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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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Santia$o Pants)stimated Produ(tion

Materials Data !ard" needed

LO13-4

LO


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13-16


;

;

LO13-4

LO


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13-17

Direct Labor Example

LO13-4

LO


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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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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

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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

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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

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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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Castro Audio >ideo, In(.)stimated In#ormation #or !etail +'erations

13-&

LO13 &


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13-35


13-&

LO13-0


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13-36

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$ni&ethe 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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Alternative Budgeting Scenarios

Santia$o Pants Alternati%e Bud$et S(enarios

13 '


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End of Chapter 13

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