2. 15-2
Every enterprise has a set of goalsEvery enterprise has a set of goals
ProfitabilityProfitability
GrowthGrowth
Public
Service
Public
Service
Strategic
Planning
Strategic
Planning
Achieving and
Maintaining
a Competitive
Advantage
Achieving and
Maintaining
a Competitive
Advantage
CRITICAL SUCCESS
FACTORS
The key strengths that
are most responsible
for making the
organization
successful
CRITICAL SUCCESS
FACTORS
The key strengths that
are most responsible
for making the
organization
successful
Strategic Planning
3. 15-3
•Express the specific steps required to achieve
the organization’s goals.
•Discuss the major capital investments
required to:
•Express the specific steps required to achieve
the organization’s goals.
•Discuss the major capital investments
required to:
Maintain
Present
Facilities
Maintain
Present
Facilities
Increase
Capacity
Increase
Capacity
Diversify
Products or
Processes
Diversify
Products or
Processes
Develop
Particular
Markets
Develop
Particular
Markets
Strategic Long-Range Plans
4. 15-4
A detailed plan, expressed in quantitative term,
that specifies how an organization will acquire and use
resources during a particular period of time.
A detailed plan, expressed in quantitative term,
that specifies how an organization will acquire and use
resources during a particular period of time.
What is a budget?What is a budget?
What is a budgeting system?What is a budgeting system?
The procedures used to develop a budgetThe procedures used to develop a budget
What Are The Key Purposes
Of Budgeting Systems?
5. 15-5
Managing Financial &
Operating Performance
Managing Financial &
Operating Performance
Facilitating
Communication
and Coordination
Facilitating
Communication
and Coordination
Evaluating
Performance &
Providing Incentives
Evaluating
Performance &
Providing Incentives
PlanningPlanning
Allocating
Resources
Allocating
Resources
What Are The Key Purposes
Of Budgeting Systems?
6. 15-6
MASTER BUDGET
A comprehensive set of budgets covering all phases of the
organization’s operations for a period of time
MASTER BUDGET
A comprehensive set of budgets covering all phases of the
organization’s operations for a period of time
PRO FORMA FINANCIAL STATEMENTS
Show how the organization’s financial statements will appear at a
specified time if operations proceed according to plan
PRO FORMA FINANCIAL STATEMENTS
Show how the organization’s financial statements will appear at a
specified time if operations proceed according to plan
CAPITAL BUDGET
A plan for the acquisition of capital asset
CAPITAL BUDGET
A plan for the acquisition of capital asset
FINANCIAL BUDGET
Shows how the organization will acquire its financial resources
FINANCIAL BUDGET
Shows how the organization will acquire its financial resources
ROLLING BUDGET
Continually updated by periodically adding a new incremental time
period, such as a quarter, and dropping the period just completed
ROLLING BUDGET
Continually updated by periodically adding a new incremental time
period, such as a quarter, and dropping the period just completed
Organizations Use Many
Types Of Budgets
7. 15-7
Sales Budget
Production Budget
Direct Material
Budget
Budgeted schedule
cost of goods
manufactured and sold
Capital Budget Budgeted balance
Statement
Direct Labor
Budget
Mft. Overhead
Budget
Cash budget
Budgeted income
Statement
Budgeted Statement
of Cash Flows
Sales Budget
Selling, General
and Administrative
Budget
R&D
Budget
Marketing
Budget
Customer Service
Budget
Operational
Budget
Exh.
15-1
Master Budget Components
8. 15-8
Among the major factors considered when forecasting
sales are:
Sales forecasting is the process of predicting sales of
goods and services.
Sales Forecasting
1. Past sales levels and trends
2. General economic trends
3. Economic trends in the
company’s industry
4. Other factors expected to
affect sales in the industry
5. Political and legal events
6. The intended pricing policy of
the company
7. Planned advertising and
product promotion
8. Expected action of
competitors
9. New products contemplated
by the company or other
firms
10. Market research studies
9. 15-9
The sales level of the prior
year
The sales level of the prior
year
Sales staffSales staff
Market
researchers
Market
researchers
Delphi techniqueDelphi technique
Econometric
models
Econometric
models
Starting
Point
Sales Forecasting
10. 15-10
OPERATIONAL BUDGETS
Specify how the company’s
operations will be carried out to
meet the demand.
