Profit Planning

Chapter 10

Garrison, Noreen, Brewer, Cheng & Yuen 2012 McGraw-Hill Education (Asia)
 Learning Objective 1

Understand why
organizations budget and
the processes they use to
create budgets.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 2
 The Basic Framework of Budgeting

A budget is a detailed quantitative plan for

acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organizations activities is known
as budgetary control.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 3
 Planning and Control

Planning
Planning Control
Control
involves
involves developing
developing involves
involves thethe steps
steps taken
taken by
by
objectives
objectives and
and management
management to to increase
increase
preparing
preparing various
various the
the likelihood
likelihood that
that the
the
budgets
budgets to
to achieve
achieve objectives
objectives setset down
down while
while
those
those objectives.
objectives. planning
planning are are attained
attained and
and
that
that all
all parts
parts of
of the
the
organization
organization are are working
working
together
together toward
toward that
that goal.
goal.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 4
 Advantages of Budgeting

Define goals
and objectives
Communicate
plans

Advantages
Coordinate Means of allocating
activities resources

Uncover potential
bottlenecks

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 5
 Responsibility Accounting

Managers should be
held responsible for
those items - and only
those items - that they
can actually control
to a significant extent.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 6
 Choosing the Budget Period

Operating Budget

2011 2012 2013 2014

Operating
Operating budgets
budgets ordinarily
ordinarily AA continuous
continuous budget
budget is
is aa
cover
cover aa one-year
one-year period
period 12-month
12-month budget
budget that
that rolls
rolls
corresponding to a companys
corresponding to a companys forward one month (or quarter)
fiscal year. Many companies forward one month (or quarter)
fiscal year. Many companies as the current month (or quarter)
divide their annual budget as the current month (or quarter)
divide their annual budget is
into four quarters. is completed.
completed.
into four quarters.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 7
 Learning Objective 2

Understand Basic
Budgeting Terms and the
Behavioral Aspects of
Budgeting.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 8
 Bottom-up and Top-down Budgeting
Bottom-up Top-down budgeting
budgeting
(Self-imposed budget
or Participative
budget )

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 9
 Advantages of the Bottom-up Budgeting
(Self-Imposed Budgets)
1.
1. Individuals
Individuals at
at all
all levels
levels of
of the
the organization
organization are
are viewed
viewed as
as
members
members of of the
the team
team whose
whose judgments
judgments are
are valued
valued by
by top
top
management.
management.
2.
2. Budget
Budget estimates
estimates prepared
prepared by
by front-line
front-line managers
managers are
are
often
often more
more accurate
accurate than
than estimates
estimates prepared
prepared by
by top
top
managers.
managers.
3.
3. Motivation
Motivation isis generally
generally higher
higher when
when individuals
individuals participate
participate
in
in setting
setting their
their own
own goals
goals than
than when
when the
the goals
goals are
are
imposed
imposed from
from above.
above.
4.
4. A
A manager
manager who
who is
is not
not able
able to to meet
meet aa budget
budget imposed
imposed
from
from above
above can
can claim
claim that
that itit was
was unrealistic.
unrealistic. Self-imposed
Self-imposed
budgets
budgets eliminate
eliminate this
this excuse.
excuse.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 10
 How to overcome problems of self-
imposed budgets
Self-imposed budgets should be reviewed
by higher levels of management to
prevent budgetary slack (or budget
padding).
Most companies issue broad guidelines in
terms of overall profits or sales. Lower
level managers are directed to prepare
budgets that meet those targets.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 11
 Advantages of the Top-down Budgeting

1.
1. Avoid
Avoid the
the potential
potential budgetary
budgetary slack
slack (budget
(budget padding).
padding).
2.
2. Provide
Provide aa clearer
clearer performance
performance goals
goals and
and expectations
expectations
from
from the
the top
top management.
management.
3.
3. May
May provide
provide better
better budget
budget due
due to
to top
top managements
managements
access
access to
to privileged/confidential
privileged/confidential market
market and
and organization
organization
information
information ..
4.
4. Provide
Provide an
an efficient
efficient budgetary
budgetary process.
process.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 12
 Budget Lapsing
A popular method among government agencies,
universities and organizations relying on allocated funds.

Any unused funding at the end of the financial period

cannot be carried forward to the following year.

