Budgeting: Accounting: A Malaysian Perspective, 5e (Adapted From Accounting 26e: Warren, Reeve & Duchac)

Example Exercise
Budgeting
Accounting: A Malaysian Perspective, 5e
(Adapted from Accounting 26e: Warren, Reeve & Duchac)
CHAPTER
9
Learning Objectives
• LO1: Describe budgeting, its objectives, and its

impact on human behavior.
• LO2: Describe the basic elements of the budget
process, the two major types of budgeting, and the
use of computers in budgeting.
• LO3: Describe the master budget for a merchandising
company.
• LO4: Prepare the basic operating budgets for a
merchandising company.
• LO5: Prepare financial budgets for a merchandising
company.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature and Objectives of Budgeting
• Budgets play an important role for organizations of all

sizes and forms.
o For example, budgets are used in managing the operations of
government agencies, churches, hospitals, and other
nonprofit organizations.
• This chapter describes and illustrates budgeting for a
merchandising company.
Objectives of Budgeting (slide 1 of 2)
• Budgeting involves:
o Establishing specific goals.
o Executing plans to achieve the goals.
o Periodically comparing actual results with the goals.
Objectives of Budgeting (slide 2 of 2)
• Budgeting affects the following managerial functions:

o Planning
 Planning involves setting goals to guide decisions and help motivate
employees.
o Directing
 Directing involves decisions and actions to achieve budgeted goals.
– A budgetary unit of a company is called a responsibility center.
 Each responsibility center is led by a manager who has the authority and responsibility
for achieving the center’s budgeted goals.
o Controlling
 Controlling involves comparing actual performance against the budgeted
goals.
– Such comparisons provide feedback to managers and employees about their
performance.
 If necessary, responsibility centers can use such feedback to adjust their activities in
the future.
Planning, Directing, and Controlling
Human Behavior and Budgeting
• Human behavior problems can arise in the budgeting

process in the following situations:
o Budgeted goals are set too tight, which are very hard or
impossible to achieve.
o Budgeted goals are set too loose, which are very easy to
achieve.
o Budgeted goals conflict with the objectives of the company
and employees.
Human Behavior Problems in Budgeting
Human Behavior and Budgeting: Setting
Budget Goals Too Tightly
• If budgeted goals are viewed as unrealistic or

unachievable, the budget may have a negative effect
on the ability of the company to achieve its goals.
• Attainable goals are more likely to motivate
employees and managers.
o For this reason, it is important for employees and managers
to be involved in the budgeting process.
 Involving employees in the budgeting process provides them with
a sense of control and, thus, more of a commitment in meeting
budgeted goals.
Budget Goals Too Loosely
• Although it is desirable to establish attainable goals,

it is undesirable to plan budget goals that are too easy.
o Such budget “padding” is called budgetary slack.
 Managers may plan slack in their budgets to provide a “cushion”
for unexpected events.
– However, slack budgets may create inefficiency by reducing the
budgetary incentive to trim spending.
Conflicting Budget Goals
• Goal conflict occurs when the employees’ or

managers’ self-interest differs from the company’s
objectives or goals.
Budgeting Systems (slide 1 of 4)
• The budgetary period for operating activities

normally includes the fiscal year of a company.
• For control purposes, annual budgets are usually
subdivided into shorter time periods, such as quarters
of the year, months, or weeks.
• A variation of fiscal-year budgeting, called

continuous budgeting, maintains a 12-month
projection into the future.
• The 12-month budget is continually revised by
replacing the data for the month just ended with the
budget data for the same month in the next year.
Continuous Budgeting
• Developing an annual budget usually begins several

months prior to the end of the current year.
• The responsibility of developing an annual budget is
normally assigned to a budget committee.
o Such a committee often consists of the budget director, the
controller, the treasurer, the production manager, and the
sales manager.
• The budget process is monitored and summarized by
the Accounting Department, which reports to the
committee.
• There are several methods of developing budget

estimates.
o One method, called zero-based budgeting, requires
managers to estimate sales, production, and other operating
data as though operations are being started for the first
time.
o A more common approach is to start with last year’s budget
and revise it for actual results and expected changes for the
coming year.
 Two major budgets using this approach are the static budget and
the flexible budget.
Static Budget (slide 1 of 2)
• A static budget shows the expected results of a

