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Budgeting
 

Budgeting

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    Budgeting Budgeting Presentation Transcript

    • BudgetingJOIN KHALID AZIZCOACHING CLASSESICMAP STAGE 1,2,3,4,5CAMICAP MODULE A,B,C,DPIPFABBA & MBAB.COM & M.COMACCOUNTING OF O/A LEVELMA-ECONOMICS0322-3385752KARACHI, PAKISTAN
    • Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-handcorner of the screen. You can point and click anywhere on the screen.
    • Nature and Objectives of Budgeting Savings 8% Entertainment Housing 6% 30% Transportation 15% Estimated portion of Clothing Utilities your total 7% 5% monthly Otherincome that 4% Food should be Medical 20% budgeted 5%
    • Objectives1. Describe budgeting, its objectives, and its impact on human behavior.2. Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.3. Describe the master budget for a manufacturing business.4. Prepare the basic income statement budgets for a manufacturing business.5. Prepare balance sheet budgets for a manufacturing business.
    • Nature and Objectives of Budgeting Objectives of Budgeting Establishing specific goals Executing plans to achieve the goals Periodically comparing actual results to the goals Feedback PLANNING DIRECTING CONTROLLING
    • Nature and Objectives of Budgeting Human Behavior and Budgeting Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals
    • Nature and Objectives of Budgeting Goal conflict occurs when individual self- interest differs from business objectives. A student’s question, “Will this be on the test?” is evidence of goal conflict.
    • Continuous Budgeting One-Year BudgetFeb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan.2006 2006 2006 2006 2006 2998 2006 2006 2006 2006 2006 2007Delete onFebruary 28
    • Continuous Budgeting One-Year BudgetMar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb.2006 2006 2006 2006 2998 2006 2006 2006 2006 2006 2007 2007 Add February 2007
    • Static BudgetsDescription: A budget that does not reflect potential changes in volume or activity levelStrength: It is simple—all expenses are budgeted as fixed costsWeakness: It does not reflect changes in revenues and expenses that occur as volumes changeTypical usage: Service organizations or administrative departments of retailers and manufacturers
    • Static Budgets Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006Direct labor $40,000Electric Power 5,000Supervisor salaries 15,000 Total department costs $60,000
    • Flexible BudgetsDescription: A budget that shows revenues and expenses for a variety of volumes or activity levelsStrength: Provides information needed to analyze the impact of volume changes on actual operating resultsWeakness: Requires greater research into costs— must differentiate fixed and variable costsTypical usage: Operational departments of retailers and manufacturers whose costs change with sales and production
    • Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production 8,000 9,000 10,000Variable cost: Direct labor $40,000 $45,000 $50,000 Electric power 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000 Cost per unit is $5.50 at all levels of activity
    • Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production 8,000 9,000 10,000Variable cost: Direct labor $40,000 $45,000 $50,000 Electric power 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000Fixed cost: Electric power $ 1,000 $ 1,000 $ 1,000 Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000
    • Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production 8,000 9,000 10,000Variable cost: Direct labor $40,000 $45,000 $50,000 Electric power 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000Fixed cost: Electric power $ 1,000 $ 1,000 $ 1,000 Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000Total department costs $60,000 $65,500 $71,000
    • Static and Flexible Budgets Overbudget ual Act lts Resu Static Budget $60,000 $72,000
    • Static and Flexible Budgets Overbudget ual Flexible Budget Act lts 10,000 Resu 8,000 9,000 units units units$60,000 $65,500 $71,000 $72,000
    • Master Budget Budgeted Income Budgeted Balance Statement SheetSales budget Cash budgetCost of goods sold budget: Capital expenditure budget Production budget Direct materials purchases budget Direct labor cost budgetSelling and administrative expense budget
    • IncomeStatement Budgets
    • Sales Budget Production Budget Expected units of sales+ Desired units in ending inventory– Estimated units in beginning inventory Total units to be produced
    • SalesBudget Production Budget Direct Materials Purchases Budget Materials needed for production + Desired ending materials inventory – Est. beginning materials inventory Direct materials to be purchased
    • Sales Budget Production Budget Direct Materials Purchases BudgetCost of Goods Direct LaborSold Budget Cost Budget Selling & Factory OverheadAdministrative Cost Budget Expenses Budget
    • Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2006 Unit Sales Unit Selling Total Product and Region Volume Price SalesWallet: East……………….. 287,000 $12.00 $ 3,444,000 West………………. 241,000 12.00 2,892,000 Total……………. 528,000 $ 6,336,000Handbag: East……………….. 156,400 $25.00 $ 3,910,000 West………………. 123,600 25.00 3,090,000 Total……………. 280,000 $ 7,000,000Total revenue from Sales……………….. $13,336,000
    • Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Units Wallet HandbagExpected units to be sold 528,000 280,000 From sales budget
    • Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Units Wallet HandbagExpected units to be sold…………. 528,000 280,000Plus desired ending inventory, December 31, 2006……………. 80,000 60,000Total 608,000 340,000
    • Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Units Wallet HandbagExpected units to be sold…………. 528,000 280,000Plus desired ending inventory, December 31, 2006……………. 80,000 60,000Total………………………………. 608,000 340,000Less estimated beginning inventory, January 1, 2006…………………. 88,000 48,000Total units to be produced………… 520,000 292,000
    • Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining TotalSquare yards required for production: Wallet (Note A)………………….. 156,000 52,000Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds. Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.
    • Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining TotalSquare yards required for production: Wallet (Note A)……..……..…….. 156,000 52,000 Handbag (Note B)……………….. 365,000 146,000Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds. Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.
    • Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining TotalSquare yards required for production: Wallet (Note A)……....………….. 156,000 52,000 Handbag (Note B).………………. 365,000 146,000Plus desired inventory, Dec. 31, 2006 20,000 12,000 Total……………………………… 541,000 210,000
    • Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining TotalSquare yards required for production: Wallet (Note A) …………………. 156,000 52,000 Handbag (Note B) ………………. 365,000 146,000Plus desired inventory, Dec. 31, 2006 20,000 12,000 Total……………………………… 541,000 210,000Less estimated inventory, Jan. 1, 2006 18,000 15,000 Total square yards to be produced.. 523,000 195,000
    • Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining TotalSquare yards required for production: Wallet (Note A)………………….. 156,000 52,000 Handbag (Note B).………………. 365,000 146,000Plus desired inventory, Dec. 31, 2006 20,000 12,000 Total……………………………… 541,000 210,000Less estimated inventory, Jan. 1, 2006 18,000 15,000 Total square yards to be produced.. 523,000 195,000Unit price (per square yard)…………. x $4.50 x $1.20Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500
    • Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Sewing TotalHours required for production: Wallet (Note A)…………. 52,000 130,000Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
    • Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Sewing TotalHours required for production: Wallet (Note A)…………. 52,000 130,000 Handbag (Note B)……….. 43,800 116,800Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800hrs. Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs
    • Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Sewing TotalHours required for production: Wallet (Note A)…………. 52,000 130,000 Handbag (Note B)……….. 43,800 116,800 Total……………………... 95,800 246,800Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800hrs. Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
    • Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Sewing TotalHours required for production: Wallet (Note A)…………. 52,000 130,000 Handbag (Note B)……….. 43,800 116,800 Total……………………... 95,800 246,800Hourly rate…………………… x $12.00 x $15.00Total direct labor cost………… $1,149,600 $3,702,000 $4,851,600Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs. Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
    • Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2006Indirect factory wages……………………... $ 732,800Supervisory salaries………………………... 360,000Power and light…………………………….. 306,000Depreciation of plant and equipment………. 288,000Indirect materials…………………………… 182,800Maintenance………………………………... 140,280Insurance and property taxes………………. 79,200Total factory overhead cost………………... $2,089,080
    • Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006Finished goods inventory, January 1 ,2006….. $ 1,095,600Work in process inventory, January 1, 2006… $ 214,400Direct materials: Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd $81,000 Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000 Direct materials inventory, January 1, 2006 $99,000
    • Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006Finished goods inventory, January 1 ,2006….. $ 1,095,600Work in process inventory, January 1, 2006… $ 214,400Direct materials: Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd $ 90,000 Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400 Direct materials inventory, December 31, 2006 $104,400
    • Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006Finished goods inventory, January 1 ,2006…. $ 1,095,600Work in process inventory, January 1, 2006... $ 214,400Direct materials: Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000 Direct materials purchases (Slide 31)…….. 2,587,500 Cost of direct materials available for use…. $2,686,500 Less direct materials inventory, December 31, 2006 (Note B)……………. 104,400 Cost of direct materials placed in production $2,582,100Direct labor (Slide 35)………………………. 4,851,600Factory overhead (Slide 36)………………….. 2,089,080Total manufacturing costs……………………. 9,522,780Total work in process during period…………. $9,737,180
    • Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006Finished goods inventory, January 1 ,2006………... $ 1,095,600Work in process inventory, January 1, 2006……….. $ 214,500Total manufacturing costs………………………….. 9,522,780Total work in process during period……………….. $9,737,180Less work in process inventory, December 31, 2006 220,000Cost of goods manufactured………………………... 9,517,180Cost of finished goods available for sale…………... $10,612,780Less finished goods inventory, December 31, 2006.. 1,565,000Cost of goods sold………………………………….. $ 9,047,780
    • Elite Accessories Inc. Selling and Administrative Expenses Budget For the Year Ending December 31, 2006Selling expenses: Sales salaries expense…………………………. $715,000 Advertising expense…………………………... 360,000 Travel expense…………………………………. 115,000 Total selling expenses………………………... $1,190,000Administrative expenses: Officers’ salaries expense………………………. $360,000 Office salaries expense…………………………. 258,000 Office rent expense……………………………... 34,500 Office supplies expense…………………………. 17,500 Miscellaneous administrative expense………….. 25,000 Total administrative expenses………………… 695,000Total selling and administrative expenses………… $1,885,000
    • Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2006Revenue from sales (slide 23) $13,336,000Cost of goods sold (slide 40) 9,047,780Gross profit $ 4,288,220Selling & administrative expenses: Selling expenses (slide 41) $1,190,000 Administrative expenses (slide 41) 695,000 Total sell. & Admin. Expenses 1,885,000Income from operations $ 2,403,220Other income: Interest revenue $ 98,000Other expense: Interest expense 90,000 8,000Income before income tax $ 2,411,220Income tax 600,000Net income $ 1,811,220
    • The cash budget is one of themost important elements of thebudgeted balance sheet. We’ll begin with a schedule of collection from sales.
    • Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January February MarchReceipts from cash sales: Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000Note A: $108,000 = $1,080,000 x 10% $124,000 = $1,240,000 x 10% $ 97,000 = $ 970,000 x 10%
    • Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January February MarchReceipts from cash sales: Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400Note B: $370,000, given as January 1, 2006 Accounts Receivable balance $388,800 = $1,080,000 x 90% x 40% $446,400 = $1,240,000 x 90% x 40%
    • Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January February March Receipts from cash sales: Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400 Collections from current month’s sales (60%)(see Note C)…………………………… 583,200 669,600 523,800Note C: $583,200 = $1,080,000 x 90% x 60% $669,600 = $1,240,000 x 90% x 60% $523,800 = $ 970,000 x 90% x 60%
    • Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January February MarchReceipts from cash sales: Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400 Collections from current month’s sales (60%)(see Note C)…………………………… 583,200 669,600 523,800Total receipts from sales on account……………………... $953,200 $1,058,400 $970,200
    • Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 January February MarchPayment of prior month’s manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000Note A: $190,000, given as January 1, 2006 Accounts Payable balance $204,000 = ($840,000 –$24,000) x 25% $189,000 = ($780,000 – $24,000) x 75%
    • Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 January February March Payment of prior month’s manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000 Payment of current month’s manufacturing costs (75%) (see Note B)…………………. 612,000 567,000 591,000Note B: $612,000 = ($840,000 – $24,000) x 75% $567,000 = ($780,000 – $24,000) x 75% $591,000 = ($812,000 – $24,000) x 75%
    • Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 January February MarchPayment of prior month’s manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000Payment of current month’s manufacturing costs (75%) (see Note B)…………………. 612,000 567,000 591,000 Total payments………………. $802,000 $771,000 $780,000
    • Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006Estimated cash receipts: January February March Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000 Collections of accounts receivable (Slide 48)………... 953,200 1,058,400 970,200 Interest revenue………………... — — 24,500 Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
    • Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006Estimated cash receipts: January February March Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000 Collections of accounts receivable (Slide 48)………... 953,200 1,058,400 970,200 Interest revenue………………... — — 24,500 Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700Estimated cash payments for: Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000 Selling and administrative expenses……………………… 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000
    • Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006Estimated cash receipts: January February March Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000 Collections of accounts receivable (Slide 48)………... 953,200 1,058,400 970,200 Interest revenue………………... — — 24,500 Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700Estimated cash payments for: Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000 Selling and administrative expenses……………………… 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000 Total cash payments………….$ 984,500 $1,210,000 $1,075,000
    • Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006Estimated cash receipts: January February March Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000 Collections of accounts receivable (Slide 48)………... 953,200 1,058,400 970,200 Capital additions 274,000 Interest expense……………….. 22,500 Income taxes…………………... 150,000 Total cash payments………….$ 984,500 $1,210,000 $1,075,000Cash increase (decrease)…………. $ 76,700 $ (27,600) $ 16,700Cash balance at beginning of month 280,000 356,700 329,100Cash balance at end of month……. $ 356,700 $ 329,100 $ 345,800Minimum cash balance…………… 340,000 340,000 340,000Excess (deficiency)………………. $ 16,700 $ (10,900) $ 5,800