ch.10 - budgeting

types of budgets

• Long range planning

  1. Set long term goals

  2. Strategies to achieve those goals

  3. Plans to implement the strategies

     1. Strategic budget

        1. Goals used to develop a long range plan

  4. Anticipate market trends

• Master budget

  • AKA  pro forma financial statement

  • Set up budgets that summarizes the goals of all of the subunits in the company

  • Consists of two classes

    • Operating

      • smaller Budgets used to prepare the budgeted income statement

      • need rev. and cash collections to make

    • Financial

      •  capital expenditure budget

      • Cash budget

      • Budgeted balance sheet

• Continuous or rolling budget

  • Updating the budget every month

pros of budgets

• Requires all levels of management to plan ahead and form goals on a continuous basis

• There are objectives to evaluate performance at each level of responsibility

• Creates a warning system for potential problems

• Communication and coordination is easier within the organization because you all have similar goals

• Management has greater awareness of overall operations and the impact of the external environment

• Motivates personnel

master budget components

• Sales budget

  • Other budgets stem from this one

• Production budget

  • You should know how much you are able to sell before you decide on how much to produce

• DM purchases budget

• DL budget

• MOH budget

• Ending FG inventory budget

• Selling and administrative budget

• Cash budget

  • Wages and salaries to personnel

• Budgeted i/s

• Budgeted balance sheet

sales forecasting

• Aka the cornerstone of all budgeting

  • Cuz every budget is based on what is forecasted

• Usually determined by marketing

• Find the sales for that industry and then what the company's share of those sales would be

• A prediction of sales(A forecast) under a set of conditions

  • Realistic

  • Optimistic

  • Pessimistic

• As you get closer to the time period, you pick a forecast and implement it for the sales budget

sales forecasting error

Q:

Suppose actual total revenue $480,000, not the $405,000 shown in this budget.

Suppose also that prices were stable. Costs would differ significantly from budgeted amounts in which of these budgets: direct materials budget, overhead budget, selling and administrative expense budget.?

A: In the situation where the actual revenue is higher than the budgeted revenue significantly, that means that the wrong sales forecast was used which affects every budget.

• In this case, the price is the same but revenue has gone up which means that sales units has increased which will make for higher variable costs for the period

Factors to consider when sales forecasting

• Economic conditions

  • Boom or bust

• Past performance

• Industry trends

• Do market research

• Plans for advertising and promotions

  • Will the budget for this increase or decrease?

• What was our previous market share

• The effect of changes in prices

• Technological developments

sales budget

• For each product:

  • expected Sales Volume* expected sales price per unit

• budgeted rev used in I/S and cash budget

• budgeted unit sales used in production budget

production budget

• Want to find out the total units that need to be produced

• Total units to be produced = total units to be sold

• Inventories have to do with finished goods

• leads to DM budget, DL budget, and MOH budget

• Budget:

  • expected Sales in units

  • Add: desired ending inventory

  • (Less: expected beginning inventory)

  • = Production requirements

production requirements ex.

expected beginning inventory

• ending balance of the period before/avg cost per unit

40,000 units/$5 = 8,000 units

 

For Jan.:

expected sales in units + desired ending inv. - expected beginning inv.

• desired ending inv. = “maintain a minimum balance of … in fg”

12,000+10,000-8,000 = 14,000

dm budget

• DM that needs to be purchased in the period = DM required for production

  • However purchased will be in dollars, requirements for production will be in units

• Budget:

  • Production requirements

    • Comes from the production budget

  • * DM required per unit

  • = DM required for production

    • This will give you units

  • Add: desired ending inventory

  • (Less: expected beginning inventory)

  • = DM to be purchased

    • DM to be purchased (in units)* price per unit

      • This will give you dollars

DL budget

• Budget:

  • Production requirements

    • Comes from the production budget

  • * DL required per unit

  • = DL required for production

    • This will give you units

  • * DL rate per hour

  • = DL budget

    • This will give you dollars

mfg cost per unit budgeting

• from DM and DL budget

• Budget:

  • DM cost per unit

  • + DL cost per unit

  • +MOH

    • Using the predetermined MOH rate

      • from the DL hours required for production or DM required for production

      • hours or units for ex.

    • also use from the DL required per unit or DM required per unit

      • hours or units for ex.

  • = Manufacturing cost per unit

ending FG budget

• Desired ending inventory* manufacturing cost per unit

budgeted i/s

• Sales

  • Total $ from sales budget

• Less: (COGS)

  • For each product : sales in units * manufacturing cost per unit

• = Gross profit

• Less: operating expenses

  • Like selling and admin

• = Profit before tax

• Taxes

  • Tax rate* profit before tax

• = Profit

cash collections

	Q1	Q2	Q3
Sales budget
Estimated cash collections	From the last quarter of the previous year
Accounts receivable Q1 Q2	Usually given a percentage that will be collected in this quarter	1-Q1%
Cash collections from credit sales
Cash collections

cash collection ex.