As a result, the following years budget may be cut because

of the under-expenditure in the previous year.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 13
 Budget Lapsing: Advantages
Budget lapsing helps ensure that the appropriate level of
resources is utilized in each period. Without budget lapsing,
risk-averse managers may unnecessarily accumulate funds
and this may adversely affect the performance of the
organization.

It helps provide an opportunity for a clean cut-off of

expenditures and to reallocate any unused resources for
other more appropriate requirements.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 14
 Budget Lapsing: Potential Problem &
Solution
Budget lapsing can cause undesired behavior effects. For
example, managers may wastefully spend their entire
budget before the end of the period in order to avoid budget
cuts.

A system of reviewing the expenditures near end of the

period may uncover unnecessary expenditures and
discourage managers to wastefully spend because of budget
lapsing.
McGraw-Hill
McGraw-Hill/Irwin
Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen
Slide 15
 Incremental versus Zero-based Budgets

Incremental method of budgeting is most commonly

used by companies. Companies start off one years budget
by referring back to the previous years figures.
Adjustments are then made to the budget to account for
the expected changes such as prices for the next year.

While incremental method of budgeting is practical and

fast, any inefficiency in the previous years figures may be
carried forward. For example, if all along the organization is
over staffed, then the budget will continually to be allowing
for the over staffing situation under this method.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 16
 Incremental versus Zero-based Budgets

Zero-Based Budgets are prepared based on the

assumption that the company has just started. Therefore,
resources required have to be justified from scratch.

For example, when budgeting for staff cost for a restaurant,

managers using the zero-based budgeting approach will
ignore the existing staff level and expenses, rather, they
will examine factors such as opening hours, number of
tables, expected patron numbers to work out the number of
staff required at each position and level, hence the
associate costs, to produce a budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 17
 Incremental versus Zero-based Budgets

Companies using the zero-based method do not simply

ignore previous years figures. Figures generated by the
zero-based method are usually compared with previous
years figures. Any large differences are investigated.

As zero-based budgeting is time consuming and costly,

companies tend to use this method for the relatively large
items and the incremental method for the rest.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 18
 Top Management Attitude:
Human Factors in Budgeting
The success of a budget program depends on three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3.Budget targets should be challenging but
achievable in order to have good motivational effects.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 19
 The Budget Committee

A
A standing
standing committee
committee responsible
responsible for
for
overall
overall policy
policy matters
matters relating
relating to
to the
the budget
budget
coordinating
coordinating the
the preparation
preparation ofof the
the budget
budget
resolving
resolving disputes
disputes related
related to
to the
the budget
budget
approving
approving the
the final
final budget
budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 20
 Learning Objective 3

Understand the Key

Components of Master
Budget in Manufacturing,
Merchandising and
Service Industries

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 21
 Understand the key components of master budget in
Manufacturing, Merchandising, and Service Industries
The first step of budgeting for every business is to budget for the
revenue, whether it is a sales budget for providing goods or services or
a funding budget. Although operational budgets are adapted
according to the industries, they are very similar and typically comprise
of budgets for
Income statement
Cash
Balance sheet.
The major differences of different industries include:
Manufacturing: production budget is involved
Merchandising: no production budget, only purchase budget of
merchandise is required.
Service Industries: budget for revenue and cost of providing services
Not-for-profit: expected funding available and plan usage of funding.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 22
 Learning Objective 4

Prepare a Master Budget

for a Manufacturing
Company.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 23
 The Master Budget: An Overview
Sales
Sales budget
budget

Selling
Selling and
and
Ending
Ending inventory
inventory administrative
administrative
Production
Production budget
budget
budget
budget budget
budget

Direct
Direct materials
materials Direct
Direct labor
labor Manufacturing
Manufacturing
budget
budget budget
budget overhead
overhead budget
budget

Cash
Cash Budget
Budget

Budgeted
Budgeted Budgeted
Budgeted
income
income balance
balance sheet
sheet
statement
statement

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 24
 Learning Objective 4 (a)

Prepare a sales budget,

including a schedule of
expected cash collections.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 25
 Budgeting Example

Royal Company is preparing budgets for the

quarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units.
The selling price is $10 per unit.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 26
 The Sales Budget

The individual months of April, May, and June are

summed to obtain the total budgeted sales in units
and dollars for the quarter ended June 30 th

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 27
 Expected Cash Collections

All sales are on account.

