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Budgeting
and
Controlling
Tools

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After
this chapter,
should be able to:
1. Describe budgeting, its
objectives, and its impact on
behavior.
2. human
Describe
the basic elements
of the budget process, the
two major types of budgeting,
and the use of computers in
budgeting.
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After studying this chapter, you
should be able to:
3. Describe the master budget
for a merchandising business.
4. Prepare the basic income
statement budgets for a
merchandising business.
5. Prepare balance sheet
budgets for a merchandising
business.

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Objective
Objective 11

9-1

Describe budgeting, its


objectives, and its impact
on human behavior.
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9-1

A budget charts a course for a business by


outlining the plans of the business in
financial terms.
Objectives of Budgeting
Establishing specific goals
Executing plans to achieve the goals
Periodically comparing actual results to the goals
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Estimated Portion of Your Total Monthly


Income That Should Be Budgeted for
Various Living Expenses Savings

8%
Entertainment
6%

9-1

Housing
30%

Transportation
15%
Clothing
7%
Other
4% Medical
5%

Utilities
5%
Food
20%

Budgeting
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9-1

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Planning

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9-1

Budgeting supports the planning process


by requiring all organizational units to
establish their goals for the upcoming
period. These goals motivate individuals
and groups to perform at high levels.
Planning also motivates employees to
attain goals and improve overall
decision making.
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Directing

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9-1

The budget can be used to direct


and coordinate operations in order
to achieve the stated goals.

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Responsibility
Centers
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9-1

The budgetary units of an organization


are called responsibility centers. Each
responsibility center is led by a manager
who has the authority over and
responsibility for the units performance.

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9-1

Controlling Through Feedback

As time passes, the actual


performance of an operation can be
compared against the planned goals.
This provides prompt feedback to
employees about their performance.
If necessary, employees can use such
feedback to adjust their activities in
the future.
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Human behavior problems

9-1

can arise if
1. the budget goal is too
tight and very hard for
the employee to
achieve.

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Human behavior problems

9-1

can arise if
2. the budget goal is too
loose and very easy for
the employee to achieve.
It is undesirable to set lower
goals than is attainable.
Such budget padding is
termed budgetary slack.

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Human behavior problems

9-1

can arise if
3. the budget goals of a
business conflict with the
objectives of the
employees.
Goal
conflict occurs when individual
self-interest differs from business
objectives or when different
departments are given conflicting
objectives.

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Objective 22

9-2

Describe the basic


elements of the budget
process, the two major
types of budgeting, and
the use of computers in
budgeting.
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9-2

A variation of fiscal-year
budgeting, called continuous
budgeting, maintains a twelvemonth projection into the future.

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9-2

Continuous Budgeting

One-Year Budget

Feb. Mar. Apr.


200
200
8
200 8
8

May June July


200 200 200
8
8
8

Aug.
200
8

Sep. Oct.
200 200
8
8

Nov. Dec.
200 200
8
8

Add February
2009
Delete on February
28

Jan.
2009

Feb.
200
9

2
0
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9-2

Zero-Based Budgeting

Zero-based budgeting
requires managers to estimate
sales, production, and other
operating data as though
operations are being started
for the first time.
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Static Budget

9-2

A static budget shows the expected


results of a responsibility center for
only one activity level. The budget
does not change even if the activity
changes.
A static budget is used by many
service companies and for some
administrative functions of
merchandising companies.
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9-2

Static Budget

Colter Manufacturing Company


Assembly Department Budget
For the Year Ending July 31, 2008
Direct labor
Electric power
Supervisor salaries
Total department costs

$40,000
5,000
15,000
$60,000

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9-2

Strength:
A static budget is simpleall expenses are
budgeted as fixed costs.

Weakness:
A static budget does not adjust for changes in
revenues and expenses that
occur as volumes change.
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9-2

Flexible Budget

Flexible budgets show the


expected results of a
responsibility center for several
activity levels.
A flexible budget is especially
useful in estimating and
controlling factory costs and
operating expenses.
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9-2

Flexible Budget

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9-2

Strength:
Flexible budgeting provides information needed to
analyze the impact of volume changes
on actual operating results.

