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Study objectives Chapter 20 -4 1. Indicate the services of budgeting. 2. State the essentials of reliable budgeting. 3. Determine the budgets that consist of the understand budget. 4. Explain the sources for preparing the budgeted earnings statement. 5. Define the major sections that a cash budget. 6. Indicate the applicability of budgeting in nonmanufacturing companies.




You are watching: The budget for a merchandiser differs from a budget for a manufacturer because

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Preview of thing Budgeting is an important to financial well-being. Usage budgets in planning and also controlling operations. Specific focus is on exactly how budgeting is used as a planning tool by management. Thing 20 -5


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Budgetary plan Budgeting Basics Budgeting & accounting Benefits Essentials of efficient budgeting length of budget period Budgeting procedure Budgeting and also human habits Budgeting and also longrange to plan The master spending plan Chapter 20 -6 preparing the operating Budgets Sales Production straight materials direct labor production overhead Selling and administrative price Budgeted income statement preparing the gaue won Budgets Cash Budgeted balance sheet Budgeting in Nonmanufacturing suppliers Merchandisers company Not-for-profit


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Budgeting Basics budget A formal composed statement of management’s plans for a stated future time period, to express in gaue won terms. Primary way to interact agreed-upon goals to all parts of the company. Disclosure efficiency. Control maker - crucial basis for performance evaluation as soon as adopted. Thing 20 -7


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Budgeting Basics – function of bookkeeping Historical audit data top top revenues, costs, and also expenses assist in formulating future budgets. Accountants generally responsible for presenting management’s budgeting objectives in gaue won terms. The budget and also its administration are, however, totally management’s responsibility. Chapter 20 -8


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Budgeting Basics - Benefits requires all levels of administration to arrangement ahead and formalize purposes on a recurring basis. Provides definite missions for assessing performance at every level the responsibility. Creates very early warning mechanism for potential problems. Thing 20 -9 LO 1: show the benefits of budgeting.


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Budgeting Basics - services Facilitates coordination of activities within the business. Outcomes in better management awareness that the entity’s overall operations and also the influence of external factors. Encourages personnel throughout organization to satisfy planned objectives. Chapter 20 -10 LO 1: show the benefits of budgeting.


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Budgeting Basics - services A spending plan is an help to monitoring not a substitute for management. Thing 20 -11 LO 1: show the services of budgeting.


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Review inquiry Which that the complying with is no a benefit of budgeting? a. Administration can setup ahead b. An early warning system is listed for potential problems. C. It allows disciplinary action to it is in taken in ~ every level of responsibility. D. The coordination of tasks is facilitated. Thing 20 -12 LO 1: suggest the benefits of budgeting.


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Effective Budgeting depends on a sound business structure v authority and also responsibility for every phases that operations clearly defined. Based upon research and evaluation with realistic goals. Accepted by every levels that management. Thing 20 -13 LO 2: State the essentials of efficient budgeting.


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The Budget period May be ready for any period of time. Most common - one year. Supplement through monthly and also quarterly budgets. Different budgets may cover different time periods. Long enough to provide an attainable goal and also minimize seasonal or cyclical fluctuations. Quick enough for reputable estimates. Continuous twelve-month budget. Fall the month just ended and add a future month. Keeps monitoring planning a full year ahead. Thing 20 -14 LO 2: State the essentials of effective budgeting.


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The Budgeting process Base budget plan goals on past performance collect data from organizational units. Begin several months before end of present year. Develop budget within the frame of a sales forecast. Reflects potential sector sales. Mirrors company’s intended share. Thing 20 -15 LO 2: State the essentials of efficient budgeting.


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The Budgeting procedure Factors considered in Sales Forecasting: thing 20 -16 1. General economic conditions. 2. Industry trends. 3. Market research studies. 4. Anticipated advertising and also promotion. 5. Previous industry share. 6. Price changes. 7. Technical developments. LO 2: State the essentials of reliable budgeting.


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Budgeting and Human behavior Participative Budgeting. Might inspire higher levels of power or discourage extr effort. Depends on how budget plan developed and administered. Invite each level of monitoring to participate. This “bottom-to-top” strategy is called Participative Budgeting. Chapter 20 -17 LO 2: State the essentials of efficient budgeting.


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Participative Budgeting Advantages: more accurate spending plan estimates since lower level supervisors have much more detailed knowledge of their area. Propensity to perceive process as fair due to involvement of reduced level management. As whole goal - develop a budget considered fair and achievable by managers while still meeting corporate goals. Risk of unreliable budgets better when they are “top -down. ” thing 20 -18 LO 2: State the essentials of effective budgeting.


