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GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
Planning
Organizing
& Directing
Controlling
Evaluating
Decision
Making
The Work of Management
GROUP 6: Alodia LOPEZ, Eunic...
Planning
Organizing &
Directing
Controlling
Evaluating
Decision
Making
The Work of Management
GROUP 6: Alodia LOPEZ, Eunic...
Planning
Organizing &
Directing
Controlling
Evaluating
Decision
Making
The Work of Management
GROUP 6: Alodia LOPEZ, Eunic...
At
present
1 Year
5 Years
The Work of Management
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
BUDGET
• detailed quantitative plan for acquiring
and using financial and other resources
over a specified forthcoming tim...
Planning
Organizing &
Directing
Controlling
Evaluating
Decision
Making
The Work of Management
GROUP 6: Alodia LOPEZ, Eunic...
A standing committee responsible for
 overall policy matters relating to the budget
 coordinating the preparation of the...
ADVANTAGES OF BUDGETING
• Define goal and objectives
• Think about and plan for the future
• Means of allocating resources...
2010 2011 2012 2013
Operating Budget – maybe perpetual
ContinuumImposed
Budgets
Participatory
Budgets
Choosing the Budget ...
Supervisor Supervisor
Middle
Management
Supervisor Supervisor
Middle
Management
Top Management
Flow of Budget Data
IMPOSED...
IMPOSED BUDGETS
• Best used in:
• In well-established
organizations.
• In start-up
organizations
• In extremely small
busi...
ADVANTAGES OF
IMPOSED BUDGETS
• Requires less time.
• Utilize top
management’s
knowledge of overall
resource availability....
DISADVANTAGES OF
IMPOSED BUDGETS
• Reduce feeling of
teamwork.
• Dissatisfaction and
low morale.
• Limited acceptance of
s...
Supervisor Supervisor
Middle
Management
Supervisor Supervisor
Middle
Management
Top Management
Flow of Budget Data
PARTICI...
PARTICIPATORY BUDGETS
Right to comment before
implementation
Ultimate right to set
budgets
Best used in:
• In well-establi...
ADVANTAGES OF
PARTICIPATORY BUDGETS
• Obtain information from those persons most familiar
with the needs and constraints o...
DISADVANTAGES OF
PARTICIPATORY BUDGETS
Require
significantly
more time.
May motivate
managers to
introduce “slack”
into th...
FINANCIAL
BUDGET
OPERATING
BUDGET
1
2
3 4 5
6 7
8
9 10
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
SALES BUDGET
• Detailed schedule
showing expected
sales for the coming
periods expressed
in units and dollars.
• A budget ...
EXAMPLE
SALES BUDGET
• Sixer’s Company is preparing
budgets for the quarter
ending June 30.
• Budgeted sales for the next
...
EXAMPLE SALES BUDGET
April May June Quarter
Budgeted
sales (units)
Sellingprice
perunit
Total sales
GROUP 6: Alodia LOPEZ,...
EXAMPLE SALES BUDGET
April May June Quarter
Budgeted
sales (units) 20,000 50,000 30,000 100,000
Sellingprice
perunit 10$
T...
EXAMPLE SALES BUDGET
April May June Quarter
Budgeted
sales (units) 20,000 50,000 30,000 100,000
Sellingprice
perunit 10$ 1...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
• A budget showing the number of units that must
be produced during each budget period to
meet sales needs and to provide ...
EXAMPLE PRODUCTION BUDGET
Sixer’s Company
wants ending
inventory to be
equal to 20% of
the following
month’s
budgeted sale...
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000
Total needed 30,000...
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000
Total needed 30,000...
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000 6,000
Total needed ...
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000 6,000 5,000 5,000
T...
EXAMPLE EXPECTED CASH COLLECTIONS
• All sales are on account.
• Sixer’s collection pattern
is:
• 70% collected in the mont...
EXAMPLE EXPECTED CASH COLLECTIONS
April May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
Total cash collections
GROUP...
EXAMPLE EXPECTED CASH COLLECTIONS
April May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales
70%x $200,000 14...
EXAMPLE EXPECTED CASH COLLECTIONS
April May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales
70% x $200,000 1...
EXAMPLE EXPECTED CASH COLLECTIONS
April May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales
70% x $200,000 1...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
• A budget showing the raw materials that must
be purchased to fulfill the production budget
and to provide for adequate i...
EXAMPLE DIRECT MATERIALS BUDGET
At Sixer’s Company, five pounds of material are
required per unit of product.
Management w...
April May June Quarter
Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000...
April May June Quarter
Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000...
April May June Quarter
Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000...
EXAMPLE EXPECTED CASH DISBURSEMENTS
FOR MATERIALS
Sixer’s pays $0.40 per pound for its materials.
