Management Accounting

Profit Planning / Budgeting

PowerPoint Authors:
Presented by:
Jon A. Booker, Ph.D., CPA, CIA
Loriza Roma D.Caldwell,
Charles W. EspirituD.B.A., CMA
JanuarySusan
10,Coomer
2018Galbreath, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1

Understand why
organizations budget and the
processes they use to create
budgets.
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activity is known as
budgetary control.
Planning and Control

Planning
Planning –– Control
Control ––
involves
involves involves
involves the
the steps
steps
developing
developing taken
taken by
by
objectives
objectives and
and management
management that that
preparing
preparing various
various attempt
attempt to
to ensure
ensure
budgets
budgets to
to achieve
achieve the
the objectives
objectives are
are
these
these objectives.
objectives. attained.
attained.
Advantages of Budgeting

Define goals
and objectives
Communicate Think about and
plans plan for the future

Advantages
Coordinate Means of allocating
activities resources

Uncover potential
bottlenecks
Responsibility Accounting
Managers should be held responsible
for those items — and only those items
— that the manager can actually control
to a significant extent.
Choosing the Budget Period

Operating Budget

2009 2010 2011 2012

The annual operating budget

may be divided into quarterly
or monthly budgets.
 Self-Imposed Budget
Top M anagem ent

M id d le M id d le
M anagem ent M anagem ent

S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r

A participative budget is prepared with the full cooperation

and participation of managers at all levels. A participative
budget is also known as a self-imposed budget.
 Advantages of Self-Imposed Budgets
1. Individuals at all levels of the organization are viewed as
members of the team whose judgments are valued by
top management.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
3. Motivation is generally higher when individuals
participate in setting their own goals than when the
goals are imposed from above.
4. A manager who is not able to meet a budget imposed
from above can claim that it was unrealistic. Self-
imposed budgets eliminate this explanation.
Self-Imposed Budgets
Most companies do not rely exclusively upon
self-imposed budgets in the sense that top
managers usually initiate the budget process
by issuing broad guidelines in terms of overall
target profits or sales.

Self-imposed
budgets should be Managers should
reviewed by higher watch our for
levels of budgetary slack.
management.
 Human Factors in Budgeting
The
The success
success of
of budgeting
budgeting depends
depends upon
upon three
three
important
important factors:
factors:
1.
1. Top
Top management
management must must be
be enthusiastic
enthusiastic and
and
committed
committed toto the
the budget
budget process.
process.
2.
2. Top
Top management
management must must not
not use
use the
the budget
budget toto
pressure
pressure employees
employees or or blame
blame them
them when
when
something
something goes
goes wrong.
wrong.
3.
3. Highly
Highly achievable
achievable budget
budget targets
targets are
are usually
usually
preferred
preferred when
when managers
managers areare rewarded
rewarded based
based
on
on meeting
meeting budget
budget targets.
targets.
The Budget Committee
A
A standing
standing committee
committee responsible
responsible for
for
• overall
overall policy
policy matters
matters relating
relating to
to the
the budget
budget
• coordinating
coordinating the
the preparation
preparation of
of the
the budget
budget
The Master Budget: An Overview
Sales Start
budget

Ending Selling and

Production administrative
inventory budget
budget expense budget

Direct Direct Manufacturing

materials labor overhead
budget budget budget

Cash
budget

Budgeted Budgeted
income balance
statement sheet
Learning Objective 2

Prepare a sales budget,

including a schedule of
expected cash collections.
Budgeting Example
 Royal
Royal Company
Company is is preparing
preparing budgets
budgets for
for the
the
quarter
quarter ending
ending June
June 30. 30.
 Budgeted
Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
 April 20,000 units
 May 50,000 units
 June 30,000 units
 July 25,000 units
 August 15,000 units
 The
The selling
selling price
price isis $10
$10 per
per unit.
unit.
The Sales Budget
The individual months of April, May, and June are
summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th
Expected Cash Collections

•• All
All sales
sales are
are onon account.
account.
•• Royal’s
Royal’s collection
collection pattern
pattern is:
is:
 70%
70% collected
collected inin the
the month
month of of sale,
sale,
 25%
25% collected
collected inin the
the month
month following
following sale,
sale,
 5% 5% uncollectible.
uncollectible.
•• The
The March
March 3131 accounts
accounts receivable
receivable balance
balance of
of
$30,000
$30,000 will
will be
be collected
collected in
in full.
full.
Expected Cash Collections

From the Sales Budget for April.

