The document discusses budgeting, including its objectives, basic elements, and types. It describes the objectives of budgeting as establishing goals, executing plans to achieve goals, and comparing actual results to goals. The basic elements of the budget process include planning, directing, and controlling. The two major types of budgeting are static budgets, which assume fixed costs, and flexible budgets, which show expenses at different activity levels. The document provides examples of static, flexible, and master budgets for a manufacturing company.

1. Budgeting
JOIN KHALID AZIZ
COACHING CLASSES
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CAM
ICAP MODULE A,B,C,D
PIPFA
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ACCOUNTING OF O/A LEVEL
MA-ECONOMICS
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4. Nature and Objectives of Budgeting
Savings
8%
Entertainment Housing
6% 30%
Transportation
15%
Estimated
portion of Clothing Utilities
your total 7%
5%
monthly Other
income that 4% Food
should be Medical 20%
budgeted 5%

5. Objectives
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.

6. 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

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

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

10. Continuous Budgeting
One-Year Budget
Mar. 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

11. Static Budgets
Description: A budget that does not
reflect potential changes in
volume or activity level
Strength: It is simple—all expenses
are budgeted as fixed costs
Weakness: It does not reflect changes in
revenues and expenses that
occur as volumes change
Typical usage: Service organizations or
administrative departments of
retailers and manufacturers

12. Static Budgets
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

13. Flexible Budgets
Description: A budget that shows revenues and
expenses for a variety of volumes or
activity levels
Strength: Provides information needed to
analyze the impact of volume changes
on actual operating results
Weakness: Requires greater research into costs—
must differentiate fixed and variable
costs
Typical usage: Operational departments of retailers
and manufacturers whose costs
change with sales and production

14. Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable 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

15. Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable 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
Fixed 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

16. Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable 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
Fixed 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
Total department costs $60,000 $65,500 $71,000

17. Static and Flexible Budgets
Overbudget
ual
Act lts
Resu
Static
Budget
$60,000 $72,000

18. 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

19. Master Budget
Budgeted Income Budgeted Balance
Statement Sheet
Sales budget Cash budget
Cost of goods sold budget: Capital expenditure
budget
Production budget
Direct materials purchases
budget
Direct labor cost budget
Selling and administrative
expense 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. Sales
Budget Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
– Est. beginning materials inventory
Direct materials to be purchased

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

24. Elite Accessories Inc.
Sales Budget
For the Year Ending December 31, 2006
Unit Sales Unit Selling Total
Product and Region Volume Price Sales
Wallet:
East……………….. 287,000 $12.00 $ 3,444,000
West………………. 241,000 12.00 2,892,000
Total……………. 528,000 $ 6,336,000
Handbag:
East……………….. 156,400 $25.00 $ 3,910,000
West………………. 123,600 25.00 3,090,000
Total……………. 280,000 $ 7,000,000
Total revenue from
Sales……………….. $13,336,000

25. Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag
Expected units to be sold 528,000 280,000
From sales budget

26. Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag
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

27. Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag
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

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. 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
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.

30. 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
Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000
Total……………………………… 541,000 210,000

32. 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
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

33. 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
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

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

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

36. Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
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
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. Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
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

38. Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending December 31, 2006
Indirect factory wages……………………... $ 732,800
Supervisory salaries………………………... 360,000
Power and light…………………………….. 306,000
Depreciation of plant and equipment………. 288,000
Indirect materials…………………………… 182,800
Maintenance………………………………... 140,280
Insurance and property taxes………………. 79,200
Total factory overhead cost………………... $2,089,080

39. Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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 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

40. Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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

41. Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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

42. Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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
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

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

44. Elite Accessories Inc.
Budgeted Income Statement
For the Year Ending December 31, 2006
Revenue from sales (slide 23) $13,336,000
Cost of goods sold (slide 40) 9,047,780
Gross profit $ 4,288,220
Selling & administrative expenses:
Selling expenses (slide 41) $1,190,000
Administrative expenses (slide 41) 695,000
Total sell. & Admin. Expenses 1,885,000
Income from operations $ 2,403,220
Other income:
Interest revenue $ 98,000
Other expense:
Interest expense 90,000 8,000
Income before income tax $ 2,411,220
Income tax 600,000
Net income $ 1,811,220

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. 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
Note A: $108,000 = $1,080,000 x 10%
$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10%

48. 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
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%

49. 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)…………………………… 583,200 669,600 523,800
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%

50. 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)…………………………… 583,200 669,600 523,800
Total receipts from sales on
account……………………... $953,200 $1,058,400 $970,200

51. 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
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. 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)…………………. 612,000 567,000 591,000
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%

53. 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)…………………. 612,000 567,000 591,000
Total payments………………. $802,000 $771,000 $780,000

54. Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated 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

55. Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated 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
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. Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated 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
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. Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated 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 $1,075,000
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