Chapter 21

The Budget Process

Learning Objectives
Why Budget?
Types of Budgets
Budget Process
Budget Preparation

Why Budget?
If you know where you are
going, youre more likely to get
there.
Plan
Perform
Evaluate
Report

The Budgeting Planning

Stage
Budgeting is a planning tool
A budget needs to tied to
the organizations goals and
objectives
A budget can be prepare
for :
Long Term (5 years)
Short Term (1 year)
4

What are your goals?

In a piece of paper write down a
goal you would like to
accomplished in the next one to
four years?

What is Involved in
Preparing the Annual
Budget

What is involved?

Forecasting sales and profit

targets by product and service
Define human resources needs
Plan for introduction of new
products or services
Set time timetable

Who is involved?
Executive Team
Department Managers
Other employees

The Master Budget

The master
budget is a set of
budgets that
consolidates an
organizations
financial
information into
budgeted financial
statements

The master
budget
includes:
Operating budgets
Budgeted balance
sheet
Cash Budget
Capital
Expenditure
Budget
7

Manufacturing Budget
Operations budget for a
manufacturing organization include:
Sales
Production
Direct material purchase
Direct Labor
Manufacturing Overhead
Selling and Administrative Expenses
8

Preparation of the Master Budget for a

Manufacturing Organization

Team Work Exercise

E5

10

Sales Budget

Sales in units
x Selling price
Sales in dollars
Next Budgets
Production
11

Team Work
Prepare a Sales Budget using
Exercise SE4

12

Production Budget

Sales in units
+ Desired Ending Finished Goods in units

Total Needs in units

-Beginning Finished Goods in units

Production in units

Next Budgets
Material Purchases,
Direct Labor, and
Overhead!
13

Production Budget
Prepare the following production budget for
the quarter assuming the company
maintains finished goods inventory equal to
one half of the next month's sales.
Budgeted sales for April are 7,000 units.
January

Desired sales in units

5,000

Desired ending finished goods inventory

2,000

Desired total units

7,000

Desired Beginning finished goods inventory

2,500

Production needs

4,500

February March

4,000

6,000

14

Answer
Prepare the
following production budget for the
:
quarter assuming the company maintains
finished goods inventory equal to one half of
the next month's sales. Budgeted sales for
April are 7,000 units.
January February March
Desired sales in units

5,000

4,000

6,000

Desired ending finished goods inventory

2,000

3,000

3,500

Desired total units

7,000

7,000

9,500

Desired Beginning finished goods inventory

2,500

2,000

3,000

Production needs

4,500

5,000

6,500

15

Team Work - More

Practice
Prepare a Production Budget.
Exercise SE5.

16

Direct Material Budget

Once you know the number of
units needed in production you
could calculate the Materials Cost.
Units x Direct Materials cost
The total $$ will be used in
calculating the Cash Budget
17

Budget Preparation and

Teamwork

Materials Budget E7, E8

Labor Budget

E10

18

The Cash Budget

The Cash Budget is a projection of
the cash an organization will
receive and the cash it will pay
out.

19

Cash Budgets
Cash Receipts
-Cash Disbursements
Change in Cash
+Beginning Cash
+Borrowings
-Repayments________________
Desired Ending Cash Balance

20

Alberta Limited needs a cash budget for the month of November.

The following information is available:
The cash balance on November 1 is $6,000.
Sales for October and November are $80,000 and $60,000
respectively. Cash collections on sales are 30 percent in the month
of sale, 65 percent in the following month, and 5 percent
uncollectible.
General expenses are budgeted to be $25,000 for November
(depreciation represents $2,000 of this amount).
Inventory purchases will total $30,000 in October and $40,000 in
November. Half of the inventory purchases are always paid for in
the month of purchase. The remainder are paid for in the following
month.
Office furniture costing $4,000 will be purchased for cash in
November, and sales commissions are budgeted at $12,000 for
November.
The company must maintain a minimum ending cash balance of
$4,000 and can borrow from the bank in multiples of $100. All
loans are repaid after 60 days.
Prepare a cash budget in good form for Alberta Limited for

21

Solution
Alberta Limited
Cash Budget
November

Cash receipts (30% of November Sales)

(65% of October Sales)
Total Cash Receipts
Cash Payments:
General Expenses ($25,000 - $2000)
Purchases (Oct $15,000 + Nov $20,000)
Office furniture
Sales Commissions
Total Cash Payments
Change in Cash
Beginning Cash
Borrowing
Repayments
Ending Cash

$18,000
52,000
$70,000
23,000
35,000
4,000
12,000
$74,000
$4,000)
6,000
2,000
$4,000

22

Cash Budgets and

Teamwork
SE8
SE9

23

Homework
P2 in its entirety
Based on Chapter

24