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This document provides an overview of budgeting concepts and processes. It discusses why organizations create budgets, the basic framework of budgets including planning and control, and the advantages of budgeting such as defining goals and allocating resources. It also covers budgeting terms and methods, including bottom-up versus top-down budgeting, incremental versus zero-based budgets, and the roles of management and budget committees. Finally, it discusses the key components of master budgets for different types of industries, including budgets for production, sales, materials, labor, and cash for manufacturing companies.
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Bab 10
- 1. © 2012 McGraw-HillEducation (Asia)Garrison, Noreen, Brewer, Cheng & Yuen Profit Planning Chapter 10
- 2. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2 Learning Objective 1 Understand why organizations budget and the processes they use to create budgets.
- 3. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 3 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of preparing a budget is called budgeting. 2. The use of budgets to control an organization’s activities is known as budgetary control.
- 4. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 4 Planning and Control Planning – involves developing objectives and preparing various budgets to achieve those objectives. Control – involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal.
- 5. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 5 Advantages of Budgeting Advantages Define goals and objectives Uncover potential bottlenecks Coordinate activities Communicate plans Think about and plan for the future Means of allocating resources
- 6. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 6 Responsibility Accounting Managers should be held responsible for those items - and only those items - that they can actually control to a significant extent.
- 7. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 7 Choosing the Budget Period Operating Budget 2011 2012 2013 2014 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 budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.
- 8. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 8 Learning Objective 2 Understand Basic Budgeting Terms and the Behavioral Aspects of Budgeting.
- 9. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 9 Bottom-up and Top-down Budgeting Bottom-up budgeting (Self-imposed budget or Participative budget ) Top-down budgeting Top Management Middle Management Lower-level Management Top Management Middle Management Lower-level Management
- 10. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 10 Advantages of the Bottom-up Budgeting (Self-Imposed Budgets) 1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.
- 11. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 11 How to overcome problems of self- imposed budgets Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack (or budget padding).” Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare budgets that meet those targets.
- 12. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 12 Advantages of the Top-down Budgeting 1. Avoid the potential budgetary slack (budget padding). 2. Provide a clearer performance goals and expectations from the top management. 3. May provide better budget due to top management’s access to privileged/confidential market and organization information . 4. Provide an efficient budgetary process.
- 13. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 13 Budget Lapsing • A popular method among government agencies, universities and organizations relying on allocated funds. • Any unused funding at the end of the financial period cannot be carried forward to the following year. • As a result, the following year’s budget may be cut because of the under-expenditure in the previous year.
- 14. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 14 Budget Lapsing: Advantages • Budget lapsing helps ensure that the appropriate level of resources is utilized in each period. Without budget lapsing, risk-averse managers may unnecessarily accumulate funds and this may adversely affect the performance of the organization. • It helps provide an opportunity for a clean cut-off of expenditures and to reallocate any unused resources for other more appropriate requirements.
- 15. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 15 Budget Lapsing: Potential Problem & Solution • Budget lapsing can cause undesired behavior effects. For example, managers may wastefully spend their entire budget before the end of the period in order to avoid budget cuts. • A system of reviewing the expenditures near end of the period may uncover unnecessary expenditures and discourage managers to wastefully spend because of budget lapsing.
- 16. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 16 Incremental versus Zero-based Budgets • Incremental method of budgeting is most commonly used by companies. Companies start off one year’s budget by referring back to the previous year’s figures. Adjustments are then made to the budget to account for the expected changes such as prices for the next year. • While incremental method of budgeting is practical and fast, any inefficiency in the previous year’s figures may be carried forward. For example, if all along the organization is over staffed, then the budget will continually to be allowing for the over staffing situation under this method.
- 17. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 17 Incremental versus Zero-based Budgets • Zero-Based Budgets are prepared based on the assumption that the company has just started. Therefore, resources required have to be justified from scratch. • For example, when budgeting for staff cost for a restaurant, managers using the zero-based budgeting approach will ignore the existing staff level and expenses, rather, they will examine factors such as opening hours, number of tables, expected patron numbers to work out the number of staff required at each position and level, hence the associate costs, to produce a budget.
- 18. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 18 Incremental versus Zero-based Budgets • Companies using the zero-based method do not simply ignore previous years’ figures. Figures generated by the zero-based method are usually compared with previous years’ figures. Any large differences are investigated. • As zero-based budgeting is time consuming and costly, companies tend to use this method for the relatively large items and the incremental method for the rest.