responsibility center for only one activity level. Once
the budget has been determined, it is not changed,
even if the activity changes.
• Static budgeting is used by many service companies,
government entities, and for some functions of
manufacturing companies, such as purchasing,
engineering, and accounting.
• A disadvantage of static budgets is that they do not
adjust for changes in activity levels.
Static Budget (slide 2 of 2)
Flexible Budget (slide 1 of 3)
• Flexible budgets show the expected results of a

responsibility center for several activity levels.
o A flexible budget is, in effect, a series of static budgets for
different levels of activity.
• A flexible budget is constructed as follows:

o Step 1: Identify the relevant activity levels.
 The relevant levels of activity could be expressed in units, machine
hours, direct labor hours, or some other activity base.
o Step 2: Identify the fixed and variable cost components of
the costs being budgeted.
o Step 3: Prepare the budget for each activity level by
multiplying the variable cost per unit by the activity level
and then adding the monthly fixed cost.
Flexible Budget
• Because the flexible budget adjusts for changes in the

level of activity, it is much more accurate and useful
than the static budget.
Static and Flexible Budgets
Example Exercise Flexible Budgeting
At the beginning of the period, the Landon Awards

Enterprise has budgeted labor costs of RM45,000 and
supervisor salaries of RM30,000 for 5,000 hours of
processing and packaging jobs. It actually completed
6,000 hours of the jobs. Determine the budget for the
business, assuming that it uses flexible budgeting.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Master Budget
• The master budget is an integrated set of operating

and financing budgets for a period of time.
o The operating budgets can be used to prepare a budgeted
income statement.
o The financial budgets provide information for a budgeted
balance sheet.
• Most companies prepare a master budget on a yearly
basis.
Master Budget for a Merchandising Company
Operating Budgets
Sales Budget (slide 1 of 2)
• The sales budget begins by estimating the quantity of

sales.
o The prior year’s sales are often used as a starting point.
• These sales quantities are then revised for such
factors as:
o Planned advertising and promotions
o Projected pricing changes
o Expected industry and general economic condition.
• Once sales quantities are estimated, the budgeted
sales revenue can be determined as follows:
Sales Budget (slide 2 of 2)
• Elite Sports Enterprise is a small merchandising firm

that sells sport equipment and accessories. Elite
Sports estimates the following sales volumes for
January, February and March, 2018.
• The unit-selling price is RM400 each. Sales in

December last year were 2,570 units, and forecasted
sales for April are 3,000 units.
Sales Budget
Purchases, Inventory & Cost of Goods Sold
Budgets (slide 1 of 4)
• The budgeted amounts for purchases, inventory and

cost of goods sold are integrated into a single budget,
which is the purchases budget.
• The budgeted volume of purchases are computed as
follows:
• At the end of each month, Elite Sports Enterprise

decides to have on hand inventory at a minimum of
70% of the expected cost of goods sold for the
following month.
• The cost of goods sold averages 50% of sales.
• The budgeted cost of goods sold and desired ending
inventory are combined together in the computation
for purchases budget.
Example Exercise Purchases Budget (slide 4 of 4)
Landon Awards Enterprise projected sales of 45,000

brass plaques for 2018. The estimated January 1, 2018,
inventory is 3,000 units, and the desired December 31,
2018 inventory is 5,000 units. What are the budgeted
purchases (in units) for 2018?
part.
Selling and Administrative Expenses Budget
(slide 1 of 2)
• The sales budget is often used as the starting point for the
selling and administrative expenses budget.
• The selling and administrative expenses budget is
normally supported by departmental schedules.
• Assume that Elite Sports Enterprise pays salaries of
RM20,000 at the end of every month, and gives the
commissions equal to 15% of sales in the following
month after they are earned. Other expenses include:
Selling and Administrative Expenses Budget
(slide 2 of 2)
Statement of Profit or Loss Budget (slide 1 of 2)
• The Statement of Profit or Loss Budget is prepared

by integrating the following budgets:
o Sales budget
o Purchases budget
o Selling and administrative expenses budget
• In addition, estimates of other income, other expense,
and income tax are also integrated into this budget.
Statement of Profit or Loss Budget (slide 2 of 2)
• This budget summarizes the budgeted operating

activities of the company.
o In doing so, the Statement of Profit or Loss budget allows
management to assess the effects of estimated sales, costs,
and expenses on profits for the year.
o If the budgeted net income is too low, management could
review and revise the operating plans in an attempt to
improve income.
Statement of Profit or Loss Budget
Elite Sports Enterprise