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Participative Budgeting Disadvantages: can be time consuming and costly. Can foster budgetary “gaming” with budgetary slack: situation where managers intentionally underestimate budgeted earnings or overestimate budgeted costs so that budget goals are much easier to meet. Chapter 20 -19 LO 2: State the essentials of reliable budgeting.


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Participative Budgeting Illustration 20 -1 circulation of budget data from lower management to peak levels. Chapter 20 -20 LO 2: State the essentials of reliable budgeting.


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Budgeting matches Long range Planning Three straightforward differences between Budgeting and Long range Planning: Time period involved, Emphasis, and also Detail presented, Budgeting is momentary – commonly one year. Long range planning - at least five years. Thing 20 -21 LO 2: State the essentials of effective budgeting.


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Review concern The essentials of effective budgeting perform not include: a. Top-down budgeting b. Management acceptance. C. Research and also analysis. D. Sound organizational structure. Chapter 20 -22 LO 2: State the essentials of reliable budgeting.


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The Master spending plan A collection of interrelated budgets that constitutes a setup of activity for a stated time period. Includes two great of budgets: operation budgets: separation, personal, instance budgets that result in the ready of the budgeted income statement – create goals for sales and also production personnel. Jae won budgets: The funding expenditures budget, the cash budget, and also the budgeted balance paper – emphasis primarily top top cash needs to money operations and capital expenditures. Chapter 20 -23 LO 3: determine the budgets that make up the master budget.


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The Master spending plan - contents Chapter 20 -24 Illustration 20 -2 LO 3: determine the budgets that consist of the grasp budget.


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Operating Budgets: Sales Budget first budget prepared. Derived from the sales forecast. Management’s finest estimate that sales revenue for the spending plan period. Every other budget depends top top the sales budget. Ready by multiplying expected unit sales volume for each product by anticipated unit selling price. Thing 20 -25 LO 3: determine the budgets that comprise the master budget.


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Operating Budgets: Sales budget Example – Hayes firm Expected sales volume: 3, 000 units in the very first quarter through 500 -unit increments because that each complying with quarter. Sales price: $60 every unit. Illustration 20 -3 thing 20 -26 LO 3: identify the budgets that make up the understand budget.


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Operating Budgets: Production spending plan Shows the units that have to be created to fulfill anticipated sales. Derived from sales budget plus the desired adjust in ending finished items (ending finished goods less the beginning finished items units). Compelled production in units formula: Illustration 20 -4 vital to have a realistic estimate of finishing inventory. Chapter 20 -27 LO 3: determine the budgets that consist of the grasp budget.


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Operating Budgets: Production spending plan Example – Hayes agency Hayes Co. Believes it can accomplish future sales requirements with an ending inventory that 20% of next quarter’s sales. Illustration 20 -5 chapter 20 -28 LO 3: identify the budgets that make up the understand budget.


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Operating Budgets: direct Materials budget Shows both the quantity and also cost of direct materials to it is in purchased. Obtained from the straight materials units compelled for manufacturing (from the manufacturing budget) to add the desired adjust in ending straight materials units. Illustration 20 -6 Budgeted expense of straight materials to be purchased = forced units of straight materials × anticipated expense per unit. Chapter 20 -29 LO 3: recognize the budgets that consist of the grasp budget.


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Operating Budgets: straight Materials budget Example – Hayes Company key component in budgeting process – desired ending inventory. An ending inventory that 10% of next quarter’s production needs is sufficient. The manufacturing of every unit needs 2 pounds the raw products at an intended price of $4 every pound. Chapter 20 -30 LO 3: determine the budgets that comprise the grasp budget.


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Operating Budgets: direct Materials budget Example – Hayes agency Illustration 20 -7 thing 20 -31 LO 3: determine the budgets that consist of the master budget.


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Operating Budgets: direct Labor spending plan Shows both the quantity of hours and cost of direct labor important to satisfy production requirements. An essential in maintaining a labor force that can satisfy expected production. Full direct labor price formula: Illustration 20 -8 thing 20 -32 LO 3: identify the budgets that consist of the understand budget.


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Operating Budgets: straight Labor budget Example – Hayes firm Direct labor hours from the manufacturing budget. Two hours of direct labor forced for every unit. Anticipated hourly wage rate $10. Illustration 20 -9 chapter 20 -33 LO 3: determine the budgets that comprise the grasp budget.


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Operating Budgets: production Overhead mirrors the expected manufacturing overhead prices for the budget plan period. Distinguishes in between fixed and also variable overhead costs. Example – Hayes agency Fixed cost quantities are assumed. Intended variable prices per direct labor hour: Indirect materials: $1. 00 Indirect labor: $1. 40 Utilities: $0. 40 Maintenance: $0. 20 chapter 20 -34 LO 3: recognize the budgets that comprise the understand budget.


