Budgeting

Chapter 8
Key Terms
• Budget: detailed plan for the future in quantitative
terms
• Participative budget / self-imposed budget: method
of preparing budgets in which managers prepare
their own budgets
• Perpetual budget / continuous budget: 12-month
budget that rolls forward by month
• Responsibility accounting: managers only
responsible for items they can exert significant
control over
• Budgetary slack: Slack in budget so figure is easier to
attain
Budgeting Overview
• Why budget?
• Planning & Control
• Advantages
• Communication
• Planning
• Allocating resources
• Budgeting period
• Usually cover one-year period or divided into four
quarters
• Versus continuous approach
Self-Imposed or Authoritative?
Pros Cons

Self-Imposed Budget • Provides good info • Time-consuming

(Info flows bottom up) • Motivational • Budgetary slack

Authoritative Budget • Enhances • Less valuable as

(Info flows top down) coordination evaluation tool
• Streamlined • Poorer info
• Control
The Master Budget
Sales
Selling/Admin

Ending
Inventory Production

Direct Material Direct Labor MOH

Cash

Income Balance Sheet

Statement
Sales Budget
Units expected to sell
× Sales price per unit
Budgeted Sales Revenue
Cash Collections Budget:
Cash sales
+ collected from credit sales 2 periods ago
+ collected from credit sales 1 period ago
+ collected from credit sales this month
Budgeted Cash Collections
Production Budget
Units needed for this month’s sales
+ desired ending FG inventory
If a Merchandising co., would prepare a
- Beginning FG inventory merchandise purchasing budget
Units to produce instead… accompanied by cash
disbursements but not DM budget
Direct Materials Budget
Units to produce
X direct materials needed per unit
Direct material needed for production
+ desired EB of DM
-BB of DM
Amount of DM to purchase
X cost of DM
Budgeted purchases of DM

Payments made this period for last period’s purchases

+ Payments made this period for this period’s purchases
Disbursements
DM/Disbursements Cont.
Direct Labor Budget
Unites to produce
X direct labor needed per unit
Amount of DL needed (hours)
X cost of DL/hour
Budgeted DL
MOH Budget
Budgeted cost allocation base needed for production
X variable MOH rate per CAB
+ Fixed MOH
-Depreciation
Budgeted cash disbursements for MOH
Ending FG Inventory
Per unit production cost (variable and fixed)
X ending FG in units
Cost of ending FG
Selling/Admin. Budget
Budgeted unit sales
X variable S&A expense per unit
+ Fixed S&A
Total S&A
-Depreciation on S&A
Budgeted cash disbursements for S&A
Cash Budget
• Composed of 4 sections
• Reciepts
• Disbursements
• Cash excess/deficiency
• Financing

BB Cash
+ Collections
-Disbursements
EB Cash
+/- Financing
Income Statement & Balance Sheet
Now you have a Master Budget!