Chapter 3-Bugetary Planning
Chapter 3-Bugetary Planning
Chapter 3-Bugetary Planning
Chapter 3
23-1
23 Budgetary Planning
Learning Objectives
State the essentials of effective budgeting and the components of the
1 master budget.
23-2
LEARNING State the essentials of effective budgeting and
OBJECTIVE 1 the components of the master budget.
Promotes efficiency.
23-3 LO 1
Budgeting and Accounting
23-4 LO 1
The Benefits of Budgeting
23-5 LO 1
The Benefits of Budgeting
Question
Which of the following is not a benefit of budgeting?
a. Management can plan ahead.
b. An early warning system is provided for potential
problems.
c. It enables disciplinary action to be taken at every level of
responsibility.
d. The coordination of activities is facilitated.
23-6 LO 1
Essentials of Effective Budgeting
23-7 LO 1
Essentials of Effective Budgeting
23-8 LO 1
Essentials of Effective Budgeting
23-9 LO 1
Essentials of Effective Budgeting
2. Industry trends
6. Price changes
7. Technological developments
23-10 LO 1
Essentials of Effective Budgeting
23-11 LO 1
BUDGETING AND HUMAN BEHAVIOR
Participative Budgeting
Advantages:
► More accurate budget estimates because lower level
managers have more detailed knowledge of their area.
► Tendency to perceive process as fair due to
involvement of lower level management.
Overall goal - produce budget considered fair and
achievable by managers while still meeting corporate
goals.
23-12 LO 1
BUDGETING AND HUMAN BEHAVIOR
Participative Budgeting
Disadvantages:
► Can be time consuming and costly.
► Can foster budgetary “gaming” or slack
23-13 LO 1
BUDGETING AND HUMAN BEHAVIOR
Illustration 23-1
Flow of budget data under
participative budgeting
23-14 LO 1
Essentials of Effective Budgeting
23-15 LO 1
Essentials of Effective Budgeting
Question
The essentials of effective budgeting do not include:
a. Top-down budgeting.
b. Management acceptance.
c. Research and analysis.
d. Sound organizational structure.
23-16 LO 1
The Master Budget
23-17 LO 1
The Master Budget
23-18 LO 1
The
Master
Budget
Illustration 23-2
Components of the
master budget
23-19 LO 1
DO IT! 1 Budget Terminology
23-20 LO 1
DO IT! 1 Budget Terminology
23-21 LO 1
DO IT! 1 Budget Terminology
Sales Budget
First budget prepared.
Derived from the sales forecast.
► Management’s best estimate of sales revenue for
the budget period.
Every other budget depends on the sales budget.
Prepared by multiplying expected unit sales volume for
each product times anticipated unit selling price.
23-23 LO 2
Sales Budget
23-24 LO 2
Class work
Goody Company estimates that unit sales will
be 10,000 in quarter 1; 12,000 in quarter 2;
14,000 in quarter 3; and 18,000 in quarter 4.
Using a sales price of $80 per unit, prepare
the sales budget by quarters for the year
ending December 31, 2010.
23-25
Production Budget
Illustration 23-4
Production requirements
formula
23-26 LO 2
Production Budget
Hayes Co. believes it can meet future sales needs with an ending
inventory of 20% of next quarter’s budgeted sales volume.
Illustration 23-5
Production budget
23-27 LO 2
Direct Materials Budget
Illustration 23-6
23-28 LO 2
Direct Materials Budget
Illustration 23-7
Direct materials budget
23-30 LO 2
Sales, Production, and Direct
DO IT! 2 Materials Budgets
Soriano Company is preparing its master budget for 2017. Relevant data
pertaining to its sales, production, and direct materials budgets are as
follows:
Sales: Sales for the year are expected to total 1,200,000 units. Quarterly
sales are 20%, 25%, 30%, and 25% respectively. The sales price is
expected to be $50 per unit for the first three quarters and $55 per unit
beginning in the fourth quarter. Sales in the first quarter of 2018 are
expected to be 10% higher than the budgeted sales for the first quarter of
2017.
