the mcgraw-hill companies, inc. 2006mcgraw-hill/irwin bis budgeting information system

The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin

BISBudgeting Information System


15-2

Key Purposes of the Budgeting System

The five primary purposes are:The five primary purposes are:1.1. Planning. Planning.

2.2. Facilitating Communication and Coordination.Facilitating Communication and Coordination.

3.3. Allocating Resources.Allocating Resources.

4.4. Managing Financial and Operational Managing Financial and Operational Performance.Performance.

5.5. Evaluating Performance and Providing Evaluating Performance and Providing Incentives.Incentives.


15-3

International Aspects of Budgeting

Firms with international operations face a variety of Firms with international operations face a variety of additional challenges in preparing their budgets . . .additional challenges in preparing their budgets . . .

1.1. Translation of foreign currencies into local Translation of foreign currencies into local currency.currency.

2.2. Budget preparation is difficult when inflation (or Budget preparation is difficult when inflation (or deflation) is high or unpredictable.deflation) is high or unpredictable.

3.3. The economies of all countries fluctuate in The economies of all countries fluctuate in terms of consumer demand, availability of terms of consumer demand, availability of skilled labor, and laws affecting commerce.skilled labor, and laws affecting commerce.

1.1. Translation of foreign currencies into local Translation of foreign currencies into local currency.currency.

2.2. Budget preparation is difficult when inflation (or Budget preparation is difficult when inflation (or deflation) is high or unpredictable.deflation) is high or unpredictable.

3.3. The economies of all countries fluctuate in The economies of all countries fluctuate in terms of consumer demand, availability of terms of consumer demand, availability of skilled labor, and laws affecting commerce.skilled labor, and laws affecting commerce.


15-4

Illustrating the Master Budget

Schedule Title of Schedule

1 Sales Budget

2 Production Budget

3 Direct-Materials Budget

4 Direct-Labor Budget

5 Manufacturing Overhead Budget

6 Selling, General, and Administrative Expense Budget (SG&A)

7 Cash Receipts Budget

8 Cash Disbursements Budget

9 Cash Budget

10 Budgeted Schedule of Cost of Goods Manufactured and Sold

11 Budgeted Income Statement

12 Budgeted Balance Sheet


15-5

The Sales Budget

Detailed schedule showing expected sales for the coming periods

expressed in units and dollars.


15-6

Sales Budget of Collegiate Apparel

Collegiate Apparel Company is preparing budgets for Collegiate Apparel Company is preparing budgets for the year ending December 31, 20x1.the year ending December 31, 20x1.

Budgeted sales are:Budgeted sales are:First quarter First quarter – 15,000 units– 15,000 unitsSecond quarter Second quarter – 5,000 units– 5,000 unitsThird quarterThird quarter – 10,000 units– 10,000 unitsFourth quarter Fourth quarter – 20,000 units– 20,000 units

The selling price is $12 per unit.The selling price is $12 per unit.

Collegiate Apparel Company is preparing budgets for Collegiate Apparel Company is preparing budgets for the year ending December 31, 20x1.the year ending December 31, 20x1.

Budgeted sales are:Budgeted sales are:First quarter First quarter – 15,000 units– 15,000 unitsSecond quarter Second quarter – 5,000 units– 5,000 unitsThird quarterThird quarter – 10,000 units– 10,000 unitsFourth quarter Fourth quarter – 20,000 units– 20,000 units

The selling price is $12 per unit.The selling price is $12 per unit.


15-7

Sales Budget of Collegiate Apparel


15-8

Production Budget

Sales Sales BudgetBudget

ProductionProductionBudgetBudget

Complete

d

Plan of resources needed to meet currentPlan of resources needed to meet currentsales demand and ensure inventory levelssales demand and ensure inventory levels

are sufficient for future sales.are sufficient for future sales.


15-9

Forecasting Production

Rearrange the basic inventory formula as follows . . .

Units inbeginninginventory

Units inbeginninginventory

Requiredproduction

in units

Requiredproduction

in units

Salesin

Units

Salesin

Units

Units in ending

inventory

Units in ending

inventory++ –– ==

Now, solve for required production . . .

Unitsto be

Produced

Unitsto be

Produced==

Salesin

Units

Salesin

Units++

Units in ending

inventory

Units in ending

inventory––

Expectedbeginninginventory

Expectedbeginninginventory


15-10

The Production Budget

Collegiate Apparel wants units in ending finished goods inventory to be 10% of the next quarter’s expected sales in units.

At the beginning of the year, 1,500 completed units were on hand.

During the first quarter of 20x2, 15,000 units are expected to be sold.

Let’s prepare the production budget.Let’s prepare the production budget.

Collegiate Apparel wants units in ending finished goods inventory to be 10% of the next quarter’s expected sales in units.

At the beginning of the year, 1,500 completed units were on hand.

During the first quarter of 20x2, 15,000 units are expected to be sold.

Let’s prepare the production budget.Let’s prepare the production budget.