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Operating Budgets: production Overhead Illustration 20 -10 chapter 20 -35 LO 3: identify the budgets that consist of the master budget.


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Operating Budgets: Selling and also Administrative projection of anticipated operation expenses. Distinguishes in between fixed and variable costs. Instance – Hayes agency Fixed cost quantities are assumed. Supposed variable prices per unit sold (from sales budget): Sales commissions: $3. 00 Freight-out: $1. 00 thing 20 -36 LO 3: determine the budgets that comprise the grasp budget.


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Operating Budgets: Selling and also Administrative Illustration 20 -11 thing 20 -37 LO 3: identify the budgets that comprise the understand budget.


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Review inquiry A sales budget plan is: a. Derived from the production budget b. Management’s best estimate that sales revenue because that the year. C. No the starting point because that the master budget. D. Prepared only for credit sales. Thing 20 -38 LO 3: determine the budgets that comprise the understand budget.


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Operating Budgets: Budgeted earnings Statement vital end-product the the operation budgets. Indicates expected profit of operations. Provides a basis because that evaluating firm performance. Prepared from the operation budgets: Sales Budget, manufacturing Budget, straight Materials Budget, straight Labor Budget, production Overhead Budget, and also Selling and Administrative price Budget. Chapter 20 -39 LO 4: describe the sources for preparing the budgeted income statement.


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Operating Budgets: Budgeted income Statement instance – Hayes firm To find cost of items sold: First, determine the unit price of one Kitchen-mate: Illustration 20 -12 Second, determine expense of goods Sold by multiply units sold times unit cost: 15, 000 devices × $44 = $660, 000 thing 20 -40 LO 4: define the resources for preparing the budgeted revenue statement.


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Operating Budgets: Budgeted revenue Statement added estimated data for budgeted income statement: interest Expense: $100 income Taxes: $12, 000 chapter 20 -41 Illustration 20 -13 LO 4: explain the sources for prepare the budgeted revenue statement.


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Review concern Each of the following budgets is provided in prepare the budgeted revenue statement other than the: a. Sales budget b. Selling and also administrative budget. C. Resources expenditure budget. D. Direct labor budget. Chapter 20 -42 LO 4: describe the sources for prepare the budgeted earnings statement.


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Financial Budgets: Cash budget Shows suspect cash flows. Often considered to be the most important output in prepare financial budgets. Includes three sections: Cash Receipts, Cash Disbursements, and Financing. Mirrors beginning and also ending cash balances. Chapter 20 -43 LO 5: describe the major sections of a cash budget.


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Operating Budgets: Budgeted earnings Statement straightforward Format Illustration 20 -14 chapter 20 -44 LO 5: define the principal sections of a cash budget.


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Financial Budgets: Cash budget Cash Receipts Section: has expected receipts native the major sources the revenue – normally cash sales and collections on credit sales. Shows expected interest and also dividends receipts as well as proceeds native planned sales that investments, plant assets, and also capital stock. Cash Disbursements Section: contains expected cash payments for straight materials and labor, taxes, dividends, tree assets, etc. Gaue won Section: shows expected borrowings and also repayments of borrowed funds plus interest. Chapter 20 -45 LO 5: define the major sections that a cash budget.


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Financial Budgets: Cash budget plan Must prepare in sequence. Finishing cash balance the one period is the beginning cash balance for the next. Data obtained from various other budgets and from management. Regularly prepared for the year top top a monthly basis. Chapter 20 -46 LO 5: explain the principal sections the a cash budget.


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Financial Budgets: Cash spending plan Example – Hayes company Assumptions Minimum preferred Cash Balance = $ 15, 000 January 1, 2012, Cash balance: $38, 000. Sales: collect 60% in quarter sold; 40% in following quarter; collection December 31, 2011 account Receivable in quarter 1. Intended sale of short term investments: $2, 000 in 4 minutes 1 1. Direct Materials: pay 50% in 4 minutes 1 purchased; 50% in following quarter; pay December 31, 2011 accounts Payable in 4 minutes 1 1. Straight Labor: pay 100% in quarter incurred. Manufacturing Overhead and Selling/Administrative Expenses: salary (except depreciation) in 4 minutes 1 incurred. Expected purchase of truck: $10, 000 cash in 4 minutes 1 2. Estimated yearly income taxes: same payment each quarter. Chapter 20 -47 Loans: salary in earliest 4 minutes 1 with enough cash (i. E. , cash ~ above hand over the $15, 000 minimum forced balance). LO 5: define the primary sections that a cash budget.


