This document provides a summary of budgeting concepts including the objectives of budgeting, types of budgets, and examples of budgets for a manufacturing company. It discusses static and flexible budgets, the master budget, income statement budgets including sales, production, materials purchases, and labor budgets, and balance sheet budgets. Budgets are presented for the Elite Accessories manufacturing company for revenues, production needs, materials purchases, and direct labor costs.

1. Budgeting Budgeting

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

4. Estimated portion of your total monthly income that should be budgeted Nature and Objectives of Budgeting

5. 1. 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. Objectives

7. Human Behavior and Budgeting Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals Nature and Objectives of Budgeting

8. 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.

9. Continuous Budgeting Feb. 2006 One-Year Budget Mar. 2006 Apr. 2006 May 2006 June 2006 July 2998 Aug. 2006 Sep. 2006 Oct. 2006 Nov. 2006 Dec. 2006 Jan. 2007 Delete on February 28

10. Continuous Budgeting Feb. 2007 One-Year Budget Add February 2007 Mar. 2006 Apr. 2006 May 2006 June 2006 July 2998 Aug. 2006 Sep. 2006 Oct. 2006 Nov. 2006 Dec. 2006 Jan. 2007

12. Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Direct labor $40,000 Electric Power 5,000 Supervisor salaries 15,000 Total department costs $60,000 Static Budgets

17. Static and Flexible Budgets $60,000 $72,000 Static Budget Actual Results Overbudget

18. $60,000 $72,000 $65,500 $71,000 Flexible Budget Static and Flexible Budgets 8,000 units Actual Results 9,000 units 10,000 units Overbudget

19. Master Budget Budgeted Income Statement Sales budget Cost of goods sold budget: Production budget Direct materials purchases budget Direct labor cost budget Selling and administrative expense budget Budgeted Balance Sheet Cash budget Capital expenditure budget

20. Income Statement Budgets

21. Sales Budget Production Budget Expected units of sales + Desired units in ending inventory – Estimated units in beginning inventory Total units to be produced

22. Direct Materials Purchases Budget Sales Budget Production Budget Materials needed for production + Desired ending materials inventory – Est. beginning materials inventory Direct materials to be purchased

23. Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget Selling & Administrative Expenses Budget Sales Budget Production Budget Cost of Goods Sold Budget

26. Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Expected units to be sold…………. 528,000 280,000 Plus desired ending inventory, December 31, 2006……………. 80,000 60,000 Total 608,000 340,000 Units Wallet Handbag

27. Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Expected units to be sold…………. 528,000 280,000 Plus desired ending inventory, December 31, 2006……………. 80,000 60,000 Total………………………………. 608,000 340,000 Less estimated beginning inventory, January 1, 2006…………………. 88,000 48,000 Total units to be produced………… 520,000 292,000 Units Wallet Handbag

28. Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Total Square yards required for production: Wallet (Note A ) ………………….. 156,000 52,000 Note 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.

29. Square yards required for production: Wallet (Note A) ……..……..…….. 156,000 52,000 Handbag (Note B) ……………….. 365,000 146,000 Note 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. Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

31. Square yards required for production: Wallet (Note A) ……....………….. 156,000 52,000 Handbag (Note B) .………………. 365,000 146,000 Plus desired inventory, Dec. 31, 2006 20,000 12,000 Total……………………………… 541,000 210,000 Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

32. Square yards required for production: Wallet (Note A) …………………. 156,000 52,000 Handbag (Note B) ………………. 365,000 146,000 Plus desired inventory, Dec. 31, 2006 20,000 12,000 Total……………………………… 541,000 210,000 Less estimated inventory, Jan. 1, 2006 18,000 15,000 Total square yards to be produced.. 523,000 195,000 Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

33. Square yards required for production: Wallet (Note A) ………………….. 156,000 52,000 Handbag (Note B) .………………. 365,000 146,000 Plus desired inventory, Dec. 31, 2006 20,000 12,000 Total……………………………… 541,000 210,000 Less estimated inventory, Jan. 1, 2006 18,000 15,000 Total square yards to be produced.. 523,000 195,000 Unit price (per square yard)…………. x $4.50 x $1.20 Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500 Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

34. Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Sewing Total Note 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. Hours required for production: Wallet (Note A) …………. 52,000 130,000

35. Cutting Sewing Total Note 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. Hours required for production: Wallet (Note A) …………. 52,000 130,000 Handbag (Note B) ……….. 43,800 116,800 . Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs. 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

