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© 2014 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any
manner. This document may not be copied# scanned# duplicated# orwarded# distributed# or posted on a website# in whole or part.
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIACnthia J. !oone, Ph.D., CPA
Copyright © 2014 by The McGraw-Hill Companies, Inc !ll rights reser"e# McGraw-Hill$Irwin
Planning and Budgeting
Chapter 13
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13-3
Learning Objectives
LO 13-1 "nderstand the role o# bud$ets in o%erall or$ani&ation 'lans.
LO 13-2 "nderstand the im'ortan(e o# 'eo'le in the bud$etin$ 'ro(ess.
LO 13-3 )stimate sales.
LO 13-4 De%elo' 'rodu(tion and (ost bud$ets.LO 13-5 )stimate (ash #lows.
LO 13-6 De%elo' bud$eted #inan(ial statements.
LO 13-7 )*'lain bud$etin$ in mer(handisin$ and ser%i(e or$ani&ations.
LO 13-8 )*'lain wh ethi(al issues arise in bud$etin$.
LO 13-9 )*'lain how to use sensiti%it analsis to bud$et under un(ertaint.
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13-4
Budgets
LO 13-1 Understand the role of budgets in overall organization pl
We focus on the planning purpose of the budgetingprocess. For our purposes here, a budget is simply theplan, stated in nancial terms, of how the organization
expects to carry out its activities and meet the nancialgoals established in the planning process.
We show how a master budget is developed and how itts into the overall plan for achieving organization goals.Before we investigate the details of developing a master
budget, we discuss the way that strategic planning canincrease competitiveness and aect global operations.
LO13-1
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13-5
Overall Plan
! master budget is part of an overall organizationplan for the next year made up of threecomponents"#$% the organization goals,
#&% the strategic long'range prot plan, and#(% the tactical short'range prot plan.
)op managers establish broad ob*ectives, which serve asorganization goals that company employees wor+ to achieve.
t is important to detail the specic steps re-uired to achieve thegoals. )hese steps are expressed in a strategic long-range plan.
)he plan for the coming year, which is more specic than long'range plans, is called the master budget, also +nown as the staticbudget, the budget plan, or the planning budget .
LO13-1
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13-6
Organizational and Individual Interaction:
Developing the Master Budget
LO13-1
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Human Element in Budgeting
LO 13-2 Understand the importance of people in the budgeting pro
+r$ani&ation$oals
Indi%idual$oals
Goal (on$ruen(e
Participative Budgeting"se o# in'ut #rom lower and middlemana$ement
em'loees- also (alled grass roots budgeting
LO13-2
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Sales Forecasting
LO 13-3 stimate sales.
ore(astin$ sales is the most di##i(ult as'e(t o# bud$etin$.
Sales sta##
Market resear(hers
Del'hi te(hni/ue
0rend analsis
)(onometri( models
LO13-3
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Forecasting by Sales Staff
!fter evaluating the sales forecasts derivedfrom various sources, the budgeting tas+ forceat /antiago 0ants arrived at the following salesbudget for the next budget year"
LO13-3
LO
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Forecasting Production
LO 13-4 1evelop production and cost budgets.
Be$innin$ balan(e$$
0rans#ers inT%
0rans#ers outT&
1 2 3 )ndin$ balan(e
"nits in be$innin$in%entor
!e/uired'rodu(tion
Bud$etedsales
1 2 3"nits in endin$
in%entor
A 'rodu(tion bud$et is a 'lan o# resour(es needed to meet (urrentsales demand and ensure that in%entor le%els are su##i(ient #or #uturesales.
