Budgeting

Chapter M5

Budgets

Charts a course for a business by outlining the plans of the business in financial terms

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2030

4050

6070

8090

1stQtr

3rdQtr

East

West

North

Objecitves

Establish specific goals

Executing plans to achieve goals

Periodically comparing actual results with goals

Management meets objectives

Planning Directing Controlling

Budgeting Systems

Static budget Flexible budget Master budget

Sales budget Production budget Direct materials purchase

budget Direct labor cost budget Factory overhead cost

budget Selling and administrative

budget Cash budget

Sales Budget

Indicates for each product the quantity of sales and expected selling price

Example 1: Brite Lite sells two products in the US and Canada. Product A is estimated to sell 5,000 units in the US and 10,000 units in Canada at $100 per unit. Product B sells 20,000 units in US and 6,000 units in Canada at $50 per unit.

Sales Budget

Product A Product BSales United States 5000 20000 Canada 10000 6000 Total units sold 15000 26000Sales price per unit 100.00$ 50.00$ Total sales 1,500,000 1,300,000 $2,800,000

Brite LiteSales BudgetFor year 2005

Production budget

Coordinates with sales budget Expected units to be sold +Desired ending inventory -Estimated beginning inventory Production for period

Production budget

Brite Lite plans to have beginning inventory of 3,000 units of A and 5,000 units of B. Ending inventory should be 10% of sales.

Production Budget

Product A Product BExpected sales 15000 units 26000 unitsDesired ending inventory 1500 2600Total 16500 28600Estimated beg inventory -3000 -5000Estimated production 13500 units 23600 units

Brite LiteProduction BudgetFor year 2004

Example 2

Geo produces three products X, Y, and Z. Sales are expected at 10,000 units to X, 15,000 units to Y, and 25,000 to Z. Beginning inventory is estimated at 3,000 to X, 5000 to Y, 2,500 to Z. Ending inventory is estimated at 1,500 to X, 4,000 to Y, and 4,000 to Z. Complete production budget.

Example 2

Product X Product Y Product ZExpected sales 10000 15000 25000Desired ending inventory 1500 4000 4000Total 11500 19000 29000Estimated beg inventory 3000 5000 2500Estimated production 8500 14000 26500

Geo ProductsProduction BudgetFor year 2005

Direct Materials Purchases Budget Estimates purchase

levels for the next year and costs

Materials required for production plus ending inventory minus beginning inventory

Direct Materials

Product A uses 2 lbs of Tox and 3lbs of Gox. Product B uses 1/2lb of Tox, 1lb of Gox, 2lbs of Plox. Gox sells for $5 per lb, Tox $10lbs and Plox $2 lb. Beg inventory is 7,300, 3,600, and 5,200 lbs. Ending inventory is 4,000lbs, 6,000lbs, and 8,000 lbs.

Direct Materials BudgetProduct Gox Tox Plox

A (production 13,500 units) Gox 3lbs per unit X 13,500 units 40500 lbs Tox 2lbs per unit X 13,500 units 27000 lbsB (production 23,600 units) Gox 1lb per units X 23,600 units 23600 lbs Tox 1/2 lb X 23,600 units 11,800lbs Plox 2lbs X 23,600 units 47,200 lbsTotal pounds of direct materials 64100 38800 47200Desired Ending Inventory 4000 6000 8000

68100 44800 55200Estimated Beginning inventory 7300 3600 5200Total pounds of direct materials 60800 41200 50000Cost per lb. 5.00$ 10.00$ 2.00$ Total cost of direct materials $304,000 $412,000 $100,000 TOTAL $816,000

Example 4:

Dare uses two materials in the production of its products X and Y. The materials are A and B. Product X requires 3 units of A and 1.5lbs of B for completion. Product Y requires 4 units of A and 1lb. Of B. A is $6 per unit and B is $5 per unit. Estimated beginning inventory is 3,000 A and 4,000 of B. Desired ending inventory is 2,000 of A and 1,000 of B. The company is expecting to product 10,000 units of X and 15,000 units of Y.

Example 4

Product A BX ( 10,000 units) A ( 3 units X 10,000 units) 30,000 units B (1.5 lbs X 10,000 units) 15,000 lbs.Y ( 15,000 units) A ( 4 units X 15,000 units) 60,000 units B (1. lbs X 15,000 units) 15,000 lbs.Total pounds of direct materials 90000 30000Desired Ending Inventory 2000 1000

92000 31000Estimated Beginning inventory 3000 4000Total pounds of direct materials 89000 27000Cost per lb. 6.00$ 5.00$ Total cost of direct materials $534,000 $135,000 TOTAL $669,000

Direct Labor Budget

Product A uses 6hrs of Dept 1 and 2hrs of Dept 2. Product B uses 4hrs of Dept 1 and 1.2hr in Dept 2. Labor is $10 per hour in Dept 1 and $7 per hour in Dept 2.