36. Cutting Sewing Total Hours required for production: Wallet (Note A) …………. 52,000 130,000 Handbag (Note B) ……….. 43,800 116,800 Total……………………... 95,800 246,800 Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Note 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

37. Cutting Sewing Total Hours required for production: Wallet (Note A) …………. 52,000 130,000 Handbag (Note B) ……….. 43,800 116,800 Total……………………... 95,800 246,800 Hourly rate…………………… x $12.00 x $15.00 Total direct labor cost………… $1,149,600 $3,702,000 $4,851,600 Note 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. Direct Labor Cost Budget For the Year Ending December 31, 2006

39. Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006 Note 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 Finished goods inventory, January 1 ,2006….. $ 1,095,600 Work in process inventory, January 1, 2006… $ 214,400 Direct materials: Direct materials inventory, January 1, 2006 (Note A) …………………………………. $ 99,000

40. Finished goods inventory, January 1 ,2006….. $ 1,095,600 Work in process inventory, January 1, 2006… $ 214,400 Direct materials: Direct materials inventory, January 1, 2006 (Note A) …………………………………. $ 99,000 Note 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, 2006

41. Finished goods inventory, January 1 ,2006…. $ 1,095,600 Work in process inventory, January 1, 2006... $ 214,400 Direct 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 $2,582,100 Direct labor (Slide 35) ………………………. 4,851,600 Factory overhead (Slide 36) ………………….. 2,089,080 Total manufacturing costs……………………. 9,522,780 Total work in process during period…………. $9,737,180 Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006

42. Less work in process inventory, December 31, 2006 220,000 Cost of goods manufactured………………………... 9,517,180 Cost of finished goods available for sale…………... $10,612,780 Less finished goods inventory, December 31, 2006.. 1,565,000 Cost of goods sold………………………………….. $ 9,047,780 Finished goods inventory, January 1 ,2006………... $ 1,095,600 Work in process inventory, January 1, 2006……….. $ 214,500 Total manufacturing costs………………………….. 9,522,780 Total work in process during period……………….. $9,737,180 Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006

43. Elite Accessories Inc. Selling and Administrative Expenses Budget For the Year Ending December 31, 2006 Selling expenses: Sales salaries expense…………………………. $715,000 Advertising expense…………………………... 360,000 Travel expense…………………………………. 115,000 Total selling expenses………………………... $1,190,000 Administrative 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………………… 695,000 Total selling and administrative expenses………… $1,885,000

45. Budgeted Balance Sheet

46. The cash budget is one of the most important elements of the budgeted balance sheet. We’ll begin with a schedule of collection from sales.

47. Receipts from cash sales: Cash sales (10%) (see Note A) ……………………... $108,000 $ 124,000 $ 97,000 January February March Note 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

48. 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 January February March Note 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

49. 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) …………………………… 583,200 669,600 523,800 January February March Note 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

50. 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) …………………………… 583,200 669,600 523,800 Total receipts from sales on account……………………... $953,200 $1,058,400 $970,200 January February March Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006

51. Payment of prior month’s manufacturing costs (25%) (see Note A) ………………… $190,000 $204,000 $189,000 January February March Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 Note 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%

52. 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) …………………. 612,000 567,000 591,000 January February March Note 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

53. 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) …………………. 612,000 567,000 591,000 Total payments………………. $802,000 $771,000 $780,000 January February March Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006

54. Estimated cash receipts: 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, 2006 January February March

55. Estimated cash receipts: 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, 2006 January February March Estimated 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

56. Estimated cash receipts: 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, 2006 January February March Estimated 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

57. Estimated cash receipts: Cash sales (Slide 45) ………….. $ 108,000 $ 124,000 $ 97,000 Collections of accounts receivable (Slide 48) ………... 953,200 1,058,400 970,200 January February March Capital additions 274,000 Interest expense……………….. 22,500 Income taxes…………………... 150,000 Total cash payments…………. $ 984,500 $1,210,000 $ 1,075,000 Cash increase (decrease)…………. $ 76,700 $ (27,600) $ 16,700 Cash balance at beginning of month 280,000 356,700 329,100 Cash balance at end of month……. $ 356,700 $ 329,100 $ 345,800 Minimum cash balance…………… 340,000 340,000 340,000 Excess (deficiency)………………. $ 16,700 $ (10,900) $ 5,800 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006

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