- 19. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 19 Top Management Attitude: Human Factors in Budgeting The success of a budget program depends on three important factors: 1. Top management must be enthusiastic and committed to the budget process. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. 3. Budget targets should be challenging but achievable in order to have good motivational effects.
- 20. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 20 The Budget Committee 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
- 21. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 21 Learning Objective 3 Understand the Key Components of Master Budget in Manufacturing, Merchandising and Service Industries
- 22. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 22 Understand the key components of master budget in Manufacturing, Merchandising, and Service Industries The first step of budgeting for every business is to budget for the revenue, whether it is a sales budget for providing goods or services or a funding budget. Although operational budgets are adapted according to the industries, they are very similar and typically comprise of budgets for • Income statement • Cash • Balance sheet. The major differences of different industries include: • Manufacturing: production budget is involved • Merchandising: no production budget, only purchase budget of merchandise is required. • Service Industries: budget for revenue and cost of providing services • Not-for-profit: expected funding available and plan usage of funding.
- 23. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 23 Learning Objective 4 Prepare a Master Budget for a Manufacturing Company.
- 24. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 24 The Master Budget: An Overview Production budget Selling and administrative budget Direct materials budget Manufacturing overhead budget Direct labor budget Cash Budget Sales budget Ending inventory budget Budgeted balance sheet Budgeted income statement
- 25. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 25 Learning Objective 4 (a) Prepare a sales budget, including a schedule of expected cash collections.
- 26. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 26 Budgeting Example Royal 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.
- 27. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 27 The Sales Budget The individual months of April, May, and June are summed to obtain the total budgeted sales in units and dollars for the quarter ended June 30th
- 28. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 28 Expected Cash Collections All sales are on account. Royal’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible. The March 31 accounts receivable balance of $30,000 will be collected in full.
- 29. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 29 Expected Cash Collections
- 30. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 30 Expected Cash Collections From the Sales Budget for April.
- 31. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 31 Expected Cash Collections From the Sales Budget for May.
- 32. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 32 Quick Check What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000
- 33. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 33 What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 Quick Check
- 34. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 34 Expected Cash Collections
- 35. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 35 Learning Objective 4 (b) Prepare a production budget.
- 36. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 36 The Production Budget Production Budget Sales Budget and Expected Cash Collections The production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory.
- 37. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 37 The Production Budget The management at Royal 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.
- 38. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 38 The Production Budget
- 39. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 39 The Production Budget March 31 ending inventory Budgeted May sales 50,000 Desired ending inventory % 20% Desired ending inventory 10,000
- 40. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 40 Quick Check What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units
- 41. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 41 What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units Quick Check
- 42. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 42 The Production Budget
- 43. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 43 The Production Budget Assumed ending inventory.
- 44. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 44 Learning Objective 4 (c) Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.
- 45. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 45 The Direct Materials Budget At Royal 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.
- 46. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 46 The Direct Materials Budget From production budget
- 47. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 47 The Direct Materials Budget
- 48. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 48 The Direct Materials Budget Calculate the materials to be purchased in May. March 31 inventory 10% of following month’s production needs.
- 49. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 49 Quick Check How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds
- 50. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 50 How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds Quick Check
- 51. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 51 The Direct Materials Budget
- 52. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 52 The Direct Materials Budget Assumed ending inventory
- 53. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 53 Expected Cash Disbursement for Materials Royal pays $0.40 per pound for its materials. One-half of a month’s purchases is 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.
- 54. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 54 Expected Cash Disbursement for Materials
- 55. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 55 Expected Cash Disbursement for Materials 140,000 lbs. × $0.40/lb. = $56,000 Compute the expected cash disbursements for materials for the quarter.
- 56. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 56 Quick Check What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400
- 57. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 57 What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 Quick Check
- 58. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 58 Expected Cash Disbursement for Materials
- 59. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 59 Learning Objective 4 (d) Prepare a direct labor budget.
- 60. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 60 The Direct Labor Budget At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. For purposes of our illustration assume that Royal has a “no layoff” policy, workers are pay at the rate of $10 per hour regardless of the hours worked. 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.
- 61. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 61 The Direct Labor Budget From production budget.
- 62. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 62 The Direct Labor Budget
- 63. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 63 The Direct Labor Budget Greater of labor hours required or labor hours guaranteed.
