CHAP 23 BUDGETARY PLANNING

Budget: a formal written statement of management’s plans for a specified

future time period, expressed in financial terms.

Budgeting and Accounting:

- Companies can obtain historical data on revenues, costs, and expenses.
These data are helpful in formulating future budgets.
- Budget & administration of budget: management responsibilities
Benefits:
- requires all levels of management to plan ahead
- provides definite objectives for evaluating performance at each level of
responsibility.
- Create an early warning system for potential problems
- Facilitates the coordination of activities within the business
- greater management awareness of the entity’s overall operations
- motivates personnel throughout the organization to meet planned
objectives.
Effective Budgeting:
 Research and analysis are more likely to result in realistic goals.
 Accept by all level management
 Depend organizational structure with authority and responsibility for all
phases of operation
Length of the budget period
- Most common - 1 year
- Different budgets may cover different time period
Budget process
- Sale forecast
- Base budget goal on past performance
Budget and human behavior
Participative budgeting - each level of management participate
Advantage:
 - Lower-level managers have more detailed knowledge of their specific
area, are able to provide more accurate budgetary estimates.
- Perceive budget process as fair due to involvement of lower level
management
Disadvantage:
- Time-consuming, costly
- Foster budgetary “gaming” through budgetary slack: managers
manipulated
Master budget
- Set of interrelated budgets that constitute a plan of action for a specified
time period
- Contain 2 class of budget:
+ Operating budget - individual budgets that result in the preparation
of the budgeted income statement - establish goals for the
company’s sales and production personnel
+ Financial budget - Bao gồm capital expenditure budget, the cash
budget, and the budgeted balance sheet - focus primarily on the
cash resources needed to fund expected operations and planned
capital expenditures.
Preparing operating budget:
1. Sales budget:
- Prepare first
- Derive from sale forecast
- Every other budget depend on sale budget

Total sale = Expected unit sale x unit selling price

VD: Hayes Company expects sales volume to be 3,000 units in the first
quarter, with 500-unit increases in each succeeding quarter. Illustration 23-
3 shows the sales budget for the year, by quarter, based on a sales price of
$60 per unit.
Production budget
- Show unit produced to meet anticipated sales
- Derived from sale budget + desire change in ending finished goods
inventory
- Realistic ending inventory
- Unit from sale budget

Note: Cuối kì này sẽ là đầu kì sau (VD: Ending finished goods quarter 1 sẽ là
beginning finished goods quarter 2)
Hayes Company believes it can meet future sales requirements by
maintaining an ending inventory equal to 20% of the next quarter’s
budgeted sales volume. Illustration 23-5 shows the production budget.
Direct material budget: unit from production budget

Hayes Company maintains an ending inventory of raw materials equal to 10% of

the next quarter’s production requirements. The manufacture of each Rightride
requires 2 pounds of raw materials, and the expected cost per pound is $4.
Illustration 23-7 shows the direct materials budget. Assume that the desired
ending direct materials amount is 1,020 pounds for the fourth quarter of 2017.
Direct labor budget: unit from production budget

Manufacturing overhead budget:

- Lấy unit từ production budget
- Phân biệt fixed cost và variable overhead cost
Hayes Company expects variable costs to fluctuate with production volume
on the basis of the following rates per direct labor hour: indirect materials
$1.00, indirect labor $1.40, utilities $0.40, and maintenance $0.20. Hayes
also recognizes that some maintenance is fixed.
Selling and administrative expense budget
- Phân biệt fixed và variable cost
- Lấy unit từ Sale budget
The variable expense rates per unit of sales are sales commissions $3 and
freight-out $1. Variable expenses per quarter are based on the unit sales
from the sales budget
Budget income statement
- Important end-product of the operating budgets
- Indicate expected profit
- Provide a basis for evaluating company performance
- Preparing operation budgets:
+ Manufacturing overhead
+ Selling &Administrative expense
+ Sale
+ DM
+ DL

Hayes then determines the cost of goods sold by multiplying the units sold
by the unit cost. Its budgeted cost of goods sold is $660,000. All data for the
income statement come from the individual operating budgets except the
following: (1) interest expense is expected to be $100, and (2) income taxes
are estimated to be $12,000.
COGS = Total unit cost x unit sold (from sale budget)
Preparing financial budget
1. Cash Budget: most important financial budget. Include 3 parts: cash
receipts, cash disbursements, financing.

+ Cash receipt section:

- Expected receipts from the company principal source: khoản thu dự kiến
từ nguồn tài chính của công ty
- Expected interest & dividends receipt có từ việc đầu tư, tài sản liên quan
nhà máy và cổ phiếu.
+ Cash disbursement section:
- Expect cash payment từ DM, DL, MOH và selling and administrative exp.
+ Financing section:
- Expected borrowings and the repayment of the borrowed funds plus
interest.
Note: Depreciation expense là non-cash expense
2.Budgeted Balance Sheet
*Merchandiser
- Sales budget
- Merchandise purchases budget thay vì production budget
- Không dùng manufacturing budget (DM, DL, MOH)
MERCHANDISE PURCHASES BUDGET

Assume that the budget committee of Lima Company is preparing the

merchandise purchases budget for July 2017. It estimates that budgeted
sales will be $300,000 in July and $320,000 in August. Cost of goods sold is
expected to be 70% of sales—that is, $210,000 in July and $224,000 in
August. The company’s desired ending inventory is 30% of the following
month’s cost of goods sold. Required merchandise purchases for July are
$214,200, computed as follows.

