Budgeting

for Planning
and Control
Prepared
Preparedby
by
Douglas
DouglasCloud
Cloud
Pepperdine
PepperdineUniversity
University

8-1
 Objectives
Objectives
1. Define budgeting, and discuss its role in planning,
After
After studying
studying this
this
controlling, and decision making.
chapter,
chapter, you
you should
should
2. Prepare the operating budget, identify its major
be
be able
able to:
to:interrelationships of
components, and explain the
the various components.
3. Identify the components of the financial budget,
and prepare a cash budget.
4. Describe the budgets for merchandise and service
firms.

8-2
 Planning:

Strategic Plan
The Master Budget
and Its
Long-Term Interrelationships
Objectives
F
e Short-Term Control:
e Objectives
d Compare actual results
b with planned amounts
a Budgets
c
k Operations

Production,
Service, and Sales
8-3
 Purposes
Purposes of
of Budgeting
Budgeting
1. It forces managers to plan.
2. It provides resource information that can be
used to improve decision making.
3. It provides a standard for performance
evaluation.
4. It improves communication and
coordination.

8-4
Two
Two Dimensions
Dimensions of
of Budgeting
Budgeting

1. How is the budget

prepared?
2. How is the budget
used to implement the
organization’s plan?

8-5
Preparing
Preparing the
the Operating
Operating Budget
Budget
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Ending finished goods inventory budget
7. Cost of goods sold budget
8. Marketing expense budget
9. Research and development budget
10. Administrative expense budget
11. Budgeted income statement
8-6
 Schedule 1 (in thousands)
ABT, Inc.
Sales Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Units 2,000 6,000 6,000 2,000 16,000
Unit selling price x $0.70 x $0.70 x $0.80 x $0.80 x $0.75
Sales $ 1,400 $ 4,200 $ 4,800 $ 1,600 $12,000

The sales forecast is the basis for the sales budget.

The accuracy of the sales forecast strongly affects the
soundness of the entire master budget.
8-7
 Computing Units to be Produced

Units to be produced = Expected unit sales +

Units, ending inventory
– Units, beginning
inventory

8-8
 Schedule 2 (in thousands)
ABT, Inc.
Production Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Sales (Schedule 1) 2,000 6,000 6,000 2,000 16,000
Desired ending
inventory 500 500 100 100 100
Total needs 2,500 6,500 6,100 2,100 16,100
Less: Beginning
inventory 100 500 500 100 100
Units to be produced 2,400 6,000 5,600 2,000 16,000

8-9
 Schedule 3 (in thousands)
ABT, Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Units to be produced
(Schedule 2) 2,400 6,000 5,600 2,000 16,000
Direct materials per
unit (lbs.) x 26 x 26 x 26 x 26 x 26
Production needs 62,400 156,000 145,600 52,000 416,000
Desired ending
inventory (lbs.) 8,000 8,000 5,000 5,000 5,000
Total needs 70,400 164,000 150,600 57,000 421,000

Continued
Continued
8-10
 Quarter
1 2 3 4 Year
Total needs 70,400 164,000 150,600 57,000 421,000
Less beginning
inventory 5,000 8,000 8,000 5,000 5,000
Direct materials to
be purchased (lbs.) 65,400 156,000 142,600 52,000 416,000
Cost per pound x $0.01 x $0.01 x $0.01 x $0.01 x $0.01
Total purchase
cost $ 654 $ 1,560 $ 1,426 $ 520 $ 4,160

8-11
 Schedule 4 (in thousands)
ABT, Inc.
Direct Labor Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Units to be produced
(Schedule 2) 2,400 6,000 5,600 2,000 16,000
Direct labor time
per unit (hrs.) x 0.015 x 0.015 x 0.015 x 0.015 x 0.015
Total hours needed 36 90 84 30 240
Wage per hour x $8 x $8 x $8 x $8 x $8
Total direct labor
cost $ 288 $ 720 $ 672 $ 240 $ 1,920

8-12
 Schedule 5 (in thousands)
ABT, Inc.
Overhead Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Budgeted direct labor
hours (Schedule 4) 36 90 84 30 240
Variable overhead
rate x $8 x $8 x $8 x $8 x $8
Budgeted variable
overhead $288 $ 720 $672 $240 $1,920
Budgeted fixed
overhead 320 320 320 320 1,280
Total overhead $608 $1,040 $992 $560 $3,200

8-13
 Schedule 6 (in thousands)
ABT, Inc.
Ending Finished Goods Inventory Budget
For the Year Ended December 31, 2004
Unit-cost computation:
Direct materials (26 lbs. @ $0.01) $0.26
Direct labor (0.015 hr. @ $8) 0.12
Overhead:
Variable (0.015 hr. @ $8) 0.12
Fixed (0.015 hr. @ $5.33) 0.08
Total unit cost $0.58
Units Unit Cost Total
Finished goods: Concrete blocks 100 $0.58 $58

8-14
 Schedule 7 (in thousands)
ABT, Inc.
Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Direct materials used (Schedule 3) $4,160
Direct labor used (Schedule 4) 1,920
Overhead (Schedule 5) 3,200
Budgeted manufacturing costs $9,280
Beginning finished goods 55
Goods available for sale $9,335
Less: Ending finished goods (Schedule 6) 58
Budgeted cost of goods sold $9,277

8-15
 Schedule 8 (in thousands)
ABT, Inc.
Marketing Expense Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Planned sales in units
(Schedule 1) 2,000 6,000 6,000 2,000 16,000
Variable marketing
expenses per unit x$0.05 x$0.05 x$0.05 x$0.05 x$0.05
Total variable
expenses $ 100 $ 300 $ 300 $ 100 $ 800

