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Chapter 7Chapter 7The The

Budgeting Budgeting ProcessProcess

Fall 2007Crosson

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Learning Objectives:

Why Budget?Types of BudgetsBudget ProcessBudget Preparation

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Why Budget?Why Budget?If you know where you are If you know where you are

going, going, you’re more likely to get you’re more likely to get there….there….

•Plan•Perform•Evaluate•Communicate

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Capital Expenditure BudgetsCapital Expenditure Budgets–Multiple yearsMultiple years–Long-lived assetsLong-lived assets

Master BudgetsMaster Budgets–Fiscal yearFiscal year–Rolling yearRolling year–Zero-basedZero-based

Types of BudgetsTypes of Budgets

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Budget Budget ProcessProcess

Strategic PlanStrategic Plan ParticipatoryParticipatoryAccountability Accountability Linked to Linked to CompensationCompensation

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Budget PreparationBudget PreparationSales*

Production SAG*

DM Purchases* DL* OH*

COGS IS**Cash B/S

See Figure 2 page 298

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Sales BudgetSales Budget

Sales in unitsSales in unitsx Selling pricex Selling priceSales in dollarsSales in dollars

Next Budgets—Production and SAG!

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Production BudgetProduction BudgetSales in unitsSales in units+ Desired Ending Finished Goods in units+ Desired Ending Finished Goods in units

Total Needs in unitsTotal Needs in units-Beginning Finished Goods in units-Beginning Finished Goods in unitsProduction in unitsProduction in units Next Budgets—

Material Purchases, Direct Labor, and Overhead!

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Production BudgetProduction BudgetSE4. SE4. Prepare the following production budget for Prepare the following production budget for the quarter assuming the company maintains the quarter assuming the company maintains finished goods inventory equal to one half of the finished goods inventory equal to one half of the next month's sales.  Budgeted sales for April are next month's sales.  Budgeted sales for April are 7,000 units. 7,000 units.

January

February

March

Desired sales in units

Desired ending finished goods inventory

Desired total units

Desired Beginning finished goods inventory

Production needs

5,000

2,000

7,000

2,500

4,500

4,000 6,000

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AnswerAnswer::

SE4. SE4. Prepare the following production budget for Prepare the following production budget for the quarter assuming the company maintains the quarter assuming the company maintains finished goods inventory equal to one half of finished goods inventory equal to one half of the next month's sales.  Budgeted sales for the next month's sales.  Budgeted sales for April are 7,000 units. April are 7,000 units.

January

February

March

Desired sales in units Desired ending finished goods inventory Desired total units Desired Beginning finished goods inventory Production needs

5,000

2,000

7,000

2,500

4,500

4,0003,0007,0002,0005,000

6,000

3,5009,5003,0006,500

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Production Budget with a Production Budget with a twist…Look and listen E8.twist…Look and listen E8.

E 8. Hard Corporation projects the E 8. Hard Corporation projects the following sales:  May $230,000; June following sales:  May $230,000; June $250,000;  July $260,000; and August $250,000;  July $260,000; and August $240,000. $240,000. The company's cost of goods sold The company's cost of goods sold percentage is 65 percent and the desired percentage is 65 percent and the desired inventory level is 25 percent of next inventory level is 25 percent of next month's sales. month's sales.

1.1.The total production budgeted in The total production budgeted in dollars for June should be:_______________ dollars for June should be:_______________ 2.2.The total production budgeted in The total production budgeted in dollars for July should be:_______________ dollars for July should be:_______________

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June Production Budget June Production Budget in in dollarsdollars

COGS in dollars =65% of $250,000COGS in dollars =65% of $250,000+ End. FG in dollars =25%(65% of $260,000)+ End. FG in dollars =25%(65% of $260,000)

Total Needs in dollarsTotal Needs in dollars-Beg. FG in dollars =25%(65%of $250,000)-Beg. FG in dollars =25%(65%of $250,000)Production costs in dollars?=_____Production costs in dollars?=_____****

**Cost Of Goods Manufactured!!!**Cost Of Goods Manufactured!!!

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Material Purchases Material Purchases BudgetBudget

Production in unitsProduction in units+Desired Ending Material Inventory+Desired Ending Material InventoryTotal Needs in unitsTotal Needs in units-Beginning Material Inventory-Beginning Material InventoryMaterial Purchases in unitsMaterial Purchases in unitsx Material cost per unitx Material cost per unitCost of Materials PurchasedCost of Materials Purchased

Next Budget—Cash!

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Cost of Goods Sold Cost of Goods Sold PreparationPreparation

Beginning Finished Goods Beginning Finished Goods in $$in $$

+Cost of Goods Manufactured +Cost of Goods Manufactured in $$in $$

Cost of Goods Available for Sale Cost of Goods Available for Sale in $$in $$

-Ending Finished Goods -Ending Finished Goods in $$in $$

Cost of Goods Sold Cost of Goods Sold in $$in $$

Next Budget—Income Statement

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What Do You Know?What Do You Know?Budget PreparationBudget Preparation

E4E4P2P2

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Cash BudgetsCash BudgetsCash Receipts-Cash DisbursementsChange in Cash+Beginning Cash+Borrowings-Repayments________________Desired Ending Cash Balance

Look and listen SE9. Alberta Limited needs a cash budgetcash budget for the month of November.  The following information is available:

The cash balance on November 1 is $6,000. Sales for October and November are $80,000 and $60,000 respectively.  Cash collections on sales are 30 percent in the month of sale, 65 percent in the following month, and 5 percent uncollectible. General expenses are budgeted to be $25,000 for November (depreciation represents $2,000 of this amount). Inventory purchases will total $30,000 in October and $40,000 in November.  Half of the inventory purchases are always paid for in the month of purchase.  The remainder are paid for in the following month. Office furniture costing $4,000 will be purchased for cash in November, and sales commissions are budgeted at $12,000 for November. The company must maintain a minimum ending cash balance of $4,000 and can borrow from the bank in multiples of $100.  All loans are repaid after 60 days.

Prepare a cash budget in good form for Alberta Limited for November. 

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Answer:Answer:Cash Receipts=$-Cash Disbursements=$Change in Cash=$+Beginning Cash $6,000+Borrowings $?-Repayments $0_________________Desired Ending Cash Balance >$4,000

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What Do You Know?What Do You Know?Cash BudgetsCash Budgets

SE7SE8E11E12E13E14

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Homework Homework

P2P2

P3P3