6 Budgeting

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BUDGETING
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Objective 1
Describe budgeting,
its objectives, and its
impact on human
behavior.
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Budget
A budget charts a course for

a business by outlining the
plans of the business in
financial terms.
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Estimated Portion of Your Total Monthly

Income That Should Be Budgeted for
Various Living Expenses
Savings
8%
Entertainment
Housing
6%
30%
Transportation
15%
Clothing Utilities
7% 5%
Other
4% Medical Food 64
5% 20%
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Objectives of Budgeting
 Establishing specific goals

 Executing plans to achieve the
goals
 Periodically comparing actual
results to the goals
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Planning
Budgeting supports the planning
process by requiring all
organizational units to establish their
goals for the upcoming period.
These goals motivate individuals and
groups to perform at high levels.
Planning also motivates employees to
attain goals and improve overall
decision making.
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Directing
The budget can be used

to direct and coordinate
operations in order to
achieve the stated goals.
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Responsibility Centers
The budgetary units of an
organization are called
responsibility centers. Each
responsibility center is led by a
manager who has the authority
over and responsibility for the
unit’s performance.
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Controlling Through Feedback

As time passes, the actual performance of
an operation can be compared against the
planned goals. This provides prompt
feedback to employees about their
performance. If necessary, employees can
use such feedback to adjust their activities
in the future.
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Human Behavior and Budgeting

Human behavior problems can arise
if—
1. the budget goal is too tight and
very hard for the employee to
achieve.
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if—
2. the budget goal is too loose and
very easy for the employee to
achieve.
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It is undesirable to set
lower goals than is
attainable. Such budget
“padding” is termed
budgetary slack.
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if—
3. the budget goals of a business
conflict with the objectives of
the employees.
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Goal Conflict
Goal conflict occurs
when individual self-
interest differs from
business objectives or
when different
departments are given
conflicting objectives.
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Objective 2
Describe the basic elements
of the budget process, the
two major types of
budgeting, and the use of
computers in budgeting.
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Budgeting Systems
A variation of fiscal-year
budgeting, called
continuous budgeting,
maintains a twelve-month
projection into the future.
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Continuous Budgeting
One-Year Budget
Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb.
2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2009 2009
Add February 2009

Delete on 20
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February 28
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Zero-Based Budgeting
Zero-based budgeting
requires managers to
estimate sales, production,
and other operating data as
though operations are being
started for the first time.
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Static Budget
 A static budget shows the expected
results of a responsibility center for
only one activity level. The budget
does not change even if the activity
changes.
 A static budget is used by many
service companies and for some
administrative functions of manu-
facturing companies.
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Strength: A static budget is simple—all
expenses are budgeted as
fixed costs.
Weakness: A static budget does not
adjust for changes in
revenues and expenses that
occur as volumes change.
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4 Static Budget
Colter Manufacturing Company
Assembly Department Budget
For the Year Ending July 31, 2008
Direct labor $40,000
Electric power 5,000
Supervisor salaries 15,000
Total department costs $60,000
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Flexible Budget
 Flexible budgets show the
expected results of a responsibility
center for several activity levels.
 A flexible budget is especially
useful in estimating and controlling
factory costs and operating
expenses.
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Strength: Flexible budgeting provides
information needed to analyze the
impact of volume changes on actual
operating results.
Weakness: Flexible budgeting requires greater
research into costs. There must be
a differentiation between fixed and
variable costs.
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Flexible Budget
 Flexible budgets show the
expected results of a responsibility
center for several activity levels.
 A flexible budget is especially
useful in estimating and controlling
factory costs and operating
expenses.
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Strength: Flexible budgeting provides
information needed to analyze the
impact of volume changes on actual
operating results.
Weakness: Flexible budgeting requires greater
research into costs. There must be
a differentiation between fixed and
variable costs.
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Flexible Budget
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Static and Flexible Budgets

If Coulter Manufacturing Company’s
Assembly Department spent $72,000
to produce 10,000 units, how much
over or under budget would the
department manager be using a static
budget? A flexible budget?
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Static and Flexible Budgets

Over Budget
Static Actual
Budget Results
$60,000 $72,000 29
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(Continued)
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Over Budget
Flexible Budget
8,000 9,000 10,000

Actual
units units units
Results
$60,000 $65,500 $71,000 $72,000 30
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(Concluded)
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22-2

Example Exercise 22-1
At the beginning of the period, the Assembly
Department budgeted direct labor of $45,000
and supervisor salaries of $30,000 for 5,000
hours of production. The department actually
completed 6,000 hours of production.
Determine the budget for the department,
assuming that it uses flexible budgeting.
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Follow My Example 22-1
Variable cost:
Direct labor (6,000 hours x $9.00*
per hour) $54,000
Fixed cost:
Supervisor 30,000
Total department cost $84,000
*45,000/5,000 hours
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For Practice: PE22-1A, PE22-1B
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Objective 3
Describe the master
budget for a
manufacturing
business.
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Budgets That Are Linked Together in

a Master Budget
Budgeted Income Statement Budgeted Balance Sheet

Sales budget Cash budget
Cost of goods sold budget: Capital expenditures
Production budget budget
Direct materials
purchases budget
Direct labor cost budget
Factory overhead cost
budget
Selling and administrative
expense budget 34
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Income Statement Budgets

