Participative budgeting does, however, have potential disadvantages. Fist the “give and take” of participative budgeting s time-consuming (and thus more ‘costly. Under a "topdown" approach, the budget is simply developed by top management and then dictated fo lowerlevel managers. A second disadvantage Fs that participative budgeting ean foster budgetary “gaming” through budgetary slack Budgetary slack occurs when managers intentionally underestimate bud seted revenues or overestimate budgeted expenses in oder to make jt easier to Schieve budgetary goals. To minimize budgetary slack, higherlevel managers ‘ust carefully review and thoroughly question the budget projections provided to them by employees whom they supervise For the budget to be elfective, top management must completely support the budget. The budget is an important basis for evaluating performance. It Iso can be used as 9 positive aid in achieving projected goals. The effet of an valuation Is positive when top management tempers citcism with advice and fssstance, In contrast, a manager is likely to respond negatively if top manage- ‘ment wses the budget exclusively to assess blame. A budget should not be used fsa pressure device to force improved performance. In sur, a budget can be a manager’ friend o fo. BUDGETING AND LONG-RANGE PLANNING ‘Budgeting and long-range planning are not the same. One important difference is the time period Involved. The maximum length of a budget is usually one year and budgets are often prepared for shorter pariods of time, such asa month ‘ora quarter In contrast, long-range planning usually encompasses a period of at Teast five years ‘A second significant difference is in emphasis, Budgeting focuses on achiev ing specie short-term goals, such as meeting annual proft objectives. Long. range planning. on the other hand, identifies longterm goals, selects state fo chieve those goals, and develops polices and plans to implement the strate tics In long-range planaing, management also considers anticipated trends in the economic and politcal environment and how the company sbould cope wit ‘hem ive Final difference between budgeting and long-range planning relates to the amount of detail presented. Budgets, as You will see in this chapter can be ‘ery detailed, Longeange plans contain considerably less deta The data ia long- Tange plans are intended more for a review of progress toward longerm goals {han ata basis of contol for achieving specific results. The primary objective of long-range planning isto develop the best strategy to maximize the company’s performance over an extended future peti, The Master Budget “The term “hse” is netaly shorthand term to describe a variety of budget documents, Alo these documents are combined intoa master budget. The master budget fsa set of interrelated budgets that constitutes a plan of action for a specie time period “The master budget contains two classes of budgets, Operating budgets are the individual budgets that result in the preparation of the budgeted income Statement, These budgets establish goals for the company’ sales and production fersonnel: In conirast, financial budgets focus primarily on the cash resources ‘eeded to fund expected operations and planned capital expenditures. Financial sree ‘earth final repo ele wi Incomparing 2 budget with fonganga ln, [budget has mare etal Sandie concemed ‘wah orto goat ‘le a fngange plan ‘Son for along period1010 23 eudgetoy Panning ‘wustration 222 Conposent ol he mez ae ‘budgets include the capital expenditure budget, the cash budget, and the bua ete balance sheet. Ilustration 23-2 shows the individual budgets inchuded in master budget, and the sequence in which they are prepared, The company fest develops the ‘operating budgets, beginning with the sales budget. Then t prepares the finan ‘lal budgets. We will explain and illustrate each blgt shown i Husiration 23-2 except the capital expenditure budge. That budget ls discussed wader the tople of capital budgeting in Chapter 26 Use ths to erm to comple the enters that follow. Long-range planning Paruipative budgeting Sil force ‘Operating budgets Monte bes inane badges La shows potenti sles fo the industry anda company’ expected ‘hare of wich sles 2 are wsedas the basis forthe preparation of he budgeted income 3. The___ isa set tera badges shat consis a plan faction loys speOed me poi 4 ides longterm goals, sles strategies 1 achleve these ‘gas and del pies and plano mpemnt thseSales, Production, and Direct Materials Budgets 1017 ‘5. Lowerlevel managers are more likely to prcelve results fair and achievable under a appmach.| eas primarily the cash resources newde to fund expe ‘operations ard panned capital expendivres ‘elution 1. Salesforce ronesnnge planning 2. Operating badges. 5. Paruciptive budgevng. (LA Maser badoe 6. Financial bude ened cris at BEDI Ean nm LeAnn ‘Once ‘We usecase study of Hayes Company in preparing the operating budgets, Hayes manufactures and sells & single product, an erganomiealy designed bike seat ‘sith muliple customizable adjustment, called the Rightride. The budgets are prepared by quarters for the year ending December 31,2017. Hayes Company begins its annual budgeting process on September 1, 2016, and it completes the ‘budget for 2017 by December 1, 2016, The company begins by preparing the bud gets for sles, production, and direct material Sales Budget ‘As shown in the master budget in Illustration 23-2, the sales budget is prepared first. Each ofthe other budgets depends on the sales budget. The sales budget is derived from the sales forecast. represents managements best estimate of sles revenue for the budget period, An inaccurate sales budget may adversely affect net Income. For example, an overly optimistic sales budget may result in excessive ‘inventories that may have tobe eld at rece prices. In contrast, an taduly pes slmiati sles budget may result in los of sales revenue de ofnventory shortages. For example, atone time Amazon.com signfcanly underestimated demand for ltse-book render the Kindle. Asa consequence, Idd nat produce enough Kindlesand ‘was completely sold out well before the holiday shopping season. Not ony dd this ‘Tepresent huge lost opportunity For Amazon, butt exposed Uhe company potential ‘competitors, wo were eager to provide customers with llematives to theKindle, Forecasing sale i challenging. For example, consider the forecasting cal- lenges fed by major sports arenas, whose revenues depend on the sucess ofthe home (eam, Madison Square Garden’s revenues from April to June were $193, million during a year