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Planning and Budgeting
Chapter 13
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
LO 13-1 Understand the role of budgets in overall organization plans.
LO 13-2 Understand the importance of people in the budgeting process.
LO 13-3 Estimate sales.
LO 13-4 Develop production and cost budgets.
LO 13-5 Estimate cash flows.
LO 13-6 Develop budgeted financial statements.
LO 13-7 Explain budgeting in merchandising and service organizations.
LO 13-8 Explain why ethical issues arise in budgeting.
LO 13-9 Explain how to use sensitivity analysis to budget under uncertainty.
13-3
LO
13-1
Budgets
LO 13-1 Understand the role of budgets in overall organization plans.
We focus on the planning purpose of the budgeting process. For our
purposes here, a budget is simply the plan, stated in financial terms, of
how the organization expects to carry out its activities and meet the
financial goals established in the planning process.
We show how a master budget is developed and how it fits 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 can increase competitiveness and affect global operations.
13-4
LO
13-1
Overall Plan
A master budget is part of an overall organization plan for the
next year made up of three components:
(1) the organization goals,
(2) the strategic long-range profit plan, and
(3) the tactical short-range profit plan.
Top managers establish broad objectives, which serve as organization goals that
company employees work to achieve.
It is important to detail the specific steps required to achieve the goals. These steps
are expressed in a strategic long-range plan.
The plan for the coming year, which is more specific than long-range plans, is called
the master budget, also known as the static budget, the budget plan, or the planning
budget .
13-5
LO
13-1
Organizational and Individual Interaction:
Developing the Master Budget
13-6
LO
13-2
Human Element in Budgeting
LO 13-2 Understand the importance of people in the budgeting process.
Organization
goals
Goal congruence
Individual
goals
Participative Budgeting
Use of input from lower- and middle-management
employees; also called grass roots budgeting
13-7
LO
13-3
Sales Forecasting
LO 13-3
Estimate sales.
Forecasting sales is the most difficult aspect of budgeting.
Sales staff
Market researchers
Delphi technique
Trend analysis
Econometric models
13-8
LO
13-3
Forecasting by Sales Staff
After evaluating the sales forecasts derived from various
sources, the budgeting task force at Santiago Pants arrived
at the following sales budget for the next budget year:
13-9
LO
13-4
Forecasting Production
LO 13-4
Develop production and cost budgets.
A production budget is a plan of resources needed to meet current
sales demand and ensure that inventory levels are sufficient for future
sales.
Beginning balance
+
BB
Transfers in
TI
–
Units in beginning
+
inventory
Required
production
–
Transfers out
= Ending balance
TO
Budgeted
sales
=
Units in ending
inventory
13-10
LO
13-4
Production Budget
Rearranging for required production:
Budgeted
sales
+
Units in ending
inventory
–
Units in beginning
=
inventory
Required
production
• Santiago Pants' sales budget is 160,000 units
• Management estimates that there will be 5,000 units
in beginning inventory and 15,000 in ending inventory.