Production: Management desires to maintain ending finished goods
inventories at 25% of next quarter’s budgeted sales volume.
Direct materials: Each unit requires 3 pounds of raw materials at a cost
of $5 per pound. Management desires to maintain raw materials
inventories at 5% of the next quarter’s production requirements. Assume
the production requirements for the first quarter of 2018 are 810,000
pounds.
23-31 LO 2
Sales, Production, and Direct
DO IT! 2 Materials Budgets
23-32 LO 2
Sales, Production, and Direct
DO IT! 2 Materials Budgets
23-33 LO 2
Sales, Production, and Direct
DO IT! 2 Materials Budgets
Prepare the sales, production, and direct materials budgets.
23-34 LO 2
Prepare budgets for direct labor, manufacturing
LEARNING
OBJECTIVE 3 overhead, and selling and administrative expenses,
and a budgeted income statement.
Illustration 23-8
Formula for direct labor cost
23-35 LO 3
Direct Labor Budget
Illustration 23-9
23-36 Direct labor budget LO 3
Manufacturing Overhead Budget
23-37 LO 3
Manufacturing Overhead Budget
23-38 LO 3
Illustration 23-10
23-39 LO 3
Selling and Administrative Expense
Budget
23-40 LO 3
Illustration 23-11
Selling and administrative
expense budget
23-41 LO 3
Budgeted Income Statement
23-42 LO 3
Budgeted Income Statement
23-43 LO 3
Budgeted Income Statement
Illustration: All data for the income statement come from the
individual operating budgets except the following: (1) interest
expense is expected to be $100, and (2) income taxes are
estimated to be $12,000. Illustration 23-13
Budgeted multiple-step income statement
23-44 LO 3
Budgeted Income Statement
Question
Each of the following budgets is used in preparing the budgeted
income statement except the:
a. Sales budget.
b. Selling and administrative budget.
c. Capital expenditure budget.
d. Direct labor budget.
23-45 LO 3
DO IT! 3 Budgeted Income Statement
23-46 LO 3
DO IT! 3 Budgeted Income Statement
Soriano Company is preparing its master budget for 2017. Relevant data
pertaining to its sales, production, and direct materials budgets are as
follows:
Sales: Sales for the year are expected to total 1,200,000 units. Quarterly
sales are 20%, 25%, 30%, and 25% respectively. The sales price is
expected to be $50 per unit for the first three quarters and $55 per unit
beginning in the fourth quarter. Sales in the first quarter of 2018 are
expected to be 10% higher than the budgeted sales for the first quarter of
2017.
Production: Management desires to maintain ending finished goods
inventories at 25% of next quarter’s budgeted sales volume.
Direct materials: Each unit requires 3 pounds of raw materials at a cost
of $5 per pound. Management desires to maintain raw materials
inventories at 5% of the next quarter’s production requirements. Assume
the production requirements for the first quarter of 2018 are 810,000
pounds.
23-47 LO 3
DO IT! 3 Budgeted Income Statement
Calculate the budgeted total unit cost and prepare the budgeted
income statement for 2017.
(a)
23-48 LO 3
DO IT! 3 Budgeted Income Statement
Calculate the budgeted total unit cost and prepare the budgeted
income statement for 2017.
(b)
23-49 LO 3
LEARNING Prepare a cash budget and a budgeted
4
OBJECTIVE balance sheet.
Cash Budget
Shows anticipated cash flows.
Often considered to be the most important output in
preparing financial budgets.
Contains three sections:
► Cash Receipts
► Cash Disbursements
► Financing
Shows beginning and ending cash balances.
23-50 LO 4
Cash Budget
Illustration 23-14
Basic form of a cash budget
23-51 LO 4
Cash Budget
23-53 LO 4
Cash Budget
23-54 LO 4
Cash Budget
23-55 LO 4
Cash Budget
23-56 LO 4
Cash Budget
Illustration 23-15
Collections from customers
23-57 LO 4
Cash Budget
23-58 LO 4
23-59 Illustration 23-17 LO 4