One-half of a month’s pu...
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000...
EXAMPLE EXPECTED CASH DISBURSEMENTS
FOR MATERIALS
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchase...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
DIRECT LABOR BUDGET
• A budget
showing the
direct labor
hours (and total
amount) needed
to produce the
number of units
spe...
EXAMPLE DIRECT LABOR BUDGET
At Sixer’s, each unit of product requires 0.05 hours
of direct labor.
The Company has a “no la...
April May June Quarter
Production 26,000 46,000 29,000 101,000
Direct labor hours
Labor hoursrequired
Guaranteedlabor hour...
EXAMPLE DIRECT LABOR BUDGET
April May June Quarter
Production 26,000 46,000 29,000 101,000
Direct labor hours 0.05 0.05 0....
April May June Quarter
Production 26,000 46,000 29,000 101,000
Direct labor hours 0.05 0.05 0.05 0.05
Labor hoursrequired ...
EXAMPLE DIRECT LABOR BUDGET
April May June Quarter
Production 26,000 46,000 29,000 101,000
Directlabor hours 0.05 0.05 0.0...
On the other hand, if the company decided to follow its no lay-off
policy and pays $15 (time-and-a-half) for every hour wo...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
MANUFACTURING OVERHEAD BUDGET
A budget showing all
costs of production
other than direct
materials and direct
labor.
Has t...
EXAMPLE MANUFACTURING OVERHEAD
BUDGET
Sixer’s Company uses a variable
manufacturing overhead rate of $1 per
unit produced....
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH...
EXAMPLE MANUFACTURING OVERHEAD
BUDGET
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg...
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
ENDING FINISHED GOODS INVENTORY BUDGET
• A budget showing the
carrying cost of the
unsold units remaining
in inventory.
• ...
EXAMPLE ENDING FINISHED GOODS
INVENTORY BUDGET
Now, Sixer’s can complete
the ending finished goods
inventory budget.
At Si...
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$
Direct labor
Manufacturing overhead
B...
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
Ma...
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
Ma...
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH...
EXAMPLE DIRECT LABOR BUDGET
April May June Quarter
Production 26,000 46,000 29,000 101,000
Directlabor hours 0.05 0.05 0.0...
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
Ma...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
SELLING AND ADMINISTRATIVE EXPENSE
BUDGET
A budget showing
expenses for areas other
than manufacturing.
Similar to the
man...
EXAMPLE SELLING AND ADMINISTRATIVE
EXPENSE BUDGET
At Sixer’s, variable selling and administrative
expenses are $0.50 per u...
April May June Quarter
Budgeted sales 20,000
Variable selling
and admin. rate 0.50$
Variable expense 10,000$
Fixed selling...
EXAMPLE SELLING AND ADMINISTRATIVE
EXPENSE BUDGET
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Varia...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
CASH BUDGET
The cash budget is divided into four sections:
• Cash receipts from the sales budget
• Cash disbursements from...
EXAMPLE CASH BUDGET
Sixer’s
• Maintains a 16% open line of credit for $75,000.
• Maintains a minimum cash balance of $30,0...
April May June Quarter
Beginning cash balance 40,000$
Add cash collections 170,000
Total cash available 210,000
Less disbu...
April May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales
70% x $200,000 140,000 140,000
25% x $200,000 50,0...
April May June Quarter
Beginning cash balance 40,000$
Add cash collections 170,000
Total cash available 210,000
Less disbu...
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000...
April May June Quarter
Beginning cash balance 40,000$
Add cash collections 170,000
Total cash available 210,000
Less disbu...
April May June Quarter
Production 26,000 46,000 29,000 101,000
Direct labor hours 0.05 0.05 0.05 0.05
Labor hoursrequired ...
April May June Quarter
Beginning cash balance 40,000$
Add cash collections 170,000
Total cash available 210,000
Less disbu...
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH...
April May June Quarter
Beginning cash balance 40,000$
Add cash collections 170,000
Total cash available 210,000
Less disbu...
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Variable selling
and admin. rate 0.50$ 0.50$ 0.50$ 0.50...
April May June Quarter
Excess (deficiency)
of Cash available
over disbursements (20,000)$
Financing:
Borrowing 50,000
Repa...
April May June Quarter
Beginning cash balance 40,000$ 30,000$
Add cash collections 170,000 400,000
Total cash available 21...
April May June Quarter
Excess (deficiency)
of Cash available
over disbursements (20,000)$ 30,000$
Financing:
Borrowing 50,...
April May June Quarter
Beginning cash balance 40,000$ 30,000$ 30,000$ 40,000$
Add cash collections 170,000 400,000 335,000...