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Financial Budgets: Cash budget plan Example – Hayes firm Usually prepare schedule of collection from customers. Illustration 20 -15 thing 20 -48 LO 5: describe the major sections of a cash budget.


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Financial Budgets: Cash spending plan Example – Hayes company Prepare schedule that cash payments for straight materials. Illustration 20 -16 currently prepare the Cash Budget based upon the assumptions and preceding schedules. Chapter 20 -49 LO 5: define the primary sections the a cash budget.


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Financial Budgets: Cash budget plan Chapter 20 -50 Illustration 20 -17 LO 5: explain the major sections of a cash budget.


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Financial Budgets: Cash spending plan Contributes to an ext effective cash management. Shows managers the require for added financing before actual need arises. Suggests when overfill cash will be available. Thing 20 -51 LO 5: describe the major sections of a cash budget.


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Financial Budgets: Budgeted Balance sheet A estimate of financial position at the finish of the budgeted period. Emerged from the budgeted balance sheet because that the preceding year and the budgets because that the current year. Thing 20 -52 LO 5: describe the major sections that a cash budget.


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Financial Budgets: Budgeted Balance sheet Illustration 20 -18 chapter 20 -53 LO 5: explain the primary sections that a cash budget.


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Review inquiry Expected straight materials purchases in Read company are $70, 000 in the very first quarter and also $90, 000 in the second quarter. Fourty percent that the purchases are paid in cash as incurred, and the balance is payment in the adhering to quarter. The budgeted cash payments because that purchases in the second quarter are: a. $96, 000 b. $90, 000 c. $78, 000 d. $72, 000 chapter 20 -54 1 st 4 minutes 1 28, 000 2 nd quarter 42, 000 = 60% 36, 000 = 40% 78, 000 LO 5: explain the primary sections of a cash budget.


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Budgeting: Merchandisers Sales Budget: beginning point and vital factor in developing the understand budget. Usage a purchases spending plan instead that a manufacturing budget. Go not usage the production budgets (direct materials, straight labor, production overhead). To determine budgeted was purchases: chapter 20 -55 LO 6: show the applicability the budgeting in nonmanufacturing companies.


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Budgeting: Merchandisers instance – Lima agency Budgeted sales for July, $300, 000, and also for August, $320, 000. Cost of items Sold: 70% that sales. Desired ending inventory: 30% of next month’s expense of products Sold. Illustration 20 -20 chapter 20 -56 LO 6: suggest the applicability of budgeting in nonmanufacturing companies.


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Budgeting: business Companies crucial factor in budgeting is coordinating professional staff demands with guess services. Problems if overstaffed: Disproportionately high labor costs, reduced profits early to extr salaries, and also / or boosted staff turnover due to lack of difficult work. Difficulties if understaffed: shed revenues because existing and future customer needs for solutions cannot be met, and also / or lose of experienced staff as result of excessive work loads. Thing 20 -57 LO 6: suggest the applicability the budgeting in production companies.


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Budgeting: Not-for-Profit Companies simply as important as for profit-oriented company. However, budget procedure differs substantially from the of a profit-oriented company. Spending plan on the communication of cash operation (expenditures and receipts), no on a revenue and expense basis. The beginning point is typically expenditures, not receipts. Management’s job is to uncover receipts necessary to support planned expenditures. Budget must be strictly followed, overspending frequently illegal. Chapter 20 -58 LO 6: show the applicability that budgeting in nonmanufacturing companies.


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Review concern The budget for a merchandiser different from a spending plan for a manufacturer because: a. A goods purchases budget plan replaces the production budget. B. The production budgets room the exact same for both. C. A merchandiser has direct labor and also direct products in that merchandising budget but not production overhead. D. Both a and also c above Chapter 20 -59 LO 6: show the applicability of budgeting in nonmanufacturing companies.


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Chapter evaluation BE 20 -8 North firm has completed every one of its operation budgets. The sales budget for the year shows 50, 000 units and also total sales that $2, 000. The total unit price of make one unit the sales is $22. Selling and also administrative costs are meant to it is in $300, 000. Earnings taxes are estimated to be $150, 000. Prepare a budgeted earnings statement for the year finishing December 31, 2012. Chapter 20 -60


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Chapter testimonial - equipment North agency Budgeted income Statement for Year finishing December 31, 2012 Sales $2, 000 price of items Sold (50, 000 systems


See more: Which Of The Following Is True Of Effectiveness? Mgt 3301 Exam Chap 1

$22) 1, 100, 000 Gross profit 900, 000 marketing & bureaucratic Expenses 300, 000 income from work 600, 000 earnings Tax expense 150, 000 Net revenue $450, 000 chapter 20 -61


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