Budgeting Accounting 21 st Edition Warren Reeve Fess

Budgeting Accounting, 21 st Edition Warren Reeve Fess Power. Point Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electroni presentation is used with the permission of NVTech Inc.

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Objectives 1. Describe budgeting, its objectives, and its After studying impact on human behavior. this chapter, you should 2. Describe the basic elements of the budget process, the twobe major abletypes to: of budgeting, and the use of computers in budgeting. 3. Describe the master budget for a manufacturing business. 4. Prepare the basic income statement budgets for a manufacturing business. 5. Prepare balance sheet budgets for a manufacturing business.

Nature and Objectives of Budgeting Estimated portion of your total monthly income that should be budgeted

Nature and Objectives of Budgeting • Establishing specific goals • Executing plans to achieve the goals • Periodically comparing actual results to the goals Feedback PLANNING DIRECTING CONTROLLING

Nature and Objectives of Budgeting Human Behavior and Budgeting Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals

Nature and Objectives of Budgeting Goal conflict occurs when individual selfinterest differs from business objectives. A student’s question, “Will this be on the test? ” is evidence of goal conflict.

Continuous Budgeting One-Year Budget Feb. 2006 Mar. Apr. 2006 Delete on February 28 May 2006 June 2006 July 2998 Aug. 2006 Sep. 2006 Oct. 2006 Nov. 2006 Dec. 2006 Jan. 2007

Continuous Budgeting One-Year Budget Mar. Apr. 2006 May 2006 June 2006 July 2998 Aug. 2006 Sep. 2006 Oct. 2006 Nov. 2006 Dec. 2006 Jan. 2007 Feb. 2007 Add February 2007

Static Budgets Description: A budget that does not reflect potential changes in volume or activity level Strength: It is simple—all expenses are budgeted as fixed costs Weakness: It does not reflect changes in revenues and expenses that occur as volumes change Typical usage: Service organizations or administrative departments of retailers and manufacturers

Static Budgets Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Direct labor Electric Power Supervisor salaries Total department costs $40, 000 5, 000 15, 000 $60, 000

Flexible Budgets Description: A budget that shows revenues and expenses for a variety of volumes or activity levels Strength: Provides information needed to analyze the impact of volume changes on actual operating results Weakness: Requires greater research into costs— must differentiate fixed and variable costs Typical usage: Operational departments of retailers and manufacturers whose costs change with sales and production

Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production Variable cost: Direct labor Electric power Total variable cost 8, 000 $40, 000 4, 000 $44, 000 9, 000 10, 000 $45, 000 $50, 000 4, 500 5, 000 $49, 500 $55, 000 Cost per unit is $5. 50 at all levels of activity

Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production Variable cost: Direct labor Electric power Total variable cost Fixed cost: Electric power Supervisor salaries Total fixed cost 8, 000 9, 000 10, 000 $40, 000 4, 000 $45, 000 $50, 000 4, 500 5, 000 $49, 500 $55, 000 $ 1, 000 15, 000 $16, 000

Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production Variable cost: Direct labor Electric power Total variable cost Fixed cost: Electric power Supervisor salaries Total fixed cost Total department costs 8, 000 9, 000 10, 000 $40, 000 4, 000 $45, 000 $50, 000 4, 500 5, 000 $49, 500 $55, 000 $ 1, 000 15, 000 $16, 000 $60, 000 $ 1, 000 15, 000 $16, 000 $65, 500 $71, 000

Static and Flexible Budgets Overbudget l a u Act lts u s e R Static Budget $60, 000 $72, 000

Static and Flexible Budgets Overbudget l a u Act lts u s e R Flexible Budget 8, 000 units 9, 000 units 10, 000 units $60, 000 $65, 500 $71, 000 $72, 000

Master Budgeted Income Statement Sales budget Budgeted Balance Sheet Cash budget Cost of goods sold budget: Capital expenditure budget Production budget Direct materials purchases budget Direct labor cost budget Selling and administrative expense budget

Income Statement Budgets

Sales Budget Production Budget Expected units of sales + Desired units in ending inventory – Estimated units in beginning inventory Total units to be produced

Sales Budget Production Budget Direct Materials Purchases Budget Materials needed for production + Desired ending materials inventory – Est. beginning materials inventory Direct materials to be purchased

Sales Budget Production Budget Cost of Goods Sold Budget Direct Labor Cost Budget Selling & Administrative Expenses Budget Direct Materials Purchases Budget Factory Overhead Cost Budget

Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2006 Product and Region Wallet: East………………. . West………………. Total……………. 6, 336, 000 Handbag: East………………. . West………………. Total……………. 7, 000 Total revenue from Sales………………. . $13, 336, 000 Unit Sales Volume Unit Selling Price Total Sales 287, 000 $12. 00 241, 000 12. 00 528, 000 $ 3, 444, 000 2, 892, 000 $ 156, 400 $25. 00 123, 600 25. 00 280, 000 $ 3, 910, 000 3, 090, 000 $

Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Units Wallet Handbag Expected units to be sold 528, 000 280, 000 From sales budget

Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Units Wallet Handbag Expected units to be sold…………. 528, 000 Plus desired ending inventory, 2006……………. Total 280, 000 December 31, 80, 000 608, 000 340, 000

Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Units Wallet Handbag Expected units to be sold…………. Plus desired ending inventory, 2006……………. Total………………. Less estimated beginning inventory, 2006…………………. Total units to be produced………… 528, 000 280, 000 December 31, 80, 000 608, 000 340, 000 January 1, 88, 000 48, 000 520, 000 292, 000

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Square yards required for production: Wallet (Note A)…………………. . 156, 000 Total 52, 000 Note A: Leather: 520, 000 units x 0. 30 sq. yd. per unit = 156, 000 sq. yds. Lining: 520, 000 units x 0. 10 sq. yd. Per unit = 52, 000 sq. yds.

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Square yards required for production: Wallet (Note A)……. . Handbag (Note B)………………. . 156, 000 365, 000 Total 52, 000 146, 000 Note B: Leather: 292, 000 units x 1. 25 sq. yd. per unit = 365, 000 sq. yds. Lining: 292, 000 units x 0. 50 sq. yd. Per unit = 146, 000 sq. yds.

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Square yards required for production: Wallet (Note A)……. . …………. . Handbag (Note B). ………………. Plus desired inventory, Dec. 31, 2006 Total……………… 156, 000 365, 000 20, 000 541, 000 52, 000 146, 000 12, 000 210, 000 Total

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Square yards required for production: Wallet (Note A) …………………. Handbag (Note B) ………………. Plus desired inventory, Dec. 31, 2006 Total……………… Less estimated inventory, Jan. 1, 2006 Total square yards to be produced. . 156, 000 365, 000 20, 000 541, 000 18, 000 523, 000 52, 000 146, 000 12, 000 210, 000 15, 000 195, 000 Total

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Square yards required for production: Wallet (Note A)…………………. . Handbag (Note B). ………………. Plus desired inventory, Dec. 31, 2006 Total……………… Less estimated inventory, Jan. 1, 2006 Total square yards to be produced. . Unit price (per square yard)…………. Total direct materials to be purchased. Total 156, 000 52, 000 365, 000 146, 000 20, 000 12, 000 541, 000 210, 000 18, 000 15, 000 523, 000 195, 000 x $4. 50 x $1. 20 $2, 353, 500 $234, 000 $2, 587, 500

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Hours required for production: Wallet (Note A)…………. Cutting Sewing 52, 000 130, 000 Total Note A: Cutting Department: 520, 000 units x 0. 10 hr. per unit = 52, 000 hrs. Sewing Department: 520, 000 units x 0. 25 hr. per unit = 130, 000 hrs.

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Hours required for production: Wallet (Note A)…………. Handbag (Note B)………. . Cutting Sewing 52, 000 43, 800 130, 000 116, 800 Total Note A: Cutting Department: 520, 000 units x 0. 10 hr. per unit = 52, 000 hrs. . Sewing Department: 520, 000 units x 0. 25 hr. per unit = 130, 000 hrs. Note B: Cutting Department: 292, 000 units x 0. 15 hr. per unit = 43, 800 hrs. Sewing Department: 292, 000 units x 0. 40 hr. per unit = 116, 800 hrs

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Hours required for production: Wallet (Note A)…………. Handbag (Note B)………. . Total…………. . . Cutting Sewing 52, 000 43, 800 95, 800 130, 000 116, 800 246, 800 Total Note A: Cutting Department: 520, 000 units x 0. 10 hr. per unit = 52, 000 hrs. . Sewing Department: 520, 000 units x 0. 25 hr. per unit = 130, 000 hrs. Note B: Cutting Department: 520, 000 units x 0. 15 hr. per unit = 43, 800 hrs. Sewing Department: 520, 000 units x 0. 40 hr. per unit = 116, 800 hrs

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Hours required for production: Wallet (Note A)…………. 52, 000 Handbag (Note B)………. . 43, 800 Total…………. . . 95, 800 Hourly rate………… x $12. 00 Total direct labor cost………… $1, 149, 600 Note A: Cutting Department: Sewing Department: Note B: Cutting Department: Sewing Department: Sewing Total 130, 000 116, 800 246, 800 x $15. 00 $3, 702, 000 $4, 851, 600 520, 000 units x 0. 10 hr. per unit = 52, 000 hrs. 520, 000 units x 0. 25 hr. per unit = 130, 000 hrs. 520, 000 units x 0. 15 hr. per unit = 43, 800 hrs. 520, 000 units x 0. 40 hr. per unit = 116, 800 hrs

Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2006 Indirect factory wages…………. . . Supervisory salaries……………. . . Power and light………………. . Depreciation of plant and equipment………. Indirect materials……………… Maintenance………………. . . Insurance and property taxes………………. Total factory overhead cost………………. . . $ 732, 800 360, 000 306, 000 288, 000 182, 800 140, 280 79, 200 $2, 089, 080

Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006 Finished goods inventory, January 1 , 2006…. . $ 1, 095, 600 Work in process inventory, January 1, 2006… $ 214, 400 Direct materials: Direct materials inventory, January 1, 2006 (Note A)…………………. $ 99, 000 Note A: Leather: 18, 000 sq. yds. x $4. 50 per sq. yd Lining: 15, 000 sq. yds. x $1. 20 per sq. yd Direct materials inventory, January 1, 2006 $81, 000 18, 000 $99, 000

Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006 Finished goods inventory, January 1 , 2006…. . $ 1, 095, 600 Work in process inventory, January 1, 2006… $ 214, 400 Direct materials: Direct materials inventory, January 1, 2006 (Note A)…………………. $ 99, 000 Note B: Leather: 20, 000 sq. yds. x $4. 50 per sq. yd Lining: 12, 000 sq. yds. x $1. 20 per sq. yd Direct materials inventory, December 31, 2006 $ 90, 000 14, 400 $104, 400

Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006 Finished goods inventory, January 1 , 2006…. Work in process inventory, January 1, 2006. . . Direct materials: Direct materials inventory, January 1, 2006 (Note A)…………………. Direct materials purchases (Slide 3)……. . Cost of direct materials available for use…. Less direct materials inventory, December 31, 2006 (Note B)……………. Cost of direct materials placed in production Direct labor (Slide 35)……………. Factory overhead (Slide 36)…………………. . Total manufacturing costs…………. Total work in process during period…………. $ 1, 095, 600 $ 214, 400 $ 99, 000 2, 587, 500 $2, 686, 500 104, 400 $2, 582, 100 4, 851, 600 2, 089, 080 9, 522, 780 $9, 737, 180

Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006 Finished goods inventory, January 1 , 2006………. . . Work in process inventory, January 1, 2006………. . Total manufacturing costs……………. . Total work in process during period………………. . Less work in process inventory, December 31, 2006 Cost of goods manufactured……………. . . Cost of finished goods available for sale…………. . . Less finished goods inventory, December 31, 2006. . Cost of goods sold…………………. . $ 1, 095, 600 $ 214, 500 9, 522, 780 $9, 737, 180 220, 000 9, 517, 180 $10, 612, 780 1, 565, 000 $ 9, 047, 780

Elite Accessories Inc. Selling and Administrative Expenses Budget For the Year Ending December 31, 2006 Selling expenses: Sales salaries expense……………. $715, 000 Advertising expense……………. . . 360, 000 Travel expense…………………. 115, 000 Total selling expenses……………. . . $1, 190, 000 Administrative expenses: Officers’ salaries expense……………. $360, 000 Office salaries expense……………. 258, 000 Office rent expense………………. . . 34, 500 Office supplies expense……………. 17, 500 Miscellaneous administrative expense…………. . 25, 000 Total administrative expenses………………… 695, 000 Total selling and administrative expenses………… $1, 885, 000

Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2006 Revenue from sales (slide 23) $13, 336, 000 Cost of goods sold (slide 40) 9, 047, 780 Gross profit 4, 288, 220 Selling & administrative expenses: Selling expenses (slide 41) Administrative expenses (slide 41) Total sell. & Admin. Expenses 1, 885, 000 Income from operations $ 2, 403, 220 Other income: Interest revenue Other expense: Interest expense 8, 000 $ $1, 190, 000 695, 000 $ 98, 000 90, 000

The cash budget is one of the most important elements of the budgeted balance sheet. We’ll begin with a schedule of collection from sales.

