CHAPTER 7

Budgetary Planning

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Management Functions
Planning
Directing and Motivating Controlling

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Budget
A formal written statement of managements plans for a specific future time period expressed in financial terms.

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Budgets
Are both short-term and long-term. Set forth the objectives of the organization and proposed ways of accomplishing them.

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Benefits of Budgeting
Requires all levels of management to plan ahead. Provides definite objectives for evaluating performance at each level of responsibility. Creates an early warning system for potential problems. Facilities coordination of activities within the organization. Results in greater management awareness of entitys overall operation. Motivates personnel throughout the organization to meet planned
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objectives.

Budget Committee
Is responsible for coordinating the preparation of the budget. Serves as review board where managers can defend their budget goals and request. Differences are reviewed, modified if necessary and reconciled.

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Illustration 7-1

Flow of Information to Top of Organization

Long-Range Planning and Budgeting

Differ: In the time period involved In emphasis Budgeting is on short-term goals

Long-range Planning
Identifies long-term goals Selects strategies to achieve them Develops policies and plans to implement them
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Master Budget
A set of interrelated budgets that constitutes a plan of action for a specific time period.

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Operating Budgets
Individual budgets that result in a budgeted income statement.

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Financial Budgets
Individual budgets that indicate the cash resources needed for expected operations and planned capital expenditures.

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Illustration 7-2

Components of Master Budget

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Sales Forecast
The projection of potential sales for the industry and the companys expected share of such sales.

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Illustration 7-3

Sales Budget An estimate of expected sales for the budget period.

Hayes Company Sales Budget For the Year Ending December 31, 2002
Quarter
Expected unit sales Unit selling price

1 2 3 4 3,000 3,500 4,000 4,500 x $60 x $60 x $60 x $60

Year 15,000 x $60

Total sales

$180,000 $210,000 $240,000 $270,000 $900,000

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Illustration 7-5

Production Budget
A projection of the units that must be produced to meet anticipated salesincluding a realistic estimate of ending inventory.
Hayes Company Production Budget For the Year Ending December 31, 2002
Quarter Expected unit sales (sales budget) Add: Desired ending FG unitsa Total required units Less: Beginning FG units Required production units
a20%

1 3,000 700 3,700 600c 3,100

2 3,500 800 4,300 700 3,600

3 4,000 900 4,900 800 4,100

4 4,500 1,000b 5,500 900 4,600

Year

15,400

of next quarters sales bExpected 2003 first-quarter sales, 5000 units x 20% c20% of estimated first-quarter 2002 sales units

Illustration 7-7

Direct Materials Budget

An estimate of the quantity and cost of direct materials to be purchased, including a realistic estimate of ending inventory.
Hayes Company Direct Materials Budget For the Year Ending December 31, 2002
Quarter 1 Units to be produced (Illustration 6-5) 3,100 Direct materials per unit x 2 Total pounds needed for production 6,200 Add: Desired ending Direct Materials 720 Total materials required 6,920 Less:Beginning Direct Materials 620 Direct materials purchases 6,300 Cost per pound x $4 Total cost of DM purchases $25,200 2 3,600 x 2 7,200 820 8,020 720 7,300 x $4 $29,200 3 4 Year

4,100 x 2 8,200 920 9,120 820 8,300 x $4

$33,200

4,600 x 2 9,200 1,020 10,220 920 9,300 x $4

$37,200 $124,800

Illustration 7-8

Direct Labor Budget A projection of the quantity and cost of direct labor to be incurred to meet production requirements.
Hayes Company Direct Labor Budget For the Year Ending December 31, 2002
1
Units to be produced (from production budget Ill 6-5) Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost 3,100 x 2 6,200 x $10 Quarter 2

3
4,100 x 2 8,200 x $10

4
4,600 x 2 9,200 x $10

Year

3,600 x 2 7,200 x $10

$62,000

$72,000

$82,000

$92,000

$308,000

Manufacturing Overhead Budget

Shows the expected manufacturing overhead costs for the budget period. Distinguishes between fixed and variable overhead costs. The fixed cost amounts are assumed, and Hayes expects the following variable costs per direct labor hour: indirect materials: $1.00 indirect labor: $1.40 utilities: $0.40 maintenance: $0.20
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Manufacturing Overhead Budget