April May June Quarter
Excess (deficiency)
of Cash available
over disbursements (20,000)$ 30,000$ 95,000$ 45,000$
Financin...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
BUDGETED INCOME STATEMENT
Sixer's Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 unit...
BUDGETED INCOME STATEMENT
Sixer's Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 unit...
MASTER BUDGET
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
BUDGETED BALANCE SHEET
Sixer’s reported the
following account
balances prior to
preparing its
budgeted financial
statement...
Sixer's Company
Budgeted Balance Sheet
June 30
Current assets
Cash 43,000$
Accounts receivable 75,000
Raw materials invent...
Sixer's Company
Budgeted Balance Sheet
June 30
Current assets
Cash 43,000$
Accounts receivable 75,000
Raw materials invent...
HUMAN FACTORS IN BUDGETING
The success of a budget program
depends on three important factors:
• Top management must be en...
GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
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Profit planning

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  • This chapter focuses on the steps taken by businesses to achieve their planned levels of profits - a process called profit planning. Profit planning is accomplished by preparing numerous budgets, which, when brought together, form an integrated business plan known as a master budget.
  • A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. The act of preparing a budget is called budgeting. The use of budgets to control an organization’s activities is known as budgetary control.
  • A budget committee is usually responsible for overall policy relating to the budget program, for coordinating the preparation of the budget, for resolving disputes related to the budget, and for approving the final budget. This committee may consist of the president and the vice presidents in charge of various functions such as sales, production, purchasing, and the controller.
  • Operating budgets ordinarily cover a one-year period corresponding to a company’s fiscal year. Many companies divide their annual budget into four quarters. A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. This approach keeps managers focused on the future at least one year ahead.
  • A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels. It is a particularly useful approach if the budget will be used to evaluate managerial performance.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The preparation of the cash budget can be quite complex. This budget should be broken down into time periods that are as short as feasible. It consists of four major sections:Cash receipts section lists all cash inflows excluding cash received from financing;Cash disbursements section consists of all cash payments excluding repayments of principal and interest;Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; andFinancing section details the borrowings and repayments projected to take place during the budget period.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The annual budget (or master budget) is a comprehensive set of budgets that cover all aspects of a firm’s activities. It consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget.The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
  • The success of a budget program depends upon three important factors:Top management must be enthusiastic and committed to the budget process, otherwise nobody will take it seriously. Top management must not use the budget to pressure employees or blame them when something goes wrong. This breeds hostility and mistrust rather than cooperative and coordinated efforts.Highly achievable budget targets are usually preferred (rather than “stretch budget” targets) when managers are rewarded based on meeting budget targets.
  • Transcript of "Profit planning"

    1. 1. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    2. 2. Planning Organizing & Directing Controlling Evaluating Decision Making The Work of Management GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    3. 3. Planning Organizing & Directing Controlling Evaluating Decision Making The Work of Management GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO Planning Planning -- involves developing objectives and preparing various budgets to achieve these objectives.
    4. 4. Planning Organizing & Directing Controlling Evaluating Decision Making The Work of Management GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO Control Control involves the steps taken by management that attempts to ensure that the objectives are attained.
    5. 5. At present 1 Year 5 Years The Work of Management GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    6. 6. BUDGET • detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. Budgeting - act of preparing a budget Budgetary control - use of budgets to control an organization’s activities GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    7. 7. Planning Organizing & Directing Controlling Evaluating Decision Making The Work of Management GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO Budgets Initiate Long Term & Short Term Plans “Through” the budget Implement Plans “According” to the Budget Measure Performance
    8. 8. A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget  resolving disputes related to the budget  approving the final budget THE BUDGET COMMITTEE GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    9. 9. ADVANTAGES OF BUDGETING • Define goal and objectives • Think about and plan for the future • Means of allocating resources • Uncover potential bottlenecks • Coordinate activities • Communicate plans
