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Budget a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
Planning Facilitating Communication and Coordination Allocating Resources Controlling Profit and Operations Evaluating Performance and Providing Incentives
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Types of Budgets
Detail Budget
Detail Budget Detail Budget
Production
Master Budget
Covering all phases of a companys operations.
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Types of Budgets
Income Statement
Balance Sheet
Types of Budgets
Capital budgets with acquisitions that normally cover several years. Financial budgets with financial resource acquisitions.
2001
2002
This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.
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Production Budget
Overhead Budget
Cash Budget
Sales Budget
Breakers, Inc. 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.
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Sales Budget
April Budgeted sales (units) 20,000 Selling price per unit $ 10 Total Revenue $ 200,000 May June Quarter
50,000 $ 10 $
30,000 10 $
100,000 10
$ 500,000
$ 300,000
$ 1,000,000
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Production Budget
Sales Budget Production Budget
Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
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Production Budget
The management of Breakers, Inc. 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.
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Production Budget
Sales in units Add: desired end. inventory Total needed Less: beg. inventory Units to be produced April 20,000 10,000 30,000 4,000 26,000 May 50,000 6,000 56,000 10,000 46,000 June 30,000 5,000 35,000 6,000 29,000 Quarter 100,000 5,000 105,000 4,000 101,000
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Direct-Material Budget
At Breakers, 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 $.40 per pound. Lets prepare the direct materials budget.
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Direct-Material Budget
Production in units Materials per unit Production needs Add: desired ending inventory Total needed Less: beginning inventory Materials to be purchased April 26,000 5 130,000 23,000 153,000 13,000 140,000 May 46,000 5 230,000 14,500 244,500 23,000 221,500 June 29,000 5 145,000 11,500 156,500 14,500 142,000 Quarter 101,000 5 505,000 11,500 516,500 13,000 503,500
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Direct-Labor Budget
At Breakers, each unit of product requires 0.1 hours of direct labor.
The Company has a no layoff policy so all employees will be paid for 40 hours of work each week.
In exchange for the no layoff policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. Lets prepare the direct labor budget.
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Direct-Labor Budget
Production in units Direct labor hours Labor hours required Guaranteed labor hours 3,000 Labor hours paid 3,000 Wage rate $ 8 Total direct labot cost $ 24,000 April 26,000 0.10 2,600 May 46,000 0.10 4,600 3,000 4,600 $ 8 $ 36,800 June 29,000 0.10 2,900 3,000 3,000 $ 8 $ 24,000 Quarter 101,000 0.10 10,100
10,600 $ 8 $ 84,800
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Overhead Budget
Here is Breakers Overhead Budget for the quarter.
April Indirect labor Indirect material Utilities Rent Insurance Maintenance $ 17,500 7,000 4,200 13,300 5,800 8,200 56,000 $ May 26,500 12,600 8,400 13,300 5,800 9,400 76,000 $ June 17,900 8,600 5,200 13,300 5,800 8,200 59,000 $ Quarter 61,900 28,200 17,800 39,900 17,400 25,800 $ 191,000
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$ 170,000
$ 400,000
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Cash Budget
(Collections and Disbursements)
April Beginning cash balance $ 40,000 Add: cash collections 170,000 Total cash available 210,000 Less: disbursements Materials 40,000 Direct labor 24,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase Dividends 25,000 Total disbursements 215,000 Excess (deficiency) of Cash available over disbursements $ (5,000) May $ 30,000 400,000 430,000 72,300 36,800 76,000 85,000 143,700 413,800 June $ 30,000 335,000 365,000 72,700 24,000 59,000 75,000 48,300 279,000 Quarter $ 40,000 905,000 945,000 185,000 84,800 191,000 230,000 192,000 25,000 907,800
$ 16,200
$ 86,000
$ 37,200
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Cash Budget
(Financing and Repayment)
April Excess (deficiency) of Cash available over disbursements Financing: Borrowing Repayments Interest Total financing Ending cash balance May June Quarter
$ 86,000
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Cost of goods manufactured Add: Beg. finished-goods inventory Cost of goods available for sale Deduct: End. finished-goods inventory Cost of goods sold
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After we complete the cost of goods manufactured and sold schedules, we can prepare the budgeted income statement for Breakers.
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$ $ $
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25%of June sales of $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit.
Current assets Cash Accounts receivable Raw materials inventory Work-in-process inventory Finished goods inventory Total current assets Property and equipment Land Building Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities
36,362 75,000 4,600 17,000 23,000 155,962 50,000 148,000 192,000 390,000 545,962 28,400 217,000 300,562 545,962
9-31
$ $
Breakers, Inc. Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Work-in-process inventory Finished goods inventory Total current assets Property and equipment Land Building Beginning balance $ 46,400 Equipment Add: net income 279,162 Total property and equipment Deduct: dividends (25,000) Total assets Ending balance $300,562 Accounts payable Common stock Retained earnings Total liabilities and equities
36,362 75,000 4,600 17,000 23,000 155,962 50,000 148,000 192,000 390,000 545,962 28,400 217,000 300,562 545,962
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$ $
Production Budget
When the interactions of the elements Selling Endingthe master budget are expressed as and Direct Direct of Overhead Inventory Materials Labor Budget a set of mathematical relations,Administrative it Budget Budget Budget Budget Direct Materials becomes a financial planning model that can be used to answer what if Cash Budget questions about unknown variables. Budgeted Income
Statement
Budget Administration
The Budget Committee is a standing committee responsible for . . .
overall policy matters relating to the budget. coordinating the preparation of the budget.
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E-Budgeting
Employees throughout an organization can submit and retrieve budget information electronically. This tends to streamline the entire budgeting process.
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Zero-Base Budgeting
To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness.
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rates. High inflation rates in some foreign countries. Differences in local economic conditions.
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Participative Budgeting
Top Management
Middle Management
Middle Management
Supervisor
Supervisor
Supervisor
Supervisor