OPERATIONAL BUDGETS
Specify how the company’s
operations will be carried out to
meet the demand.
Prepared
from the
sales budget
MANUFACTURING
Production Budget
shows the number
of product units to
be manufactured
MANUFACTURING
Production Budget
shows the number
of product units to
be manufactured
MERCHANDISING
Merchandise
Purchases Budget
used instead of a
production budget
MERCHANDISING
Merchandise
Purchases Budget
used instead of a
production budget
SERVICE INDUSTRY
Set of budgets
that shows how
the firm will meet the
demand for its
services
SERVICE INDUSTRY
Set of budgets
that shows how
the firm will meet the
demand for its
services
Operational Budgets: Meeting
Demand For Goods & Services
11. 15-11
OPERATIONAL BUDGETS
Specify how the company’s operations will be carried
out to meet the demand for its goods or services
OPERATIONAL BUDGETS
Specify how the company’s operations will be carried
out to meet the demand for its goods or services
Cash
Budget
Cash
Budget
Shows expected cash
receipts from selling
goods and services,
and
disbursements to pay
bills
Shows expected cash
receipts from selling
goods and services,
and
disbursements to pay
bills
Capital
Budget
Capital
Budget
Details plans for
major acquisitions
and disposals of
assets
Details plans for
major acquisitions
and disposals of
assets
Operational
budgets
encompass a
plan for using
the basic factors
of production
(material, labor,
and overhead)
to produce a
product or
provide a service
Operational
budgets
encompass a
plan for using
the basic factors
of production
(material, labor,
and overhead)
to produce a
product or
provide a service
Operational Budgets: Meeting
Demand For Goods & Services
12. 15-12
The sales budget displays the projected sales in
units and the projected sales return
The sales budget displays the projected sales in
units and the projected sales return
1st 2nd 3rd 4th Year
Sales in
Units 15,000 5,000 10,000 20,000 50,000
Unit sales
price X $12 X $12 X $12 X $12 X $12
Total sales
revenue $180,000 $60,000 $120,000 $240,000 $600,000
Seasonal Pattern in SalesSeasonal Pattern in Sales
Sales Budget
13. 15-13
10% of next quarter’s
expected sales
10% of next quarter’s
expected sales
10% of first quarter of next
year’s expected sales of 15,000
10% of first quarter of next
year’s expected sales of 15,000
Production Budget
Total units required - Expected beginning finished goods inventory =
Units to be produced
Total units required - Expected beginning finished goods inventory =
Units to be produced
Sales in units + Desired ending finished goods inventory = Total units requiredSales in units + Desired ending finished goods inventory = Total units required
14. 15-14
Raw materials
required for
production +
Desired ending
inventory = Total
raw material
required
Raw materials
required for
production +
Desired ending
inventory = Total
raw material
required
Shows the number of units and the cost of
material to be purchased and used
Shows the number of units and the cost of
material to be purchased and used Total raw material
required -
Expected
beginning
inventory of raw
material = Raw
material to be
purchased
Total raw material
required -
Expected
beginning
inventory of raw
material = Raw
material to be
purchased
Direct Material Budget
15. 15-15
Shows the number of hours and the cost of direct labor
to be used during the budget period
Shows the number of hours and the cost of direct labor
to be used during the budget period
For either strategic business reasons or ethical concerns, many
companies try to maintain a relatively stable labor force. If production
employees are retained when production declines, the labor force will not
be a unit-level cost.
For either strategic business reasons or ethical concerns, many
companies try to maintain a relatively stable labor force. If production
employees are retained when production declines, the labor force will not
be a unit-level cost.