    10. 10. 2010 2011 2012 2013 Operating Budget – maybe perpetual ContinuumImposed Budgets Participatory Budgets Choosing the Budget Period GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    11. 11. Supervisor Supervisor Middle Management Supervisor Supervisor Middle Management Top Management Flow of Budget Data IMPOSED BUDGETS GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    12. 12. IMPOSED BUDGETS • Best used in: • In well-established organizations. • In start-up organizations • In extremely small businesses • In times of economic crises • When operating managers lack budgetary skills or perspective. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    13. 13. ADVANTAGES OF IMPOSED BUDGETS • Requires less time. • Utilize top management’s knowledge of overall resource availability. • Increase probability that the firm’s strategic plans are incorporated. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    14. 14. DISADVANTAGES OF IMPOSED BUDGETS • Reduce feeling of teamwork. • Dissatisfaction and low morale. • Limited acceptance of stated goals and objectives. • May stifle initiative of lower level managers. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    15. 15. Supervisor Supervisor Middle Management Supervisor Supervisor Middle Management Top Management Flow of Budget Data PARTICIPATORY BUDGETS GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    16. 16. PARTICIPATORY BUDGETS Right to comment before implementation Ultimate right to set budgets Best used in: • In well-established organizations. • In extremely large businesses. • In times of economic affluence. • When operating managers have strong budgetary skills and perspectives. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    17. 17. ADVANTAGES OF PARTICIPATORY BUDGETS • Obtain information from those persons most familiar with the needs and constraints of the organizational units. • Leads to better morale and higher motivation. • Integrates knowledge that is diffused among various levels of management. • Provides a means to develop fiscal responsibility and budgetary skills of employees. • Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management. • Are generally more realistic. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    18. 18. DISADVANTAGES OF PARTICIPATORY BUDGETS Require significantly more time. May motivate managers to introduce “slack” into the budget. May support “empire building” by subordinates. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    19. 19. FINANCIAL BUDGET OPERATING BUDGET 1 2 3 4 5 6 7 8 9 10 MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    20. 20. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    21. 21. SALES BUDGET • Detailed schedule showing expected sales for the coming periods expressed in units and dollars. • A budget showing the number of units, sales price and total sales for each quarter (or month). GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    22. 22. EXAMPLE SALES BUDGET • Sixer’s Company is preparing budgets for the quarter ending June 30. • Budgeted sales for the next five months are: • April 20,000 units • May 50,000 units • June 30,000 units • July 25,000 units • August 15,000 units. • The selling price is $10 per unit. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    23. 23. EXAMPLE SALES BUDGET April May June Quarter Budgeted sales (units) Sellingprice perunit Total sales GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO 20,000 50,000 30,000 100,000 20,000 50,000 + 30,000 100,000
    24. 24. EXAMPLE SALES BUDGET April May June Quarter Budgeted sales (units) 20,000 50,000 30,000 100,000 Sellingprice perunit 10$ Total sales 200,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO 20,000 X $10 $200,000
    25. 25. EXAMPLE SALES BUDGET April May June Quarter Budgeted sales (units) 20,000 50,000 30,000 100,000 Sellingprice perunit 10$ 10$ 10$ 10$ Total sales 200,000$ 500,000$ 300,000$ 1,000,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    26. 26. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    27. 27. • A budget showing the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Finished Units to be Produced = Expected Sales in Units + Desired Ending Inventory of Finished Units - Beginning Inventory of Finished Units PRODUCTION BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    28. 28. EXAMPLE PRODUCTION BUDGET Sixer’s Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4,000 units were on hand. Let’s prepare the production budget. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    29. 29. April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000 Add desired ending inventory 10,000 Total needed 30,000 Less beginning inventory 4,000 Required production 26,000 Budgeted sales 50,000 Desired percent 20% Desired inventory 10,000 EXAMPLE PRODUCTION BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO March 31 ending inventory
