Profit Planning, Activity-Based Budgeting and e-Budgeting 9 Chapter Nine
Purposes of Budgeting Systems <ul><li>Budget </li></ul><ul><li>a detailed plan, expressed in quantitative terms, that spec...
Activity-Based Costing versus Activity-Based Budgeting Resources Cost objects: products and services produced, and custome...
Types of Budgets Detail Budget Detail Budget Detail Budget Master Budget Covering all phases of a company’s operations. Sa...
Types of Budgets 1999 2000 2001 2002 Continuous or  Rolling Budget This budget is usually a twelve-month  budget that roll...
Direct Materials Budget Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production B...
Budgeted Financial Statements Direct Materials Budget Cash Budget Sales of Services or Goods Ending Inventory Budget Work ...
Sales Budget <ul><li>Breakers, Inc. is preparing budgets for the quarter ending June 30. </li></ul><ul><li>Budgeted sales ...
Sales Budget
Production Budget Completed Production must be adequate to meet budgeted sales and provide for sufficient ending inventory...
Production Budget <ul><li>The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following mont...
Production Budget From sales budget
Production Budget
Production Budget March 31 ending inventory
Production Budget
Production Budget
Direct-Material Budget <ul><li>At Breakers, five pounds of material are required per unit of product. </li></ul><ul><li>Ma...
Direct-Material Budget From our production budget
Direct-Material Budget 10% of the following  month’s production
Direct-Material Budget March 31  inventory
Direct-Material Budget
Direct-Material Budget
Direct-Labor Budget <ul><li>At Breakers, each unit of product requires 0.1 hours of direct labor. </li></ul><ul><li>The Co...
Direct-Labor Budget From our production budget
Direct-Labor Budget
Direct-Labor Budget This is the greater of labor hours required or labor hours guaranteed.
Direct-Labor Budget
Overhead Budget <ul><li>Here is Breakers’ Overhead Budget for the quarter. </li></ul>
Selling and Administrative Expense Budget <ul><li>At Breakers, variable selling and administrative expenses are $0.50 per ...
Selling and Administrative Expense Budget From our Sales budget
Selling and Administrative Expense Budget
Selling and Administrative Expense Budget
<ul><li>At Breakers, all sales are on account. </li></ul><ul><li>The company’s collection pattern is: </li></ul><ul><ul><l...
Cash Receipts Budget
Cash Receipts Budget
Cash Disbursement Budget <ul><li>Breakers pays $0.40 per pound for its materials. </li></ul><ul><li>One-half of a month’s ...
Cash Disbursement Budget 140,000 lbs. × $.40/lb. = $56,000
Cash Disbursement Budget
Cash Disbursement Budget Continued <ul><li>Breakers: </li></ul><ul><ul><li>Maintains a 12% open line of credit for $75,000...
Cash Disbursement Budget Continued From our Cash Receipts Budget
Cash Disbursement Budget Continued From our Cash Disbursements Budget
Cash Disbursement Budget Continued From our Direct Labor Budget
Cash Disbursement Budget Continued From our Overhead Budget
Cash Disbursement Budget Continued From our Selling and Administrative Expense Budget
Cash Disbursement Budget Continued To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of cred...
Cash Disbursement Budget Financing and Repayment Ending cash balance for April is the beginning May balance.
Cash Disbursement Budget Continued Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000.
Cash Disbursement Budget Financing and Repayment
Cash Disbursement Budget Continued At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at...
Cash Disbursement Budget Financing and Repayment
Cash Disbursement Budget Continued
Cash Disbursement Budget Financing and Repayment
Budgeted Income Statement Completed After we complete the cash budget, we can prepare the budgeted income statement for Br...
Budgeted Ending Inventory * rounded Manufacturing overhead is applied on the basis of direct labor hours. Total overhead  ...
Budgeted Income Statement
Budgeted Balance Sheet <ul><li>Breakers reports the following account balances on June 30 prior to preparing its budgeted ...
25%of June sales of  $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit.
50% of June purchases  of $56,800
Budget Administration <ul><li>The Budget Committee is a standing committee responsible for .  . . </li></ul><ul><ul><ul><l...
E-Budgeting <ul><li>Employees throughout an organization can submit and retrieve budget information electronically. This t...
Firewalls and Information Security <ul><li>Budget information is extremely sensitive and confidential. A firewall is a com...
Zero-Base Budgeting <ul><li>To receive funding during the budgeting process, each activity must be justified in terms of i...
International Aspects of Budgeting <ul><li>Firms with international operations face special problems when preparing a budg...
Budgeting Product Life-Cycle Costs Product planning and concept Design. Preliminary design. Detailed design and testing. P...
Behavioral Impact of Budgets <ul><li>Budgetary Slack: Padding the Budget </li></ul><ul><ul><li>People often perceive that ...