Royals collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% uncollectible.
The March 31 accounts receivable
balance of $30,000 will be collected in full.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 28
 Expected Cash Collections

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 29
 Expected Cash Collections

From
From the
the Sales
Sales Budget
Budget for
for April.
April.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 30
 Expected Cash Collections

From
From the
the Sales
Sales Budget
Budget for
for May.
May.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 31
 Quick Check

What will be the total cash collections for

the quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 32
 Quick Check

What will be the total cash collections for

the quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 33
 Expected Cash Collections

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 34
 Learning Objective 4 (b)

Prepare a
production budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 35
 The Production Budget

Sales Production
Budget Budget
ed
and l et
p
Expected
o m
C
Cash
Collections

The production budget must be adequate to

meet budgeted sales and to provide for
the desired ending inventory.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 36
 The Production Budget

The management at Royal Company wants

ending inventory to be equal to 20% of the
following months budgeted sales in units.

On March 31, 4,000 units were on hand.

Lets prepare the production budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 37
 The Production Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 38
 The Production Budget

March 31
ending inventory
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 39
 Quick Check

What is the required production for May?

a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 40
 Quick Check

What is the required production for May?

a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 41
 The Production Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 42
 The Production Budget

Assumed ending inventory.

McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 43
 Learning Objective 4 (c)

Prepare a direct materials

budget, including a
schedule of expected cash
disbursements for
purchases of materials.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 44
 The Direct Materials Budget
At Royal Company, five pounds of material are
required per unit of product.
Management wants materials on hand at the
end of each month equal to 10% of the
following months production.
On March 31, 13,000 pounds of material are
on hand. Material cost is $0.40 per pound.

Lets prepare the direct materials budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 45
 The Direct Materials Budget

From
From production
production budget
budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 46
 The Direct Materials Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 47
 The Direct Materials Budget

March 31 inventory

10% of following months Calculate the materials to

production needs. be purchased in May.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 48
 Quick Check

How
How much
much materials
materials should
should be
be purchased
purchased in
in May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 49
 Quick Check

How
How much
much materials
materials should
should be
be purchased
purchased in
in May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 50
 The Direct Materials Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 51
 The Direct Materials Budget

Assumed ending inventory

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 52
 Expected Cash Disbursement for Materials
Royal pays $0.40 per pound for its materials.
One-half of a months purchases is paid for in the
month of purchase; the other half is paid in the
following month.
The March 31 accounts payable balance is
$12,000.

Lets calculate expected cash disbursements.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 53
 Expected Cash Disbursement for Materials

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 54
 Expected Cash Disbursement for Materials

Compute the expected cash

disbursements for materials
for the quarter.

140,000 lbs. $0.40/lb. = $56,000

McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 55
 Quick Check

What
What are
are the
the total
total cash
cash disbursements
disbursements for
for the
the
quarter?
quarter?
a.
a. $185,000
$185,000
b.
b. $$ 68,000
68,000
c.
c. $$ 56,000
56,000
d.
d. $201,400
$201,400

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 56
 Quick Check

What are the total cash disbursements for the

quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 57
 Expected Cash Disbursement for Materials

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 58
 Learning Objective 4 (d)

Prepare a direct
labor budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 59
 The Direct Labor Budget
At Royal, each unit of product requires 0.05 hours (3
minutes) of direct labor.
The Company has a no layoff policy so all employees
will be paid for 40 hours of work each week.
For purposes of our illustration assume that Royal has a
no layoff policy, workers are pay at the rate of $10 per
hour regardless of the hours worked.
For the next three months, the direct labor workforce will
be paid for a minimum of 1,500 hours per month.
Lets prepare the direct labor budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 60
 The Direct Labor Budget

From production budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 61
 The Direct Labor Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 62
 The Direct Labor Budget

Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 63
 The Direct Labor Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 64
 Quick Check

What would be the total direct labor cost for

the quarter if the company follows its no lay-
off policy, but pays $15 (time-and-a-half) for
every hour worked in excess of 1,500 hours
in a month?
a. $79,500
b. $64,500
c. $61,000
d. $57,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 65
 Quick Check

What would be the total direct labor cost for

the quarter if the company follows its no lay-
off policy, but pays $15 (time-and-a-half) for
every hour worked in excess of 1,500 hours
in a month?
a. $79,500
b. $64,500
c. $61,000
d. $57,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 66
 Learning Objective 4 (e)

Prepare a
manufacturing
overhead budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 67
 Manufacturing Overhead Budget