From the Sales Budget for May.
Quick Check 

What will be the expected cash

collections in June from the June
sales?
a. $125,000
b. $210,000
c. $335,000
d. $905,000
Expected Cash Collections
The Production Budget
Sales Production
Budget Budget
ed
and l et
p
Expected
o m
C
Cash
Collections

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
Learning Objective 3

Prepare a production budget.

The Production Budget
• The
The management
management at at Royal
Royal Company
Company wants
wants
ending
ending inventory
inventory to
to be
be equal
equal to
to 20%
20% ofof the
the
following
following month’s
month’s budgeted
budgeted sales
sales in
in units.
units.

• On
On March
March 31,
31, 4,000
4,000 units
units were
were on
on hand.
hand.

 Let’s
Let’s prepare
prepare the
the production
production budget.
budget.
The Production Budget

Budgeted May sales 50,000

March 31 Desired ending inventory % 20%
ending inventory Desired ending inventory 10,000
Quick Check 
What is the required production
for May?
a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units
The Production Budget

Assumed ending inventory.

Learning Objective 4

Prepare a direct materials

budget, including a schedule
of expected cash
disbursements for purchases
of materials.
The Direct Materials Budget
•• At
At Royal
Royal Company,
Company, fivefive pounds
pounds of of material
material
are
are required
required per
per unit
unit of
of product.
product.
•• Management
Management wantswants materials
materials onon hand
hand atat the
the
end
end ofof each
each month
month equal
equal toto 10%
10% ofof the
the
following
following month’s
month’s production.
production.
•• On
On March
March 31,
31, 13,000
13,000 pounds
pounds ofof material
material are
are
on
on hand.
hand. Material
Material cost
cost is
is $0.40
$0.40 per
per pound.
pound.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
The Direct Materials Budget

From production budget

The Direct Materials Budget

March 31 inventory

10% of following month’s Calculate the materials to

production needs. be purchased in May.
7-31

Quick Check 
How much materials should be
purchased in May?
a. 221,500 pounds
b. 240,000 pounds
c. 230,000 pounds
d. 211,500 pounds
The Direct Materials Budget
The Direct Materials Budget

Assumed ending inventory

 Expected Cash Disbursement for
Materials
•• Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its materials.
materials.
•• One-half
One-half ofof aa month’s
month’s purchases
purchases is is paid
paid for
for in
in
the
the month
month ofof purchase;
purchase; the
the other
other half
half is
is paid
paid inin
the
the following
following month.
month.
•• The
The March
March 3131 accounts
accounts payable
payable balance
balance is is
$12,000.
$12,000.

Let’s
Let’s calculate
calculate expected
expected cash
cash disbursements.
disbursements.
Expected Cash Disbursement for Materials
Expected Cash Disbursement for Materials

Compute the expected cash

disbursements for materials
for the quarter.

140,000 lbs. × $.40/lb. = $56,000

Quick Check 
What are the total cash
disbursements for the quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400
Expected Cash Disbursement for Materials
Learning Objective 5

Prepare a direct labor budget.