- 64. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 64 The Direct Labor Budget
- 65. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 65 Quick Check What would be the total direct labor cost for the quarter if the company follows its no lay- off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000
- 66. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 66 What would be the total direct labor cost for the quarter if the company follows its no lay- off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000 Quick Check 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$
- 67. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 67 Learning Objective 4 (e) Prepare a manufacturing overhead budget.
- 68. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 68 Manufacturing Overhead Budget At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours. The variable manufacturing overhead rate is $20 per direct labor hour. Fixed manufacturing overhead is $50,000 per month, which includes $20,000 of noncash costs (primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget.
- 69. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 69 Manufacturing Overhead Budget Direct Labor Budget.
- 70. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 70 Manufacturing Overhead Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour * * rounded
- 71. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 71 Manufacturing Overhead Budget Depreciation is a noncash charge.
- 72. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 72 Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 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 Finished Goods Inventory Budget Direct materials budget and information.
- 73. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 73 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 Finished Goods Inventory Budget Direct labor budget.
- 74. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 74 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 ? Ending Finished Goods Inventory Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour *
- 75. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 75 Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 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 Finished Goods Inventory Budget Production Budget.
- 76. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 76 Learning Objective 4 (f) Prepare a selling and administrative expense budget.
- 77. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 77 Selling and Administrative Expense Budget At Royal, the selling and administrative expense budget is divided into variable and fixed components. The 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.
- 78. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 78 Selling and Administrative Expense Budget Calculate the selling and administrative cash expenses for the quarter.
- 79. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 79 Quick Check What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000
- 80. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 80 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 Quick Check
- 81. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 81 Selling Administrative Expense Budget
- 82. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 82 Learning Objective 4 (g) Prepare a cash budget.
- 83. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 83 Format of the Cash Budget The cash budget is divided into four sections: 1. Cash receipts section lists all cash inflows excluding cash received from financing; 2. Cash disbursements section consists of all cash payments excluding repayments of principal and interest; 3. 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 4. Financing section details the borrowings and repayments projected to take place during the budget period.
- 84. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 84 The Cash Budget Assume the following information for Royal: 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 (both purchases paid in cash) Has an April 1 cash balance of $40,000
- 85. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 85 The Cash Budget Schedule of Expected Cash Collections.
- 86. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 86 The Cash Budget Direct Labor Budget. Manufacturing Overhead Budget. Selling and Administrative Expense Budget. Schedule of Expected Cash Disbursements.
- 87. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 87 The Cash Budget Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit.
- 88. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 88 The Cash Budget Ending cash balance for April is the beginning May balance. Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit.
- 89. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 89 The Cash Budget
- 90. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 90 Quick Check What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000
- 91. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 91 What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 Quick Check
- 92. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 92 The Cash Budget $50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 and repayment on June 30.
- 93. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 93 The Budgeted Income Statement Cash Budget Budgeted Income Statement With interest expense from the cash budget, Royal can prepare the budgeted income statement.
- 94. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 94 Learning Objective 4(h) Prepare a budgeted income statement.
- 95. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 95 The Budgeted Income Statement Royal Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) 1,000,000$ Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000 Interest expense 2,000 Net income 239,000$ Sales Budget. Ending Finished Goods Inventory. Selling and Administrative Expense Budget. Cash Budget.
- 96. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 96 Learning Objective 4 (i) Prepare a budgeted balance sheet.
- 97. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 97 The Budgeted Balance Sheet Royal reported the following account balances prior to preparing its budgeted financial statements: • Land - $50,000 • Common stock - $200,000 • Retained earnings - $146,150 (April 1) • Equipment - $175,000
- 98. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 98 Royal Company Budgeted Balance Sheet June 30 Assets: Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Land 50,000 Equipment 367,000 Total assets 564,550 Liabilities and Stockholders' Equity Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and stockholders' equity 564,550$ 11,500 lbs. at $0.40/lb. 5,000 units at $4.99 each. 50% of June purchases of $56,800. 25% of June sales of $300,000.