Participative Budgeting Flow of Budget Data
End of Chapter 9
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Profit Planning, Activity-Based Budgeting and e-Budgeting

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Profit Planning, Activity-Based Budgeting and e-Budgeting

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Profit Planning, Activity-Based Budgeting and e-Budgeting

  1. 1. Profit Planning, Activity-Based Budgeting and e-Budgeting 9 Chapter Nine
  2. 2. Purposes of Budgeting Systems <ul><li>Budget </li></ul><ul><li>a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. </li></ul><ul><li>Planning </li></ul><ul><li>Facilitating Communication and Coordination </li></ul><ul><li>Allocating Resources </li></ul><ul><li>Controlling Profit and Operations </li></ul><ul><li>Evaluating Performance and Providing Incentives </li></ul>
  3. 3. Activity-Based Costing versus Activity-Based Budgeting Resources Cost objects: products and services produced, and customers served. Activities Resources Forecast of products and services to be produced and customers served. Activities Activity-Based Costing (ABC) Activity-Based Budgeting (ABB)
  4. 4. Types of Budgets Detail Budget Detail Budget Detail Budget Master Budget Covering all phases of a company’s operations. Sales Production Materials
  5. 5. Types of Budgets 1999 2000 2001 2002 Continuous or Rolling Budget This budget is usually a twelve-month budget that rolls forward one month as the current month is completed. L o n g R a n g e B u d g e t s Capital budgets with acquisitions that normally cover several years.
  6. 6. Direct Materials Budget Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget Selling and Administrative Budget Direct Labor Budget Overhead Budget Ending Inventory Budget Direct Materials
  7. 7. Budgeted Financial Statements Direct Materials Budget Cash Budget Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget Selling and Administrative Budget Direct Labor Budget Overhead Budget Ending Inventory Budget Direct Materials Exh. 9-1
  8. 8. Sales Budget <ul><li>Breakers, Inc. is preparing budgets for the quarter ending June 30. </li></ul><ul><li>Budgeted sales for the next five months are: </li></ul><ul><ul><li>April 20,000 units </li></ul></ul><ul><ul><li>May 50,000 units </li></ul></ul><ul><ul><li>June 30,000 units </li></ul></ul><ul><ul><li>July 25,000 units </li></ul></ul><ul><ul><li>August 15,000 units. </li></ul></ul><ul><li>The selling price is $10 per unit. </li></ul>
  9. 9. Sales Budget
  10. 10. Production Budget Completed Production must be adequate to meet budgeted sales and provide for sufficient ending inventory. Sales Budget Production Budget
  11. 11. Production Budget <ul><li>The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. </li></ul><ul><li>On March 31, 4,000 units were on hand. </li></ul><ul><li>Let’s prepare the production budget. </li></ul>
  12. 12. Production Budget From sales budget
  13. 13. Production Budget
  14. 14. Production Budget March 31 ending inventory
  15. 15. Production Budget
  16. 16. Production Budget
  17. 17. Direct-Material Budget <ul><li>At Breakers, five pounds of material are required per unit of product. </li></ul><ul><li>Management wants materials on hand at the end of each month equal to 10% of the following month’s production. </li></ul><ul><li>On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. </li></ul><ul><li>Let’s prepare the direct materials budget. </li></ul>
  18. 18. Direct-Material Budget From our production budget
  19. 19. Direct-Material Budget 10% of the following month’s production
  20. 20. Direct-Material Budget March 31 inventory
  21. 21. Direct-Material Budget
  22. 22. Direct-Material Budget
  23. 23. Direct-Labor Budget <ul><li>At Breakers, each unit of product requires 0.1 hours of direct labor. </li></ul><ul><li>The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. </li></ul><ul><li>In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). </li></ul><ul><li>For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. </li></ul><ul><li>Let’s prepare the direct labor budget. </li></ul>
  24. 24. Direct-Labor Budget From our production budget
  25. 25. Direct-Labor Budget
  26. 26. Direct-Labor Budget This is the greater of labor hours required or labor hours guaranteed.