Service Companies
Suppose that Stephan Lawn and Plowing Service estimates that it will
service 300 small lawns, 200 medium lawns, and 100 large lawns during the
month of July. It estimates its direct labor needs as 1 hour per small lawn,
1.75 hours for a medium lawn, and 2.75 hours for a large lawn. Its average
cost for direct labor is $15 per hour. Stephan prepares a direct labor
budget as follows.
 Cook Farm Supply Company
Sales Budget
For the Six Months Ending June 30, 2017

Quarter 1 Quarter 2 Total

Expected unit sales 40000 56000 96000

Unit selling price 60 60 60

Total sales (40000 x 60) 2400000 3360000 5760000

Cook Farm Supply Company

Production Budget
For the Six Months Ending June 30, 2017

Quarter 1 Quarter 2 Total

Expected unit sales 40000 56000

Add: Desired ending finished goods 15000 18000

units

Total required units 55000 74000

Less: Beginning finished goods units 8000 15000

Required production units 47000 59000 106000

Cook Farm Supply Company

Direct Material Budget - Gumm
For the Six Months Ending June 30, 2017

Quarter 1 Quarter 2 Total

Unit to be produced 47000 59000

Direct materials per unit 4 4

Total pounds needed for production 188000 236000

Add: Desired ending direct materials 10000 13000

Total materials required 198000 249000

Less: Beginning direct materials 9000 10000

Direct materials purchases 189000 239000

Cost per pound 3,8 3,8

Total cost of direct material purchase 718200 908200 1626400

Cook Farm Supply Company

Selling and Administrative Budget
For the Six Months Ending June 30, 2017

Quarter 1 Quarter 2 Total

Budgeted sales in units 40000 56000

Variable (15% of Sales) 360000 504000 864000

Fixed cost 175000 175000 350000

Total 535000 679000 1214000

Calculate total cost per bag

Direct materials Quantity Unit cost Total

Gumm 4 pounds 3,8 15,2

Tarr 6 pounds 1,5 9

Direct labor 0,25 hour 16 4

Manufacturing overhead (125% of 5

direct labor cost)

Cost per bag $33,2

Calculate COGS

Cook Farm Supply Company

Budgeted Cost of Goods Sold

Quarter 1 Quarter 2 Total

Budgeted sales units 40000 56000

Budgeted cost of goods sold per unit 33,2 33,2

Cost of goods sold 1328000 1859200 3187200

Cook Farm Supply Company

Budgeted Income Statement
For the Six Months Ending June 30, 2017

Sales Revenue 5760000

Cost of goods sold 3187200

Gross profit 2572800

Selling and administrative expense 1214000

Income from operation 1358800

Interest expense 100000

Income before income taxes 1258800

Income tax expense (30%) 377640

Net income 881160

a)

Deleon Inc.
Sales budget
For the year ending December 31, 2017
 JB 50 JB 60 Total

Expected unit sales 400000 200000

Unit selling price 20 25

Total sale 8000000 5000000 13000000

b)

Deleon Inc.
Production budget
For the year ending December 31, 2017

JB 50 JB 60

Expected unit sales 400000 200000

Add: Desire ending finished goods inventory 30000 15000

Total required units 430000 215000

Less: Beginning finished goods inventory 25000 10000

Required production units 405000 205000

c)

Deleon Inc.
Direct material budget
For the year ending December 31, 2017
 JB 50 JB 60 Total

Units to be produced 405000 205000

Direct material per unit 2 3

Total pounds needed for production 810000 615000

Add: Desire ending direct materials (pounds) 30000 10000

Total materials required 840000 625000

Less: Beginning direct materials (pounds) 40000 15000

Direct materials purchases 800000 610000

Cost per pound $3 $4

Total cost of direct material purchase $2.400.000 $2.440.000 $4.840.000

d)

Deleon Inc.
Direct labor budget
For the year ending December 31, 2017

JB 50 JB 60 Total

Units to be produced 405000 205000

Direct labor time (hours) per unit 0,4 0,6

Total required direct labor hours 162000 123000

Direct labor cost per hour 12 12

Total direct labor cost 1944000 1476000 3420000

e)

Deleon Inc.
Budgeted income statement
For the year ending December 31, 2017

JB 50 JB 60 Total

Sales 8000000 5000000 13000000

Cost of goods sold 5200000 4000000 9200000

Gross profit 2800000 1000000 3800000

Operating expense

Selling expense 560000 360000 920000

Administrative expense 540000 340000 880000

Interest expense 150000

Total 1950000

Income before income taxes 1850000

(Gross profit - total operating expense)

Income tax expense (30%* income before 555000

income taxes)

Net income 1295000

a)
Sales for June: 800000 x (1+5%) = 840000
Sales for July: 840000 x (1+5%) = 882000
COGS for June = 75% x 840000 = 630000
COGS for July = 75% x 882000 = 661500

Suppar Company
Merchandise Purchase Budget

May June

Budgeted cost of goods sold 600000 630000

Add: Desired ending merchandise inventory 63000 66150

Total 663000 696150

Less: Beginning merchandise inventory 60000 63000

Beginning May = Ending April = 10%*600000
Beginning June = Ending May

Require merchandise purchase 603000 633150

b)

Suppar Company
Budgeted income statement

May June

Sales 800000 840000

Cost of goods sold 600000 630000

Gross profit 200000 210000

Operating expense

Sales salaries 35000 35000

Advertising 48000 50400

May (6% x 800000)
June (6% x 840000)

Delivery expense 16000 16800

May (2% x 800000)
June (2% x 840000)

Sales commissions 40000 42000

May (5% x 800000)
June (5% x 840000)
 Rent expense 5000 5000

Depreciation expense 800 800

Utilities 600 600

Insurance 500 500

Interest expense 2000 2000

Total 147900 153100

Income before income taxes 52100 56900

(Gross profit - total operating expense)

Income tax expense (30%* income before 15630 17070

income taxes)

Net income 36470 39830