- 99. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 99 Royal Company Budgeted Balance Sheet June 30 Assets: Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Land 50,000 Equipment 367,000 Total assets 564,550 Liabilities and Stockholders' Equity Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and stockholders' equity 564,550$ Beginning balance 146,150$ Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$
- 100. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 100 Learning Objective 5 Prepare Budget on the Key Components for the Service Industry
- 101. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 101 Key Budget Components for the Service Industry Wonder World, a hypothetical theme park, has the following data: Main Sources of Revenue Major Expenses Departments • Ticketing • Food & Beverages • Souvenir Shop • Salaries • Rent • Cost of Sales • Advertising • Maintenance • Depreciation • Utilities • Finance & Administration • Operations • Marketing • Souvenir Shop • Food and Beverages • Maintenance
- 102. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 102 Learning Objective 5 (a) Prepare a Visitorship Budget
- 103. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 103 Visitorship Budget Number of Visitors Adults 750,000 Children 250,000 Total Visitors 1,000,000 Based on historical records, economic outlook, tourist arrival expectations, the following visitorship budget for the coming year is prepared:
- 104. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 104 Learning Objective 5 (b) Prepare a Revenue Budget
- 105. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 105 Revenue Budget Revenue per visitor Gate Collections : Adults $13 Gate Collections : Children $9 Souvenir Shop $4 Food and Beverages $6 Based on the average price charged by Wonder World and other historical data, the following revenues per visitor are budgeted and approved by the top management:
- 106. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 106 Revenue Budget Revenue Gate Collections : Adults1 $9,750,000 Gate Collections : Children2 $2,250,000 Souvenir Shop3 $4,000,000 Food and Beverages4 $6,000,000 Total Revenue $22,000,000 With the budgeted number of visitors and revenues per visitor from each category, the budgeted revenues are computed: Note 1 750,000 X $13 2 250,000 X $9 3 1,000,000 X $4 4 1,000,000 X $6
- 107. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 107 Learning Objective 5 (c) Prepare a Cost of Sales Budget and Expense Budget
- 108. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 108 Cost of Sales Budget Cost of Sales Souvenir Shop $2,000,000 Food and Beverage $3,000,000 Total $5,000,000 For cost of sales on souvenirs and food and beverages, the company normally makes use of the historical cost of sales % and takes into account of any expected price changes from the suppliers. For the coming year, the expected cost of sales % is 50% on sales for both the souvenir shop and food and beverages.
- 109. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 109 Expenses Budget How the items are budgeted will depend on the nature of the items. Nature of expense Amount Budget approach Rental $1,100,000 5% of revenue as agreed with the landlord. Salaries $3,500,000 Zero based approach by reviewing the actual requirement of each position and its suitable rate of pay. Advertising $1,200,000 Proposed by marketing manager. Maintenance $980,000 Proposed by maintenance manager. Depreciation $890,000 Computed by the finance manager by taking into account of existing assets and proposed new assets. Utilities $580,000 Computed by maintenance manager based on the rates and usage expectations. Other operating expenses $490,000 Based on judgment and any specific requirements such as legal expenses. Total $8,740,000
- 110. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 110 Learning Objective 5 (d) Prepare a Budgeted Income Statement
- 111. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 111 Budgeted Income Statement Budgeted Income Statement Revenue $22,000,000 Cost of goods sold $5,000,000 Expenses $8,740,000 Net income $8,260,000 Budgeted Income Statement can be prepared by putting all previous budgeted information together.
- 112. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 112 Learning Objective 6 Explain the Costs and Benefits of Budgeting
- 113. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 113 Costs and Benefits of Budgeting • Budgeting is time-consuming and costly. • Budgetary slack or padding is an inherent problem of budgeting. • Despite the drawbacks of budgeting, most companies are still using budgets to plan, communicate, set objectives and allocate resources etc. • Since budgets are still commonly used, benefits of budgeting are high and drawbacks of budgeting can be minimized by having a good budgeting system. • For a good budgeting system, it is critical to have effective communication and mutual trust between the top management and its staff.
- 114. McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 114 End of Chapter 10
Editor's Notes
- #2 Chapter 10: Profit planning. 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.
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- #10 Bottom-up budgeting The initial flow of budget data in a bottom up budgeting system is from lower levels of management to higher levels of management. Each person with responsibility for cost or revenue will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization. Therefore, it is also called a self-imposed budget or participative budget that requires 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. Top-down budgeting Top management sets all the key targets for the entire company. These key targets are then move downwards for the middle and lower-level management to come up with other detailed budgeted figures. Under this approach, middle and lower-level management are tasked to complete the budget plan towards meeting the key targets set by the top management.
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- #13 Problems of self-imposed budget can be solved by the top-down budgeting approach. For example, it can: avoid the potential budgetary slack (budget padding). provide a clearer performance goals and expectations from the top management. provide better budget due to top management’s access to privileged/confidential market and organization information . provide an efficient budgetary process.