160,000
units
+
15,000
units
–
5,000
units
=
170,000
units
13-11
LO
13-4
Production Budget
13-12
LO
13-4
Production Costs
Direct
materials
Direct
labor
Manufacturing
overhead
Indirect Indirect
Other
labor materials
13-13
LO
13-4
Direct Materials Example
13-14
LO
13-4
Direct Materials Example
Santiago Pants
Estimated Production
Materials Data
Yards needed:
13-15
LO
13-4
Direct Materials Example
$
$
13-16
LO
13-4
Direct Labor Example
13-17
LO
13-4
Overhead Example
Santiago Pants
Schedule of Budgeted Manufacturing Overhead
For the Budget Year Ended December 31
Variable overhead needed to product 170,000 units:
Indirect materials and supplies @ $0.30 per unit
Materials handling @ $0.40 per unit
Other indirect labor @ $0.10 per unit
Total variable overhead
$ 51,000
68,000
$ 17,000
$136,000
Fixed manufacturing overhead (supervisory labor $102M,
maintenance and repairs $50M, plant administration $85M,
utilities $55M, depreciation $140M, insurance $30M,
property taxes $60M, and other $22M)
Total manufacturing overhead
$544,000
$680,000
13-18
LO
13-4
Cost of Goods Sold Example
Santiago Pants
Budgeted Statement of Cost of Goods Sold
For the Budget Year Ended December 31
Beginning work-in-process inventory
Manufacturing costs:
Direct materials:
Beginning inventory
Purchases
Materials available for manufacturing
Less: Ending inventory
Total direct materials costs
Direct labor
Manufacturing overhead
Total manufacturing costs
Less: Ending work-in-process
Cost of goods manufactured
Add: Beginning finished goods inventory
Less: Ending finished goods inventory
Cost of goods sold
a
Management estimate
b
$
-0-
$
35,000
1,715,000
$1,750,000
(50,000)
$1,700,000
1,870,000
680,000
$4,250,000
-0$4,250,000
120,000a
(375,000)b
$3,995,000
Estimate: (15,000 units × $25 value of finished goods)
13-19
LO
13-4
Marketing and Administrative
Budget Example
13-20
LO
13-4
Income Statement Example
13-21
LO
13-5
Cash Budget
LO 13-5
Estimate cash flows.
The cash budget is a statement of cash on hand at the
start of the budget period, expected cash receipts,
expected cash disbursements, and the resulting cash
balance at the end of the budget period.
• Cash receipts:
– Collection of accounts receivable
– Cash sales
– Sales of assets
– Borrowing
– Issuing stock
– Other
13-22
LO
13-5
Cash Budget
Some cash disbursements:
– Materials purchases
– Manufacturing costs
– Operating activities
– Debt repayment
– Acquisition of new assets
– Income taxes
– Dividends
– Other activities
13-23
LO
13-5
Cash Budget
Santiago Pants
Cash Budget
For the Budget Year Ended December 31
Cash balance beginning of period
$ 830,000
Receipts:
Collections on accounts
$6,840,000
Collections employee loans
100,000
Total receipts
6,940,000
Less: Disbursements:
Payments for accounts payable
1,694,000
Direct labor
1,870,000
Manufacturing overhead less noncash depreciation charges
540,000
Marketing and administrative costs less noncash charges
1,422,000
Payments for federal income taxes
350,000
Dividends
30,000
Reduction in long-term debt
23,000
Acquisition of new assets
1,470,000
Total disbursements
7,399,000
Budgeted ending cash balance
$ 371,000
13-24
LO
13-5
Cash Collections Example
Santiago Pants
Monthly Collection Experience
Sales on Credit
Expected Sales for Three Months
13-25
LO
13-5
Cash Collections Example
Santiago Pants
Multiperiod Schedule of Cash Collections
For the Quarter Ended March 31
Month
January
Beginning accounts receivable,
January 1, $540,000
January sales, $500,000a
February sales, $450,000b
March sales, $600,000c
Total cash collections
$540,000
100,000
$640,000
February
$375,000
90,000
$465,000
March
Total for
Quarter
$337,500
120,000
$457,500
$ 540,000
475,000
427,500
120,000
$1,562,500
a
20% collected in January, 75% collected in February, and 5% not collected
20% collected in February, 75% collected in March, and 5% not collected
c 20% collected in March, 75% collected in April, and 5% not collected
b
13-26
LO
13-5
Cash Disbursements Example
Santiago Pants
Monthly Disbursements for Purchases Experience
Cash disbursement for current month's purchases
Cash disbursement for prior month's purchases
Cash discounts taken
Total cash disbursement for purchases
50%
48
2
100%
Expected Purchases for Three Months
January sales
$120,000
February sales
$200,000
March sales
$250,000
13-27
LO
13-5
Cash Disbursements Example
Santiago Pants
Multiperiod Schedule of Cash Disbursements
For the Quarter Ended March 31
Month
January
Beginning accounts payable,
January 1, $256,000
January purchases, $120,000a
February purchases, $200,000b
March purchases, $250,000c
Additional cash payments
Total cash disbursements
$256,000
60,000
250,000
$566,000
February
$ 57,600
100,000
250,000
$407,600
March
Total for
Quarter
$ 96,000
125,000
250,000
$471,000
$ 256,000
117,600
196,000
125,000
750,000
$1,444,600
a
50% paid in January, 48% paid in February, and 2% discounts taken
50% paid in February, 48% paid in March, and 2% discounts taken
c 50% paid in March, 48% paid in April, and 2% discounts taken
b
13-28
LO
13-6
Budgeted Balance Sheet
Example
LO 13-6
Develop budgeted financial statements.