when the Knicks made he NBA plays. Bat revenues were ‘only $133.2 million a couple of years later when the team didnot mabe the pl ‘offs. Or, consider the challenge faced by Hollywood movie producersin predict. the complicated revenue stream produced by a new movie. More theater Het sales represent nly 20% of total revenue. The bulk of revenue comes from floba sales, DVDs, video-on-demand, merchandising products, and videogames, All of which ae difficult o forecast. “The sales budget is prepared by multiplying the expected unit sles volume for each product by ts antilpated unit selling price, Hayes Company expects sales volume to be 3.000 units in the first quarter with SO0-unitinereases in each Succeeding quarter. Ilustation 23-3 (page 1012) shows the sales budget for the year by quarter based on a sales price of $60 per unit. Action Plan 7 Understand the bude leg proces cling tBelimponence ofthe {Blerorent Understand the Bare tine ap ‘imc ou Y Diente badgtng om longrange anaing 1 Renin that1012 23 Budgetary Panning Mustain 253 ‘slr todet HAVES COMPANY les Budget For the Year Ending December 31.2017 ‘ure 6 Swpecedunitsales 3800 “4600 7 unitseting ree x$60__x$60___ $50 2 Total sale Tisp00 — #71000 900 Some companies classify the anticipated sles revenue as cash or cre sales and by geographical regions, oritories, or saleqperson Service Company Insight Sg mettle 2% arg EEE py Riigaty “oe a an twee un Optimism _ments? Most states rely on income taxes, which fluctuate a Rp smear Se see easel ses tarerhavert acre othe shi rm manufacturing {0 sence companies and from bickandmartar stares 12 tbe imeis aleve (ea, lca, state Source: Cone Deans, “Se Fleer Foe” Wl fedora prepare anal budgets. Mast are required Set ml Orie Och 309) Submit be anced budgets thats esinated revenues ate svepouedtocorerantkipated expenditures Unfortunate, ty nan vhat gouormant bude searstay ‘tating government revert canbe 3 cfu as tate ute evenans using eronamie dour? sven mone ft than estimating compan revenues For (00 WP forts ansaes and aon! ‘ample ding aacet yay, themaian sate goverment 1000") Production Budget “The production budget shows the number of units of product to produce to meet anticipated sales demand, Production requirements are determmed Irom the following formula." that __ - and suigees , ted dion Baping cued eben es snes. reagent atisints ” cenans 7 "in _ —_t ay wasn rocoto. ich ars ob none aSoles, Production, and Direct Moteriah Budgets 1013 A realistic estimate of ending inventory is essential in scheduling pro duction requirements. Excessive inventories in one quarter may led (0 Cul- backs in production and employes lays ina subsequent quarter On the other hand, inadequate inventories may result elther In added costs for overime work oriniost sles, Hayes Company belioves ican meet future sales requirements by ‘maintaining an ending inventory equal to 20% of the next quarter's budgeted Ssleeunlume Forreampe, the ending finished goods inventory forthe fist quarter {2700 units (2050 % ancpated second quarter sales of 3 300 units) Mastation 235 shows the production budget ato Flashed ‘Sais mea Prd is (= (aoe ages HAYES COMPANY aay ution Budget For the ver ending Decmber 3, 2017 Gurer ‘ape unit le Tet a 5 Ganration 233), oo 350040004500 2 Ade: Dested ending rished goods nit _"700__"B00 90010008 1 Total required ute 3704300500 3.00 5 est degining fisted good nits cor___700__a00_ 900 0 Required praducin nite 7100 3500 41004000 12 20% of next quarerssaes 13 Meapacted 2016 st quar sles 5,000 unis x 20% “20 of estimated st quarter 2017 sales unis a0 ‘The production budget, n turn, provides the bass forthe budgeted costs foreach manufacturing cost element, as explained inthe following pages, Direct Materials Budget “The direct materials budget shows both the quantity and cost of direct materials to be purchased, The quantities of direct materials are derived from the folowing Formal Direc a ' Acquire Materials Units Sa eee Direct Materials Reged ory ONE ag ane tts to Trewuction’ Wate Units Mates Units ge purchased Alter the company determines the numberof units to purchase, It can compute the budgeted cost of direct materials to be purchased. It does so by multiplying the required unis of direct materials bythe antletpated cos per un Psion gt stration 23.6 Ferm ee mae ‘nies1014 23 sucgetay Panning Unit of Dine Materials _The desired ending Inventory is again a key component inthe budgeting ene process. For example, inadequats inventories could resul in temporary shat Dict || bina downs of production. Because ofits close proximity to suppliers, Hayes Com. Bora Nea pany mantans an ending ientry of raw materials equal fo TO% of the next Fests | Reweé quarters production requirements The manufacture ofeach Righiide requires Tater Te 2 pounds of raw materials, and theespected cos per pournd $4, Mlustration 23-7 Stes the det materia bags Assume thatthe Sse ening direct mate ale amount 1,020 pounds for he out quarter of 2017 smstin 257 Sct ge ir os incision me at SS ‘ HAYES COMPANY vnnsorpicet | 2 For the Yor Ending December 31,2017 ‘an | oan | eer |S) ze vw & Junto groin sation 235) Sito 3600 aa + fore mater perant ana eget * Toa pooner needed or prodction 500 Tae 8s aa 3 hod red ening dectmaterahtoindi 72003). Fetter Sano aose a9 Men tegming area maser mind) sae 1: ove stra ache S300 1300 1) Cot per pound vse se Sete 11 Soe of die motley 3300 F900 36 10% of next quarters production resumen 1 bom of estimated squares pouncsneede ft prdution eee Metting That Prices narager decidedte naa mach lage quent of aw Won't Fall Imatriswo avoid payag even higher psn the fre For eample afer coon pie rose 2%, ane manage of printed Ttive manufurer decided to soc 8 age Suppl of plan Fis In antcpation of sational pce Incesse. Whee comely har stout 3Dbowef Yah n Inventor he prcased, 500 boxes, Sometimes things happen reeahate ther normal Side for example, the Dredeament that busi Sauce Ua Pen anda Wr, “Compa ot Up fener faced when the Cormier et RM Sret nant Cine Ban 2 Price of many raw mater 2011) 2s recent syreckete ee uber, cto, ol, eM. at are the potent downsides of stocking 3 huge eat, sel Copp: eau of raw mater (Go to WiyPLUS fr te sicespris for saeminly everthing were 9068 SUB50M Irma and seuss sustion)Sales, Production, and Direct Materials Budgets 1015, Dom 2 Soriane Company's preparing ts master budget for2017Releant da pertainingoia Action Man Sales, production and dret materials budgets ae as follows. 