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Objective 4
Prepare the basic
income statement
budgets for a
manufacturing business.
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Sales Budget
The sales budget normally
indicates for each product—
(1) the quantity of estimated
sales and
(2) the expected unit selling
price.
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Factors Expected to Affect Future

Sales include—
 backlog of unfilled sales orders

 planned advertising and promotion
 expected industry and general economic
conditions
 productive capacity
 projected pricing policy
 findings of market research studies
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Sales Budget
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Production Budget
The number of units to be

manufactured to meet budgeted
sales and inventory needs for
each product is set forth in the
production budget.
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Sales
Budget Production Budget
Expected units of sales

+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
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Landon Awards Co. projected sales of 45,000
brass plaques for 2008. The estimated January
1, 2008 inventory is 3,000 units, and the
desired December 31, 2008 inventory is 5,000
units. What is the budgeted production (in
units) for 2008?
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Expected units to be sold 45,000

Plus: desired ending inventory,
December 31, 2008 5,000
Total 50,000
Less estimated beginning inventory,
January 1, 2008 3,000
Total units to be produced 47,000
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Direct Materials Purchases Budget

Sales
Direct Materials
Purchases Budget
Materials needed for production

+ Desired ending materials inventory
– Estimated beginning materials inventory
Direct materials to be purchased
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Direct Materials
Purchases Budget
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Landon Awards Co. budgeted production of
47,000 brass plaques in 2008. Brass sheet is
required to produce a brass plaque. Assume 96
square inches of brass sheet is required for each
brass plaque. The estimated January 1, 2008
brass sheet inventory is 240,000 square inches.
The desired December 31, 2008 brass sheet
inventory is 200,000 square inches. If brass
sheets costs $0.12 per square inch, determine the
materials purchases budget for 2008. 46
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Square inches required for production:
Brass sheet (47,000 x 96 sq. in.) 4,512,000
Plus: desired ending inventory,
December 31, 2008 200,000
Total 4,712,000
Less estimated beginning inventory,
January 1, 2008 240,000
Total square inches to purchase 4,472,000
Unit price (per square inch) x $0.12
Total direct materials to be purchased $ 536,640
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Direct Labor Cost Budget

Sales
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
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Direct Labor Cost Budget
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Landon Awards Co. budgeted production of

47,000 brass plaques in 2008. Each plaque
requires engraving. Assume that 12 minutes
are required to engrave each plaque. If
engraving labor costs $11.00 per hour,
determine the direct labor cost budget for 2008.
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Hours required for engraving:

Brass plaque (47,000 x 12 min.) 564,000 min.
Convert minutes to hour / 60 min.
Engraving hours 9,400 hrs.
Hourly rate x $11.00
Total direct labor cost $103,400
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Factory Overhead Cost Budget

Sales
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
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Factory Overhead Cost

Budget
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Cost of Goods Sold Budget

Sales
Direct Materials
Purchases Budget
Cost of Goods
Direct Labor
Sold Budget Cost Budget
Factory Overhead
Cost Budget
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Cost of Goods Sold

Budget
Direct materials
purchase budget
Direct labor
cost budget
Factory overhead
cost budget
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Prepare a cost of goods sold budget for Landon
Awards Co. using the information in Example
Exercise 22-3 (Slide 47) and 22-4 (Slide 51).
Assume the estimated inventories on January 1, 2008
for finished goods and work in process were $54,000
and $47,000, respectively. Also assume the desired
inventories on December 31, 2008 for finished goods
and work in process were $50,000 and $49,000,
respectively. Factory overhead was budgeted for
$126,000. Go to Slide 47 Go to Slide 51
Type “56” and press “Enter” to return to this slide. 56
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Finished goods inventory, Jan. 1, 2008 $ 54,000
Work in process inventory, Jan. 1, 2008 $ 47,000
Direct materials:
Direct materials inventory, Jan. 1, 2008
(240,000 x $0.12) $ 28,800
Direct materials purchases (EE 22-3) 536,640
Cost of direct materials available for
use $565,440
Less direct materials inventory, Dec.
31, 2008 (200,000 x $0.12) 24,000
Cost of direct materials placed in
production $541,440
Direct labor (EE 22-4) 103,400
Factory overhead 126,000
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Total manufacturing costs 770,840
(Continued)
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Follow My Example 22-5 (continued)
Total work in process during period $817,840

Less work in process inventory, December 31, 2008 49,000
Cost of goods manufactured 768,840
Cost of finished goods available for sale $822,840
Less finished goods inventory, December 31, 2008 50,000
Cost of goods sold $772,840
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Selling and Administrative Expense