- #14 A popular method among government agencies, universities and organizations relying on allocated funds. Any unused funding at the end of the financial period cannot be carried forward to the following year. As a result, the following year’s budget may be cut because of the under-expenditure in the previous year.
- #15 Budget Lapsing: Advantages Budget lapsing helps ensure that the appropriate level of resources is utilized in each period. Without budget lapsing, risk-averse managers may unnecessarily accumulate funds just in case of any sudden fund requirements. Unnecessary savings from, for example, essential repair and maintenance, may adversely affect the organization. It helps provide an opportunity for a clean cut-off of expenditures and to reallocate any unused resources for other more appropriate requirements.
- #16 Budget Lapsing: Potential Problem & Solution Budget lapsing can cause undesired behavior effects. For example, managers may wastefully spend their entire budget before the end of the period in order to avoid budget cuts. A system of reviewing the expenditures near end of the period may uncover unnecessary expenditures and discourage managers to wastefully spend because of budget lapsing.
- #17 Incremental method of budgeting is most commonly used by companies. Companies start off one year’s budget by referring back to the previous year’s figures. Adjustments are then made to the budget to account for the expected changes such as prices for the next year. While incremental method of budgeting is practical and fast, any inefficiency in the previous year’s figures may be carried forward. For example, if all along the organization is over staffed, then the budget will continually to be allowing for the over staffing situation under this method.
- #18 Zero-Based Budgets are prepared based on the assumption that the company has just started. Therefore, resources required have to be justified from scratch. For example, when budgeting for staff cost for a restaurant, managers using the zero-based budgeting approach will ignore the existing staff level and expenses, rather, they will examine factors such as opening hours, number of tables, expected patron numbers to work out the number of staff required at each position and level, hence the associate costs, to produce a budget.
- #19 Companies using the zero-based method do not simply ignore previous years’ figures. Figures generated by the zero-based method are usually compared with previous years’ figures. Any large differences are investigated. As zero-based budgeting is time consuming and costly, companies tend to use this method for the relatively large items and the incremental method for the rest.
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- #23 The master budget consists of a number of separate but interdependent budgets that formally lay out the company’s sales, production, and financial goals. The master budget culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. Exhibit 10-2 provides an overview of the various parts of the master budget and how they are related. Companies in different industries adapt this master budget based on their particular needs. For a manufacturer, the first step in the budgeting process is the preparation of the sales budget, which is a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process as all other budgets such as the production budget and the income statement budget depend on the sales budget. The sales budget is compiled by taking into account, for example, past sales levels, general economic trends, competitors’ actions and pricing strategies. Once the sales budget is done, a manufacturer will do the production budget based on the sales budget and the required finished goods inventory. Finished goods inventory is necessary to cater for any unexpected change in demand. Thereafter, the production budget is utilized to determine the budgets for direct materials, direct labor and manufacturing overheads. A budget for selling and administrative expenses will then be prepared. Finally, budgeted cash statement, income statement and balance sheet are compiled. For a merchandiser, the first step is also the preparation of the sales budget. After the sales budget, a merchandiser will do a budget for the merchandise purchases. The sales budget and the inventory required are utilized to compile the budget for merchandise purchases. Production, direct materials, direct labor and manufacturing overhead budgets are not applicable for a merchandiser. Similar to a manufacturer, other budgets including selling and administrative expenses, cash, income statement and balance sheet are prepared. For a service provider, same as a manufacturer or a merchandiser, a sales budget is done first. The sales budget gives details of the services to be provided and the related income. Based on the sales budget, other budgets are then prepared. To most service providers, human capital (or human resources) budgeting/planning could be one of the most important budget after sales budget. A not-for-profit organization budget has many similarities with other organizations. The major difference is that this organization normally does not charge for its goods and services. Instead, funding is obtained from government bodies or donors. Therefore, there is no sales budget for a not-for-profit organization. Instead, it will have a budget for revenue or funding. From this budget, the organization will then plan for its activities accordingly by producing a budget for activities and expenses. Therefore, the first step of budgeting for every business is to budget for the revenue, whether it is a sales budget for providing goods or services or a funding budget. Although operational budgets are adapted according to the industries, they are very similar and typically comprise of budgets for income statement, cash and balance sheet. We will next describe the detailed budgeted information for a manufacturer.