    30. 30. April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000 Add desired ending inventory 10,000 Total needed 30,000 Less beginning inventory 4,000 Required production 26,000 4. Equals finished units to be produced 1. Expected sales in units 2. Plus Desired Ending Inventory of finished units. 3. Less Beginning Inventory of finished units. EXAMPLE PRODUCTION BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    31. 31. April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000 Add desired ending inventory 10,000 6,000 Total needed 30,000 56,000 Less beginning inventory 4,000 10,000 Required production 26,000 46,000 EXAMPLE PRODUCTION BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    32. 32. April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000 Add desired ending inventory 10,000 6,000 5,000 5,000 Total needed 30,000 56,000 35,000 105,000 Lessbeginning inventory 4,000 10,000 6,000 4,000 Required production 26,000 46,000 29,000 101,000 Assumed EXAMPLE PRODUCTION BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    33. 33. EXAMPLE EXPECTED CASH COLLECTIONS • All sales are on account. • Sixer’s collection pattern is: • 70% collected in the month of sale, • 25% collected in the month following sale, • 5% is uncollectible. • The March 31 accounts receivable balance of $30,000 will be collected in full. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    34. 34. EXAMPLE EXPECTED CASH COLLECTIONS April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$ Total cash collections GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    35. 35. EXAMPLE EXPECTED CASH COLLECTIONS April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$ April sales 70%x $200,000 140,000 140,000 25%x $200,000 50,000$ 50,000 Total cash collections 170,000$ ? GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO from Sales Budget
    36. 36. EXAMPLE EXPECTED CASH COLLECTIONS April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$ April sales 70% x $200,000 140,000 140,000 25% x $200,000 50,000$ 50,000 May sales 70% x $500,000 350,000 350,000 25% x $500,000 125,000$ 125,000 Total cash collections 170,000$ 400,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    37. 37. EXAMPLE EXPECTED CASH COLLECTIONS April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$ April sales 70% x $200,000 140,000 140,000 25% x $200,000 50,000$ 50,000 May sales 70% x $500,000 350,000 350,000 25% x $500,000 125,000$ 125,000 June sales 70% x $300,000 210,000 210,000 Total cash collections 170,000$ 400,000$ 335,000$ 905,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    38. 38. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    39. 39. • A budget showing the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories Required Purchases of Raw Materials = Amount Required for Production + Desired Ending Inventory of Raw Materials - Beginning Inventory of Raw Materials DIRECT MATERIALS BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    40. 40. EXAMPLE DIRECT MATERIALS BUDGET At Sixer’s Company, five pounds of material are required per unit of product. Management wants materials on hand at the end of each month equal to 10% of the following month’s production. On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Let’s prepare the direct materials budget. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    41. 41. April May June Quarter Production 26,000 46,000 29,000 101,000 Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000 Add desired ending inventory Total needed Less beginning inventory Materials to be purchased From production budget EXAMPLE DIRECT MATERIALS BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    42. 42. April May June Quarter Production 26,000 46,000 29,000 101,000 Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000 Add desired ending inventory 23,000 Total needed 153,000 Less beginning inventory 13,000 Materials to be purchased 140,000 ? March 31 inventory 10% of the following month’s production EXAMPLE DIRECT MATERIALS BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    43. 43. April May June Quarter Production 26,000 46,000 29,000 101,000 Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000 Add desired ending inventory 23,000 14,500 11,500 11,500 Total needed 153,000 244,500 156,500 516,500 Less beginning inventory 13,000 23,000 14,500 13,000 Materials to be purchased 140,000 221,500 142,000 503,500 1. Amount required for production. 2. Plus Desired Ending Inventory of raw materials. 3. Less Beginning Inventory of raw materials. 4. Required purchases of Direct Materials EXAMPLE DIRECT MATERIALS BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO Assumed
    44. 44. EXAMPLE EXPECTED CASH DISBURSEMENTS FOR MATERIALS Sixer’s pays $0.40 per pound for its materials. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month. The March 31 accounts payable balance is $12,000. Let’s calculate expected cash disbursements. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    45. 45. April May June Quarter Accounts pay. 3/31 12,000$ 12,000$ April purchases 50% x $56,000 28,000 28,000 50% x $56,000 28,000$ 28,000 May purchases June purchases Total cash disbursements 40,000$ ? 140,000 lbs. × $.40/lb. = $56,000 EXAMPLE EXPECTED CASH DISBURSEMENTS FOR MATERIALS GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    46. 46. EXAMPLE EXPECTED CASH DISBURSEMENTS FOR MATERIALS April May June Quarter Accounts pay. 3/31 12,000$ 12,000$ April purchases 50% x $56,000 28,000 28,000 50% x $56,000 28,000$ 28,000 May purchases 50% x $88,600 44,300 44,300 50% x $88,600 44,300$ 44,300 June purchases 50% x $56,800 28,400 28,400 Total cash disbursements 40,000$ 72,300$ 72,700$ 185,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    47. 47. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    48. 48. DIRECT LABOR BUDGET • A budget showing the direct labor hours (and total amount) needed to produce the number of units specified in the production budget. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    49. 49. EXAMPLE DIRECT LABOR BUDGET At Sixer’s, each unit of product requires 0.05 hours of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. In exchange for the “no layoff” policy, workers agreed to a wage rate of $10 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month. • Let’s prepare the direct labor budget. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    50. 