LO13-4
LO
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Production Budget
4 Mana$ement estimates that there will be 5,666 unitsin be$innin$ in%entor and 75,666 in endin$ in%entor.
4 Santia$o Pants8 sales bud$et is 796,666 units
Bud$etedsales
"nits in endin$in%entor
"nits in be$innin$in%entor
1 2 3!e/uired
'rodu(tion
Rearranging for required productionRearranging for required production
796,666units
75,666units
5,666units
1 2 376,666
units
LO13-4
LO
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Production Budget
LO13-4
LO
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Production Costs
2anufacturingoverhead
1irectmaterials
1irectlabor
Indire(tlabor
Indire(tmaterials
+ther
LO13-4
LO
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Direct Materials Example
LO13-4
LO
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Direct Materials Example
Santia$o Pants)stimated Produ(tion
Materials Data !ard" needed
LO13-4
LO
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13-16
Direct Materials Example
;
;
LO13-4
LO
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13-17
Direct Labor Example
LO13-4
LO
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13-18
Overhead Example
Santia$o PantsS(hedule o# Bud$eted Manu#a(turin$ +%erheador the Bud$et ariable o%erhead needed to 'rodu(t 76,666 units:Indire(t materials and su''lies ? ;6.=6 'er unitMaterials handlin$ ? ;6.@6 'er unit+ther indire(t labor ? ;6.76 'er unit
0otal %ariable o%erhead
i*ed manu#a(turin$ o%erhead su'er%isor labor ;76M,
maintenan(e and re'airs ;56M, 'lant administration ;5M,utilities ;55M, de're(iation ;7@6M, insuran(e ;=6M,'ro'ert ta*es ;96M, and other ;M
0otal manu#a(turin$ o%erhead
; 57,666 9,666; 7,666;7=9,666
;5@@,666;96,666
LO13-4
LO
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13-19
Cost of Goods Sold Example#antiago Pant"
Budgeted #tate$ent of %o"t of &ood" #o'd(or t)e Budget !ear *nded +ece$,er 31
Beginning or.-in-proce"" inventor/0anufacturing co"t"
+irect $ateria'"Beginning inventor/
Purc)a"e"0ateria'" avai'a,'e for $anufacturingLe"" *nding inventor/
ota' direct $ateria'" co"t"+irect 'a,or 0anufacturing over)eadota' $anufacturing co"t"Le"" *nding or.-in-proce""%o"t of good" $anufactureddd Beginning fini")ed good" inventor/Le"" *nding fini")ed good" inventor/%o"t of good" "o'd
35
1715175 5
17 187 68
--
425 --
425 12a
375,
3995
a 0anage$ent e"ti$ate , *"ti$ate 15 unit" 25 va'ue of fini")ed good"
LO13-4
LO
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13-20
Marketing and AdministrativeBudget Example
LO13-4
LO
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13-21
Income Statement Example
LO13-4
LO
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13-22
Cash Budget
LO 13-5 stimate cash 3ows.0he (ash bud$et is a statement o# (ash on hand at the
start o# the bud$et 'eriod, e*'e(ted (ash re(ei'ts,e*'e(ted (ash disbursements, and the resultin$ (ash
balan(e at the end o# the bud$et 'eriod.
4 Cash re(ei'ts: 2 Colle(tion o# a((ounts re(ei%able 2 Cash sales
2 Sales o# assets 2 Borrowin$ 2 Issuin$ sto(k 2 +ther
13-5
LO
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13-23
Cash Budget
Some (ash disbursements: 2 Materials 'ur(hases 2 Manu#a(turin$ (osts 2 +'eratin$ a(ti%ities
2 Debt re'ament 2 A(/uisition o# new assets 2 In(ome ta*es 2 Di%idends
2 +ther a(ti%ities
13-5
LO
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13-24
Cash Budget#antiago Pant"%a") Budget
(or t)e Budget !ear *nded +ece$,er 31
%a") ,a'ance ,eginning of periodReceipt"
%o''ection" on account"%o''ection" e$p'o/ee 'oan"
ota' receipt"Le"" +i",ur"e$ent"
Pa/$ent" for account" pa/a,'e+irect 'a,or 0anufacturing over)ead 'e"" nonca") depreciation c)arge"0ar.eting and ad$ini"trative co"t" 'e"" nonca") c)arge"
Pa/$ent" for federa' inco$e tae"+ividend"Reduction in 'ong-ter$ de,tcqui"ition of ne a""et"
ota' di",ur"e$ent"Budgeted ending ca") ,a'ance
684 1
1694 187 54 1422
35 3 23 147
83
694
7399 371
13-5
LO
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13-25
Cash Collections Example
Santia$o PantsMonthl Colle(tion )*'erien(eSales on Credit
)*'e(ted Sales #or 0hree Months
13-5
LO
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13-26
Cash Collections ExampleSantia$o Pants
Multi'eriod S(hedule o# Cash Colle(tionsor the Euarter )nded Mar(h =7
Beginning accounts receivable, January 1, $54,
January sales, $5,a
!ebruary sales, $45,b
"arc# sales, $,c
%otal cas# collections
$54, 1,
$4,
$3&5, ',
$45,
$33&,5 12,$45&,5
:anuar/
$ 54, 4&5, 42&,5 12,$1,52,5
0ont)
(e,ruar/ 0arc)ota' for ;uarter
a 2< co''ected in :anuar/ 75< co''ected in (e,ruar/ and 5< not co''ected, 2< co''ected in (e,ruar/ 75< co''ected in 0arc) and 5< not co''ectedc 2< co''ected in 0arc) 75< co''ected in pri' and 5< not co''ected
13-5
LO
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13-27
Cash Disbursements Example
Santia$o PantsMonthl Disbursements #or Pur(hases )*'erien(e
Cash disbursement #or (urrent month8s 'ur(hases 56FCash disbursement #or 'rior month8s 'ur(hases @Cash dis(ounts taken 0otal (ash disbursement #or 'ur(hases 766F
)*'e(ted Pur(hases #or 0hree Months
Januar sales ;76,666ebruar sales ;66,666
Mar(h sales ;56,666
13-5
LO
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13-28
Cash Disbursements ExampleSantia$o Pants
Multi'eriod S(hedule o# Cash Disbursementsor the Euarter )nded Mar(h =7
Beginning accounts payable, January 1, $25,
January purc#ases, $12,a
!ebruary purc#ases, $2,b
"arc# purc#ases, $25,c
())itional cas# pay*ents
%otal cas# )isburse*ents
$25, ,
25,
$5,
$ 5&, 1,
25,
$4&,
$ ', 125, 25,
$4&1,
:anuar/
$ 25, 11&, 1', 125, &5,
$1,444,
0ont)
(e,ruar/ 0arc)ota' for ;uarter
a 5< paid in :anuar/ 48< paid in (e,ruar/ and 2< di"count" ta.en, 5< paid in (e,ruar/ 48< paid in 0arc) and 2< di"count" ta.enc 5< paid in 0arc) 48< paid in pri' and 2< di"count" ta.en
13-5
LO3
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13-29
Budgeted Balance SheetExample
LO 13-6 1evelop budgeted nancial statements.