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- #102 This section illustrates the essential aspects of budgeting of a theme park (a hypothetical one). Wonder World is a theme park which has some mechanical rides, an aquarium and a dolphin pool. On average, about one million visitors including locals and tourists are attracted to the theme park annually. Wonder World is a very profitable company. Wonder World has three main sources of revenue, namely, ticketing, food and beverages and the souvenir shop. For expenses, the major ones are salaries, rent and cost of sales for selling food and beverages and souvenir items. Wonder World has a number of departments, Finance and Administration, Operations, Marketing, Souvenir Shop, Food and Beverages and Maintenance. Each of the department head provides input of his or her area of responsibility for the company’s annual budget.
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- #104 Based on historical records, economic outlook, tourist arrival expectations, the visitorship budget is then prepared. This is the important first step of the budgeting process for a theme park as revenue and expenses are driven by these numbers. In this example, Adults and Children numbers are estimated as 750,000 and 250,000 respectively, totaling 1,000,000 .
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- #106 Based on the average price charged by Wonder World and other historical data, the revenues budget, including gate collection (i.e. entrance ticket), souvenir shop revenue, and food and beverages revenue per visitor are prepared and approved by the top management.
- #107 With the budgeted number of visitors and revenues per visitor from each category, the budgeted revenues are computed. In this example, a total of $22,000,000 is budgeted.
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- #109 For cost of sales on souvenirs and food and beverages, the company normally makes use of the historical cost of sales percentage and takes into account of any expected price changes from the suppliers. For the coming year, the expected cost of sales percentage is is budgeted at 50% on sales for both the souvenir shop and food and beverages.
- #110 Regarding rental expense, Wonder World has an agreement with its landlord to pay either a lump sum of $200,000 or 5% of the revenue, whichever is higher. Since opening of the attraction, Wonder World’s 5% of revenue has always exceeded the $200,000 lump sum by a very far amount, therefore, its budgeted rent can simply be computed at 5% of sales. Salary expense is a top expense item for Wonder World. Each year, the head of finance will analyze and discuss salary expense with top management and recommend the appropriate amount to be budgeted for next year. Generally, for salaries, the zero-based approach is used to estimate the budgeted figure. For incremental approach, we take last year’s expense and adjust for changes in headcounts and rate of pay. For the zero-based approach, we do not start off with last year’s figure; instead, we review from scratch the number of staff required based on tasks and duties to be performed. Suitable rates of pay for different levels of staff are discussed. With this method, any inappropriate staff number or pay will not be carried forward into next year. Advertising is more of a discretionary item for Wonder World. The marketing manager will propose the amount to be spent and estimate the effect of the advertising before seeking the approval of the top management. For TV advertising, viewership demography together with detailed costing will have to be presented to the top management for approval. In the end, the top management will decide on the types of advertisement and the total to be spent. Maintenance expenditure is more of a technical area and safety cannot be compromised. The maintenance manager has a bigger role to play in terms of the amount required. The maintenance manager will list down the various maintenance and enhancement jobs required to be done next year and estimate the total budget required for these jobs. Top management will go through the list and discuss with the maintenance manager to decide on the timing of the jobs. For maintenance jobs, they normally get approved and for the enhancement jobs, top management may decide to delay the jobs for a while. Depreciation expense is mainly computed by the Finance Department. The expense can be computed by using all the existing depreciable assets’ values and depreciation policies plus any applicable additional depreciation for assets to be acquired in the coming year. If all planned purchases are according to the original plan, depreciation expense budget can be fairly accurate. The maintenance department is also responsible for estimating the amount to be budgeted for utilities. Current facilities, planned new facilities, change in rates of utilities will be taken into account to estimate the utilities expense for next year. It should be noted that Wonder World utilities are not so sensitive to change in number of visitors. Even with a very low level of visitors, air conditioning and lightings for all the indoor facilities have to be kept on, the life support system, which consumes a lot of electricity, has to be kept on for fishes and dolphins. Other operating expenses such as legal and audit fees, travel and fish food are estimated based on a combination of historical information and human judgment. In general, the smaller items require less time to estimate based on the cost and benefit rule.
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- #112 Budgeted Income Statement can be prepared by putting all previous budgeted information together.
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- #114 Budgeting is time-consuming and costly. Budgetary slack or padding is an inherent problem of budgeting. Despite the drawbacks of budgeting, most companies are still using budgets to plan, communicate, set objectives and allocate resources etc. Since budgets are still commonly used, benefits of budgeting must be high and drawbacks of budgeting can be minimized by having a good budgeting system. For a good budgeting system, it is critical to have effective communication and mutual trust between the top management and its staff.
- #115 End of chapter 10.