50. April May June Quarter Production 26,000 46,000 29,000 101,000 Direct labor hours Labor hoursrequired Guaranteedlabor hours Labor hourspaid Wagerate Totaldirect labor cost From production budget EXAMPLE DIRECT LABOR BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    51. 51. EXAMPLE DIRECT LABOR BUDGET April May June Quarter Production 26,000 46,000 29,000 101,000 Direct labor hours 0.05 0.05 0.05 0.05 Labor hoursrequired 1,300 2,300 1,450 5,050 Guaranteedlabor hours Labor hourspaid Wagerate Totaldirect labor cost GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    52. 52. April May June Quarter Production 26,000 46,000 29,000 101,000 Direct labor hours 0.05 0.05 0.05 0.05 Labor hoursrequired 1,300 2,300 1,450 5,050 Guaranteedlabor hours 1,500 1,500 1,500 Labor hourspaid 1,500 2,300 1,500 5,300 Wagerate Totaldirect labor costHigher of labor hours required or labor hours guaranteed. EXAMPLE DIRECT LABOR BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    53. 53. EXAMPLE DIRECT LABOR BUDGET April May June Quarter Production 26,000 46,000 29,000 101,000 Directlabor hours 0.05 0.05 0.05 0.05 Labor hoursrequired 1,300 2,300 1,450 5,050 Guaranteed labor hours 1,500 1,500 1,500 Labor hourspaid 1,500 2,300 1,500 5,300 Wage rate 10$ 10$ 10$ 10$ Total directlabor cost 15,000$ 23,000$ 15,000$ 53,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    54. 54. On the other hand, if the company decided to follow its no lay-off policy and pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month, the direct labor budget would look like this: EXAMPLE DIRECT LABOR BUDGET April May June Quarter Labor hours required 1,300 2,300 1,450 Regular hours paid 1,500 1,500 1,500 4,500 Overtime hours paid - 800 - 800 Total regular hours 4,500 $10 45,000$ Total overtime hours 800 $15 12,000$ Total pay 57,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    55. 55. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    56. 56. MANUFACTURING OVERHEAD BUDGET A budget showing all costs of production other than direct materials and direct labor. Has two components: variable which depends on the number of units produced from the production budget and fixed overhead which depends on the total cost expected to be incurred GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    57. 57. EXAMPLE MANUFACTURING OVERHEAD BUDGET Sixer’s Company uses a variable manufacturing overhead rate of $1 per unit produced. Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    58. 58. April May June Quarter Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs Total mfg. OH costs Less noncash costs Cash disbursements for manufacturing OH From production budget EXAMPLE MANUFACTURING OVERHEAD BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    59. 59. EXAMPLE MANUFACTURING OVERHEAD BUDGET April May June Quarter Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000 Less noncash costs Cash disbursements for manufacturing OH GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    60. 60. April May June Quarter Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000 Less noncash costs 20,000 20,000 20,000 60,000 Cash disbursements for manufacturing OH 56,000$ 76,000$ 59,000$ 191,000$ Depreciation is a noncash charge. EXAMPLE MANUFACTURING OVERHEAD BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    61. 61. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    62. 62. ENDING FINISHED GOODS INVENTORY BUDGET • A budget showing the carrying cost of the unsold units remaining in inventory. • Contains an itemization of the three main costs required in the inventory assets which are direct materials, direct labor and overhead allocation. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    63. 63. EXAMPLE ENDING FINISHED GOODS INVENTORY BUDGET Now, Sixer’s can complete the ending finished goods inventory budget. At Sixer’s, manufacturing overhead is applied to units of product on the basis of direct labor hours. Let’s calculate ending finished goods inventory. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    64. 64. 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 EXAMPLE ENDING FINISHED GOODS INVENTORY BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    65. 65. 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 EXAMPLE ENDING FINISHED GOODS INVENTORY BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    66. 66. 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 Total labor hours required 5,050 hrs. = $49.70 per hr.* EXAMPLE ENDING FINISHED GOODS INVENTORY BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    67. 67. April May June Quarter Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000 Less noncash costs 20,000 20,000 20,000 60,000 Cash disbursements for manufacturing OH 56,000$ 76,000$ 59,000$ 191,000$ EXAMPLE MANUFACTURING OVERHEAD BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    68. 68. EXAMPLE DIRECT LABOR BUDGET April May June Quarter Production 26,000 46,000 29,000 101,000 Directlabor hours 0.05 0.05 0.05 0.05 Labor hoursrequired 1,300 2,300 1,450 5,050 Guaranteed labor hours 1,500 1,500 1,500 Labor hourspaid 1,500 2,300 1,500 5,300 Wage rate 10$ 10$ 10$ 10$ Total directlabor cost 15,000$ 23,000$ 15,000$ 53,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    69. 69. 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$ Ending Inventory X Product Cost= 5,000 X 4.99 = 24,950 Production Budget EXAMPLE ENDING FINISHED GOODS INVENTORY BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    70. 70. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    71. 71. SELLING AND ADMINISTRATIVE EXPENSE BUDGET A budget showing expenses for areas other than manufacturing. Similar to the manufacturing overhead budget as it includes variable and fixed expenses GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    72. 