• the amount that is expensed in feb. but will be collected in march

  • 225,000*(3/4) = 168,750

• the amount that is expensed and collected march

  • 450,000*(1/4) = 112,500

• total collection for march

  • 168,750+112,500 = 281,250

cash collections ex. a % is cash sales and credit sales are collected the next month

physical cash collection for may:

• 150,000*30% = 45,000

credit sales collected in may = credit sales from april

• 250,000*(1-30%) = 175,000

total collection for may

• 45,000+175,000 = 220,000

ex. cash collection when there is a previous balance

jan. a/p balance from previous period

• $12,000

jan. cash purchase payment

• 15,000*20% = 3,000

jan. credit purchase payment

• credit amount of purchase

  • 15,000-3,000 = 12,000

• how much of the credit amount paid in jan.

  • 12,000*(1/2) = 6,000

total jan payment

• make sure to include a/p balance from previous period

12,000+3,000+6,000 = 21,000

budgeting admin

• Levels:

  • Budget officer

    • aka chief budget officer

    • Specifies how the budget will be compiled

  • Budget manual

    • Specifies details on budget information

      • Who is responsible

      • When is it required

      • The form of the information

  • Budget committee

    • Appointed committee that advises the budget director

• The amount of levels you have depends on the size of the company

  • Can have none

  • Multinational companies would need all three

budgeting ethics

• Managers are usually rewarded for staying under the budget

• but when costs are defined as cash payments for DM, DL, MOH

  • Managers will increase their payables which would decrease cash payments for the current period

  • There are ways to manipulate the accounting to reflect being under the budget

business ethics ex.

Q: manager does not participate in the budgeting process. The manager will be paid a bonus equal to ten percent of actual sales revenue in 2008. If the manager responds unethically to the bonus plan, what problem(s) for Healthworks, Inc could arise?

A: If the bonus is connected to the revenue then the likely course the manager will take is being neglectful in terms of costs which is bad for the company

participative budget

• Managers and employees are integrated into the budgeting process

• Pros

  • Managers have information and expertise that upper management might not have

  • Good for morale

    • Managers are less motivated if they're being told what to do rather than if they are sticking to a plan that they were a part of making

• cons

  • can add too much padding so that easier to meet goals

  • more time consuming and costly

padding the budget

• Setting budgetary goals that are easy to attain

• Easily attained goals - realistic goals = budgetary slack

• Used to deal with uncertainties

• only if there is participative budgeting

ex. of the effects of padding the budget

Q:

sales price of these devices has been very stable over the last three years.If this manager padded his or her budget, what row of numbers in the budget would likely be affected most directly? Are these numbers likely to be above or below the manager's expectations?

A: The most affected row is the sales in units because a padded budget Lowers expectations which would mean less production

zero based budgeting

• Developing a budget for each activity as if the company is in its first year of operations

  • So amounts from the previous period are not carried forward

• This happens every few periods

a big ex.

big ex. sales budget

• • 

big ex. production budget

big ex. dm budget

• For paper boards

  • DM required per box

    • C

      • 70 LBS per 100 boxes = 70 / 100 = 0.7

    • P

      • 30 LBS per 100 boxes = 30 / 100 = 0.3

	Box type C	Box type P	Total
Production requirements	495,000	495,000
DM required per box	*0.3	* 0.7
DM required for production	148,500 lbs	346,500 lbs	495,000 lbs
Add: desired ending inventory			5000
Less: expected beginning inventory			(15,000)
DM to be purchased			485,000 * $0.20 = 97,000

• For corrugating medium

  • DM required per box

    • C

      • 20 LBS per 100 boxes = 20 / 100 = 0.2

    • P

      • 30 LBS per 100 boxes = 30 / 100 = 0.3

	Box type C	Box type P	Total
Production requirements	495,000	495,000
DM required per box	* 0.2	* 0.3
DM required for production	495,000 * 0.2 = 99,000	495,000 * 0.3 = 148,500.0	99,000 + 148,500 = 247,500
Add: desired ending inventory			10,000
Less: expected beginning inventory			(5000)
DM to be purchased			247,500 + 10,000-5000 = 252500 then 252,500 * 0.1 = 25,250

big ex. DL budget

	Box type C	Box type P	Total
Production requirements	495,000	495,000
DL required per box	0.25 / 100 = 0.0025	0.5 / 100 = 0.005
DL hours required for production	495,000 * 0.0025 = 1,237.5	495,000 * 0.005 = 2,475.0	1237.5 + 2475 = 3712.5
DL rate per hour			12
DL budget amount			3712.5 * 12 = $44550

big ex. mfg cost / unit budget

		Box type C	Box type P
DM cost per unit: Paperboards		0.3 * 0.2 = 0.06 0.3 lbs  *   0.2 box              lbs	0.7*0.2 = 0.14  0.7 lbs  *  0.2 box            lbs
corrugating medium		0.2*0.1 = 0.02 0.2 lbs  *   0.1 box              lbs	0.3*0.1 = 0.03 0.3 lbs  *   0.1 box              lbs
DL cost per unit		0.0025*12 = 0.03 0.0025 hrs  *   12 box                    hrs	0.005*12 = 0.06 0.005 hrs  *   12 box                 hrs
Pred. MOH rate	148,500/3712.5 = 40
MOH		0.0025*40 = 0.1	0.005*40 = 0.2
mfg cost/unit		0.06 + 0.02 + 0.03 + 0.1 = 0.21	0.14 + 0.03 + 0.06 + 0.2 = 0.43

big ex. ending fg. inv.

• C

  • 5000 *0.21 = 1050

• P

  • 15,000 * 0.43 = 6,450.0

big ex. budgeted i/s