 The Direct Labor Budget
•• At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours (3
(3
minutes)
minutes) ofof direct
direct labor.
labor.
•• The
The Company
Company has has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours of of work
work each
each week.
week.
•• For
For simplicity,
simplicity, we’ll
we’ll assume
assume thatthat workers
workers are
are paid
paid $10
$10
per
per hour
hour regardless
regardless of of the
the hours
hours worked
worked (No(No overtime
overtime
pay).
pay).
•• For
For the
the next
next three
three months,
months, thethe direct
direct labor
labor workforce
workforce
will
will be
be paid
paid for
for aa minimum
minimum of of 1,500
1,500 hours
hours perper month.
month.
 Let’s
Let’s prepare
prepare the the direct
direct labor
labor budget.
budget.
The Direct Labor Budget

From production budget

The Direct Labor Budget
The Direct Labor Budget

Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
The Direct Labor Budget
Quick Check 
What would be the total direct labor cost
for the quarter if the company follows its
no lay-off policy, but pays $15 (time-and-a-
half) for every hour worked in excess of
1,500 hours in a month? April May June Quarter
a. $79,500 Labor hours required 1,300 2,300 1,450
Regular hours paid 1,500 1,500 1,500 4,500
b. $64,500 Overtime hours paid - 800 - 800

c. $61,000 Total regular hours 4,500 $10 $ 45,000

d. $57,000 Total overtime hours 800 $15 $ 12,000
Total pay $ 57,000
Learning Objective 6

Prepare a manufacturing
overhead budget.
Manufacturing Overhead Budget
•• At
At Royal
Royal manufacturing
manufacturing overhead
overhead isis applied
applied to
to
units
units of
of product
product on
on the
the basis
basis of
of direct
direct labor
labor hours.
hours.
•• The
The variable
variable manufacturing
manufacturing overhead
overhead rate
rate is
is $20
$20
per
per direct
direct labor
labor hour.
hour.
•• Fixed
Fixed manufacturing
manufacturing overhead
overhead isis $50,000
$50,000 per
per
month
month and
and includes
includes $20,000
$20,000 of
of noncash
noncash costs
costs
(primarily
(primarily depreciation
depreciation of
of plant
plant assets).
assets).

 Let’s
Let’s prepare
prepare the
the manufacturing
manufacturing overhead
overhead budget.
budget.
Manufacturing Overhead Budget

Direct Labor Budget

Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour*
Total labor hours required 5,050 *rounded
Manufacturing Overhead Budget

Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
Ending Finished Goods Inventory
Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct materials
budget and information
Ending Finished Goods Inventory
Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct labor budget

Ending Finished Goods Inventory
Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units
Unit product cost $ 4.99
Ending finished goods inventory

Total mfg. OH for quarter $251,000

= $49.70 per hour*
Total labor hours required 5,050
Ending Finished Goods Inventory
Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $ 24,950

Production Budget
Learning Objective 7

Prepare a selling and

administrative expense
budget.
 Selling and Administrative Expense Budget
•• At
At Royal,
Royal, the
the selling
selling and
and administrative
administrative expenses
expenses
budget
budget isis divided
divided into
into variable
variable and
and fixed
fixed components.
components.
•• The
The variable
variable selling
selling and
and administrative
administrative expenses
expenses areare
$0.50
$0.50 per
per unit
unit sold.
sold.
•• Fixed
Fixed selling
selling and
and administrative
administrative expenses
expenses are
are $70,000
$70,000
per
per month.
month.
•• The
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses include
include
$10,000
$10,000 in in costs
costs –– primarily
primarily depreciation
depreciation –– that
that are
are not
not
cash
cash outflows
outflows ofof the
the current
current month
month..

Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and
administrative
administrative expense
expense budget.
budget.
Selling and Administrative Expense Budget

Calculate the selling and administrative

cash expenses for the quarter.
Quick Check 
What are the total cash disbursements
for selling and administrative expenses
for the quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000
Selling and Administrative Expense Budget
Learning Objective 8

Prepare a cash budget.