Statement of Profit or Loss Budget
For the Three Months Ending March 31, 2018
RM RM
Revenue from sales (from Exhibit 9) 3,290,000
Cost of goods sold (from Exhibit 10) (1,645,000)
Gross profit 1,645,000
Selling and Administrative expenses:
Selling expenses (from Exhibit 11) 589,300
Administrative expenses (from Exhibit 11) 116,900
(706,200)
Income from operations 938,800
Other expense:
Interest expense (from Exhibit 16) (24,825)
Net Income 913,975
Financial Budgets
• The financial budgets reflect the financing and

investing activities of the company.
• Two financial budgets are the:
o Cash budget
o Capital expenditures budget
Cash Budget
• The cash budget estimates the expected receipts

(inflows) and payments (outflows) of cash for a
period of time.
• Cash budget can be affected by the various operating
budgets like the sales and purchases budgets, as well
as the capital expenditures budget, dividend policies
and plans for equity or debt financing.
• To prepare cash budget, we begin by developing the
estimated cash receipts and estimated cash payments
portion of the cash budget
Estimated Cash Receipts (slide 1 of 5)
• The primary source of estimated cash receipts is from

cash sales and collections on account (credit sales).
• In addition, cash receipts may be obtained from plans
to issue equity or debt financing as well as other
sources such as interest revenue.
• To estimate cash receipts from cash sales and
collections on account, a schedule of collections from
sales is prepared.
• The budgeted cash collected for any month is the sum

of the cash collected from previous month’s sales and
the cash collected from current month’s sales.
• Assume the following data for Elite Sports
Enterprise:
• Elite expects to sell 10% of its merchandises for cash.

• The remaining 90% will be credit sales, in which
60% are expected to be collected in the month of the
sale and the other 40% in the following month after
44
Determine estimated Cash Receipts from cash sales
January February March

Receipts from cash sales:
Cash sales (10% x current
month’s sales—Note A)……. $108,000 $124,000 $ 97,000
Note
NoteA:
A: $108,000
$108,000==$1,080,000
$1,080,000xx10%
10%
$124,000
$124,000==$1,240,000
$1,240,000xx10%
10%
$$ 97,000 64
97,000==$$ 970,000
970,000xx10%
10%
45
Determine estimated Cash Receipts: sales on account

Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)……….. $370,000 $388,800 $446,400
Note
NoteB:
B: $370,000,
$370,000,given
givenas
asJan.
Jan.1,1,2008
2008Accts.
Accts.Rec.
Rec.balance
balance
$388,800
$388,800==$1,080,000
$1,080,000xx90%90%xx40%
40%
$446,400
$446,400==$1,240,000
$1,240,000xx90%90%xx40%
40%
46
Cash Receipts from current month credit sales

Receipts from sales on account:

Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)………... $370,000 $388,800 $446,400
Collections from current
month’s sales (60%) (Note C) 583,200 669,600 523,800
Note
NoteC:
C: $583,200
$583,200==$1,080,000
$1,080,000xx90%
90%xx60%
60%
$669,600
$669,600==$1,240,000
$1,240,000xx90%
90%xx60%
60%
$523,800
$523,800==$$ 970,000
970,000xx90%
90%xx60%
60%
Schedule of Collections from Sales
Schedule of
Collections
from Sales
(exhibit 13)
Estimated Cash Payments (slide 1 of 2)
• Estimated cash payments are planned reductions in

cash for operating costs and expenses such as cost of
goods purchased, selling and administrative expenses.
• In addition, estimated cash payments may be planned
for capital expenditures, dividends, interest payments,
or long-term debt payments.
• To estimate cash payments for purchases, a schedule
of payments for cost of goods purchased is prepared.
Estimated Cash Payments (slide 2 of 2)
• The purchases budget is used to develop a schedule of

payments for purchases. Let’s assume the following data
for Elite Sports Enterprise:
 The balance of accounts payable on January 1, 2018 was
RM133, 050 incurred for merchandise purchases.
 Elite expects to pay 75% of purchases in the current
month and the remaining is payable in the following
month.
• The budgeted cash payments for any period are the sum
of the cash paid from the purchase costs in the current
period (75%) and the cash paid from purchase costs in
the previous period (25%).
Schedule of Payments for Purchases
Completing the Cash Budget (slide 1 of 3)
• We need to estimate other payments.