Hayes Company Manufacturing Budget For the Year Ending December 31, 2002
Quarter Variable Costs Indirect materials ($1.00 per DLH) Indirect labor ($1.40 per DLH) Utilities ($ .40 per DLH) Maintenance ($.20 per DLH) Total variable Fixed costs Supervisory salaries Depreciation Property tax and insurance Maintenance Total fixed Total manufacturing overhead Direct Labor hours 1 $ 6,200 8,680 2,480 1,240 18,600 20,000 3,800 9,000 5,700 38,500 $57,100 2 $ 7,200 10,080 2,880 1,440 21,600 20,000 3,800 9,000 5,700 38,500 $60,100 7,200 3 $ 8,200 11,480 3,280 1,640 24,600 20,000 3,800 9,000 5,700 38,500 $63,100 4 $ 9,200 12,880 3,680 1,840 27,600 20,000 3,800 9,000 5,700 38,500 $66,100

Illustration 7-9

Year $ 30,800 43,120 12,320 6,160 92,400 80,000 15,200 36,000 22,800 154,000 $246,400

6,200

8,200

9,200

30,800 $ 8.00

Manufacturing overhead rate per direct labor hour ($246,400 30,800)

Selling and Administrative Expense Budget

Is a projection of anticipated operating expenses. Distinguishes between fixed and variable costs.
Fixed cost amounts are assumed, and Hayes expects the following variable costs per unit sold (from sales budget):
sales commissions: $3.00 freight-out: $1.00
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Illustration 7-10

Selling and Administrative Expense Budget

Hayes Company Selling & Administrative Budget For the Year Ending December 31, 2002
Quarter Variable Costs Sales commissions ($3 per unit) Freight-out ($1 per unit) Total variable Fixed costs Advertising Sales salaries Office Salaries Depreciation Property taxes and insurance Total fixed Total selling and administrative expenses 1 $ 9,000 3,000 12,000 5,000 15,000 7,500 1,000 1,500 30,000 $42,000 2 $ 10,500 3,500 14,000 5,000 15,000 7,500 1,000 1,500 30,000 $44,000 3 $ 12,000 4,000 16,000 5,000 15,000 7,500 1,000 1,500 30,000 $46,000 4 $ 13,500 4,500 18,000 5,000 15,000 7,500 1,000 1,500 30,000 $48,000 Year $ 45,000 15,000 60,000 20,000 60,000 30,000 4,000 6,000 120,000 $180,000

Illustration 7-12

Budgeted Income Statement

An estimate of the expected profitability of operations for the budget period.
Hayes Company Budgeted Income Statement For the Year Ending December 31, 2002 Sales (Illustration 6-3) Cost of goods sold (15,000 x $44) Gross profit Selling & administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income
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$900,000 660,000 240,000 180,000 60,000 100 59,900 12,000 $ 47,900

Financial Budgets Consist of:

Capital Expenditure Budget Cash Budget Budget Balance Sheet

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Illustration 7-13

Cash Budget A projection of anticipated cash flows.

Any Company Cash Budget

Beginning cash balance Add: Cash receipts (itemized) Total cash available Less: Cash disbursements (itemized) Excess (deficiency) of available cash over cash disbursements Financing
Ending cash balance
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$x,xxx x,xxx x,xxx x,xxx x,xxx x,xxx $x,xxx

Budgeted Balance Sheet

A projection of financial position at the end of the budget period.

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Illustration 7-17

Hayes Company Budgeted Balance Sheet December 31, 2006

ASSETS
Cash Accounts receivable Finished goods inventory Raw materials inventory Buildings & Equipment Less: Accumulated Depreciation Total assets $ 37,900 108,000 44,000 4,080 $ 192,000 48,000 144,000 $337,980

LIABILITIES AND STOCKHOLDERS EQUITY

Accounts payable Common stock Retained earnings Total liabilities and stockholders equity $ 18,600 225,000 94,380 $337,980

Merchandise Purchases Budget

The estimated cost of goods to be purchased by a merchandiser to meet expected sales.

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Nonmanufacturing Companies such as service enterprises and not-forprofit organizations also need budgeting!

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Not-for-profit entities budget on the basis of cash flows rather than on a revenue and expense basis.

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