Download Inventory, Purchases and Cost of Goods Sold Budget

Chapter 21
Learn why managers use budgets
Develop
strategy
Control
Plan
Act
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3
Forces
managers to
plan
Promotes
coordination and
communication
Provides a
benchmark
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4
Understand the components of the master budget


Set of budgeted financial statements and
supporting schedules
Three types:
◦ Operating
◦ Capital expenditures
◦ Financial
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Sales budget
Inventory
budget
Purchases and
cost of goods
sold budget
Operating
expenses budget
Budgeted income
statement
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Budgeted income
statement
Capital
expenditures
budget
Cash
budget
Budgeted
balance
sheet
Budgeted
statement of
cash flows
Financial budget
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8
Prepare an operating budget


Forecast of sales revenues
Cornerstone of master budget
◦ Level of sales affects all elements
Budgeted total sales
Sales price
Expected
number of
units sold
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Cost of goods sold = Beginning inventory
+ Purchases – Ending inventory
Purchases = Cost of goods sold +
Ending inventory – Beginning inventory
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SALES BUDGET
Quarter ended
March 31 June 30
Sept. 30
Nine-month
total
Cash sales 30%
$30,000
$45,000
$37,500
$112,500
Credit sales 70%
70,000
105,000
87,500
262,500
$150,000 $125,000
$375,000
Total sales
$100,000
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12
Inventory, Purchases and Cost of Goods Sold Budget
March 31
June 30 Sept. 30
9-month
total
Cost of goods sold
(60% of total sales)
$60,000 $90,000 $75,000
$225,000
+ Desired ending inventory
($25,000 plus 10% next
quarter’s cost of goods sold)
34,000
32,500
37,000
Total inventory required
94,000 122,500
112,000
- Beginning inventory
(11,000) (34,000) (32,500)
= Budgeted purchases
$83,000 $88,500 $79,500
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

Expenses can be either fixed or variable
Includes items such as:
◦
◦
◦
◦
Salaries
Rent
Insurance
Advertising
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Prepare a financial budget
Cash
Budget
Budgeted
Balance
Sheet
Budgeted
Statement of
Cash Flows
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

Details how the business expects to go from the
beginning cash balance to the desired ending
balance
Four major parts:
◦
◦
◦
◦
Cash collections from customers
Cash payments for purchases
Cash payments for operating expense
Cash payments for capital expenditures
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
Cash collections from customers
◦ Cash sales from the sales budget
◦ Collections of previous month’s credit sales
 Accounts receivable

Cash payments for purchases
◦ Payment of current month purchases from the purchases
budget
◦ Payment of prior month purchases
 Accounts payable
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
Payments for operating expense
◦ Use data from operating expense budget
◦ Do not include noncash expenses such as depreciation

Payments for capital expenditures
◦ Use budgeted data
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Cash Budget
Beginning cash balance
$ 10
Cash collections
8
Cash available
18
Cash payments:
Purchases of inventory
10
Operating expenses
2
Capital expenditures
4
Total cash payments
16
Ending cash balance before financing
2
Less: minimum cash balance
(4)
Cash excess (deficiency)
(2)
Financing of cash deficiency
Borrowing
2
Payments
Total effects of financing
2
Ending cash balance
$
4
$
4
12
16
8
2
1
11
5
(4)
1
$
(1)
(1)
4
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(a)
Book value of equipment:
Cost
Less: Accumulated depreciation
Book value
Plus: Gain
Expected cash receipt
$22,000
(7,000)
$15,000
4,000
$19,000
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August
Expected sales in units
September
7,800
9,100
$13
$13
$101,400
$118,300
Cash sales (30%)
30,420
35,490
Credit sales (70%)
70,980
82,810
Selling price
Expected sales
Cash sales
$35,490
September credit sales
collected
82,810 x ¾
62,108
August credit sales collected
70,980 x ¼
17,745
Expected cash collections in September
$115,343
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Sales commissions & selling expenses
August
25% of sales
September
$25,350
$29,575
Rent and property taxes
Sales commissions & selling expense:
September: (9,100 x 13 x 25%) x 2/3
August: (7,800 x 13 x 25%) x 1/3
Expected cash payments for expenses
$4,000
19,717
8,450
$32,167
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Use sensitivity analysis in budgeting


Actual results often differ from budgeted amounts
Sensitivity analysis
◦ What-if technique that determines the result if predicted
amounts differ from those budgeted

Spreadsheet programs used for budgeting make
sensitivity analysis cost-effective
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Companywide budget
Department
A Budget
Department
A1 Budget
Department
B Budget
Department
A2 Budget
Department
Sub – B
Budget
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

Company’s individual operating units roll up
budgets to prepare company-wide budget
Budget management software used
◦ Often part of Enterprise Resource Planning (ERP)
system

Software allows managers to spend more time
analyzing data
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Prepare performance reports for responsibility
centers


Subunit of organization whose manager is
accountable for specific activities
Four types:
Cost
center
Revenue
center
Profit
center
Investment
center
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
Cost center
◦ Managers accountable for costs only
 Goal – to control costs

Revenue center
◦ Managers primarily accountable for revenues
 Goal – increase revenues

Profit center
◦ Managers accountable for both revenues and costs
 Goal – increase profits
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
Investment center
◦ Managers accountable for investments, revenues, and
costs
◦ Responsible for:
 Generating sales
 Controlling expenses
 Managing investment needed to earn the income
◦ Goal – increase return on investment, residual income, or
economic value added
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

Performance reports compare budgeted and
actual amounts
Reporting at all levels:
◦
◦
◦
◦

Division (investment centers)
Product lines (profit centers)
Production (cost centers)
Sales (revenue centers)
Management by exception
◦ Shows variances between actual and budgeted amounts
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