At
At Royal,
Royal, manufacturing
manufacturing overhead
overhead is is applied
applied toto units
units
of
of product
product onon the
the basis
basis of
of direct
direct labor
labor hours.
hours.
The
The variable
variable manufacturing
manufacturing overhead
overhead rate
rate is
is $20
$20 per
per
direct
direct labor
labor hour.
hour.
Fixed
Fixed manufacturing
manufacturing overhead
overhead is is $50,000
$50,000 per
per month,
month,
which
which includes
includes $20,000
$20,000 ofof noncash
noncash costs
costs (primarily
(primarily
depreciation
depreciation ofof plant
plant assets).
assets).

Lets
Lets prepare
prepare the
the manufacturing
manufacturing overhead
overhead budget.
budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 68
 Manufacturing Overhead Budget

Direct
Direct Labor
Labor Budget.
Budget.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 69
 Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour *
Total labor hours required 5,050

* rounded

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 70
 Manufacturing Overhead Budget

Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 71
 Ending Finished Goods Inventory Budget

Direct
Direct materials
materials
budget
budget and
and information.
information.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 72
 Ending Finished Goods Inventory Budget

Direct
Direct labor
labor budget.
budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 73
 Ending Finished Goods Inventory Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour *
Total labor hours required 5,050

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 74
 Ending Finished Goods Inventory Budget

Production
Production Budget.
Budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 75
 Learning Objective 4 (f)

Prepare a selling and

administrative
expense budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 76
 Selling and Administrative Expense Budget
At Royal, the selling and administrative expense budget is
divided into variable and fixed components.
The variable selling and administrative expenses are $0.50
per unit sold.
Fixed selling and administrative expenses are $70,000 per
month.
The fixed selling and administrative expenses include
$10,000 in costs primarily depreciation that are not cash
outflows of the current month.

Lets prepare the companys selling and administrative

expense budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 77
 Selling and Administrative Expense Budget

Calculate the selling and administrative

cash expenses for the quarter.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 78
 Quick Check

What are the total cash disbursements for

selling and administrative expenses for the
quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 79
 Quick Check

What are the total cash disbursements for

selling and administrative expenses for the
quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 80
 Selling Administrative Expense Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 81
 Learning Objective 4 (g)

Prepare a cash
budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 82
 Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the
company will need to borrow money or if it will be able to
repay funds previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 83
 The Cash Budget

Assume the following information for Royal:

Maintains a 16% open line of credit for $75,000
Maintains a minimum cash balance of $30,000
Borrows on the first day of the month and repays
loans on the last day of the month
Pays a cash dividend of $49,000 in April
Purchases $143,700 of equipment in May and
$48,300 in June (both purchases paid in cash)
Has an April 1 cash balance of $40,000
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 84
 The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections.
Collections.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 85
 The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements.
Disbursements.
Direct Labor
Budget.
Manufacturing
Overhead Budget.

Selling and Administrative

Expense Budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 86
 The Cash Budget

Because Royal maintains

a cash balance of $30,000,
the company must borrow
$50,000 on its line-of-credit.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 87
 The Cash Budget

Because Royal maintains

a cash balance of $30,000,
the company must borrow
$50,000 on its line-of-credit.

Ending cash balance for April

is the beginning May balance.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 88
 The Cash Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 89
 Quick Check

What is the excess (deficiency) of cash

available over disbursements for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 90
 Quick Check

What is the excess (deficiency) of cash

available over disbursements for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 91
 The Cash Budget

$50,000 16% 3/12 = $2,000

Borrowings on April 1 and
repayment on June 30.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 92
 The Budgeted Income Statement

Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C

With interest expense from the cash

budget, Royal can prepare the budgeted
income statement.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 93
 Learning Objective 4(h)

Prepare a budgeted
income statement.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 94
 The Budgeted Income Statement

Sales
Sales Budget.
Budget.
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending
Ending Finished
Finished
Sales (100,000 units @ $10) $ 1,000,000 Goods
Cost of goods sold (100,000 @ $4.99) 499,000
Goods Inventory.
Inventory.
Gross margin 501,000
Selling and administrative expenses 260,000 Selling
Selling and
and
Operating income 241,000 Administrative
Administrative
Interest expense 2,000
Expense
Expense Budget.
Budget.
Net income $ 239,000

Cash
Cash Budget.
Budget.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 95
 Learning Objective 4 (i)

Prepare a
budgeted balance
sheet.