7 Kou the frm and Sours atthe sales Sales. Sales fr the year are expected to total 1 200,000 units. Quaierysles asa : Soe pereatapeef ol e500 Sane 3a 2 spc Teas pce 4 . {pede 20 per sk or ce uns no 55 pruning Pp he ei intiiariuener Srna uorerafDolsutexpecesiovelvengher—Feaih Nt, thane badge sso he fst acre 207 ees Prduerion Mamagemet cess o maintain he ending Fnsd goods isentree “atleast Saale quotes bagel. rower ks. ‘ret mats Each nets 3 pun of ro ert oof 5 por ti crgenea SaetSmaneen maetasenoneasotiere Seweamne get {usr production requirements, Assume he production requirements toc the ist Sa [Quarter 2018 ae 810100 pounds Oe a tema he on, ad ret mate 7 for2007. slerequired to meet. Prepare the ales, preduction and diret materials budgets by quarters for 2017, ue Solution 1 Know ov to compute ‘Add Detred ending fnited goods unts* 75,009 90,000 75.000 66,000 ‘otalrequred unite 315000 350900 35000 ae 000 ss: Begining fished grods wits _g0.0_75.000_30000_75,000 1p Kequed production unis 355.000 315000 — 345900 1,.0C0 1008 12 025% of net quarters un sles $3 Peeinaed fst quater 2018 sales units: 240,000 + (24,000 10%) = 268000: 264,000 25% sof eninated ft quarter 207 sls units (240,000 «2580,1016 23 Buagetary Penning Direct materia per unt M3 etal pounds eed for reduction 945000 1035000 373.000 ‘i Dested ending diet Total matershirequred ——BI2250 96,750 TTR50— 373.500. es Begining direct, mater (pane) Direct materia prehaes 308500 1026.00 669.850 ost per poune x85 “otal es of deect Imari purrases_S3A7B00G $4,747 00 $5.134.500 $e349.250__$16.101250, setimates re quater 2018 production requiemens: 810,000 5% = 4500 55 of estimated fest quarter pounds needed fo production fel SORIANO COMPANY Dee Mateil Budget For he Yer Ending December 312017 ‘Gus a 2 tobe predued 85000 31000 345000 27000 atria (eur) 51750 _a2680 soo" eannins ‘OBIECTVE smuctraion 2 6 Feu dre trot dees ail EDV, ES, WED, EPI, E23, 2s 25, EDGED, Son Prepare budgets for direct labor, manufacturing overhead, and selling Eee UT caeecaas As shown in Illustration 23-2 (page 1010), the operating budgets culminate with [preparaiion ofthe budgeted income siaemen, Before we can dota, we need 10 prepare budgets for direct labor, manufseturing overhead, andslling and admin trative expenses Direct Labor Budget Like the direct materfals budget, the direct labor budget con ains the quentity ‘yours} and cost of dreet labor necessary to meet production requirements. The ‘otal dect labor cost is derived from the following frrmub, tora vee labor cost Nous x cont = per Unit per Hour Direct labor hours are determined from the production budget, At Hayes ‘Company, two hours of direct fabor are required 0 produce each unit of Snished foods. The antepated houry wogerate $10. lnration33 shows these data oODirect aber, Manutactring Overhead, nd SBA Expence Budgets 1017 nae sme re fle ee ate Eoin TI 1 HAYES COMPANY 2 De Laor boget : forte war tndng Seen : oa € Unistobeprediedamraton2s) 3700 mba Ato = > rector tne Bow pent wee “ya 1 Totarequred et bor Pours eau 700 8200 9300 2 Drea bor cot pe how xs este sto xsi 10 Tou deat boron San0o S720 Ser s304009 a tation 229 ‘The direc labor budget feria in maintaining labor force that can meet FE bet the expected levels of production. en ‘Manufacturing Overhead Budget ‘The manufacturing overhead budget shows the expected manufacturing over head costs for the budget period. As Ilstration 23-10 shows, this budget lstin- tuishes between variable and fixed overhead costs. Hayes Company expects ‘rlable costs to Muctuate with production volume on the bass of the following Tales pe direct labor hou: indirect materials $1.00, indirect labor $1.40, ules $0.40, and maintenance $0.20. Thus, for the 6200 direct labor hours to produce 3,100 units, Budgeted indirect materials are $6,200 (6,200 X $1), and budgeted indirect labor is $8,680 (6,200 x $1.40) Hayes also recognizes that some mainte ‘nance i fixed, The amounts reported for ied costs are assumed for our example ee theo ta 2 vt oe a] v HAYES COMPANY 2 Manufacturing Overhead Budget 3 forthe Yor Ending December 31,2017 « ‘Gua Variable cons 7 Indeetmaterts($.00hou") § 6200 $ 7200 $ 8200 $ $200 $ 30800 1 Indvectnbor($10hou) 8680 1Dge0. 11880 TABHO,120 9) Usties (0.0N0u7) 2am 2880 3.280680 12:30 19, Maintenance S02hou) —_1240 1401800 Bt0__6 160 [1 Total vaabe cons (S00 14500 77.600 SAD |:3 Superior sti 20000 20000 90,000 | Depreciation Se00 15200 15 Propary tna nd insurance S000 36.000 6 Maitenance 5.700__2200 1 Total fe eons 500 500 18 Tota manutacuring overhead 3 19 thuseation 235) 62007200 8200 _9200_ 30.500. 120 Manufacing overhead ate per dec abor Four EEO 30500) S| An important asumeion the company can ad to ‘he $10 parhowr abo ont opis too wise range possible production sey. rtrtion 2-10 anaactsing overeat ae1018. 23 sudoetay Panning ‘The accuracy of budgeted overhead cost estimates can be grealy improved by employing ativty-based costing. [AL Hayes Company, overhead is applied to produesion on the basis of direct, labor hours. Thus, aslusiration 23-10 shows, the ardgeted annual rate i $8 por hour ($246,400 + 30,80) Selling and Administrative Expense Budget Hayes Company combines its opzating expenses into one budget, the selling and administrative expense budget. This budget projects anticipated selling ‘and administrative expenses for the budget period. This budget (lastration 23:11) alo classifies expenses oe sther variable or fixed. In this ease, the variable ‘expense rates per tni of sales resales commissions $3 and freight-out $1. Vari able expenses per quarter are based on the unit sales from the sales budget (see IMustraion 233, pe 1012). For example, Hayes expects sales inthe frst quarter Masami art to be 3,000 units Thus, sales commissions expense is $9,000 (3.000 * $3), and SeiegansSacertatie fFeight-out 5 $3,600(300 x $1). Fixed expenses are baicd on assumed data, pee lg | HAYES COMPANY | Sng nd Att apr Bet Zon mo tow Tot, § budgeted saesin units usration 23:3) _“Ea00 __“soo__“ago_~a500_“T5600 O eeveectl ee 11 Sale commision (3 par unit $ 91000 siasco $1200 $18500 § «5.000 4 Freighcout (pe unit 30003500 00 450015000 10,Total variable expeies 2a 5000 Ts e000" ied expenes Rea ee ‘atvertsing 5000 000 S000 S000 20000 | Soles sles 15.000 S000 15.000 15.000 69.000 Offs trie 7500 7500 750075003000 Depredation ‘a0 001.000 10004000 Property taxes an insurance 500 1s0o__1500___1500__6000, Total ued expenses a9 800 — se — so 8 — re 00 [total ang ad e—eeee—eeeeeoee smite expenses ‘2000 s44000 $46,000 sexu sana Budgeted Income Statement The budgeted income statement isthe important end. product of the operating. ‘budgets ‘Ths budget indicates the expected profitability of operations