Hilton Maher Selto

15
Budgeting & Financial
Planning
McGraw-Hill/Irwin
2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
15-3
Every enterprise has a set of goals
Profitability
Growth
Public
Service
Strategic
Planning
Achieving and
Maintaining
a Competitive
Advantage
CRITICAL SUCCESS
FACTORS
The key strengths that
are most responsible
for making the
organization
successful
Strategic Planning
15-4
Express the specific steps required to achieve
the organizations goals.
Discuss the major capital investments
required to:
Maintain
Present
Facilities
Increase
Capacity
Diversify
Products or
Processes
Develop
Particular
Markets
Strategic Long-Range Plans
15-5
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 budgeting system?
The procedures used to develop a budget
What Are The Key Purposes
Of Budgeting Systems?
15-6
Managing Financial &
Operating Performance
Facilitating
Communication
and Coordination
Evaluating
Performance &
Providing Incentives
Planning
Allocating
Resources
What Are The Key Purposes
Of Budgeting Systems?
15-7
MASTER BUDGET
A comprehensive set of budgets covering all phases of the
organizations operations for a period of time
PRO FORMA FINANCIAL STATEMENTS
Show how the organizations financial statements will appear at a
specified time if operations proceed according to plan
CAPITAL BUDGET
A plan for the acquisition of capital asset
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
Organizations Use Many
Types Of Budgets
15-8
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
15-9
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
companys 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
15-10
The sales level of the prior
year
Sales staff
Market
researchers
Delphi technique
Econometric
models
Starting
Point
Sales Forecasting
15-11
OPERATIONAL BUDGETS
Specify how the companys
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
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
Operational Budgets: Meeting
Demand For Goods & Services
15-12
OPERATIONAL BUDGETS
Specify how the companys operations will be carried
out to meet the demand for its goods or services
Cash
Budget
Shows expected
cash receipts from
selling goods and
services, and
disbursements to pay
bills
Capital
Budget
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: Meeting
Demand For Goods & Services
15-13
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 Sales
Sales Budget
15-14
1st 2nd 3rd 4th Year
Sales in units 15,000 5,000 10,000 20,000 50,000
Add desired ending
inventory of finished
goods 500 1,000 2,000 1,500 1,500
Total units required 15,500 6,000 12,000 21,500 51,500
Less expected
beginning inventory of
finished goods 1,500 500 1,000 2,000 1,500
Units to be produced
14,000 5,500 11,000 19,500 50,000
10% of next quarters
expected sales
10% of first quarter of next
years expected sales of 15,000
Production Budget
Total units required - Expected beginning finished goods inventory =
Units to be produced
Sales in units + Desired ending finished goods inventory = Total units required
15-15
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
Total raw material
required -
Expected
beginning
inventory of raw
material = Raw
material to be
purchased
1st 2nd 3rd 4th Year
Units to be
produced 14,000 5,500 11,000 19,500 50,000
Required per unit
(yards)
x 1.5 x 1.5 x 1.5 x 1.5 x 1.5
Required for
production
(yards) 21,.000 8,250 16,500 29,250 75,000
Add desired
ending inventory
(yards)
825 1,650 2,925 2,100 2,100
Total required 21,825 9,900 19,425 31,350 77,100
Less expected
beginning
inventory (yards)
2,100 825 1,650 2,925 2,100
Purchases (yards) 19,725 9,075 17,775 28,425 75,000
Cost per yard x $2 x $2 x $2 x $2 x $2
Total cost $39,450 18,150 $35,550 $56,850 $150,000
Direct Material Budget
15-16
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.
1st 2nd 3rd 4th Year
Units to be produced 14,000 5,500 11,000 19,500 50,000
Direct-labor required
per unit
x .2 x .2 x .2 x .2 x .2
Total direct-labor hours
required 2,800 1,100 2,200 3,900 10,000
Direct-labor cost per
hour
x $10 x $10 x $10 x $10 x $10
Total direct-labor cost
$28,000 $11,000 $22,000 $39,000 $100,000
Direct-Labor Budget
15-17
Shows the cost of overhead expected to be incurred in
the production process during the budget period
Indirect material
Electricity for machinery
Setup Purchasing &
material handling
Inspection
Supervisory salaries
Insurance and property
taxes Maintenance
Utilities Depreciation
Design
1st 2nd 3rd 4th Year
Unit-level costs $5,600 $2,200 $4,400 $7,800 $20,000
Batch-level
costs $8,400 $3,300 $6,600 $11,700 $30,000
Product-level
costs $1,000 $1,000 $1,000 $1,000 $4,000
Facility and
gen'l operations
level costs
$36,500 $36,500 $36,500 $36,500 $146,000
Total overhead $51,500 $43,000 $48,500 $57,000 $200,000
Less:
depreciation
$15,000 $15,000 $15,000 $15,000 $60,000
Total cash
disbursements
for overhead
$36,500 $28,000 $33,500 $42,000 $140,000
Manufacturing Overhead Budget
15-18
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
Sales commissions
Freight-out
Licensing fees for use of
universities names and logos
Sales salaries, Advertising,
& Clerical wages
Selling, General, & Administration
(SG&A) Expense Budget
15-19
1st 2nd 3rd 4th Year
Sales revenue
$180,000 $60,000 $120,000 $240,000 $600,000
Collections in
quarter of sale $144,000 $48,000 $96,000 $192,000 $480,000
Collections in
quarter following
sale 43,200 32,400 10,800 21,600 108,000
Total cash receipts
$187,200 $80,400 $106,800 $213,600 $588,000
Details the expected cash collections during a budget period
80% of revenue
18% x $240,000 (prior
quarters revenue)
Cash Receipts Budget