Budget
Sales
Direct Materials
Purchases Budget
Cost of Goods
Direct Labor
Sold Budget Cost Budget
Selling & Factory Overhead

Administrative Cost Budget
Expenses
Budget
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Selling and Administrative

Expense Budget
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Budgeted Income Statement

Sales budget
Cost of goods
sold budget
Selling and
administrative
expenses budget
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Objective 5
Prepare balance
sheet budgets for a
manufacturing
business.
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Cash Budget
The cash budget is one of the
most important elements of the
budgeted balance sheet. The
cash budget presents the
expected receipts (inflows) and
payments (outflows) of cash
for a period of time.
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Estimated Cash Receipts

January February March
Receipts from cash sales:
Cash sales (10% x current
month’s sales—Note A)……. $108,000 $124,000 $ 97,000
Note A: $108,000 = $1,080,000 x 10%

$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10% 64
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Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)……….. $370,000 $388,800 $446,400
Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance

$388,800 = $1,080,000 x 90% x 40%
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$446,400 = $1,240,000 x 90% x 40%
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Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)………... $370,000 $388,800 $446,400
Collections from current
month’s sales (60%) (see Note
C)…………………………… 583,200 669,600 523,800
Note C: $583,200 = $1,080,000 x 90% x 60%

$669,600 = $1,240,000 x 90% x 60% 66
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$523,800 = $ 970,000 x 90% x 60%
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Schedule of Collections
from Sales
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Estimated Cash Payments

Payments of prior months’ manu-
facturing costs {[25% x previous
month’s manufacturing costs
(less depreciation)]—Note A}….. $190,000 $204,000 $189,000
Note A: $190,000, given as January 1, 2006 Accounts

Payable balance
$204,000 = ($840,000 – $24,000) x 25%
$189,000 = ($780,000 – $24,000) x 25%
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Payments of prior months’ manu-
facturing costs {[25% x previous
month’s manufacturing costs
(less depreciation)]—Note A}….. $190,000 $204,000 $189,000
Payments of current month’s
manufacturing costs {[75% x
current month’s manufacturing
costs (less depreciation)]—
Note B}…………….…………… $612,000 $567,000 $591,000
Note B: $612,000 = ($840,000 – $24,000) x 75%

$567,000 = ($780,000 – $24,000) x 75% 69
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$591,000 = ($812,000 – $24,000) x 75%
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Schedule of Payments for

Manufacturing Costs
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Landon Awards Co. collects 25% of its sales on
account in the month of the sale and 75% in the
month following the sale. If sales on account
are budgeted to be $100,000 for March and
$126,000 for April, what are the budgeted cash
receipts from sales on account for April?
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April
Collections from March sales (75% x
$100,000) $ 75,000
Collections from April sales (25% x
$126,000) 31,500
Total receipts from sales on account $106,500
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Completing the Cash Budget

Estimated cash receipts from:
Cash sales (Slide 68) $ 108,000 $ 124,000 $ 97,000
Collections of accounts
receivable (Slide 68) 953,200 1,058,400 970,200
Interest revenue — — 24,500
Total cash receipts $1,061,200 $1,182,400 $1,091,700
Estimated cash payments for:
Manufacturing costs (Slide 71) $ 802,000 $ 771,000 $ 780,000
Selling and administrative expenses 160,000 165,000 145,000
Capital additions 274,000
Interest expense 22,500
Income taxes 150,000
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Cash Budget
Schedule of
collections
from sales
Schedule of cash
payments for
manufacturing
costs
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Capital Expenditures Budget

The capital expenditures budget
summarizes plans for acquiring fixed assets.
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Budgeted Balance Sheet

The budgeted balance

sheet estimates the
financial condition at the
end of a budget period.
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6 Budgeting

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6 Budgeting

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Aktuaria MIPA ITB

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A budget charts a course for

Estimated Portion of Your Total Monthly

 Establishing specific goals

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The budget can be used

Controlling Through Feedback

Human Behavior and Budgeting

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Add February 2009

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Static and Flexible Budgets

Static and Flexible Budgets

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8,000 9,000 10,000

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Budgets That Are Linked Together in

Budgeted Income Statement Budgeted Balance Sheet

Income Statement Budgets

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Factors Expected to Affect Future

 backlog of unfilled sales orders

The number of units to be

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Expected units of sales

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Expected units to be sold 45,000

Direct Materials Purchases Budget

Materials needed for production

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Direct Labor Cost Budget

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Landon Awards Co. budgeted production of

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Hours required for engraving:

Factory Overhead Cost Budget

Factory Overhead Cost

Cost of Goods Sold Budget

Cost of Goods Sold

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Total work in process during period $817,840

Selling and Administrative Expense

Selling & Factory Overhead

Selling and Administrative

Budgeted Income Statement

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Estimated Cash Receipts

Note A: $108,000 = $1,080,000 x 10%