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January Receipts from cash sales: Cash sales (10%)(see Note A)…………. . . 97, 000 February March $108, 000 $ 124, 000 $ Note A: $108, 000 = $1, 080, 000 x 10% $124, 000 = $1, 240, 000 x 10% $ 97, 000 = $ 970, 000 x 10%

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January February March Receipts from cash sales: Cash sales (10%)(see Note A)…………. . . $108, 000 $ 124, 000 $ 97, 000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)……. $370, 000 $ 388, 800 $446, 400 Note B: $370, 000, given as January 1, 2006 Accounts Receivable balance $388, 800 = $1, 080, 000 x 90% x 40% $446, 400 = $1, 240, 000 x 90% x 40%

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January February March Receipts from cash sales: Cash sales (10%)(see Note A)…………. . . $108, 000 $ 124, 000 $ 97, 000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)……. $370, 000 $ 388, 800 $446, 400 Collections from current month’s sales Note C: $583, 200 = $1, 080, 000 x 90% x 60% (60%)(see Note $669, 600 = $1, 240, 000 x 90% x 60% C)……………… 583, 200 669, 600 $523, 800 = $ 970, 000 x 90% x 60% 523, 800

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006 January Receipts from cash sales: Cash sales (10%)(see Note A)…………. . . 97, 000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)……. $446, 400 Collections from current February $108, 000 $ 124, 000 $370, 000 $ 388, 800 month’s sales (60%)(see Note C)……………… 523, 800 583, 200 669, 600 March $

Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 January February March Payment of prior month’s manufacturing costs (25%) A)………………… $189, 000 $190, 000 (see Note $204, 000 Note A: $190, 000, given as January 1, 2006 Accounts Payable balance $204, 000 = ($840, 000 –$24, 000) x 25% $189, 000 = ($780, 000 – $24, 000) x 75%

Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 January February March Payment of prior month’s manufacturing costs (25%) (see Note $204, 000 A)………………… $190, 000 $189, 000 Payment of current month’s manufacturing costs (75%) B)…………………. 612, 000 Note(see B: Note $612, 000 = ($840, 000 – $24, 000) x 75% 567, 000 591, 000$567, 000 = ($780, 000 – $24, 000) x 75% $591, 000 = ($812, 000 – $24, 000) x 75%

Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 January February March Payment of prior month’s manufacturing costs (25%) A)………………… $189, 000 Payment of current month’s manufacturing costs (75%) (see Note B)…………………. 591, 000 Total payments………………. $780, 000 $190, 000 (see Note $204, 000 612, 000 567, 000 $802, 000 $771, 000

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March Estimated cash receipts: Cash sales (Slide 45)…………. . $ 108, 000 $ 124, 000 $ 97, 000 Collections of accounts receivable (Slide 48)………. . . 953, 200 1, 058, 400 970, 200 Interest revenue………………. . . — — 24, 500 Total cash receipts……………. $1, 061, 200 $1, 182, 400 $1, 091, 700

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March Estimated cash receipts: Cash sales (Slide 45)…………. . $ 108, 000 $ 124, 000 $ 97, 000 Collections of accounts receivable (Slide 48)………. . . 953, 200 1, 058, 400 970, 200 Interest revenue………………. . . — — 24, 500 Total cash $1, 061, 200 $1, 182, 400 Estimated cashreceipts……………. payments for: $1, 091, 700 Manufacturing costs (Slide 51). . $ 802, 000 $ 771, 000 $ 780, 000 Selling and administrative expenses…………… 160, 000 165, 000 145, 000 Capital additions 274, 000 Interest expense 22, 500 Income taxes 150, 000

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March Estimated cash receipts: Cash sales (Slide 45)…………. . $ 108, 000 $ 124, 000 $ 97, 000 Collections of accounts receivable (Slide 48)………. . . 953, 200 1, 058, 400 970, 200 Interest revenue………………. . . — — 24, 500 Total cash $1, 061, 200 $1, 182, 400 Estimated cashreceipts……………. payments for: $1, 091, 700 Manufacturing costs (Slide 51). . $ 802, 000 $ 771, 000 $ 780, 000 Selling and administrative expenses…………… 160, 000 165, 000 145, 000 Capital additions 274, 000 Interest expense 22, 500 Income taxes 150, 000 Total cash payments…………. $ 984, 500 $1, 210, 000 $1, 075, 000

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March Estimated cash receipts: Cash sales (Slide 45)…………. . $ 108, 000 $ 124, 000 $ 97, 000 Collections of accounts receivable (Slide 48)………. . . 953, 200 1, 058, 400 970, 200 Capital additions 274, 000 Interest expense………………. . 22, 500 Income taxes…………………. . . 150, 000 Total cash payments…………. $ 984, 500 $1, 210, 000 Cash increase (decrease)…………. $ 76, 700 $ (27, 600)$ 16, 700 $1, 075, 000 Cash balance at beginning of month 280, 000 356, 700 329, 100 Cash balance at end of month……. $ 356, 700 $ 329, 100 $ 345, 800 Minimum cash balance…………… 340, 000 Excess (deficiency)………………. $ 16, 700 $ (10, 900)$ 5, 800

Chapter 21 The End