for the ‘budge period. The budgeted income statement provides the basis fer evaluating ‘compatty performance. Budgeted income statements often act asa cll to action. For example, a board member at XM Satelite Radio Hollings fel that budgeted costs vere 100 high relative to budgeted revenues. When management refused 10 ‘cut its marketing and programming costs, the board member resigned. He felt that without the cuts, the company risked financial crisis ‘As your would expec, the budgeted income statement is prepared from the sarious operating budgels. For example, to find the cost of goods sold, Haye> ‘Company must frst determine the total fit coat of producing one Rightside, a8 Tallac Direct Labor, Manufacturing Overhead, and SA Expense Budgets 1019 Cont of One Rig ‘cont Element Mhustratlon Quanity Unit Cost Total Direct materials 7 pounds $4008.00 Direc Isbor 239 hows $1000, 2000 Manatoctring ovethend 2310 -Dhours «$8006.00, ‘otal unit east $3.00 Hayes then determines cost of goods sald by multiplying the units sold by the unit cost, Its budgeted cor of goods sol is $660,000 (15,000 x $84). All data for the income siatement come from the individual operating budgets except the following: (1) interest expense Is expected to be $100, and (2) income taxes are shows the budgeted muliple-step Income Sales uston 283) 3900300 ‘Cost of goods sold (15,000 x $44) £60,000, Gro rte 0900 ‘Siting nd adminisrain expenses season 2510) iam Income fom operations e000 Eisaniiol ito Tree fre ene ae 30 tome epee itso Navicome E900 Dom! 3 Een Soriano Company ix preparing is budasted income statment for 2017. Relevant data peraiing to ts sls, producion and det materials budgets canbe found in 2 (Gage 115), Tnaddton, Soriano budgets 0.8 hours of direct aber per unit or cot ot 15 per ‘hour und manufacturing oveead at $25 per direc Tabor hour is budgeted selling ond administrative expenses for 217 are 312.000 000. (@)Caleulate the budgeted ota unl costo) Prepare the budgeted mutiplestep income Stauement fr 2017. igore eam taxes.) Solution (cost Element Quantity Unit Cost Total Dirset materls Sopounds $5 $1500 Dirt abor Shore 515 750 Manufacturing overhead Sours 25 230 “Total wnt cost aration 23-12 amputation otal unites lerrtion 3343 ged mies nome ‘tate ‘Action Han (7 Real that total wait ot consi aes ‘tate aret labor, Sind panufactaring orate102023 audgetary Pienning ‘Suen of the coe Sido of gods so esteatin 2-18 Basclomalacash tage eta wnt The cash budget ispre- pated afer he ober bodgets because the Information eerste by the other budgesacate, {he pected ions ond ‘sation of ean ‘SORIANO COMPANY Budgeted Incone Statement For the Vent Ending December 31,2017 Sas 1,200,000 units from sleshuag, pe 1019) ‘Cost of goods ol (1 200,000 « 85.004ni {Gros roi Selng and sdminsraive expenses Netincome. eka eels MLE ELS, E2511, LESS aBd 99288, As shown in Mlustration 23-2 (page 1010), the financial budgets consist of the ‘capitalespenditure budget the cash Budget, and the budgeted balance sheet. We ‘ull discuss the eapital expenditure budget in Chapter 26 ‘Cash Budget ‘Tha eash budget shows anticipated each flowe. Because cash ie eo vital, this ‘budget is of:en considered to be the most important financial budget. The eash ‘budget contains three sections (cash receips, cash disbursements, and financing) ana the boginning and eng eal Lalas, asses Mgniation 23-18 Ta Tan 2 taping cas balance sx 00 4 cash esp romizs) p00 5 Total avaiable cath mn 6 Lee Cah dabursemens(hemized) a 7 ces (eticone) of able cath ob cachdburaments oa © inandng 200K | > endingeash bance S00 ‘The cash receipts section includes expected receipts from the company’s principal source(s) of revenue. These are usually cash sales and cllections Irom ustomets on credit sales. This setion also shows anicipaed recetpis of interest fad dsidends, and proceeds from planned sales of investments, plant asses, and the company’s eapital stock. ‘The cash disbursements section shows expected cash payments. uch pay ‘ments inlude direct materials. diret labor manufacturing overhead, and selling, oOCath Budget and Budgeted Balnce Sheet and administrative expenses. This section also includor projected payments for Income taxes, dividends, investments, and plant assets, “The financing section shows expected borrowings and the repayment of the borrossed funds plus interest. Companies need this section when there is a cash deficiency or when the cash balance is below management’ minimum required balance ‘ala in the cash budget ate prepared in Sequence. The ending cash balance of one period becomes the beginning cash balance for the next period. Compar nies obtain data for preparing the cash budget from other budgets and from {formation provided by management. In practice, cash budgets are often pre pared forthe jear ona monthly basis. “To minim 7 detail, we will assume that Hayes Company prepares an annual cash budget by quarters, ts cash budget is based on the following assumptions 1. The January 1, 2017, cash balance is expected to be $38,000. Hayes wishes to maintain abalance of atleast $15,000. 2, Sales (lustation 23-3, page 1012): 60% are collected in the quate sold and 40% recollected inthe ellowing quarter. Accounts receivable of $60,000 at December 13,2016, are expected tobe collected in flim the frst quarter of 2017 '3. Short-term investment securities are expected tobe sold for $2,000 cash in the First quarter 4. Direct materials (Ilustration 23-7, page 1014): 50% are pad in the quarter purchased and 50% are paid in the Following quarter Accounts payable of $10,600 at December 31,2018, are expected to be paid in full im the fist ‘quarter of 2017 5. Direct nbor (lustration 23.9, page 1017}: 100%is paid inthe quarter incurred 66. Manufacturing overhead (illustration 23-10, page 1017) and selling and administrative expenses (lustration 23-11, page 1018): All items except deprecation are paid in the quarter incurred, ‘Management plans to purchase a truck in the second quarter for $10,000 cash, Hayes makes equal quarterly paymentsof is estimated $12,000 annual income Loans are repaid inthe earlest quarter in which there issuficiont cash (that fs, then the eash on hand exceeds the $15,000 minimum required balance). Inpreparng the cash budget it suseful to prepare schedules for eollectons from castomers(astumplon 2) and cash payments for direct material assumption 4). ‘Those schedules are shown in ksrations 23-15 (below) and 23-16 (page 1022). [Rasta = ayes Companys a Trantunas cacumeiene 7 3 Coton Quarter 5 eco eb 120018 ie & fetus s9n000 "ronan + v2.0: > Second quer 