Direct-Labor Budget
16. 15-16
Shows the cost of overhead expected to be incurred in
the production process during the budget period
Shows the cost of overhead expected to be incurred in
the production process during the budget period
Indirect material
Electricity for machinery
Indirect material
Electricity for machinery
Setup Purchasing &
material handling
Inspection
Setup Purchasing &
material handling
Inspection
Supervisory salaries
Insurance and property
taxes Maintenance
Utilities Depreciation
Supervisory salaries
Insurance and property
taxes Maintenance
Utilities Depreciation
DesignDesign
Manufacturing Overhead Budget
17. 15-17
1st 2nd 3rd 4th Year
Unit-level expenses $14,000 $5,500 $11,000 $19,500 $50,000
Customer-level
expenses $1,500 $1,500 $1,500 $1,500 $6,000
Facility and general
operations-level
expenses $4,750 $4,750 $4,750 $4,750 $19,000
Total expenses $20,250 $11,750 $17,250 $25,750 $75,000
Shows the planned amounts of expenditures for selling, general,
and administrative expenses during a budget period
Shows the planned amounts of expenditures for selling, general,
and administrative expenses during a budget period
Sales commissions
Freight-out
Sales commissions
Freight-out
Licensing fees for use of
universities’ names and logos
Licensing fees for use of
universities’ names and logos
Sales salaries, Advertising,
& Clerical wages
Sales salaries, Advertising,
& Clerical wages
Selling, General, & Administration
(SG&A) Expense Budget
18. 15-18
Details the expected cash collections during a budget periodDetails the expected cash collections during a budget period
80% of revenue80% of revenue
18% x $240,000 (prior
quarter’s revenue)
18% x $240,000 (prior
quarter’s revenue)
Cash Receipts Budget
19. 15-19
2nd quarter
X 80%X 80%
$48,000$48,000
$32,400$32,400
$80,400$80,400
X 18%X 18%
$180,000$180,000 $60,000$60,000
1st quarter
Total cash receipts
($48,000 + $32,400)
Total cash receipts
($48,000 + $32,400)
Collections in quarter
following sale (18% of
sales)
Collections in quarter
following sale (18% of
sales)
Collections in quarter of
sale (80% of sales)
Collections in quarter of
sale (80% of sales)
Total revenueTotal revenue
Uncollectible accounts
2% X $60,000 = $1,200
Uncollectible accounts
2% X $60,000 = $1,200
Budgeting Cash Receipts
20. 15-20
Details the expected cash payments during a budget periodDetails the expected cash payments during a budget period
1st 2nd 3rd 4th Year
Cost of raw
material purchases $39,450 $18,150 $35,550 $56,850 $150,000
Cash payments for
purchases made
during the quarter $23,670 $10,890 $21,330 $34,110 $90,000
Cash payments for
prior quarter's
purchases 22,740 15,780 7,260 14,220 60,000
Total cash
payments for direct
material purchases $46,410 $26,670 $28,590 $48,330 $150,000
Other cash
disbursements $84,750 $50,750 $72,750 $106,750 $315,000
Total cash
disbursements $131,160 $77,420 $101,340 $155,080 $465,000
60% of
current
quarter’s
purchases
60% of
current
quarter’s
purchases
40% of
prior
quarter’s
purchases
40% of
prior
quarter’s
purchases
Cash Disbursements Budget
21. 15-21
2nd quarter
X 60%X 60%
$10,890$10,890
$15,780$15,780
$26,670$26,670
X 40%X 40%
$39,450$39,450 $18,150$18,150
1st quarter
Total
($10,890 + $15,780)
Total
($10,890 + $15,780)
Payments made during
the quarter following
(40% of purchases)
Payments made during
the quarter following
(40% of purchases)
Payments made during
the same quarter as
purchases (60% of
sales)
Payments made during
the same quarter as
purchases (60% of
sales)
Total purchase
on account
Total purchase
on account
Budgeting Cash Disbursements
22. 15-22
1st 2nd 3rd 4th Year
Cash receipts $187,200 $80,400 $106,800 $213,600 $588,000
Less cash disbursements (131,160) (77,420) (101,340) (155,080) (465,000)
Change in cash balance
during quarter due to
operations $56,040 $2,980 $5,460 $58,520 $123,000
Proceeds from bank loan 100,000 100,000
Payments for construction
of plant addition (45,000) (15,000) (5,000) (35,000) (100,000)
Repayment of principal on
bank loan (25,000) (25,000) (25,000) (25,000) (100,000)
Interest on bank loan (2,500) (1,875) (1,250) (625) (6,250)
Change in cash balance
during the period $83,540 ($38,895) ($25,790) ($2,105) $16,750
Cash balance, beginning
of period 10,000 93,540 54,645 28,855 10,000
Cash balance, end of
period $93,540 $54,645 $28,855 $26,750 $26,750
A short-
term loan
was taken
out on Jan.