7-61

Format of the Cash Budget

The cash budget is divided into four sections:
1. Cash receipts listing all cash inflows excluding
borrowing;
2. Cash disbursements listing all payments
excluding repayments of principal and interest;
3. Cash excess or deficiency; and
4. The financing section listing all borrowings,
repayments and interest.
 The Cash Budget
Royal:
Royal:
 Maintains
Maintains aa 16%
16% openopen line
line of
of credit
credit for
for
$75,000
$75,000
 Maintains
Maintains aa minimum
minimum cash cash balance
balance of of $30,000
$30,000
 Borrows
Borrows onon the
the first
first day
day ofof the
the quarter
quarter and
and
repays
repays loans
loans onon the
the last
last day
day of
of the
the quarter.
quarter.
 Pays
Pays aa cash
cash dividend
dividend of of $49,000
$49,000 inin April
April
 Purchases
Purchases $143,700
$143,700 of of equipment
equipment in in May
May and
and
$48,300
$48,300 inin June
June paid
paid in
in cash
cash
 Has
Has an
an April
April 11 cash
cash balance
balance of of $40,000
$40,000
The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections
Collections
The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements
Disbursements

Direct Labor
Budget

Manufacturing
Overhead Budget

Selling and Administrative

Expense Budget
7-65

The Cash Budget

In the month of April will

expect to have a cash
deficiency of $20,000.
The Cash Budget

Because Royal maintains

a cash balance of $30,000,
the company must borrow
$50,000 on its line-of-credit.

Ending cash balance for April

is the beginning May balance.
The Cash Budget
Quick Check 
What is the excess (deficiency) of
cash available over disbursements
for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000
The Cash Budget

$50,000 × 16% × 3/12 = $2,000

Borrowings on April 1 and
repayment on June 30.
Learning Objective 9

Prepare a budgeted
income statement.
The Budgeted Income Statement
Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C

After we complete the cash budget,

we can prepare the budgeted income
statement for Royal.
 The Budgeted Income Statement
Sales
Sales Budget
Budget
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending
Ending Finished
Finished
Sales (100,000 units @ $10) $ 1,000,000 Goods
Cost of goods sold (100,000 @ $4.99) 499,000
Goods Inventory
Inventory
Gross margin 501,000
Selling and administrative expenses 260,000 Selling
Selling and
and
Operating income 241,000 Administrative
Administrative
Interest expense 2,000
Expense
Expense Budget
Budget
Net income $ 239,000

Cash
Cash Budget
Budget
Learning Objective 10

Prepare a budgeted
balance sheet.
The Budgeted Balance Sheet
Royal
Royal reported
reported the
the following
following account
account balances
balances
prior
prior to
to preparing
preparing its
its budgeted
budgeted financial
financial
statements:
statements:
•• Land
Land -- $50,000
$50,000
•• Common
Common stock
stock -- $200,000
$200,000
•• Retained
Retained earnings
earnings -- $146,150
$146,150
•• Equipment
Equipment -- $175,000
$175,000
 Royal Company
Budgeted Balance Sheet 25%
25% of
of June
June
June 30 sales
sales of
of
Current assets $300,000
$300,000
Cash $ 43,000
Accounts receivable 75,000 11,500
11,500 lbs.
lbs.
Raw materials inventory 4,600 at
at $0.40/lb.
$0.40/lb.
Finished goods inventory 24,950
Total current assets 147,550 5,000
5,000 units
units
Property and equipment at
at $4.99
$4.99 each
each
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
50%
50% of of June
June
Accounts payable $ 28,400
purchases
purchases
Common stock 200,000
of
of $56,800
$56,800
Retained earnings 336,150
Total liabilities and equities $ 564,550
7-76

Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable 75,000
Beginning balance $146,150
Raw materials inventory Add:
4,600net income 239,000
Deduct: dividends (49,000)
Finished goods inventory 24,950
Ending balance $336,150
Total current assets 147,550
Property and equipment
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550

Accounts payable $ 28,400

Common stock 200,000
Retained earnings 336,150
Total liabilities and equities $ 564,550
International Aspects of Budgeting
When a multinational company enters into
the budgeting process there are at least
three major problems that must be dealt
with . . .
1.Fluctuations in foreign currency exchange
rates.
2. High inflation rates.
3. Local economic conditions and
governmental policies.
The End