Santiago Pants
Budget Balance Sheet
For the Budget Year Ended December 31 ($000)
Budget Year
Assets
Current assets:
Cash
Accounts receivable
Inventories
Other current assets
Total current assets
Long-term assets:
Property, plant, equipment
Less: Accumulated depreciation
Total assets
Balance
Jan 1
Additions Subtractions
Balance
Dec 31
$ 830
540
155
161
$1,686
$ 6,940
7,200
4,265
-0$18,405
$ 7,399
6,840
3,995
100
$18,334
$ 371
900
425
61
$1,757
1,866
(1,246)
$2,306
1,470
-0(220)
-0$19,651 $18,334
3,336
(1,470)
$3,623
13-29
LO
13-6
Budgeted Balance Sheet
Example
Santiago Pants
Budget Balance Sheet
For the Budget Year Ended December 31 ($000)
Budget Year
Balance
Jan 1
Liabilities and Shareholders Equity
Current liabilities:
Accounts payable
Taxes payable
Current portion of long-term debt
Total current liabilities
Long-term liabilities
Total liabilities
Shareholders' equity
Common stock
Retained earnings
Total shareholders
Total liabilities and shareholders equity
Additions Subtractions
Balance
Dec 31
$ 256
187
23
$ 466
258
$ 724
$1,715
550
23
$2,288
-0$2,288
$1,694
350
23
$2,067
23
$2,090
$ 277
387
23
$ 687
235
$ 922
$ 437
1,145
$1,582
$2,306
$ -01,149
$1,149
$3,437
$ -030
30
$2,120
$ 437
2,264
$2,701
$3,623
13-30
LO
13-6
Assembling the Master Budget
for a Manufacturing Firm
13-31
LO
13-7
Budgeting in Service
Organizations
LO 13-7 Explain budgeting in merchandising and service organizations.
Sales forecast
Budgeted cost
of services
Budgeted
income
statement
Cash budget
Marketing and
administrative
cost budget
Budgeted
balance sheets
13-32
LO
13-7
Budgeting Retail and Wholesale
Organizations
Sales forecast
Marketing and
administrative
cost budget
Purchases
Budgeted
income
statement
Cash budget
Budgeted
balance sheets
13-33
LO
13-7
Budgeting Retail and Wholesale
Organizations
Castro Audio & Video, Inc.
Estimated Information for Retail Operations
13-34
LO
13-7
Budgeting Retail and Wholesale
Organizations
13-35
LO
13-8
Ethical Problems in Budgeting
LO 13-8
Explain why ethical issues arise in budgeting.
Budgets can create serious
ethical issues for many people.
The company must recognize
the trade-off between
encouraging unbiased reporting
by managers and the use of
budget information in
performance evaluation and
rewards.
13-36
LO
13-9
Budgeting Under Uncertainty
LO 13-9 Explain how to use sensitivity analysis
to budget under uncertainty.
Budgets allow management to explore many
alternatives.
Spreadsheets are helpful in preparing budgets
and quantifying “what-if” conditions. Questions
like what if labor costs are 10 percent higher (or
lower) than projected?
13-37
LO
13-9
Alternative Budgeting Scenarios
Santiago Pants Alternative Budget Scenarios
13-38
End of Chapter 13
13-39