Lecture 7 Slides

Introduction to Budgeting

• Management Accounting (ACC5040): Focused on the budgeting process, critical for organized financial planning.

• Lecture 7: Continuation of Chapter 15.

Session's Agenda

1. Lecture 6 Recap: Overview of previous discussions on budgeting.

2. Manufacturing Overhead Budgets: Examination of costs associated with production.

3. Operating Expenses Budget: Estimation of non-manufacturing costs.

4. Moodle Quiz 2: Assessment of knowledge covered so far.

Lecture 6 Recap

• A brief overview of key points from Lecture 6, reinforcing previously discussed concepts.

Defining a Budget

• Budget: A quantitative expression of a proposed plan of action by management for a specified period.

  • Serves as a tool to coordinate necessary steps for plan implementation.

  • Includes both financial and nonfinancial data.

Strategic Planning in Budgeting

• Long-Run and Short-Run Planning: Differentiation between strategic (long-term) and operating (short-term) plans.

  • Long-Run Budgets: Associated with strategic goals.

  • Short-Run Budgets: Focus on immediate operational plans.

The Budgeting Process

• Master Budget Preparation: Central aspect of the budgeting process.

  • Components:

    • Operating (Production) Budget: Foundation for the budgeted income statement.

    • Financial Budget: Derived from the operating budget, leading to the budgeted balance sheet and cash flows statement.

Operating (Production) Budget Overview

• Foundational Building Blocks:

  • Materials: Costs associated with raw materials used in production.

  • Labor: Direct labor costs associated with manufacturing.

  • Factory Overhead Budget: Indirect costs that support production.

  • SG&A Budget: Selling, General, and Administrative expenses.

  • Sales Budget: Estimated sales that inform production needs.

Steps in Creating the Basic Operating (Production) Budget

1. Sales/Revenues Budget: Estimate of expected sales.

2. Production Budget: Number of units to produce based on sales forecasts.

3. Direct Materials Usage Budget: Determine material needs for production.

4. Direct Manufacturing Labor Budget: Estimate labor hours and costs.

5. Manufacturing Overhead Costs Budget: Budget for all overhead costs.

6. Operating Expense Budget: Budget for fixed and variable period costs.

7. Budgeted Income Statement: Final revenue and expense projections.

Steps in Creating the Basic Financial Budget

• Based on Operating Budgets:

  1. Capital Expenditures Budget: Planned investments in physical assets.

  2. Cash Budget: Projections of cash inflows and outflows.

  3. Budgeted Balance Sheet: Expected financial position at the budgeting period's end.

  4. Budgeted Statement of Cash Flows: Overview of cash movements during the period.

Manufacturing Overhead & Operating Expense Budgets

• Overhead Budget: Includes budgets for each manufacturing overhead item; lines represent distinct budgets for proper cost tracking.

• Operating Expense Budget: Similar to overhead budget but for non-manufacturing costs, segmented into fixed and variable components.

Exercise 1 Overview

• Rolleter Company: A case study for budget preparation, involving artistic frame production for events.

  • Controller: Bob Anderson is responsible for master budget preparation.

Fixed Manufacturing Overhead Costs Breakdown

• Monthly Fixed Costs: £80,000 per month, detailed as:

  • Rent: £10,000

  • Equipment Depreciation: £20,000

  • Supervision Salaries: £50,000

• Fixed Operating Expenses: Total £60,000 per quarter, includes salaries, advertising, and depreciation.

Budget Preparation Requirements for Rolleter Company

1. Prepare the manufacturing overhead costs budget for Q1 of 2025.

2. Prepare the operating expense budget for Q1 of 2025.

Example Calculations for Budgeting

• For manufacturing overhead costs, including variable costs linked to direct labor hours and production estimates.

• Operating expense calculations to maintain financial viability based on sales estimations.

2nd Moodle Quiz Information

• Date: November 15, 2024

• Content: Covers select topics from decision-making and budgeting process lectures.

• Format: 15 multiple-choice questions, open for 24 hours but to be completed within 40 minutes.

Preparation for Next Week

• Key preparatory actions include:

  • Review Quiz 2 material thoroughly.

  • Submit Coursework Assignment on time.

  • Exercises related to Seminar 8.

  • Attend Lecture 8 on November 12, 2024.