72. EXAMPLE SELLING AND ADMINISTRATIVE EXPENSE BUDGET At Sixer’s, variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $70,000 per month. The fixed selling and administrative expenses include $10,000 in costs – primarily depreciation – that are not cash outflows of the current month. Let’s prepare the company’s selling and administrative expense budget. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    73. 73. April May June Quarter Budgeted sales 20,000 Variable selling and admin. rate 0.50$ Variable expense 10,000$ Fixed selling and admin. expense 70,000 Total expense 80,000 Less noncash expenses 10,000 Cash disburse- ments for selling & admin. 70,000$ ? Budgeted Sales X Variable Selling and Administrative Rate Variable Expense + Fixed Selling and Administrative Expense Total Expense - Noncash Expense EXAMPLE SELLING AND ADMINISTRATIVE EXPENSE BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    74. 74. EXAMPLE SELLING AND ADMINISTRATIVE EXPENSE BUDGET April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000 Variable selling and admin. rate 0.50$ 0.50$ 0.50$ 0.50$ Variable expense 10,000$ 25,000$ 15,000$ 50,000$ Fixed selling and admin. expense 70,000 70,000 70,000 210,000 Total expense 80,000 95,000 85,000 260,000 Less noncash expenses 10,000 10,000 10,000 30,000 Cash disburse- ments for selling & admin. 70,000$ 85,000$ 75,000$ 230,000$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    75. 75. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    76. 76. CASH BUDGET The cash budget is divided into four sections: • Cash receipts from the sales budget • Cash disbursements from direct materials, direct labor, manufacturing overhead and selling administrative expense budgets • Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and • Financing section details the borrowings and repayments projected to take place during the budget period. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    77. 77. EXAMPLE CASH BUDGET Sixer’s • Maintains a 16% open line of credit for $75,000. • Maintains a minimum cash balance of $30,000. • Borrows on the first day of the month and repays loans on the last day of the month. • Pays a cash dividend of $49,000 in April. • Purchases $143,700 of equipment in May and $48,300 in June paid in cash. • Has an April 1 cash balance of $40,000. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    78. 78. April May June Quarter Beginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000 Total disbursements 230,000 Excess (deficiency) of cash available over disbursements (20,000)$ Schedule of Expected Cash Collections EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    79. 79. April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$ April sales 70% x $200,000 140,000 140,000 25% x $200,000 50,000$ 50,000 May sales 70% x $500,000 350,000 350,000 25% x $500,000 125,000$ 125,000 June sales 70% x $300,000 210,000 210,000 Total cash collections 170,000$ 400,000$ 335,000$ 905,000$ EXAMPLE EXPECTED CASH COLLECTIONS GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    80. 80. April May June Quarter Beginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000 Total disbursements 230,000 Excess (deficiency) of cash available over disbursements (20,000)$ Schedule of Expected Cash Collections Schedule of Expected Cash Disbursements EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    81. 81. April May June Quarter Accounts pay. 3/31 12,000$ 12,000$ April purchases 50% x $56,000 28,000 28,000 50% x $56,000 28,000$ 28,000 May purchases 50% x $88,600 44,300 44,300 50% x $88,600 44,300$ 44,300 June purchases 50% x $56,800 28,400 28,400 Total cash disbursements 40,000$ 72,300$ 72,700$ 185,000$ EXAMPLE EXPECTED CASH DISBURSEMENTS FOR MATERIALS GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    82. 82. April May June Quarter Beginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000 Total disbursements 230,000 Excess (deficiency) of cash available over disbursements (20,000)$ Schedule of Expected Cash Collections Schedule of Expected Cash Disbursements Direct Labor Budget EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    83. 83. April May June Quarter Production 26,000 46,000 29,000 101,000 Direct labor hours 0.05 0.05 0.05 0.05 Labor hoursrequired 1,300 2,300 1,450 5,050 Guaranteed labor hours 1,500 1,500 1,500 Labor hourspaid 1,500 2,300 1,500 5,300 Wage rate 10$ 10$ 10$ 10$ Total direct labor cost 15,000$ 23,000$ 15,000$ 53,000$ EXAMPLE DIRECT LABOR BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    84. 84. April May June Quarter Beginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000 Total disbursements 230,000 Excess (deficiency) of cash available over disbursements (20,000)$ Schedule of Expected Cash Collections Schedule of Expected Cash Disbursements Direct Labor Budget Manufacturing Overhead Budget EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    85. 85. April May June Quarter Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000 Less noncash costs 20,000 20,000 20,000 60,000 Cash disbursements for manufacturing OH 56,000$ 76,000$ 59,000$ 191,000$ EXAMPLE MANUFACTURING OVERHEAD BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    86. 86. April May June Quarter Beginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000 Total disbursements 230,000 Excess (deficiency) of cash available over disbursements (20,000)$ Schedule of Expected Cash Collections Schedule of Expected Cash Disbursements Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    87. 