Power Notes Chapter 20 Budgeting Learning Objectives 1

Power Notes Chapter 20 Budgeting Learning Objectives 1. Nature and Objectives of Budgeting 2. Budgeting Systems 3. Master Budget 4. Income Statement Budgets 5. Balance Sheet Budgets C 20 - 1

Chapter 20 Power Notes Budgeting Slide # 3 8 11 37 Power Note Topics • • Budgeting Methods and Approaches Flexible Budgeting Income Statement Budgets Cash Budgets Note: To select a topic, type the slide # and press Enter. C 20 - 2

Nature and Objectives of Budgeting Establishing specific future goals Executing plans to achieve the goals Comparing actual results to the goals Human Behavior and Budgeting Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals C 20 - 3

Static Budgets Description: A budget that does not reflect potential changes in volume or activity level Strength: Simple—all expenses are budgeted as fixed costs Weakness: Does not reflect changes in revenues and expenses that occur as volumes change Typical Usage: Service organizations or administrative departments of retailers and manufacturers C 20 - 4

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 C 20 - 5

Incremental Budgets Description: A budget that is prepared by increasing last year’s budget by a fixed amount or a percentage Strength: Simple to prepare; management focuses on new programs and business changes Weakness: Little emphasis on analyzing last year’s budget—inefficiencies are passed on to the current year Typical Usage: Government, not-for-profit organizations C 20 - 6

Zero-Based Budgets Description: A budget that requires management to start at zero and estimate all expenses as a new operation Strength: Forces a comprehensive analysis of business priorities and needs for resources Weakness: Difficult and time-consuming to prepare Typical Usage: Organizations focusing on cost reduction and evaluating efficiency C 20 - 7

Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Units of production 8, 000 9, 000 10, 000 Variable cost: Direct labor ($5 per unit) $40, 000 $45, 000 $50, 000 Electricity ($0. 5 per unit) 4, 000 4, 500 5, 000 Total variable cost $44, 000 $49, 500 $55, 000 Cost per unit is $5. 50 at all levels of activity C 20 - 8

Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Units of production 8, 000 9, 000 10, 000 Variable cost: Direct labor ($5 per unit) $40, 000 $45, 000 $50, 000 Electricity ($0. 5 per unit) 4, 000 4, 500 5, 000 Total variable cost $44, 000 $49, 500 $55, 000 Fixed cost: Electric power $ 1, 000 Supervisor salaries 15, 000 Total fixed cost $16, 000 C 20 - 9

Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Units of production 8, 000 9, 000 10, 000 Variable cost: Direct labor ($5 per unit) $40, 000 $45, 000 $50, 000 Electricity ($0. 5 per unit) 4, 000 4, 500 5, 000 Total variable cost $44, 000 $49, 500 $55, 000 Fixed cost: Electric power $ 1, 000 Supervisor salaries 15, 000 Total fixed cost $16, 000 C 20 - 10

Income Statement Budgets Sales Budget C 20 - 11

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 C 20 - 12

Income Statement Budgets Sales Budget + Production Budget Direct Materials Purchases Budget Materials needed for production Desired ending materials inventory - Estimated beginning materials inventory Direct materials to be purchased C 20 - 13

Income Statement Budgets Sales Budget Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget C 20 - 14

Income Statement Budgets Sales Budget Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget C 20 - 15

Income Statement Budgets Sales Budget Cost of Goods Sold Budget Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget C 20 - 16

Income Statement Budgets Sales Budget Cost of Goods Sold Budget Selling & Administrative Expenses Budget Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget C 20 - 17

Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003 Unit Sales Unit Selling Product and Region Volume Price Wallet: East 287, 000 West 241, 000 Total 528, 000 Total Sales $12. 00 $3, 444, 000 12. 00 2, 892, 000 $6, 336, 000 How are these numbers determined? C 20 - 18

Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003 Unit Sales Unit Selling Product and Region Volume Price Wallet: East West Total Handbag: East West Total 287, 000 241, 000 528, 000 $12. 00 $3, 444, 000 12. 00 2, 892, 000 $6, 336, 000 156, 400 123, 600 280, 000 $25. 00 $3, 910, 000 25. 00 3, 090, 000 $7, 000 Total Sales C 20 - 19

Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003 Unit Sales Unit Selling Product and Region Volume Price Wallet: East 287, 000 West 241, 000 Total 528, 000 Handbag: East 156, 400 West 123, 600 Total 280, 000 Total sales revenue Total Sales $12. 00 $3, 444, 000 12. 00 2, 892, 000 $6, 336, 000 $25. 00 $3, 910, 000 25. 00 3, 090, 000 $7, 000 $13, 336, 000 C 20 - 20

Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Units Wallet Handbag Sales 528, 000 280, 000 From sales budget C 20 - 21

Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Units Wallet Handbag Sales 528, 000 280, 000 Plus desired ending inventory, Dec. 31, 2003 Total 608, 000 340, 000 80, 000 60, 000 C 20 - 22

Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Units Wallet Handbag Sales 528, 000 280, 000 Plus desired ending inventory, Dec. 31, 2003 Total 608, 000 340, 000 Less estimated beginning inventory, Jan. 1, 2003 Total production 520, 000 80, 000 60, 000 88, 000 48, 000 292, 000 C 20 - 23