000 Ie econo 4 mie guar 240.09 00 §s6o00 3 our uaer sma 00 |t0| oa eotatone TEE asa 3 eration 223; 800006; 10000040 masration 2245. Calc romana 40241022 23 Budgetary Penning asrtion 20-16 Pens or det str Al ‘Assumption 3 a © Begining eas lance oi 5 soo 5 1500s i300 2 Reeobts ‘olecions rom caxtomert 2 193000 228000254000 Sale ofvestment secures 2 ° > ° 1 Totlreaipt| {000 —zaapan ss Total aaiabe cach 22350024 000277400 12 lees: Ocursements Direct materiale ‘ vz0 ama 500 | iret aber 5 sco 72000 ant 2.000 ‘Manufacturing overhead 6 5330053005300 2.300 Sling end administrate parses ‘a0 = a0 aso 700 1 Puree of ruck 7 10000 2 ° (8 income ta expense 5 4000 3.00 2.000 4000 19 Total deoursement iezs0o nit s00 050) “a s00 ces detieny of ead coh 20, over cash alsusements asso aoa. 800 2 nancng 2 ed: Borrowings ° ano o ° 23 ss repoymens ncing rere © ° 2300 ° 2 ending cash bance 26 457.100 $3,200 depreciation 7 "52000 $1,000 dopreition 5 recounts payable, 146 sraéo0 6 Fesequarer 25200600 $1260 7 Second quarter 73200 as00 14600 2 Thi quarter 33200 "500 $16,600 9 Four quare 37.200, 500 10, Total payments $i soi 317 00 — 55100 35.200 | 12 Mer svation 23.7 25,200» 50; $25,200 « 50 iastration 23-17 shows the eash budget for Hayes Company. The budget indicates that Hayes will ned $3,000 of financing In the second quarter to main- {ain a minimum cash balance of $15,000. Since there isan exeess of available cash over disbursements of $22,500 atthe end ofthe third quarter: the borrow ‘ng, pha $100 interest is repaid inthis quarter.Cash Budget and Budgeted Bolnce sheet 1023 cash budget contributes to more effective cash management. It shows ‘managers when addtional financing snecessary well before the actual need arises [And, it indicates when excess cash i available fr investments or ther purposes. Fcc aerial Obrmpic Games ee es PRS corel eereteecemtpeentod Se ee ee ey a Vcore Semete ee aomace seesrenteae CS cycons penn a Se eee were nnnce erect once nea aaa Budgeted Balance Sheet ‘The budgeted balance sheet is a projection of financial position atthe end of the budget period. This budget is developed from the budgeted balance sheet for the preceding year and the budgets forthe current yea. Pertinent data from the budgeted balance sheet at December 31,2016, ares follows Bulings nd equipment $182.00 Commonstack $228,000 ‘Accumulated epeecaion —§28400—~Reaipedeaings 5 46.480, Mustration 23-18 shows Hayes Companys budgeted classified balance sheet ‘at December 31,2017, Mucration 2248 Budgeted sed bare Cursent mets ash Finished poe inventory Raw malaralsloventory Total euven aests ‘Property plan sod egipment Building and squpment 1192000 Less: Accumulted deprecation 48,000 oral assets1024 23 sudgerary Planing Liabilities and Stockholders Equity Labites Aecouns payable $1800 Sakae esi ‘Common stock 1225000 Retained earnings Sea “Total stockholders equly “Tal labia and stockholder? equity ‘The computations and sources ofthe amounts are exphined below. ‘cash: Ending cash balance $37,900, shown in the cash budget (Ulstration 23-17, page 1022) Accounts receivable: 40% of fourth-quarter sole $270,000, shown in the: schedule of expected collections from customers (Ilusration 2315, page 1021). Finished goods inventory: Desired ending inventory’ 1,000 units, shown in the production budget (lustration 23-5, page 1013) times the total unit cost '$44 (shown inIllstration 2312, page 1019). aw materials inventory: Desired ending inventory 1,020 pounds, times. the cost per pound $4, shown in the diceet materials budget (llustration 23-7, page 1014). Buildings and equipment: December 31, 2016, aalance $182,000, plus pur. ‘chase of truck fo $10,000 (illustration 23-17, page 1022). Accumulated depreciation: December 31, 2016, balance $28,800, plus '15,200 depreciation shown in manufactusing overhead budget (ilustration 23-10, page 1017) and $4,000 depreciation shows in selling and administra- tive expense budget (Illustration 23-11, page 1018). Accounts payable: 50% of fourth-quarter purchases $37,200, shown in schedule ‘of expected payments for direct materials (Ilustraion 23-16, page 1022). ‘Common stock: Unchanged from the beginning of the year Retained earnings: December 31, 2016, balance $46,480, plus net income ‘$47 900, shown in budgeted income statement Ilistration 23-13, page 1019). After budget data are entered into the computer, Hayes prepares the various budgets (sales, cash, ete), as well as the budgeted nancial statements. Using spreadsheeis, management can also perform “what If” (sensitivity) analyses ‘based on different hypothetical assumptions, For example, suppose that sales noe af the busines? The impact ofthe varewsassmpuons on he budge {is quickly determined by the spreadsheet. Armed with these analyses, managers make more informed decisions about the impact of various projets. They also Anticipate future problems and business opportunites. As seen in this chapter ‘budgeting isan excellent use of computer spreadsheets, porn « Marg Company management wan o elma mannan monly eas blancs of 515000, A the begining of Maych, th cash balances $16,800, expected eash recap for Marchare $210.00, and cash disbursements re expected tobe 820,000 How much cash any. must be borrowed to malta he desired minim monly balan?‘Budgeting in Nonmanutactring Companies 1025 5 18810 210000 220000 0 500 i508, “To maloain the desir minimum cath Balsncs of $1500, Marian Company mis Bore $500 tea el vce meri WEDS, E3814, 23-15, E216 ad wn BI LEARNING ‘OBIECTIVE Poet ‘Budgeting isnot limited to manufacturers, Budgets are also used by merchanders, ‘service companies, and notlorproft organizations. ‘Merchandisers ‘As in manufacturing operations, the sales budget for merchandiser s both the Starting point and the key factor in the development of the master budget. The "major differences between the master budgets ofa merchandiser and a mamufae- turer area follows. ‘A merchandiser uses a merchandise purchases budget instead of a pro: vetion budget 2. Amerchandiser does not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead), ‘The merchandise purchases budget shows the estimated cost of goods to bbe purchased to meet expected sales. The formula fr determining budgeted mer chandise purchases is as follows. ‘oilustrat, assume thatthe budget committee of Lima Company is prepar- sng the merchandise purchases budget for July 201. ICestmates that Budgeted sales will be $300,000 in July and $320,000 in August, Cost of goods sold is expected 10 be 70% of sales—that is, $210,000 in July (70 x $300,000) and '$224,000 in August (70 x $320,000). The