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Week12_LectureSlides_Budgets

ACCT 1511Session 1, 2009

Week 12

Budgeting for

Planning & Control

Budgeting for planning and control

What is a budget?

Why and how is it used?Behavioural aspects of budgeting 2

Behavioural aspects of budgeting O3Master budget and its components O4

Case study

Planning

Formulating long-and short-term plans

Directing and Controlling motivating Implementing the plans

Controlling Measuring performance

Comparing actual to planned performance

Decision making Source: Garrison and Noreen (2000)

Budgets –Definition

?Formal documents that quantify an

organisation’s plan for achieving its goals ?Expressed in either Physical or Financial: O1

–E.g.?Typical emphasis is on the Short Term: –Why?–Exception

Benefits of budgets

?Planning –i.e.

?Communication and Coordination –i.e.O1

5?Motivational tool –i.e.

?Improved decisions concerning resources –

i.e.

Benefits of budgets

?Control

–“You get what you measure”–Evaluate performance

–Discrepancies between budgeted and actual

?Why??Condition ?Poor assumptions ?Bad performance

For example…

?Sales budget

–Estimated sales in units = 70,000

–Estimated revenue = $350,000

–Estimated profit = $50,000

7?Actual sales

–Unit sold70,000

–Revenue generated $350,000

–Profit $20,000

Behavioural aspects of budgeting

Key features of effective budgets

?Well-defined organisational structure

–e.g.

?Efficient accounting and reporting system

–e.g.

Behavioural aspects of budgeting

?Flexibility

–What if??

M ti t l i iti f hi

?Motivate employees in a positive fashion

–Goal congruence

–Management’s participation

Behavioural aspects of budgeting

?Realistic standards

–“Achievable?

?Useful feedback…

?Responsibility and accountability…

?Evaluation methods…

–Incentives?

–Consequences?

Master budget

?Set of interrelated budgets

?Composed of operating, cash and financial

budgets

111.Operating budgets

–profit-generating activities

–Revenue & Costs (expenses)

Master budget

2.Cash budgets

–Ensure that there is adequate cash at all times

Fi i l b d

3.Financial statement budgets

–Funding?

–Financial position?

Master budget

Budget preparation:

Operating Cash FS

Master Budget –Manufacturing

Production Sales & Admin Capital Exp.

Sales Budget

DM DL

Finished Goods

COGS

Budgeted BS

Budgeted CFS

Cash

Budgeted IS

Master Budget –Retail

Production Sales & Admin Capital Exp.

Sales Budget

Purchases Budget

DM DL

Finished Goods

COGS

Budgeted BS

Budgeted CFS

Cash

Budgeted IS

Purchases Budget

Direct materials Direct labour OH

Production budget S & A Budget

Cash Budget

Capital Exp. Budget

Sales Budget

Cash Budgets

Operating Budgets FS Budgets

Finished Goods

COGS

Budgeted IS

Budgeted CFS

Budgeted BS

Case Study –Operating budget

?We want to plan and control the

company’s operations

17?How?

–Prepare a master budget for the first quarter of

2009

?First step is the operating budget

Case Study Information

?(1) Forecasted unit sales are as follows:

?(1)Each unit will be sold for $1,100

January

115

February

140

March

150

April

110

?(2)Closing FG inventory at the end of the month is to

be equal to budgeted sales requirement for following

month

?(3)You currently have 75finished inventory units (no

RM or WIP)

Case Study Information

?(4)Each unit will require $368of raw materials

and 5hours of direct labour (at $35 per hour)O4

?(5)Budgeted variable overhead is $55per unit

Case Study Information

?(6)Fixed overhead is $38,000per month

including $6,250 depreciation (why is this important?)?(6)Overhead allocation based on DLH O4

()?(7)Sales comm. is 2%of revenue. Fixed S&A

OH is $2500/month

?(8)Policy:Ending monthly balance of RM to

be $100, WIP $0

Case Study Information

?Balance Sheet as at December 31 2008

–o/b on 1 January = o/b for the first quarter 2009

21Prepare an Operating Budget

PowerPooch

Operating Budget

For the Quarter Ended March 31, 2009

J F b M h Q t

January

February

March

Quarter REMEMBER:

“Beginning” of the Quarter = beginning of January

“End” of the Quarter = end of March

(1) Sales Budget

January February March Quarter

Sales

No of Units 115140150405Selling Price $1,100$1,100$1,100$1,100Sales Revenue

$126,500$154,000$165,000$445,500

(1)Forecasted sales

Sales vs. production

In January

?Planned sale is 115 units (1)

?Need to have 140 units at the end of Jan (2)

25?Currently have 75 units (3)

?How many units do you need to produce?