Weakness:
Flexible budgeting requires greater research into
costs. There must be a
differentiation between fixed and
variable costs.

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9-2

If Coulter Manufacturing Companys


Assembly Department spent $72,000 to
produce 10,000 units, how much over or
under budget would the department
manager be using a static budget? A
flexible budget?

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9-2

00
0
,
$12

Over
Budget

Static
Budget

$60,000

Actual
Results

$72,000

(Continued)

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Over
Budget

9-2

0
0
0
$1,

Flexible Budget

10,000
9,000
8,000
units
units
units
$60,000 $65,500
$71,000
(Concluded)

Actual
Results
$72,000

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3
0

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Objective
3
Objective 3

9-3

Describe the master


budget for a
merchandising
business.
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9-3

Budgets That Are Linked Together in a Master Budget


Budgeted Income
Statement
Sales budget

Purchase budget
Inventory budget
Cost of goods sold
budget
Selling and
administrative
expense budget

Budgeted Balance
Sheet

Cash budget
Capital expenditures
budget

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Income Statement
Budgets

9-3

Sales Budget

Purchases Budget

Inventory Budget

Selling and Administrative


Expenses Budget

Cost of Goods Sold


Budget
Budgeted Income
Statement

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Elite Sports Enterprise
Balance Sheet on December 31, 2009
Assets
RM

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Current assets
Cash
Accounts receivable
Merchandise inventory
Prepaid rent

Fixed assets
Equipment and other
Accumulated depreciation
Total Assets
Liabilities and Owners Equity
Current liabilities
Accounts payable
Accrued commissions payable
Long term liability
Owners equity
Total Liabilities and Owners Equity

9-3

RM

190,000
370,080
378,000
6,000

944,080

140,000
36,000

104,000

Balance
Sheet
Budgets

1,048,080

133,050
154,200

287,250
200,000
560,830
1,048,080

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Objective 44

9-4

Prepare the basic


income statement
budgets for a
merchandising
business.
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Sales
Budget
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9-4

The sales budget normally


indicates for each product
(1) the quantity of estimated sales and
(2)the expected unit selling price.

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Factors Expected to Affect Future


Sales include

9-4

backlog of unfilled sales orders


planned advertising and promotion
expected industry and general
economic conditions
productive capacity
projected pricing policy
findings of market research studies
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9-4

Sales Budget (Exhibit 1)

Elite Sports Enterprise


Sales Budget
For the Months of January, February and March
Month

Forecasted Sales
Volume

Unit Selling
Price

Total Sales

January

2,700

RM400

RM1,080,000

February

3,100

RM400

RM1,240,000

March

2,425

RM400

RM 970,000

Total revenue from sales

RM3,290,000

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9-4

Purchase Budget

Purchase budget is used to estimate the


quantity of merchandises needed to be
purchased in order to fulfill the targeted
sales demand. Use the following formulation
to determineBudgeted
total purchase
needed.
Cost of goods sold
(+) Desired Ending inventory
Total inventory needed
(-) Estimated Beginning inventory
Total Purchase needed

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Purchases Budget (Exhibit 2)

9-4

Elite Sports Enterprise


Purchases Budget
For the Months of January, February and March
Cost of goods sold
(50% of current sales)
Plus Desired ending inventory
(70% of next month cost of goods sold)
Total inventory needed
Less Beginning inventory
Total Purchases (RM)

January

February

March

Total

540,000

620,000

485,000

1,645,000

434,000

339,500

*420,000

420,000

974,000
# 378,000
596,000

959,500
434,000
525,500

905,000
339,500
565,500

2,065,000
378,000
1,687,000

Note
* : RM420,000 = (3,000 x 400) x 50% x 70%
# : RM378,000 = given as December 31, 2009, Accounts Receivable
balance, or
= 70% x January cost of goods sold of RM540,000

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Selling and administrative expense

9-4

The sales budget is often used as the


starting point for estimating the
selling and administrative expenses.