company’s desired ending inventory is foe t st thecarh budge tration 23 Mescandsepacases ‘oma1026 23 suagetary Panning stration 23-20 rca purses det cof ara Bape Bape tseration 2321 et ab bef saice 40% of the folowing months cost of goods sold. Kequired merchandise pul ‘chases for July are $214,200, compute a Fallows, UMA COMPANY tMorhandes Porcine Badgat Forte Month Ending aly 3 ludgeted cor of good 0 (5900000 » 70%) ‘st Dede ening chance ventory ($224,000 30% List: Boginning merchandoe invnton ($210,000 30%) egues merhonaise purses for ly When a moschandiser is departmentltzed, i prepares separate budgets for ‘each department. For ecample, a grocery siore prepares sales budgets and pur- chases buds foreach of is major departments such as meats, dairy and pro duce. The store then combines these budgets into a master budget forthe sore. ‘When a retailer has branch stores, it prepares separate master budgets foreach sore. Then, i incorporates these budgets into master budgets for Ube compan asa whole Service Companies Ina service company, such a8 a public accounting firm, aw office, ora medical practice, the ertcal factor in budgeling is coordinating professional staff ‘needs with antlelpated services. Ifa firm js oversiaffed, several problems may result: Labor costs are disproportionately high. Profits are lower because of the Additional salaries. Stall umover sometimes increases because of lack of chal: lenging work. In contrast fa service company is undersalfed, t may lse reve rite because existing and prospective client needs for service cannot be met. M0, professional staff may seek other jobs Because of excessive workloads Suppose that Stephan Lawn and Plowing Service estimates that it wil service 300 small lawns, 200 medium lawas, and 100 large lawns during the month of July estimates its dieet labor needs as 1 hour per smal wa, 1.75 hours for 3 medium lawn, and 27 hours fra large lawn. is average cost fr dre labor Is $15 per hour. Stephan prepares direct labor budget as follows. ei ae ME RE UE OS TE Mt : | ‘ sont_| 5 Direct labor tne hous per wm | 8 Direct labor cos per hour 315 9: Total dre bor ort 32500, aaBudgeting in Nonmanutacuring Companies 1027 Service companies can obtain budget data for service revenue from expected ‘output or expected input. When outpat is used, itis necessary to determine the ‘expected billings ofcliens for services performed. In a public aecounting firm, forexample, outpa isthe sum of is billings in auditing ax, and consulting ser ices, When input date aie use, cals profesional stl sacle projets iso her billable time, The fir then applies billing rates to billable time to produce expected service revenue Not-for-Profit Organizations ‘Budgeting ust as important for not-for profit organizaions.as for proft-oriented ‘businesses, The budget process, however is different. In most cases, not-for-profit centtine hago on the Basis of cash flows (expenditures and receipts), rather ‘than on a revenue and expense basis, Further, the starting point in the process. 's usually expenditures, not receipts. For the notforprof entity, management’ task generally is to find the receipts needed suppor the planned expenditures. ‘The stisity index is also likely tobe signfcanty diferent For example, ins not {orproft emity such as a university, budgeted faulty posiions may be based on fallsime equivalent students or eredit hours expected tobe aught na department For some governmental units, votes approve the budget. In other eases, such ‘asstate governments and the federal government, legislate approval is required ‘ier the budget fs adopted, it must be followed. Overspending is often legal. In ‘goternmental budgets, authorizations tend to be ona lineby-ine basis. That is, {he budget for « muntlpalty may have a tpeciied muheraaton for polloe and fire protection, garbage collection street paving, and so oa. Te lne-ltem autho: ‘Haalion of governmental budgets significantly limits the amount of discretion management can exerese, Th el’ manager often cannot use savings from one Iine tem, such as streot paving. to cover increased spendirgin anther Hine item suchas snow removal, [Masoum of Contemporary Art Budget Short- aia at ering! dca nd nolan so Eye Can See Even Preston Unversity wth the largest endowment per ‘tent of any US. univer (82 milion per suder, experienced 25% drop i the vale of Is endowment on the fiancal markets plunged. Because the endow ‘rentaupport 5% ofthe university $125 bllon budget, hen the endowment fl he uriverstyhadtomake cut. Many ras were capped 52.00, aminstrative Bodoets ‘wer cu by St, and major consvucon projects were ut ons, to ste to budgets The thse of Eom ‘enporary At in Los 1oyesr purod te ftom $50 millon $2 sauce dur Ms a ee “SsHD nN Sémtion tsnewty escrerferes at Stun OneCare 8 heed dreor trove 2001S iba “clionas Pons Chse ap Bere Moe {oui he museumts Dnata stet a Cre oma 8 20%, som Iepuuton, though Mein “neon Cos ge ardor St Wad Spending, The eee. Ste ba Onin Uo, 208 Rogues Werle has pay -eventuayrestened he muscu sv ‘allohen te soc make ses a seus op (Goto “Tn met recent receion cual bugeting challenger WEPLUS fr rave and aston! queers) “eeneaty al govereent agence Txrevees roped1028 2B suigetary Penning bDOIT! 5 co z 5 Budget Deck Copycat tha 2017 sen wl be $15,000 in quarter 1, §20,0004n quer? sd $2500 in quarter 3. Cos of goods ld 8s of salen Mamagcment dai to fave naling fished poods imentory cou 1o 18% the next guarers expected os of cons ‘sl Prepares merchandise purchases badge by quae forthe fst ss months of 2017 Solution 7 To ' BECKER COMPANY 2 Merchandise Purchases Budget 2 Fo he Se Month nding une 30,2017 : oar 5 TF sient 1 budgeted cos of goods sok ale = 80) $1060 $18.500 ‘da: Desired ering merehanse ventory SH ofnent quarterscom of goods soy 247 300 8 Tot! Taso 18,00 19 te Being merchand inventory (Osh thequanarscon of goodeso) 1.002.400 1 Required merchandise purchases Fiago0 $16,620 #25300 lua ence mtr DESH 10, £3319, 6232, ESI, and oon 20 REVIEW AND PRACTICE [[ieanunic ossecrves nevew ste he mal of fee bging and he ‘capoersel he maar spe Te pray fone eG elgg heh wage te un abel) rvs Ste otter or ‘ling patra tna sna arg ‘tin prea role ans conde Sind ine Wl eele gene meg ‘serene haen pence fanad SSSR eat See Fel epmnal sce ye ad Shel cepa yaa! momen he mane lf oetohoe set) ae. producto (es meee {Shia artacreg or sing Sain ape) Sotgel eane semen cp upended ash SET) Spel se Prepare uae tors, poston sd eect Orne The sales budget is derived {rom sales fore. Sarthe position fe sors wah ‘i usr dere oi rtd ptr ‘oo omits an eee pa tnensy 