–Production Budget

FG Inventory

(2) Production Budget

Production January February March Quarter

No.of units (sales)115140150405

27Desired end inv140150110110

No.of units needed255290260515

less: begin inv140150

No.of units produce255150110515

(2)

(2) Production Budget

Production January February March Quarter

No.of units (sales)115140150405

Desired end inv140150110110

No.of units needed255290260515

less: begin inv140150

No.of units produce255150110515

115+140

(2) Production Budget

Production January February March Quarter

No.of units (sales)115140150405

29Desired end inv140150110110

No.of units needed255290260515

less: begin inv7514015075

No.of units produce180150110440

(3)

Now need to consider cost of

manufacturing these units

(3) Direct Materials Budget

Direct materials January February March Quarter

Units to Produce180150110440

Direct materials/unit$368$368$368$368

(4)

Production needs$66,240$55,200$40,480$161,920

Desired end inv.$100$100$100$100

Total needs$66,340$55,300$40,580$162,020

Less: Beg inv.$0$100$100$0

DM Purchased$66,340$55,200$40,480$162,020

(3)

(8)

(4) Direct Labour Budget

Direct labour January

February

March Quarter

Remember this for OH allocation (6)

31Units to produce 180150110440Direct labour/unit 5555Total hours needed 9007505502200Wage/hour

$35$35$35$35Total direct labour $31,500$26,250$19,250$77,000

(4)

(4)(5) Overhead Budget

Overhead (OH)January

February

March

Quarter

Remember this for OH allocation

Units to produce 180150110440Variable OH rate $55$55$55$55Budget. var OH $9,900$8,250$6,050$24,200Budget fixed OH $38,000

$38,000$38,000$114,000Total OH $47,900$46,250$44,050$138,200

(5)(6)(6) S&A Expense Budget

Selling & Admin January

February

March Quarter

Planned unit sales 115140150405O4

33Variable S&A/unit $22$22$22$22Total variable $2,530$3,080$3,300$8,910Fixed S&A $2,500$2,500$2,500$7,500Total $5,030$5,580$5,800$16,410(6) S&A Expense Budget

Selling & Admin January

February

March Quarter

Planned unit sales 115140150405Commission = 2% x $1,100

((1) and (7))

Variable S&A/unit $22$22$22$22Total variable $2,530$3,080$3,300$8,910Fixed S&A $2,500$2,500$2,500$7,500Total $5,030$5,580$5,800$16,410

(6) S&A Expense Budget

Selling & Admin January

February

March Quarter

Planned unit sales 115140150405O4

Variable S&A/unit $22$22$22$22Total variable $2,530$3,080$3,300$8,910Fixed S&A $2,500$2,500$2,500$7,500Total $5,030$5,580$5,800$16,410

(7)

(7) Ending Inventory Budget

Rounded Units Unit cost Total RM$100O4

For the Quarter Ended March 31 2009

39WIP

Finished Goods

Total Inventory

From Info (8)

(7) Ending Inventory Budget

Rounded Units Unit cost Total

RM$100

For the Quarter Ended March 31 2009

WIP$0

Finished Goods

Total Inventory

From Info (8)

(7) Ending Inventory Budget

Rounded Units Unit cost Total

RM$100$100

For the Quarter Ended March 31 2009

41WIP$0$0

Finished Goods110 units$857$94,270

Total Inventory

From the Production

Budget (desired

ending inventory

(7) Ending Inventory Budget

Rounded Units Unit cost Total

RM$100$100

For the Quarter Ended March 31 2009

WIP$0$0

Finished Goods110 units$857$94,270

Total Inventory$94,370

(8) COGS Budget

Beg. Raw Materials Inventory 0

Add: Purchases $162,020Material Available $162,020

L Cl i RM I t O4

43Less: Closing RM Inventory $100Direct materials used $161,920Direct labour used $77,000Overhead

$138,200 Budgeted manu costs $377,120

Add: Opening WIP

(8) COGS Budget

Beg. Raw Materials Inventory 0

Add: Purchases $162,020Material Available $162,020

L Cl i RM I t O4

Less: Closing RM Inventory $100Direct materials used $161,920Direct labour used $77,000Overhead

$138,200 Budgeted manu costs $377,120

Add: Opening WIP

(8) COGS Budget

Beg. Raw Materials Inventory 0

Add: Purchases $162,020Material Available $162,020

L Cl i RM I t O4

Less: Closing RM Inventory $100Direct materials used $161,920Direct labour used $77,000Overhead

$138,200 Budgeted manu costs $377,120

Add: Opening WIP

(8) COGS Budget

Beg. Raw Materials Inventory 0

Add: Purchases $162,020Material Available $162,020

L Cl i RM I t O4

Less: Closing RM Inventory $100Direct materials used $161,920Direct labour used $77,000Overhead