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) yds. Handbag (Note B) 156, 000 sq. 365, 000 Note A: 520, 000 units x 0. 30 sq yd. /unit = 156, 000 sq. yds. Note B: 292, 000 units x 1. 25 sq. yds. /unit = 365, 000 sq yds. C 20 - 24

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) 156, 000 sq. yds. Handbag (Note B) 365, 000 Plus desired inventory, Dec. 31, 2003 20, 000 Total 541, 000 sq. yds. Note A: 520, 000 units x 0. 30 sq yd. /unit = 156, 000 sq. yds. Note B: 292, 000 units x 1. 25 sq. yds. /unit = 365, 000 sq yds. C 20 - 25

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) 156, 000 sq. yds. Handbag (Note B) 365, 000 Plus desired inventory, Dec. 31, 2003 20, 000 Total 541, 000 sq. yds. Less estimated inventory, Jan. 1, 2003 18, 000 Total square yards to be purchased 523, 000 sq yds. Note A: 520, 000 units x 0. 30 sq yd. /unit = 156, 000 sq. yds. Note B: 292, 000 units x 1. 25 sq. yds. /unit = 365, 000 sq yds. C 20 - 26

Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) 156, 000 sq. yds. Handbag (Note B) 365, 000 Plus desired inventory, Dec. 31, 2003 20, 000 Total 541, 000 sq. yds. Less estimated inventory, Jan. 1, 2003 18, 000 Total square yards to be purchased 523, 000 sq yds. Unit price x $ 4. 50 Total direct materials purchased $2, 353, 500 Note A: 520, 000 units x 0. 30 sq yd. /unit = 156, 000 sq. yds. Note B: 292, 000 units x 1. 25 sq. yds. /unit = 365, 000 sq yds. C 20 - 27

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 Cutting Sewing Total Hours required for production: Wallet (Note A) 52, 000 130, 000 Handbag (Note B) 43, 800 116, 800 Note A: Cutting Dept. : 520, 000 units x 0. 10 hrs. per unit = 52, 000 hrs. Sewing Dept. : 520, 000 units x 0. 25 hrs. per unit = 130, 000 hrs. Note B: Cutting Dept. : 292, 000 units x 0. 15 hrs. per unit = 43, 800 hrs. Sewing Dept. : 292, 000 units x 0. 40 hrs. per unit = 116, 800 hrs. C 20 - 28

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 Cutting Sewing Total Hours required for production: Wallet (Note A) 52, 000 130, 000 Handbag (Note B) 43, 800 116, 800 Total 95, 800 246, 800 Hourly rate x $12 x $15 Note A: Cutting Dept. : 520, 000 units x 0. 10 hrs. per unit = 52, 000 hrs. Sewing Dept. : 520, 000 units x 0. 25 hrs. per unit = 130, 000 hrs. Note B: Cutting Dept. : 292, 000 units x 0. 15 hrs. per unit = 43, 800 hrs. Sewing Dept. : 292, 000 units x 0. 40 hrs. per unit = 116, 800 hrs. C 20 - 29

Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 Cutting Sewing Total Hours required for production: Wallet (Note A) 52, 000 130, 000 Handbag (Note B) 43, 800 116, 800 Total 95, 800 246, 800 Hourly rate x $12 x $15 Total direct labor cost $1, 149, 600 $3, 702, 000 $4, 851, 600 Note A: Cutting Dept. : 520, 000 units x 0. 10 hrs. per unit = 52, 000 hrs. Sewing Dept. : 520, 000 units x 0. 25 hrs. per unit = 130, 000 hrs. Note B: Cutting Dept. : 292, 000 units x 0. 15 hrs. per unit = 43, 800 hrs. Sewing Dept. : 292, 000 units x 0. 40 hrs. per unit = 116, 800 hrs. C 20 - 30

Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2003 Indirect factory wages $ 732, 800 Supervisor salaries 360, 000 Power and light 306, 000 Depreciation of plant and equipment 288, 000 Indirect materials 182, 800 Maintenance 140, 280 Insurance and property taxes 79, 200 C 20 - 31

Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2003 Indirect factory wages $ 732, 800 Supervisory salaries 360, 000 Power and light 306, 000 Depreciation of plant and equipment 288, 000 Indirect materials 182, 800 Maintenance 140, 280 Insurance and property taxes 79, 200 Total factory overhead cost$2, 089, 080 C 20 - 32

Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13, 336, 000 Cost of goods sold 9, 047, 780 Gross profit $4, 288, 220 Selling & admin. expenses: Selling expenses $1, 190, 000 Administrative expenses 695, 000 Total sell. & admin. exp. 1, 885, 000 Income from operations $2, 403, 220 Other income: Interest revenue $ 98, 000 Other expense: Interest expense 90, 000 8, 000 Income before income tax $2, 411, 220 Income tax 600, 000 Net income $1, 811, 220 C 20 - 33

Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13, 336, 000 Cost of goods sold 9, 047, 780 Gross profit $4, 288, 220 Selling & admin. expenses: Selling expenses $1, 190, 000 Administrative expenses 695, 000 Total sell. & admin. exp. 1, 885, 000 Income from operations $2, 403, 220 Other income: Interest revenue $ 98, 000 Other expense: Interest expense 90, 000 8, 000 Income before income tax $2, 411, 220 Income tax 600, 000 Net income $1, 811, 220 C 20 - 34

Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13, 336, 000 Cost of goods sold 9, 047, 780 Gross profit $4, 288, 220 Selling & admin. expenses: Selling expenses $1, 190, 000 Administrative expenses 695, 000 Total sell. & admin. exp. 1, 885, 000 Income from operations $2, 403, 220 Other income: Interest revenue $ 98, 000 Other expense: Interest expense 90, 000 8, 000 Income before income tax $2, 411, 220 Income tax 600, 000 Net income $1, 811, 220 C 20 - 35

Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13, 336, 000 Cost of goods sold 9, 047, 780 Gross profit $4, 288, 220 Selling & admin. expenses: Selling expenses $1, 190, 000 Administrative expenses 695, 000 Total sell. & admin. exp. 1, 885, 000 Income from operations $2, 403, 220 Other income: Interest revenue $ 98, 000 Other expense: Interest expense 90, 000 8, 000 Income before income tax $2, 411, 220 Income tax 600, 000 Net income $1, 811, 220 C 20 - 36

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 January Budgeted sales $970, 000 Cash sales (10%) Credit sales (90%) $873, 000 February $1, 080, 000 $1, 240, 000 108, 000 $972, 000 124, 000 $1, 116, 000 March 97, 000 C 20 - 37

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 January Budgeted sales $970, 000 Cash sales (10%) Credit sales (90%) $873, 000 February $1, 080, 000 $1, 240, 000 108, 000 $972, 000 124, 000 $1, 116, 000 Collections on account: Current month (60%) $523, 800 $583, 200 March 97, 000 $669, 600 C 20 - 38

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 January Budgeted sales $970, 000 Cash sales (10%) Credit sales (90%) $873, 000 February $1, 080, 000 $1, 240, 000 108, 000 $972, 000 124, 000 $1, 116, 000 March 97, 000 Collections on account: Current month (60%) $583, 200 $669, 600 $523, 800 Prior month (40%) 370, 000 388, 800 446, 400 Total on account $953, 200 $1, 058, 400 $970, 200 C 20 - 39

Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 January Budgeted sales $970, 000 Cash sales (10%) Credit sales (90%) $873, 000 February $1, 080, 000 $1, 240, 000 108, 000 $972, 000 124, 000 $1, 116, 000 March 97, 000 Collections on account: Current month (60%) $583, 200 $669, 600 $523, 800 Prior month (40%) 370, 000 388, 800 446, 400 Total on account $953, 200 $1, 058, 400 $970, 200 C 20 - 40

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108, 000 $124, 000 $97, 000 Accounts receivable 953, 200 1, 058, 400 970, 200 Interest Revenue — — 24, 500 Total cash receipts$1, 061, 200 $1, 182, 400 $1, 091, 700 C 20 - 41

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108, 000 $124, 000 $97, 000 Accounts receivable 953, 200 1, 058, 400 970, 200 Interest Revenue — — 24, 500 Total cash receipts$1, 061, 200 $1, 182, 400 $1, 091, 700 Estimated cash payments: Manufacturing costs $802, 000 $771, 000 $780, 000 Selling & administrative exp. 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 C 20 - 42

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108, 000 $124, 000 $97, 000 Accounts receivable 953, 200 1, 058, 400 970, 200 Interest Revenue — — 24, 500 Total cash receipts$1, 061, 200 $1, 182, 400 $1, 091, 700 Estimated cash payments: Manufacturing costs $802, 000 $771, 000 $780, 000 Selling & administrative exp. 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 Cash increase (decrease) $76, 700 $(27, 600) $16, 700 C 20 - 43

Elite Accessories Inc. Cash Budget January February March Estimated cash receipts: Cash sales $108, 000 $124, 000 $97, 000 Accounts receivable 953, 200 1, 058, 400 970, 200 Interest Revenue — — 24, 500 Total cash receipts$1, 061, 200 $1, 182, 400 $1, 091, 700 Estimated cash payments: Manufacturing costs $802, 000 $771, 000 $780, 000 Selling & administrative exp. 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 Cash increase (decrease) $76, 700 $(27, 600) $16, 700 C 20 - 44

Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108, 000 $124, 000 $97, 000 Accounts receivable 953, 200 1, 058, 400 970, 200 Interest Revenue — — 24, 500 Total cash receipts$1, 061, 200 $1, 182, 400 $1, 091, 700 Estimated cash payments: Manufacturing costs $802, 000 $771, 000 $780, 000 Selling & administrative exp. 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 Cash increase (decrease) $76, 700 $(27, 600) $16, 700 C 20 - 45

Chapter 20 Power Notes Budgeting This is the last slide in Chapter 20. Note: To see the topic slide, type 2 and press Enter. C 20 - 46