(ssets+urrent assets
+as#(ccounts receivablenventories
Ot#er current assets%otal current assets
Long-ter* assetsroperty, plant, e/uip*entLess (ccu*ulate) )epreciation
%otal assets
Budget !ear
$ 03 54 155
11$1,0
1,0 1,24$2,3
$ ,'4 &,2 4,25
--$10,45
1,4& 22$1',51
$ &,3'' ,04 3,''5
1$10,334
-- --$10,334
$ 3&1 ' 425
1$1,&5&
3,33 1,4&$3,23
Ba'ance:an 1 ddition" #u,traction"
Ba'ance+ec 31
Santia$o PantsBud$et Balan(e Sheet
or the Bud$et
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13-30
Budgeted Balance SheetExample
Lia,i'itie" and #)are)o'der" *quit/
%urrent 'ia,i'itie"ccount" pa/a,'eae" pa/a,'e%urrent portion of 'ong-ter$ de,t
ota' current 'ia,i'itie"Long-ter$ 'ia,i'itie"ota' 'ia,i'itie"#)are)o'der"= equit/
%o$$on "toc.Retained earning"
ota' ")are)o'der"ota' 'ia,i'itie" and ")are)o'der" equit/
Budget !ear
$ 25 10& 23$ 4 250
$ &24
$ 43& 1,145$1,502$2,3
$1,&15 55 23$2,200 --
$2,200
$ -- 1,14'$1,14'$3,43&
$1,'4 35 23$2,& 23
$2,'
$ -- 3 3$2,12
$ 2&& 30& 23$ 0& 235
$ '22
$ 43& 2,24$2,&1$3,23
Ba'ance:an 1 ddition" #u,traction"
Ba'ance+ec 31
Santia$o Pants
Bud$et Balan(e Sheetor the Bud$et
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13-31
Assembling the Master Budgetfor a Manufacturing Firm
13-
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LO13 &
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13-33
Budgeting Retail and WholesaleOrganizations
0urchases2ar+eting andadministrative
cost budget
Sales #ore(ast
Budgetedincome
statement
4ash budget
Bud$etedbalan(e sheets
13-&
LO13 &
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13-34
Budgeting Retail and WholesaleOrganizations
Castro Audio >ideo, In(.)stimated In#ormation #or !etail +'erations
13-&
LO13 &
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13-35
Budgeting Retail and WholesaleOrganizations
13-&
LO13-0
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Ethical Problems in Budgeting
LO 13-8 xplain why ethical issues arise in budgeting.
Bud$ets (an (reate seriousethi(al issues #or man 'eo'le.
0he (om'an must re(o$niðe tradeo## between
en(oura$in$ unbiased re'ortin$b mana$ers and the use o#
bud$et in#ormation in'er#orman(e e%aluation and
rewards.
13-0
LO13-'
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13-37
Budgeting Under Uncertainty
LO 13-9 xplain how to use sensitivity analysis to budget under uncertainty.
Bud$ets allow mana$ement to e*'lore manalternati%es.
S'readsheets are hel'#ul in 're'arin$ bud$etsand /uanti#in$ Hwhati# (onditions. Euestionslike what i# labor (osts are 76 'er(ent hi$her or
lower than 'roe(tedK
13-'
LO13-'
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13-38
Alternative Budgeting Scenarios
Santia$o Pants Alternati%e Bud$et S(enarios
13 '
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End of Chapter 13