For example, a budgeted increase in


sales may require more advertising.
Other examples of expenses driven
by
sales
volume
are
sales
commissions, packaging and delivery
expenses.
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Consider the following assumption in preparing


selling and administrative expense:
Salaries (paid at the end of

9-4

RM2,000 / month

month).
Commission (paid at early of the

15% of sales

following month)

2% of sales, paid as incurred

..

RM10,000 per month, paid as

Advertising

incurred

RM2,000 expiration per month

Other selling expenses.

RM6,000 per month

1% of sales, paid as incurred

Rent

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Selling and Administrative Expense Budget


Elite Sports Enterprise
(Exhibit 3)

9-4

Selling and Administrative Expenses Budget


For the Months of January, February and March

Administrative expenses:
Salaries (fixed)
Rent
Depreciation
Miscellaneous expenses
Total administrative expenses
Selling expenses:
Commissions
Advertising
Others
Total selling expenses
Total selling and
administrative expenses

January

Februar
y

March

Total

20,000
2,000
6,000
10,800
38,800

20,000
2,000
6,000
12,400
40,400

20,000
2,000
6,000
9,700
37,700

60,000
6,000
18,000
32,900
116,900

186,000 145,500
24,800 19,400
10,000 10,000
220,800 174,900
261,200 212,60
0

493,500
65,800
30,000
589,300
706,200

162,000
21,600
10,000
193,600
232,400

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Budgeted Income Statement (exhibit 4)

9-4

Elite Sports Enterprise


Budgeted Income Statement
For the Three Months Ending March 31, 2010
RM
RM
Revenue from sales (from Exhibit 1)
3,290,000
Cost of goods sold (from Exhibit 2)
(1,645,000)
Gross profit
1,645,000
Selling and Administrative expenses:
Selling expenses
(from Exhibit 3)
589,300
Administrative expenses (from Exhibit 3)
116,900
(706,200)
Income from operations
938,800
Other expense:
Interest expense (from Exhibit 7)
(24,825)
Net Income
913,975

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Objective
Objective 55

9-5

Prepare balance sheet


budgets for a
merchandising
business.
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Cash Budget

9-5

The cash budget is one of the


most important elements of the
budgeted balance sheet. The
cash budget presents the
expected receipts (inflows) and
payments (outflows) of cash for a
period of time.

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Determine estimated Cash Receipts from cash sales

9-5

JanuaryFebruaryMarch

Receipts from cash sales:


Cash sales (10% x current
months salesNote A) $108,000

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%
$$ 97,000
97,000==$$ 970,000
970,000xx10%
10%

$124,000

$97,000

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Determine estimated Cash Receipts: sales on account

9-5

JanuaryFebruaryMarch

Receipts from cash sales:


Cash sales (10% x current
months salesNote A).$108,000 $124,000 $ 97,000

Receipts from sales on account:


Collections from prior months
sales (40% of previous months
credit salesNote B)..$370,000 $388,800 $446,400

Note
NoteB:
B:

$370,000,
$370,000,given
givenasasJan.
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%

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Cash Receipts from current month credit sales


Receipts from cash sales:
Cash sales (10% x current
months salesNote A)

9-5

JanuaryFebruaryMarch
$108,000$124,000$ 97,000

Receipts from sales on account:


Collections from prior months
sales (40% of previous months
credit salesNote B)...$370,000 $388,800 $446,400
Collections from current
months sales (60%) (see 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%

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Elite Sports Enterprise


Schedule of Collections from Sales
For the three months ending March 31, 2010

9-5

Schedule
of
Collections
from Sales
(exhibit 5)

200
9

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Schedule of Payments for purchase

9-5

Estimated cash payments are planned reductions in


cash from cost of goods purchased, selling and
administrative expenses, capital expenditures, and
other sources, such as buying securities or paying
interest or dividends. A supporting schedule can be
used in estimating the cash payments for
purchases.
Consider the following assumption to determine
estimated cash payment for purchase: Firm
expects to pay 75% of the purchases in the
month in which they are incurred and the
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balance in the following month.