Continued
8-16
 Quarter
1 2 3 4 Year

Fixed marketing
expenses:
Salaries $ 10 $ 10 $ 10 $ 10 $ 40
Advertising 10 10 10 10 40
Depreciation 5 5 5 5 20
Travel 3 3 3 3 12
Total fixed expenses $ 28 $ 28 $ 28 $ 28 $112
Total marketing
expenses $128 $328 $328 $128 $912

8-17
 Schedule 9 (in thousands)
ABT, Inc.
Research and Development Expenses Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Sales $18 $18 $18 $18 $ 72
Prototype design and
development 10 10 10 10 40
Total R & D
expenses $28 $28 $28 $28 $112

8-18
 Schedule 10 (in thousands)
ABT, Inc.
Administrative Expense Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Salaries $25 $25 $25 $25 $100
Insurance --- --- 15 --- 15
Depreciation 10 10 10 10 40
Travel 2 2 2 2 8
Total administrative
expenses $37 $37 $52 $37 $163

8-19
 Schedule 11 (in thousands)
ABT, Inc.
Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Sales (Schedule 1) $12,000
Less: Cost of goods sold (Schedule 7) 9,277
Gross margin $ 2,723
Less: Marketing expenses (Schedule 8) -912
R & D expenses (Schedule 9) -112
Administrative expenses (Schedule 10) -163
Operating income $ 1,536
Less: Interest expense (Schedule 12) 42
Income before taxes $ 1,494
Less: Income taxes 600
Net income $ 894

8-20
 Schedule 11 (in thousands)
ABT, Inc.
Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Sales (Schedule 1) $12,000
Less: Cost of goods sold (Schedule 7) 9,277
Gross margin $ 2,723
Less: Marketing expenses (Schedule 8) -912
R & D expenses (Schedule 9) -112
Administrative expenses (Schedule 10) -163
Operating income $ 1,536
Less: Interest expense (Schedule 12) 42
Income before taxes $ 1,494
Less: Income taxes 600
Net income $ 894
8-21
 The
The Financial
Financial Budgets
Budgets

The usual financial budgets prepared are:

 The cash budget

 The budgeted balance sheet

 The budgeted statement of cash flows

 The budget for capital expenditures

8-22
 The
The Cash
Cash Budget
Budget
Beginning cash balance
+ Cash receipts
Cash available
- Cash disbursements
- Minimum cash balance
Excess or deficiency of cash
- Repayments
+ Loans
+ Minimum cash balance
Ending cash balance
8-23
 Schedule 12 (in thousands)
ABT, Inc.
Cash Budget
For the Year Ended December 31, 2004
Quarter
1 2 3 4 Year
Beginning cash balance $ 120 $ 113 $ 152 $1,334 $ 120
Cash collections 1,490 3,780 4,710 2,080 12,060
Total cash available $1,610 $3,893 $4,862 $3,414 $12,180

Total disbursements $2,097 $3,317 $3,310 $2,079 $10,803

Minimum cash balance 100 100 100 100 100
Total cash needs $2,197 $3,417 $3,410 $2,179 $10,903

Excess (deficiency) of cash -$ 587 $ 476 $1,452 $1,235 $ 1,277

Add: Borrowings 600 --- --- --- 600
Less: Repayments --- 400 200 --- 600
Less: Interest paid --- 24 18 --- 42
Ending cash balance $ 13 $ 52 $1,234 $1,235 $ 1,235
Plus: Minimum cash balance 100 100 100 100 100
Ending cash balance $ 113 $ 152 $1,334 $1,335 $ 1,335

8-24
 ABT, Inc.
Schedule of Cash Receipts (in thousands)
Source Quarter 1 Quarter 2 Quarter 3 Quarter 4
Cash sales $ 700 $2,100 $2,400 $ 800
Received on
account from sales in:
Quarter 4, 2003 300
Quarter 1, 2004 490 210
Quarter 2, 2004 1,470 630
Quarter 3, 2004 1,680 720
Quarter 4, 2004 560
Total cash receipts $1,490 $3,780 $4,710 $2,080

8-25
 ABT, Inc.
Balance Sheet (in thousands)
December 31, 2003
Assets
Current assets:
Note
Notethat
thatthis
thisisisthe
the
Cash $ 120
actual balance sheet
Accounts receivableactual balance sheet 300
for
for2003
2003
Material inventory 50
Finished goods inventory 55
Total current assets $ 525
Property, plant, and equipment:
Land $2,500
Building and equipment 9,000
Accumulated depreciation -4,500
Total property, plant, and equipment 7,000
Total assets $7,525
Continued
Continued
8-26
 Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 100
Stockholders’ equity:
Common stock, no par $ 600
Retained earnings 6,825
Total stockholders’ equity 7,425
Total liabilities and stockholders’ equity $7,525

8-27
 Schedule 13 (in thousands)
ABT, Inc.
Budgeted Balance Sheet
December 31, 2004
Assets
Current assets:
Cash $1,335
Accounts receivable 240
Material inventory 50
Finished goods inventory 58
Total current assets $1,683
Property, plant, and equipment:
Land $2,500
Building and equipment 9,600
Accumulated depreciation -5,360
Total property, plant, and equipment 6,740
Total assets $8,423
Continued
Continued 8-28
 Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 104
Stockholders’ equity:
Common stock, no par $ 600
Retained earnings 7,719
Total stockholders’ equity 8,319
Total liabilities and stockholders’ equity $8,423

8-29
 End of

Chapter

8-30
8-31