  27. 27. Direct-Labor Budget
  28. 28. Overhead Budget <ul><li>Here is Breakers’ Overhead Budget for the quarter. </li></ul>
  29. 29. Selling and Administrative Expense Budget <ul><li>At Breakers, variable selling and administrative expenses are $0.50 per unit sold . </li></ul><ul><li>Fixed selling and administrative expenses are $70,000 per month. </li></ul><ul><li>The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash outflows for the month. </li></ul>
  30. 30. Selling and Administrative Expense Budget From our Sales budget
  31. 31. Selling and Administrative Expense Budget
  32. 32. Selling and Administrative Expense Budget
  33. 33. <ul><li>At Breakers, all sales are on account. </li></ul><ul><li>The company’s collection pattern is: </li></ul><ul><ul><li>70% collected in the month of sale, </li></ul></ul><ul><ul><li>25% collected in the month following sale, </li></ul></ul><ul><ul><li>5% is uncollected. </li></ul></ul><ul><li>The March 31 accounts receivable balance of $30,000 will be collected in full. </li></ul>Cash Receipts Budget
  34. 34. Cash Receipts Budget
  35. 35. Cash Receipts Budget
  36. 36. Cash Disbursement Budget <ul><li>Breakers pays $0.40 per pound for its materials. </li></ul><ul><li>One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month. </li></ul><ul><li>No discounts are available. </li></ul><ul><li>The March 31 accounts payable balance is $12,000. </li></ul>
  37. 37. Cash Disbursement Budget 140,000 lbs. × $.40/lb. = $56,000
  38. 38. Cash Disbursement Budget
  39. 39. Cash Disbursement Budget Continued <ul><li>Breakers: </li></ul><ul><ul><li>Maintains a 12% open line of credit for $75,000. </li></ul></ul><ul><ul><li>Maintains a minimum cash balance of $30,000. </li></ul></ul><ul><ul><li>Borrows and repays loans on the last day of the month. </li></ul></ul><ul><ul><li>Pays a cash dividend of $25,000 in April. </li></ul></ul><ul><ul><li>Purchases $143,700 of equipment in May and $48,300 in June paid in cash. </li></ul></ul><ul><ul><li>Has an April 1 cash balance of $40,000 . </li></ul></ul>
  40. 40. Cash Disbursement Budget Continued From our Cash Receipts Budget
  41. 41. Cash Disbursement Budget Continued From our Cash Disbursements Budget
  42. 42. Cash Disbursement Budget Continued From our Direct Labor Budget
  43. 43. Cash Disbursement Budget Continued From our Overhead Budget
  44. 44. Cash Disbursement Budget Continued From our Selling and Administrative Expense Budget
  45. 45. Cash Disbursement Budget Continued To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of credit.
  46. 46. Cash Disbursement Budget Financing and Repayment Ending cash balance for April is the beginning May balance.
  47. 47. Cash Disbursement Budget Continued Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000.
  48. 48. Cash Disbursement Budget Financing and Repayment
  49. 49. Cash Disbursement Budget Continued At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at 12%.
  50. 50. Cash Disbursement Budget Financing and Repayment
  51. 51. Cash Disbursement Budget Continued
  52. 52. Cash Disbursement Budget Financing and Repayment
  53. 53. Budgeted Income Statement Completed After we complete the cash budget, we can prepare the budgeted income statement for Breakers. Cash Budget Budgeted Income Statement
  54. 54. Budgeted Ending Inventory * rounded Manufacturing overhead is applied on the basis of direct labor hours. Total overhead $191,000 Total labor hours 10,600 hrs. = $18.02 per hr. *
  55. 55. Budgeted Income Statement
  56. 56. Budgeted Balance Sheet <ul><li>Breakers reports the following account balances on June 30 prior to preparing its budgeted financial statements: </li></ul><ul><ul><li>Land - $50,000 </li></ul></ul><ul><ul><li>Building (net) - $148,000 </li></ul></ul><ul><ul><li>Common stock - $200,000 </li></ul></ul><ul><ul><li>Retained earnings - $46,400 </li></ul></ul>
  57. 57. 25%of June sales of $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit.
  58. 58. 50% of June purchases of $56,800
  59. 59. Budget Administration <ul><li>The Budget Committee is a standing committee responsible for . . . </li></ul><ul><ul><ul><li>overall policy matters relating to the budget. </li></ul></ul></ul><ul><ul><ul><li>coordinating the preparation of the budget. </li></ul></ul></ul>
  60. 60. E-Budgeting <ul><li>Employees throughout an organization can submit and retrieve budget information electronically. This tends to streamline the entire budgeting process. </li></ul>
  61. 61. Firewalls and Information Security <ul><li>Budget information is extremely sensitive and confidential. A firewall is a computer or router placed between a company’s internal network and the internet to control all information between the outside world and the company’s local network. </li></ul>
  62. 62. Zero-Base Budgeting <ul><li>To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness. </li></ul>
  63. 63. International Aspects of Budgeting <ul><li>Firms with international operations face special problems when preparing a budget. </li></ul><ul><ul><li>Fluctuations in foreign currency exchange rates. </li></ul></ul><ul><ul><li>High inflation rates in some foreign countries. </li></ul></ul><ul><ul><li>Differences in local economic conditions. </li></ul></ul>
  64. 64. Budgeting Product Life-Cycle Costs Product planning and concept Design. Preliminary design. Detailed design and testing. Production. Distribution and customer service.
  65. 65. Behavioral Impact of Budgets <ul><li>Budgetary Slack: Padding the Budget </li></ul><ul><ul><li>People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.” </li></ul></ul>
  66. 66. Participative Budgeting Flow of Budget Data
  67. 67. End of Chapter 9

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