$138,200Budgeted Manu Costs $377,120

Add: Opening WIP

(8) COGS Budget

Add: Opening WIP

$0Total cost of WIP $377,120

Less: Closing WIP $0O4

Info 3

Info 8

$Cost of FG Manufactured

$377,120Beginning finished goods B/S 65,300 Goods available for sale $442,420Less: End finished goods $94,270 Budgeted COGS

$348,150

(8) COGS Budget

Add: Opening WIP $0Total cost of WIP $377,120

Less: Closing WIP $0O4

$Cost of FG Manufactured

$377,120Beginning finished goods B/S 65,300 Goods available for sale $442,420Less: End finished goods $94,270

Budgeted COGS

(8) COGS Budget

Add: Opening WIP $0Total cost of WIP $377,120

Less: Closing WIP $0O4

$Cost of FG Manufactured

$377,120Beginning finished goods B/S 65,300 Goods available for sale $442,420Less: End finished goods $94,270 Budgeted COGS

$348,150

Cash and Financial Information

?(1)20%of sales are received in cash in the

month of sale;80%in the following month.

–Current debtors balance (31 Dec 2008) to be

received in January.O4

received in January.

?(2)Raw materials purchase to be paid for in

the following month.

–Current creditor balance (31 Dec 2008) will be paid in January.

Cash and Financial Information

?(3)Direct labour and the cash portion of total

overhead is paid in the month incurred –Remember…depreciation is $6,250

Starting in January sales commission is going

Cash paid for

depreciation?O4

?(4)Starting in January, sales commission is going to be paid in the month following sale.

–No sales commission outstanding

?(5)Tax rate is 40%

Cash and Financial Information

?You are given:

–Balance Sheet as at December 31, 2008–Key figures from the Operating Budgets

?Prepare:

–(1) Cash Budget,

–(2) Budgeted Income Statement –(3) Budgeted Balance Sheet

Cash Budget

?Cash In

–Cash collections

?Cash Out –Payments

(1) Cash Budget

Month

Quarter

January February March

Beginning cash bal 255000186525202630255000O4

B/S 2008

55255,000$ 186,525$ 202,630$ 255,000$ Collections:

Cash sales (sales this month)30,80033,00089,100

Credit sales (previous month)49,600101,200123,200274,000Total cash available

304,600$ 318,525$ 358,830$ 618,100$

(1) Cash Budget

Month

Quarter

January

February March

Beginning cash bal 25500021182520263025500020% x $126,500 (1) and Sales Budget

255,000$ 211,825$ 202,630$ 255,000$ Collections:

Cash sales (sales this month)25,30030,80033,00089,100

Credit sales (previous month)49,600101,200123,200274,000Total cash available

329,900$ 343,825$ 358,830$ 618,100$

(1) Cash Budget

Month

Quarter

January

February March

Beginning cash balance

255000211825202630255000trade debtors in BS (1)

57255,000$ 211,825$ 202,630$ 255,000$ Collections:

Cash sales (sales this month)25,30030,80033,00089,100 Credit sales (previous month)49,600101,200123,200274,000Total cash available

329,900$ 343,825$ 358,830$ 618,100$

(1) Cash Budget

Less disbursements:January February March Quarter

Raw materials 46,00066,34055,200167,540 Direct labour 31,50026,25019,25077,000Trade creditors on BS (2)

,,,, Overhead

41,65040,00037,800119,450 Selling and administrative Fixed

2,500

2,5002,5007,500 Commission 02,5303,0805,610Total disbursements

121,650

137,620

117,830

377,100

(1) Cash Budget

Less disbursements:January February March Quarter Raw materials 46,00066,34055,200167,540 Direct labour 31,50026,25019,25077,000DL Budget and (3)

59,,,, Overhead

41,65040,00037,800119,450 Selling and administrative Fixed

2,500

2,5002,5007,500 Commission 02,5303,0805,610Total disbursements

121,650

137,620

117,830

377,100(1) Cash Budget

Less disbursements:January February March Quarter Raw materials 46,00066,34055,200167,540 Direct labour 31,50026,25019,25077,000Total Overhead –Depreciation 47,900 (OH Budget) –6,250 (3)O4

,,,, Overhead

41,65040,00037,800119,450

Selling and administrative Fixed

2,500

2,5002,5007,500 Commission 02,5303,0805,610Total disbursements

121,650

137,620

117,830

377,100

(1) Cash Budget

Less disbursements:January February March Quarter Raw materials 46,00066,34055,200167,540