10 are atthe required numberof production uns, ‘The direct raters budget sors wth the eet ma teva une (eg pounds) required for badge pro. Aheton, adds desl ending dret materials unis, nd atraes beginning direct materials units ave trequved drt material re tobe putes. This moun Is mulled bythe det materals cst (ea ont por pound) 10 ante atthe tal east of dee ‘materia purchases {© Prepare budgets for ect labor, mansfactring over- Ia and sein and administrative pense and 3 Didgeted income statement. The direct nbor budget ‘torte ith the ups to he produced ae determined 0 {he production budget. The amount le mld by ‘he dee shor hours parunitand the de ba cost, ingand administeatve apense fudge ts al of the dial tpes of sel Ing and sdmitsratve expense ems, distinguishing Ietwcon fed sndariable ans, The Budgeted incomewow 40 statement is prepared from the varus operating budgets. Cost of goods sod i determine by ealeulat= Ing the budgeted cost to produce one un, then mul plbing his amount bs the numberof uns so Draper seach budget and» budgsted bales choot The cooh budget as three ssclone Gessipta dls. bursements, and financing) and the beginning and ‘endingens balancen Receipts and payment section te determined after preparing separateschedules for ‘collections rom custerers and peyment to suppliers GLOSSARY REVIEW Budget A formal writen statement of managements ans fora specified future time period expressed in Financiers (p. 1006) ‘Budgetary slack The amount by which managerinen- ‘nally underestimates budgeted revenues oroverest ‘mates budgted expenses In order o take ease 10 Sehieve avery goals (100) Budget committee A group responsible for coordina nthe preartion ofthe budge (p 1008). ‘Budgeted balance sheet proj of nan post tion atthe ed ofthe budget peed (p 023). Budgeted income statement An timate of the ‘expected profiably of opeallos for the budget evi. (p. 118), Cashbudget Aproction fant ich sp. 1020. Direct labor budget A projection ofthe quay and cost ff diet lab necessary meet production fege= rents (116) Direct materials budget An estimate of the quantity ‘and cost of ret materials obe purchase. (p. 1013) Financial budgets Individual budgets that focus pe marily on thr eash resources needed to fund expected ‘operations nd planne capital expendires.(p, 1009). Long-range planning A formalized proces of dently ing Tongtern goals, slacting satel fo achieve PRACTICE MULTIPLE-CHOICE QUESTIONS 1. Which othe followings nota Bere of badgetng® (a) Management ca pan ae {) Aneary warning stem proidd for potential (@)Henables disciplinary action tbe ten at every Leet of esponsbiy. (2) The coordination of activites Isoelated. 2. Rhudeet {Gy tbe cesponsiby of managenns seeounians. (©) isthe primary method of comunicaling agreed- ‘pon objectives throughout an ogarizabon. (e) Ignores past peeformance becuse ft represents ‘manogement plans fora futur time pero, (4) may promoteefeeney But aso role n evaluat ig revtermene, (Manufacturing overhead budget An esimate of (Master budget 4 st of interlaced budgets that constl- (Merchandise purchases budget The esimated cost of Operating budgets Tndividual budgets hat result in 2 "sip mere manage nc won opr Production budget A pjestion of thei sales et Ay stn of ected sas eeu fr sles forecart Te projctin of poten ss fore Selling and adeministative expense budget A proj Practice Mutpl-choie Questions 1029 he budgeted balance set i developed trom she ‘budgeted balance shes trom the preceding Year and the various budgets forthe curent year © Aoply budgeting principles to nonmanutacturing companier Budgeting ray be used by merchandiser Tordeopment of a merchandise ng Coordinating staff eas wih anepated serio te ‘otf proft organizations the starting pola In bud aetng is usually expenditures, not recep those goos, and developing policies nd plans to imple~ sent te states, (1009). ‘expected manufacturing overbeod costor the budget period (@ 1017. fates pan of scion ora specif time perio. (1008) ‘goods to be purchased by a mercharder (0 mest spected ste (p 1023) budgeted income statement (p 109), budgeting A bud approach hat sas that managers allel partys p. 100), ‘hat mus Te prouced to meet ancpatd sales (3.1012) the bode period (1011). industry and the Eompany’s expected share of such sles (P1007. ‘ion of anepate sling apd administave expenses forthe badgst period (p 1018). 4. The essentials of efecve budgeting donot include: (101) {@) topdown bodgeting {) managemen sreeptance. {esearch and anaes {@) sound organizational struct, 4, Compared tobulgtng lngeang lansing generally (10 1) faethe: {@) same amount of deta (©) longer ime period 5. Assles budge {@) derived from the prdcton budge {) managements best estimate af sales revense for {) noc the starting point forthe maser badge. (@) prepared only for credit ales (2 same emphasis. (@) same ime period. 021030 23 oudgetary Planning (W02) 6, The formule forthe production budget is budgeted sales nuts pas (@) ested ending merchandise invmtory le begin hing merase inventory: (©) begtoning fashed goods unis las sired ending Finished poss unis. (6) desired ending det materia units les beinning ‘inst materials unit (4) desired ending ished goods units ls begining Finished goods unis Direct materials inventories are kept in pounds in ‘Byrd Company, and the vtal pounds of direct ms- terials needed for production 9300. Irth bea fing Inventory is 1000 pounds and the desved nding inventory is 2.200 pounds the ol pounds to be phased is 900. won 2 ( 9700. to muliply the dict labor cox per hai by the {6) total required divest bor boars {0 phyaeal unt to be produced {e) equivalent tobe provoced. {G) Nocomect answers gen (403) 9, Eachof te following budge isused preparing the budgeted income aisement excep the (a) sales budge (6) sling ad administrative expense budget (6) capital expendiure bude. {) diet labor budget, (10. 10. The budgeted income statement: (a) the end-product of tho operating buds (@ the cnd-prodict ofthe Sania budgets (e) the Starting pole of Une master budget. {G) dependent on cash eceptsand es disbursements (104) 14, The bonged bone sete (3) developed from the budget helance shot forse preceding yard the hadpts Ue curen yoo Solutions 1) the lst operating budget prepared £0 tied wo propre tech Be {@) Alef he above « 12, Te format of cash budget 5} Bopinning cath balance + Cash receipts + Cash (08) from financing ~ Cash disbursements = Ending cach balnce 48) Beginning cas Inance + Cash cepts Cash dis ‘buremenis “/~inancing = Endingcash balance 4) Beginning cash balance: Net income — Cash dividends = Endng cash balance 42) Bopinming cash tlance + Cath reversion ~ Cash expenses» Ending esh balance 18, Expected direct matals purchases in Rend Com- pany are $70,000 i the fmt quarter an $90,000 In ‘the second quarter Forty percent. ofthe purchases ‘se paid in cash lnc, and the balance paid Inthe following. gar ‘mens for purchases 2) 196,00, 6) $90.00, 14, Th budget fora merchandiser difer rom a budget (L05) ora manufacturer esas" (2) a merchandise purciaees budget replaces the prouction buds 4) the manufacturing budgets re notaplicable 6) None ofthe above. 