15-20
2nd quarter
X 80%
$48,000
$32,400
$80,400
X 18%
$180,000 $60,000
1st quarter
Total cash receipts
($48,000 + $32,400)
Collections in quarter
following sale (18% of
sales)
Collections in quarter
of sale (80% of sales)
Total revenue
Uncollectible accounts
2% X $60,000 = $1,200
Budgeting Cash Receipts

15-21
Details 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
quarters
purchases
40% of
prior
quarters
purchases
Cash Disbursements Budget

15-22
2nd quarter
X 60%
$10,890
$15,780
$26,670
X 40%
$39,450 $18,150
1st quarter
Total
($10,890 + $15,780)
Payments made during
the quarter following
(40% of purchases)
Payments made
during the same
quarter as purchases
(60% of sales)
Total purchase
on account
Budgeting Cash Disbursements
15-23
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
The loan
was used for
construction
Details the expected cash receipts and disbursements


Unpaid
principal
x 10%


Cash Budget: Combining
Receipts And Disbursements
15-24
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)
Budgeted Schedule Of Cost Of
Goods Manufactured & Sold
15-25
Shows 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%
Budgeted Income Statement
15-26
Shows the
expected end of
period balances
for the
companys
assets,
liabilities, and
owners equity
Current assets
Cash $26,750
Accounts receivable 43,200
Inventory
Raw material $4,200
Finished goods 13,500
Supplies
2,000
Total inventory
19,700
Total current assets 89,650
Long-lived assets
Building $500,000
Equipment
320,000
Less accumulated depreciation (300,000)
Building and equipment, net of
accumulated depreciation
520,000
Total assets
$609,650
Budgeted Balance Sheet

15-27
Shows the expected end of period balances for the companys
assets, liabilities, and owners 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
15-28
Managers make assumptions and predictions in preparing
budgets because organizations operate in a world of uncertainty
FINANCIAL PLANNING MODEL
a set of mathematical relationships that expresses
the interactions among the various operational,
financial, and environmental events that determine
the overall results of an organizations activities
Uncollectible accounts expense = 2% (Sales revenue)
Uncollectible accounts expense = p (Sales revenue)
The budget staff can
run the financial
planning model as
many times as
desired with p = a
different value each
time
Financial Planning Models
15-29
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
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
15-30
A budget affects virtually everyone in an organization: those who
prepare it, those who use it to facilitate decision-making, and those
who are evaluated using the budget
Budgetary
Slack
Participativ
e
Budgeting
PADDING THE BUDGET
Intentionally
underestimating
revenue or overestimating
costs in order to enhance
the persons performance
evaluation
People perform better and
make greater attempts to
achieve a goal if they have
been consulted in setting
the goals
Behavioral Implications Of
Budget
15-31
END OF
CHAPTER
15