Direct labour 31,500

26,25019,25077,000Selling & Admin Budget O4

61,,,, Overhead

41,65040,00037,800119,450 Selling and administrative Fixed

2,5002,5002,5007,500 Commission 2,5303,0805,610Total disbursements

121,650137,620117,830377,100Excess (deficiency) of cash

208,250

202,630

241,000

(1) Cash Budget

Less disbursements:January February March Quarter Raw materials 46,00066,34055,200167,540 Direct labour 31,50026,25019,25077,000Commission starts Jan, but paid

following month

,,,, Overhead

41,65040,00037,800119,450 Selling and administrative Fixed

2,500

2,5002,5007,500 Commission 02,5303,0805,610Total disbursements

121,650137,620117,830377,100Excess (deficiency) of cash

208,250

202,630

241,000

(1) Cash Budget

Less disbursements:January February March Quarter Raw materials 46,00066,34055,200167,540 Direct labour 31,50026,25019,25077,000O4

63,,,, Overhead

41,65040,00037,800119,450 Selling and administrative Fixed

2,500

2,5002,5007,500 Commission 02,5303,0805,610Total disbursements

121,650137,620117,830377,100Excess (deficiency) of cash

208,250

202,630

241,000

(1) Cash Budget

Less disbursements:January February March Quarter Raw materials 46,00066,34055,200167,540 Direct labour 31,50026,25019,25077,000Financing?Jan (c/b) = ??O4

,,,, Overhead 41,65040,00037,800119,450 Selling and administrative Fixed 2,5002,5002,5007,500 Commission 02,5303,0805,610Total disbursements 121,650137,620117,830377,100Excess (deficiency) of cash 208,250202,630241,000241,000

(1) Cash Budget

Month

Quarter

January

February March

Beginning cash balance 255000208250202630255000Ending

balance of January

255,000$ 208,250$ 202,630$ 255,000$ Collections:

Cash sales (sales this month)25,30030,80033,00089,100 Credit sales (previous month)49,600101,200123,200274,000Total cash available

329,900$ 340,250$ 358,830$ 618,100$

(3) Budgeted Balance Sheet Current Assets

Bank $241,000

Debtors I t

From Cash Budget (Ending balance for

the Quarter)

Inventory Non-current Assets

Machinery Acc Depn Total Assets

(3) Budgeted Balance Sheet

Current Assets

Bank $241,000Debtors $132,000

I t

March sales $165,000 x 0.8 (1)

Inventory Non-current Assets

Machinery Acc Depn Total Assets

(3) Budgeted Balance Sheet

Current Assets $

Bank $241,000Debtors

$132,000

I t

$94370$467370

Schedule 7:

RM 100

FG 94,270

Inventory $94,370$467,370Non-current Assets

Machinery Acc Depn $0Total Assets

$467,370

(3) Budgeted Balance Sheet

Current Assets

Bank $241,000Debtors $132,000

I t $94370$467370BS o/b $18,750 + (6,250 x 3)

Inventory $94,370$467,370Non-current Assets Machinery $300,000

Acc Depn $37,500$262,500

Total Assets

$729,870

Same as 31/12/08(3) Budgeted Balance Sheet

Current Assets

Bank $241,000Debtors $132,000

I t

$94370$467370O4

Inventory $94,370$467,370Non-current Assets

Machinery $300,000

Acc Depn $37,500$262,500

Total Assets

$729,870

(3) Budgeted Balance Sheet

Current Liabilities Trade creditors $40,480 Accrued expenses $36,446

$76,926

March direct materials (2)

Shareholders' equity Contributed Capital $600,000 Retained profits

$54,869

$654,869Total Liabilities and Equity

$731,795

(3) Budgeted Balance Sheet

Current Liabilities Trade creditors $40,480 Accrued expenses $35,676

$76,156

Commission $3,300 (schedule 6) + tax $32,376 (Income Statement)

Shareholders' equity Contributed Capital $600,000 Retained profits

$54,869

$654,869Total Liabilities and Equity

$731,025

(3) Budgeted Balance Sheet

Current Liabilities Trade creditors $40,480

Accrued expenses $35,676$76,156

B/S 200877

Shareholders' equity Contributed Capital $600,000 Retained profits

$54,869

$654,869Total Liabilities and Equity

$731,025

(3) Budgeted Balance Sheet

Current Liabilities

Trade creditors $40,480 Accrued expenses $35,676

$76,156

$5,150 (BS o/b) + $48,564 (Budgeted Profit)

Shareholders' equity Contributed Capital $600,000 Retained profits

$53,714

$653,714Total Liabilities and Equity

$729,870

(3) Budgeted Balance Sheet

Current Liabilities

Trade creditors$40,480

Accrued expenses$35,676$76,156

79Shareholders' equity

Contributed Capital$600,000

Retained profits$53,714$653,714 Total Liabilities and Equity$729,870

Week12_LectureSlides_Budgets

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