15-11

The Production Budget

5,000 5,000 × 10% = 500 units× 10% = 500 units5,000 5,000 × 10% = 500 units× 10% = 500 units


15-12

Direct-Materials Budget

Direct materials needed for the budget period Direct materials needed for the budget period can be determined as follows . . .can be determined as follows . . .

RequiredRequiredmaterialsmaterials

purchasespurchases

RequiredRequiredmaterialsmaterials

purchasespurchases==

MaterialsMaterialsused inused in

productionproduction

MaterialsMaterialsused inused in

productionproduction++

EndingEndingmaterialsmaterialsinventoryinventory

EndingEndingmaterialsmaterialsinventoryinventory

––BeginningBeginningmaterialsmaterialsinventoryinventory

BeginningBeginningmaterialsmaterialsinventoryinventory


15-13


At Collegiate Apparel 1.5 yards of fabric are required At Collegiate Apparel 1.5 yards of fabric are required per unit of product.per unit of product.

Management wants fabric on hand at the end of each Management wants fabric on hand at the end of each quarter to be 10% of next quarter’s raw materials quarter to be 10% of next quarter’s raw materials required. On January 1required. On January 1stst, 2,100 yards of fabric are on-, 2,100 yards of fabric are on-hand. During the first quarter of 20x2, Collegiate hand. During the first quarter of 20x2, Collegiate expects 21,000 yards of fabric to be required.expects 21,000 yards of fabric to be required.

Each yard of fabric cost the company $2.Each yard of fabric cost the company $2.

Let’s prepare the direct materials budget.Let’s prepare the direct materials budget.

At Collegiate Apparel 1.5 yards of fabric are required At Collegiate Apparel 1.5 yards of fabric are required per unit of product.per unit of product.

Management wants fabric on hand at the end of each Management wants fabric on hand at the end of each quarter to be 10% of next quarter’s raw materials quarter to be 10% of next quarter’s raw materials required. On January 1required. On January 1stst, 2,100 yards of fabric are on-, 2,100 yards of fabric are on-hand. During the first quarter of 20x2, Collegiate hand. During the first quarter of 20x2, Collegiate expects 21,000 yards of fabric to be required.expects 21,000 yards of fabric to be required.

Each yard of fabric cost the company $2.Each yard of fabric cost the company $2.

Let’s prepare the direct materials budget.Let’s prepare the direct materials budget.


15-14


8,250 8,250 × 10% = 825 units× 10% = 825 units8,250 8,250 × 10% = 825 units× 10% = 825 units


15-15

Direct-Labor Budget

At Collegiate Apparel, each unit produced requires 0.20 hour (12 minutes) of direct labor.

Workers earn a wage rate of $10 per hour regardless of the hours worked. Collegiate Apparel can hire workers as needed to meet production.

Let’s prepare the direct labor budget.Let’s prepare the direct labor budget.


15-16

Direct-Labor Budget


15-17

Cash Receipts Budget At Collegiate Apparel all sales are made on

account.

The company collects 80% of its billings in the quarter of the sale, 18% in the following quarter. The remaining two percent of each quarter’s sales are expected to be uncollectible.

Sales in the last quarter of 20x0 were $240,000.

Let’s prepare the Cash Receipts Budget.


15-18

Cash Receipts Budget

$240,000 $240,000 × 18% = $43,200× 18% = $43,200$240,000 $240,000 × 18% = $43,200× 18% = $43,200

$180,000 $180,000 × 2% = $3,600× 2% = $3,600$180,000 $180,000 × 2% = $3,600× 2% = $3,600

$180,000 $180,000 × 18% = $32,400× 18% = $32,400$180,000 $180,000 × 18% = $32,400× 18% = $32,400


15-19

Cash Payments for Direct-Materials At Collegiate Apparel all purchases of raw

materials are made on account.

The company pays for 60% of its purchases in the quarter of the purchase and the remaining 40% in the following quarter.

Purchases in the last quarter of 20x0 were $56,850.

Let’s prepare the Cash Receipts Budget.


15-20

Cash Payments for Direct-Materials

$18,150 $18,150 × 60% = $10,890× 60% = $10,890$18,150 $18,150 × 60% = $10,890× 60% = $10,890$39,450 $39,450 × 40% = $15,780× 40% = $15,780$39,450 $39,450 × 40% = $15,780× 40% = $15,780


15-21

How It All Fits Together

Sales forecastProduction

budgetSG&Abudget

Required directmaterials, labor

and mfg. overheadbudgets

Budgetedincome

statement


15-22



budgetSG&A

budget



Budgeted costof goods mfg.

and sold

Budgetedincome

statement


15-23



budgetSG&A

budget



Budgeted costof goods mfg.

and sold

Budgetedincome

statement

Cash budget

Budgeted balancesheet


SOFTWARES AVAILABLE

15-24

the mcgraw-hill companies, inc. 2006mcgraw-hill/irwin bis budgeting information system

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