Example

Product Dept 1 Dept 2Product A ( 13,500 units) Dept 1: 13,500 * 6 hrs 81000 Dept 2: 13,500 * 2hrs 26000Product B ( 26,500 units) Dept 1: 26,500 * 4 hrs 106000 Dept 2: 26,500 * 1/2hrs 13,250Total hours of production 187,000 39,250Direct labor cost per hour 10.00$ 7.00$ Total cost of direct materials $1,870,000 $274,750 TOTAL $2,144,750

Factory Overhead BudgetIndirect labor $25,000, utilities $45,000, maintenance$40,000 and insurance $60,000

Indirect labor 25,000.00$ Utilities expense 45,000.00$ Maintenance expense 40,000.00$ Insurance expense 60,000.00$ Total factory overhead 170,000.00$

Cost of goods sold budget

Is composed of the budgets for production, direct materials, direct labor and factory overhead

Cash Budget

Is one of the most important elements of budgets

Presents the expected receipts and payments of cash for a period of time

Divided into Cash receipts Cash payments Other items

Cash Receipts Budget

Magna has estimated sales of $1,080,000 in January, $1,240,000 in february, and March of $970,000. Accounts receivable has a balance on January 1 of $370,000. The company expects 10% of its sales to be in cash. Of the credit sales 60% will be collected in the month of the sale and remainder the next month.

Cash Sales

January: $1,080,000 X 10% = $108,000

Feb: $1,240,000 X 10% = $124,000 March: $970,000 X 10% = $97,000

Credit Receipts

January collections: 60% of Jan collected in January Credit sales: $1,080,000 X 90% Collection: $972,000 X 60% = $583,200 Dec sales: $370,000 value of Accts receivable Feb collections: 40% of Jan credit sales $972,000 X 40% = $388,800 60% of Feb credit sales $1,240,000 X 90% X 60% = $669,600

Credit Receipts

March: Feb: 40% of credit sales $1,160,000 X 40% = $446,400 March: 60% of credit sales $970,000 X 90% X 60% = $523,800

Cash Receipts Budget

January February MarchCash receipts $108,000 $124,000 $97,000Cash collections December sales $370,000 January sales $583,200 $388,800 February sales $669,600 $446,400 March sales $523,800 Total credit collections $953,200 $1,058,400 $970,200Total cash receipts $1,061,200 $1,182,400 $1,067,200

Cash Payments Budget

Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expenses

Assume manufacturing costs are $840,000, $780,000, and $812,000 for Jan through March. Beg balance in accounts payable is $190,000. Depreciation expense is $24,000 per month included in mfg costs. Mfg costs are paid 75% in month incurred and remainder next month.

Cash Payment Budget

January Mfg cost $840,000 Depreciation 24,000 Net 816,000 Current mo: $816,000 X 75% =$612,000 Next mo: $816,000 X 25% = $204,000

Cash Payment Budget

February: Mfg cost $780,000 Depre 24,000 Net $756,000 Current: $756,000 X 75% = $567,000 Next: $756,000 X 25% = $189,000

Cash Payment Budget

March: Mfg $812,000 Dep 24,000 Net 788,000 Current: $788,000 X 75% = $591,000

Cash Payment Budget

January February MarchManufacturing costs December $190,000 January $612,000 $204,000 February $567,000 $189,000 March $591,000

$802,000 $771,000 $780,000

Completing the Budget

Cash balance on Jan 1 is $280,000 Quarterly tax on 3/31 is $150,000 Quarterly interest paid 1.10 is $22.500 Selling expense $160,000, $165,000 and

$145,000 Interest revenue 3/21 is $24,500 Capital expenditures 2/28 is $274,000 Minimum cash balance is $340,000

Cash BudgetJanuary February March

Estimated cash receipts Cash sales $108,000 $124,000 $97,000 Credit receipts $953,200 $1,058,400 $970,200 Interest revenue $24,500Total cash receipts $1,061,200 $1,182,400 $1,091,700Estimated cash payments Manufacturing costs $802,000 $771,000 $780,000 Selling expenses $160,000 $165,000 $145,000 Capital expenditures $274,000 Interest expense $22,500 Tax payment $150,000Total cash payments $984,500 $1,210,000 $1,075,000Net cash increase(decrease) $76,700 -$27,600 $16,700Cash balance at beg of month $280,000 $356,700 $329,100Cash balance at end of mo. $356,700 $329,100 $345,800Minimum cash balance $340,000 $340,000 $340,000Excess ( deficiency) $16,700 -$10,900 $5,800