2) Both a) and (above 18. In mos eases, not fespof ents: 4) prepare budgets using the se steps {ie by proftorented busine 4b) know Budgeted cosh reeipt the beginning fof atime period 20 hey bude! only forespe a0) tures 4) begin the budgsting proces by budstng expen: lures rather tam ecaps 4) can ignore bydgtabecatne they are not expected toigenerate me iecone, 1. (eBags doe nx nce cnbledcpary ston tobe ton rere rapesliy: Teather chee aa ets bce | 2.0) A budget ie primary met of consmunkting speed pon cbjacivesroughout ou ogpation Thecsher choker stort ene Gs ge ‘tune at moe a ‘herent alee of ma igre ht nia tbe tng ye rm hich farce glare outed nt manage seamen) pat pero ade (Ghthebudpt nc ns my promot iicxry bu an imperatorin peers po Baling rot oe ofthe sent ftetvebding The te bes ee rb latemens 40) Longange pain perl econ pat et 5 er whereas ei ml cover 3 ea | ae “heather ches ae incre eu etin an longs planing) do ot fave the ame oun of ea) J nat Ie teste asad do a ove theme ie pod 5.) A sae budge s managements bo cima sles rena fre year The oer ccs rename ene se ‘gets the est bat prepare ns the ane bd tat nt ere rom ayer dg (she sing ps Cor ‘hemos bar ond preparer both ah andr Sle {6 (The ermal rhe praaton bats bgt se nas ps ein ending rhe gods unis es beng {esa yor units Teather choles oe terre ore 14a) Pounds tab prlaaed ~ Anos fir pois {ny a.) 90, (950, 9708, n (9.500) + Dein vir 220) ~ Bening inventory (4) Diet Inbar cost = Dc bor cow! pr our Toa regard et nbor hour The athe haces are herore 9-4) The capil expr a wein preping the budgeted come amt. Tea chales ee samenrocice Exercises 1031 10.) The bude inca teen eth re proach apertng uso () the sei hat, bearing int athe mater Dodge ol depenaem onthe cask dbase ment 1a) The ase bale set destopd from the budgeted lane she fer he cen yea the badge fr the 12.) The ona of cashes Begining cosh lance * Cash eseps~ Cash bursement += Fencing“ Ending Sintunce The other coicerre throne acer 13.6) Baad copa the eon quarter ~ Pacha ose gure (2.00; 70400 6) + 4 Porshe forth cond gure S340, $9000 40%)" $7800 na a) 3600 6) 9000 oe) $72.00. 14.2) The be fora merchandiser us morhanda purchases badge! in plac of producing, andthe mane. toring bsg eno pplcae for marchandae Tetfore, ax eth nce) nd) ae comet. eho) te be 15. (in most eases, nofor grt ents Begin the basing process by badging expen. ‘The ther choles ars nce beset eat anes nor prafenie (a) prepare budgets wang diferent, ‘ime tps av those used by Soivoiented enterprises () bude far bath epenires and rect: 268 (2) anne icra bude PRACTICE EXERCISES. 1. On January 1, 2017 the Heche Company budget commie as reached agreement on Pest product an diner the oloing data forthe 6 month ending ue 0 2017. iter eb arr ms eden. forse Sales units Fut quarter $00, second quar 6000, 02) ‘hind qusner 7200 Ending row materials inventory: AOaf the net quarter production requirements Ending inished goods inventory: 308eof the nes quarterexpecied sales unis Thirdquarier2017 production” 7.500 unite “The ending aw materia and finished gods inventories t Deccmber31, 2016, follow the ‘ime percentage ratonshipe fo production and sles tht occur in 2017. To pounds of Fav materials are required o make ach uni of frished goods. Raw matrae purchased "Sr epocted to coe $5 pr pounds Instructions (a) Prepare a production budget by quarters for she month period ended June 30, 2017 (@) Prope a dwct muri budget by quarters forthe 6zonth period ends June 30, a 5 te Segiming ined goer une 500" 30 12 mow < ee ana 8pent dor wos) 1032 © Sepa enone ee M Muto de matenspucse Taney aM Ta 2. Jake Company expects o have cath balance of $85 000 on Jnsary 1, 2017. Reesant ‘monthly budge data or the Rist 2 months of 2017 areas follows Collins rm customer: Jnusry $100,000 February $160.00. Payments or det materia: January $60,000, Febru $80.000. Det bor: fanny $2000, February 45 00 Wipes paint eon heyare neue Manufacturing overheat: January $2600, Februar $31,000. These cots include dere lation af $1,000 per month A aier overt ext ep sincere id administrative expenses January $15,000, Febuary 20,00. These costae 10 deprevation Thy ae pak a incre Sales of maetabe securities tn January arc expected i relize $1090 neath. lke ‘Company ha ine feet at foal Bonk that enables Iw bor yp $25.000, The compan wan to miniin 3 minima monthly eas ance o 25400 Instructions Prepare cath budget for Janay apa Febru: Solution oOa radice rebiems 1033 [practice prostems 1. Aaheile Company i preparing its maser budge for 3017. Relevant dat peraing io Prpwesasan raisin {usSales an prodaction bagels areas Fallows. me Sale Sales (or the year are expected to ol 2,100,000 units, Quarterly sles, as a 107) percentage of tastes, are 18%, 23%, 3% and 25%, respetively. The sles prices ‘apse tobe $70 porn for the Birt tree quarters and $75 por unt besinning In the fourth quarter Sasi the rst quater of 2018 ate expected to be 10% higher than the budgeted sales volume forthe fist quarer of 2017 Production. Manogerent desires to mainiain ending nishod goods Ivenores at 20H ofthe net quarters budgeied sales volume Instructions ‘Prepare he sates Budget an production Dudgot by quarters for 2017 Solaton 1 as Fe a a PoE at peta tes 5 Smo fy Seca t Nocti 1 “somone eww sem eer ff ileeereswig Riot — Hass — ans — (Sracpesng 3 spare oe sen wan sss sand penn sa i — Sb — tt aH fr sotauacseatener acceso ” 2 Barrett Company has completed al operating budgets other than thelncomestatement Prepare esto {or 2017, Selected data frm these budgets fallow oi a ane stant ‘Sales: 300,000 | ‘idle ht Prchabes of raw material: 148,000, 03 ag memory oa aera $15.00 Direct labor: $40,000 | Manufacturing overhead: $73.00, cing $3000 of depreciation expense Selling and administrative expenses: 836.000 Including deprecation expense of $1000 Inderet expense: $1,000 Principal payment on note: $2,000, Dividends declared: $2000 Income iat rte S08 Other information “Assume hat the number of units produced equals dhe number sk earn accounts receable: 410 2017 sale.