2, 20x1
A short-
term loan
was taken
out on Jan.
2, 20x1
The loan
was used for
construction
The loan
was used for
construction
Details the expected cash receipts and disbursementsDetails the expected cash receipts and disbursements
Unpaid
principal
x 10%
Unpaid
principal
x 10%
Cash Budget: Combining
Receipts And Disbursements
23. 15-23
Details the direct material, direct labor, and manufacturing overhead
costs to be incurred and the cost of the goods to be sold
Details the direct material, direct labor, and manufacturing overhead
costs to be incurred and the cost of the goods to be sold
Direct material
Raw material inventory, January 1 $4,200
Add: Purchases of raw material 150,000
Raw material available for use $154,200
Deduct: Raw-material, December 31 4,200
Direct material used $150,000
Direct labor 100,000
Manufacturing overhead 200,000
Subtotal $450,000
Add: Work-in-process inventory, Jan. 1 0
Subtotal 450,000
Deduct: Work-in-process inventory, Dec. 31 0
Cost of goods manufactured 450,000
Add: Finished goods inventory, Jan. 1 13,500
Cost of goods available for sale $463,500
Deduct: Finished goods inventory, Dec. 31 13,500
Cost of goods sold $450,000
1,500 units
x $9
absorption
manufacturing
cost
(direct material
= $3, direct
labor = $2, and
overhead = $4)
1,500 units
x $9
absorption
manufacturing
cost
(direct material
= $3, direct
labor = $2, and
overhead = $4)
Budgeted Schedule Of Cost Of
Goods Manufactured & Sold
24. 15-24
Shows the expected revenue and expenses for the budget periodShows the expected revenue and expenses for the budget period
Sales revenue $600,000
Less: Cost of goods sold 450,000
Gross margin $150,000
Other expenses:
Selling, general and
administrative expenses $75,000
Uncollectible accounts
expense 12,000
Interest expense 6,250
Total other expenses 93,250
Net income $56,750
$600,000
x 2%
$600,000
x 2%
Budgeted Income Statement
25. 15-25
Shows the
expected end of
period balances
for the
company’s
assets,
liabilities, and
owner’s equity
Shows the
expected end of
period balances
for the
company’s
assets,
liabilities, and
owner’s equity
Budgeted Balance Sheet
26. 15-26
Shows the expected end of period balances for the company’s
assets, liabilities, and owner’s equity
Shows the expected end of period balances for the company’s
assets, liabilities, and owner’s equity
Current liabilities
Accounts payable $22,740
Total current liabilities $22,740
Long-term liabilities
Note payable 200,000
Total liabilities 222,740
Owner's equity 386,910
Total liabilities and
owner's equity $609,650
Budgeted Balance Sheet
27. 15-27
Designate a
BUDGET
DIRECTOR
(usually the
controller) who
specifies the
process by which
budget data will
be gathered,
collects the
information, and
prepares the
master budget
Designate a
BUDGET
DIRECTOR
(usually the
controller) who
specifies the
process by which
budget data will
be gathered,
collects the
information, and
prepares the
master budget
The BUDGET
DIRECTOR develops
& disseminates a
BUDGET MANUAL
indicating who is
responsible for
providing various
types of budget
information, when
the information is
required, and what
form the information
is to take
The BUDGET
DIRECTOR develops
& disseminates a
BUDGET MANUAL
indicating who is
responsible for
providing various
types of budget
information, when
the information is
required, and what
form the information
is to take
A BUDGET
COMMITTEE,
consisting of key
senior executives,
often is appointed
to advise the
budget director
during the
preparation of the
budget
A BUDGET
COMMITTEE,
consisting of key
senior executives,
often is appointed
to advise the
budget director
during the
preparation of the
budget
Responsibility For Budget
Administration