87. April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000 Variable selling and admin. rate 0.50$ 0.50$ 0.50$ 0.50$ Variable expense 10,000$ 25,000$ 15,000$ 50,000$ Fixed selling and admin. expense 70,000 70,000 70,000 210,000 Total expense 80,000 95,000 85,000 260,000 Less noncash expenses 10,000 10,000 10,000 30,000 Cash disburse- ments for selling & admin. 70,000$ 85,000$ 75,000$ 230,000$ EXAMPLE SELLING AND ADMINISTRATIVE EXPENSE BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    88. 88. April May June Quarter Excess (deficiency) of Cash available over disbursements (20,000)$ Financing: Borrowing 50,000 Repayments - Interest - Total financing 50,000 Ending cash balance 30,000$ 30,000$ -$ -$ Ending cash balance for April is the beginning May balance. Because Sixer’s maintains a cash balance of $30,000, the company must borrow on its line-of-credit EXAMPLE CASH BUDGET FINANCING AND REPAYMENT GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    89. 89. April May June Quarter Beginning cash balance 40,000$ 30,000$ Add cash collections 170,000 400,000 Total cash available 210,000 430,000 Less disbursements Materials 40,000 72,300 Direct labor 15,000 23,000 Mfg. overhead 56,000 76,000 Selling and admin. 70,000 85,000 Equipment purchase - 143,700 Dividends 49,000 - Total disbursements 230,000 400,000 Excess (deficiency) of cash available over disbursements (20,000)$ 30,000$ Total Cash Available - Total Disbursements Beginning Cash Balance + Cash Collections EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    90. 90. April May June Quarter Excess (deficiency) of Cash available over disbursements (20,000)$ 30,000$ Financing: Borrowing 50,000 - Repayments - - Interest - - Total financing 50,000 - Ending cash balance 30,000$ 30,000$ Because the ending cash balance is exactly $30,000, Sixer’s will not repay the loan this month. EXAMPLE CASH BUDGET FINANCING AND REPAYMENT GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    91. 91. April May June Quarter Beginning cash balance 40,000$ 30,000$ 30,000$ 40,000$ Add cash collections 170,000 400,000 335,000 905,000 Total cash available 210,000 430,000 365,000 945,000 Less disbursements Materials 40,000 72,300 72,700 185,000 Direct labor 15,000 23,000 15,000 53,000 Mfg. overhead 56,000 76,000 59,000 191,000 Selling and admin. 70,000 85,000 75,000 230,000 Equipment purchase - 143,700 48,300 192,000 Dividends 49,000 - - 49,000 Total disbursements 230,000 400,000 270,000 900,000 Excess (deficiency) of cash available over disbursements (20,000)$ 30,000$ 95,000$ 45,000$ At the end of June, Sixer’s has enough cash to repay the $50,000 loan plus interest at 16%. EXAMPLE CASH BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    92. 92. April May June Quarter Excess (deficiency) of Cash available over disbursements (20,000)$ 30,000$ 95,000$ 45,000$ Financing: Borrowing 50,000 - - 50,000 Repayments - - (50,000) (50,000) Interest - - (2,000) (2,000) Total financing 50,000 - (52,000) (2,000) Ending cash balance 30,000$ 30,000$ 43,000$ 43,000$ $50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 and repayment of June 30. EXAMPLE CASH BUDGET FINANCING AND REPAYMENT GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    93. 93. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    94. 94. BUDGETED INCOME STATEMENT Sixer's Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) 1,000,000.00 Cost of goods sold (100,000 @ $4.99) 499,000.00 Gross margin 501,000.00 Selling and administrative expenses 260,000.00 Operating income 241,000.00 Interest expense 2,000.00 Net income 239,000.00 GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    95. 95. BUDGETED INCOME STATEMENT Sixer's Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) 1,000,000.00 Cost of goods sold (100,000 @ $4.99) 499,000.00 Gross margin 501,000.00 Selling and administrative expenses 260,000.00 Operating income 241,000.00 Interest expense 2,000.00 Net income 239,000.00 GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO from Sales Budget from Ending Finished Goods Inventory Budget$1,000,000 - $499,000 Selling and Administrative Expense Budget (including noncash expenses)$501,000 - $260,000 from Cash Budget Financing and Repayment$241,000 - $2,000
    96. 96. MASTER BUDGET GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    97. 97. BUDGETED BALANCE SHEET Sixer’s reported the following account balances prior to preparing its budgeted financial statements: • Land - 500,000Php • Common stock - 200,000Php • Retained earnings - 146,150Php GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    98. 98. Sixer's Company Budgeted Balance Sheet June 30 Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Equipment (assumed) 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$ 25%of June sales of $300,000 11,500 lbs. at $0.40/lb. 5,000 units at $4.99 each 50% of June purchases of $56,800 GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    99. 99. Sixer's Company Budgeted Balance Sheet June 30 Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Equipment (assumed) 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$ Beginning balance 146,150$ Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$ GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    100. 100. HUMAN FACTORS IN BUDGETING The success of a budget program depends on three important factors: • Top management must be enthusiastic and committed to the budget process. • Top management must not use the budget to pressure employees or blame them when something goes wrong. • Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO
    101. 101. GROUP 6: Alodia LOPEZ, Eunice GRANADO, Edmar ALMARIO THANK YOU!!!
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