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 96
 The Budgeted Balance Sheet

Royal reported the following account

balances prior to preparing its budgeted
financial statements:
Land - $50,000
Common stock - $200,000
Retained earnings - $146,150 (April 1)
Equipment - $175,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 97
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 98
 Beginning balance $146,150
Add: net income 239,000
Deduct: dividends (49,000)
Ending balance $336,150

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 99
 Learning Objective 5

Prepare Budget on
the Key
Components for the
Service Industry

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 100
 Key Budget Components for the Service Industry

Wonder World, a hypothetical theme park, has the following data:

Main Sources Major

Departments
of Revenue Expenses
Ticketing Salaries Finance & Administration
Food & Rent Operations
Beverages Cost of Sales Marketing
Souvenir Shop Advertising Souvenir Shop
Maintenance Food and Beverages
Depreciation Maintenance
Utilities

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 101
 Learning Objective 5 (a)

Prepare a
Visitorship Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 102
 Visitorship Budget
Based on historical records, economic outlook, tourist
arrival expectations, the following visitorship budget for the
coming year is prepared:

Number of Visitors
Adults 750,000
Children 250,000
1,000,00
Total Visitors 0

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 103
 Learning Objective 5 (b)

Prepare a Revenue
Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 104
 Revenue Budget
Based on the average price charged by Wonder World and
other historical data, the following revenues per visitor are
budgeted and approved by the top management:

Revenue per visitor

Gate Collections : Adults $13
Gate Collections : Children $9
Souvenir Shop $4
Food and Beverages $6

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 105
 Revenue Budget
With the budgeted number of visitors and revenues per visitor
from each category, the budgeted revenues are computed:
Revenue
Gate Collections : Adults1 $9,750,000
Gate Collections : Children2 $2,250,000
Souvenir Shop3 $4,000,000
Food and Beverages4 $6,000,000
Total Revenue $22,000,000
Note
1
750,000 X $13
2
250,000 X $9
3
1,000,000 X $4
4
1,000,000 X $6

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 106
 Learning Objective 5 (c)

Prepare a Cost of
Sales Budget and
Expense Budget

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 107
 Cost of Sales Budget
For cost of sales on souvenirs and food and beverages, the
company normally makes use of the historical cost of sales
% and takes into account of any expected price changes
from the suppliers. For the coming year, the expected cost of
sales % is 50% on sales for both the souvenir shop and food
and beverages.

Cost of Sales
$2,000,0
Souvenir Shop 00
Food and $3,000,0
Beverage 00
$5,000,
Total
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
000
Garrison, Noreen, Brewer, Cheng & Yuen Slide 108
Expenses Budget
How the items are budgeted will depend on the nature of the items.

Nature of expense Amount Budget approach

Rental $1,100,000 5% of revenue as agreed with the landlord.

Zero based approach by reviewing the

Salaries $3,500,000 actual requirement of each position and its
suitable rate of pay.
Advertising $1,200,000 Proposed by marketing manager.
Maintenance $980,000 Proposed by maintenance manager.
Computed by the finance manager by
Depreciation $890,000 taking into account of existing assets and
proposed new assets.

Computed by maintenance manager based

Utilities $580,000
on the rates and usage expectations.

Based on judgment and any specific

Other operating expenses $490,000
requirements such as legal expenses.
Total $8,740,000
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 109
 Learning Objective 5 (d)

Prepare a
Budgeted Income
Statement

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 110
 Budgeted Income Statement

Budgeted Income Statement can be prepared by putting all

previous budgeted information together.

Budgeted Income Statement

Revenue $22,000,000
Cost of goods sold $5,000,000
Expenses $8,740,000
Net income $8,260,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 111
 Learning Objective 6

Explain the Costs

and Benefits of
Budgeting

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 112
 Costs and Benefits of Budgeting
Budgeting is time-consuming and costly.
Budgetary slack or padding is an inherent problem of
budgeting.
Despite the drawbacks of budgeting, most companies are
still using budgets to plan, communicate, set objectives
and allocate resources etc.
Since budgets are still commonly used, benefits of
budgeting are high and drawbacks of budgeting can be
minimized by having a good budgeting system.
For a good budgeting system, it is critical to have effective
communication and mutual trust between the top
management and its staff.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 113
 End of Chapter 10

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 114