• Payments for selling & administrative expenses are based
on the selling & administrative expense budget but
excluding noncash items like depreciation & prepaid
expenses
• Assume the following additional data for Elite Sports

Enterprise:
• Short term loan is available from the local bank at an

interest rate of 10% per annum. So Elite can borrow
or repay loans in multiples of RM1,000.
• The cash budget is structured for a budget period as

follows:
• The total available cash balance and the total cash needed
will determine whether cash financing is required.
• Borrowing is necessary when cash available plus cash
receipts are less than cash payments.
Cash Budget (slide 1 of 2)
Example Exercise Cash Budget (slide 2 of 2)
Landon Awards Enterprise collects 25% of its sales on

account in the month of the sale and 75% in the month
following the sale. If sales on account are budgeted to
be RM100,000 for March and RM126,000 for April,
what are the budgeted cash receipts from sales on
account for April?
part.
Capital Expenditures Budget
• The capital expenditures budget summarizes plans

for acquiring fixed assets.
o Such expenditures are necessary as machinery and other
fixed assets wear out or become obsolete.
o In addition, purchasing additional fixed assets may be
necessary to meet increasing demand for the company’s
product.
• Capital expenditures budgets are often prepared for
five to ten years into the future.
o This is necessary because fixed assets often must be
ordered years in advance.
Statement of Financial Position Budget
• The budgeted statement of financial position is

prepared based on the operating and financial budgets
of the master budget.
• It is dated as of the end of the budget period and is
similar to a normal statement of financial position
except that estimated amounts are used.
• If the statement indicates a weakness in financial
position, revising the financing plans or other plans
may be necessary.
THANK YOU

Budgeting: Accounting: A Malaysian Perspective, 5e (Adapted From Accounting 26e: Warren, Reeve & Duchac)

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Example Exercise

• LO1: Describe budgeting, its objectives, and its

• Budgets play an important role for organizations of all

• Budgeting affects the following managerial functions:

• Human behavior problems can arise in the budgeting

• If budgeted goals are viewed as unrealistic or

• Although it is desirable to establish attainable goals,

• Goal conflict occurs when the employees’ or

• The budgetary period for operating activities

• A variation of fiscal-year budgeting, called

• Developing an annual budget usually begins several

• There are several methods of developing budget

• A static budget shows the expected results of a

• Flexible budgets show the expected results of a

• A flexible budget is constructed as follows:

• Because the flexible budget adjusts for changes in the

At the beginning of the period, the Landon Awards

• The master budget is an integrated set of operating

• The sales budget begins by estimating the quantity of

• Elite Sports Enterprise is a small merchandising firm

• The unit-selling price is RM400 each. Sales in

• The budgeted amounts for purchases, inventory and

• At the end of each month, Elite Sports Enterprise

Landon Awards Enterprise projected sales of 45,000

• The Statement of Profit or Loss Budget is prepared

• This budget summarizes the budgeted operating

Elite Sports Enterprise

• The financial budgets reflect the financing and

• The cash budget estimates the expected receipts

• The primary source of estimated cash receipts is from

• The budgeted cash collected for any month is the sum

• Elite expects to sell 10% of its merchandises for cash.

Estimated Cash Receipts (slide 3 of 5)

Determine estimated Cash Receipts from cash sales

January February March

Estimated Cash Receipts (slide 4 of 5)

Determine estimated Cash Receipts: sales on account

January February March

Estimated Cash Receipts (slide 5 of 5)

Cash Receipts from current month credit sales

January February March

Receipts from sales on account:

• Estimated cash payments are planned reductions in

• The purchases budget is used to develop a schedule of

• We need to estimate other payments.

• Assume the following additional data for Elite Sports

• Short term loan is available from the local bank at an

• The cash budget is structured for a budget period as

Landon Awards Enterprise collects 25% of its sales on

• The capital expenditures budget summarizes plans

• The budgeted statement of financial position is

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