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9-5

Schedule of Payments for purchase (exhibit 5)

Elite Sports Enterprise


Schedule of Payments for Purchases
For the Three Months Ending March 31, 2010
January February
Payments of current months purchases
(75% x current months purchases)
447,000
394,125
Note A
Payments of prior months purchases
(25% x previous months purchases)
133,050
149,000
Note B
Note
75% x 596,000 = 447,000
TotalA:
payments
580,050
543,125
75% x 525,500 = 394,125
75% x 565,500 = 424,125
Note B: 133,050 given as December 31, 2009 Accounts payable balance, or
25% x Dec. purchases =[(2,570 x 400) x 50%] + [70% x 540,000]
[70% x 514,000)] = 532,200 x 25% = 133,050
25% x 596,000 = 149,000
25% x 525,500 = 131,375

March
424,125
131,375
555,500

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Schedule of Payments for selling and


administrative expenses (exhibit 6)

9-5

Elite Sports Enterprise


Schedule of Payments for Selling and Administrative
Expenses
For the Three Months Ending March 31, 2010
January Februar
March
y
Selling and Administrative Expenses:
Salaries (fixed)
20,000
20,000
20,000
Miscellaneous expenses
10,800
12,400
9,700
Commissions (previous months)
154,200 162,000 186,000
Advertising
21,600
24,800
19,400
Others
10,000
10,000
10,000
Total Payments
216,600 229,200 245,100

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Completing the Cash Budget

9-5

Consider additional information as given below in


preparing cash budget:
1.pay a new year bonus of RM280,000 on January
10
2. Pay a quarterly interest expense of RM22,500 on
March 31.
3. The company plans to buy a new warehouse
costing RM145,000 in early January (assume that
the depreciation of the warehouse is already
included in the depreciation of the fixed assets).
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Completing the Cash Budget

9-5

Consider additional information as given below in


preparing cash budget:

4. The company requires a minimum of RM200,000


as a cash balance at the end of each month.
5. Loan-related information:
Assume that firm can borrow or repay
loans in multiples of RM1,000.
Loan interest rate of 10% per year,
Borrowing occurs at the beginning and repayment
at the end of the months.
Firm will borrow only when necessary and will
repay as promptly as possible.

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9-5

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Completing the Cash Budget (exhibit 7)

Elite Sports Enterprise


Cash Budget
For the Three Months Ending March
January
RM
Beginning cash balance
190,000
Estimated cash receipts from sales
(from Exhibit 3)
953,280
Total available cash (a)
1,143,280
Estimated cash payments for:
Merchandise purchases (from Exhibit
5)
Selling and administrative expenses
(from Exhibit 6)
Interest expense
New year bonus
Acquisition of a new warehouse
Total payments

31, 2010
February
RM
200,630

March
RM
205,380

1,058,400
1,259,030

970,200
1,175,58
0

580,050

543,125

555,500

216,600

229,200

245,100
22,500

280,000
145,000
1,221,65
0

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772,325 823,100

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9-5

Completing the Cash Budget (cont) (Exhibit 7)

Elite Sports Enterprise


Cash Budget
For the Three Months Ending March 31, 2010 (cont..)
Total payments (from previous slide)
1,221,650
772,325
823,100
Minimum cash balance desired (b)
200,000
200,000
200,000
Total cash needed
(c)
1,421,650
972,325 1,023,100
Excess (deficiency) of cash (a - c) = (d)
(278,370)
286,705
152,480
Financing:
Borrowing
279,000
Repayments
(279,000)
Interest
* (2,325)
Total cash from financing
(e)
279,000 (281,325)
Ending cash balance
e)

(b + d +

Note * : Interest expense for a month


= 279,000 x 10% x 1/12 =
2,325

200,630

205,380

352,480

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9-5

Budgeted Balance Sheet

The budgeted balance sheet


estimates the financial condition
at the end of a budget period.

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