BUDGET- a quantitative plan for acquiring and using resources over a specified time period.

INCOME EXPENSES

PROFIT PLANNING

MASTER BUDGET-Refers to a summary of a company’s plans including specific targets for sales , production and financing activities.

Budgets are used for two distinct purposes : planning control

PROFIT PLANNING

Planning- involves developing goals and preparing various budgets to achieve those goals.

Control- involves the steps taken by management to increase the likelihood that all parts of the organization are working together to achieve the goals set down at the planning stage.

PROFIT PLANNING

ADVANTAGES OF BUDGETING:1. Budgets communicate management’s plans throughout the organization.2. Budgets force managers to think about and plan for the future.3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.

PROFIT PLANNING

4. The budgeting process can uncover potential bottlenecks before they occur.

5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts.

6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

PROFIT PLANNING

In administering the budget program, it is particularly important that top management not use the budget to pressure or blame employees. Or else, it will cause: rather than:

PROFIT PLANNING

BUDGET COMMITTEE-usually responsible for overall policy relating

to the budget program and for coordinating the preparation of the budget itself.

- may consist of the president; vice-presidents in charge of various functions such as sales, production, and purchasing; and the controller.

- resolves the difficulties and disputes relating to the budget.

- approves the final budget.

PROFIT PLANNING

MASTER BUDGET

- Consists of a number of separate but interdependent budgets.

PROFIT PLANNING

Steps in Preparing the Master Budget:1. Prepare a sales budget.2. Prepare the production budget ( DM

Budget, DL Budget, MOH Budget)3. Combine the data from the production

budget, sales budget and the selling and administrative expenses budget.

4. Determine the cash budget.

PROFIT PLANNING

SALES BUDGET- the starting point in preparing the

master budget.- it is a detailed schedule showing the

expected sales for the budget period.- based on the company’s sales

forecast which may require the use of sophisticated mathematical models and statistical tools.

PROFIT PLANNING

PRODUCTION BUDGET -prepared after the sales budget. - it is the no. of units that must be produced to satisfy the sales needs and to provide for the desired ending inventory.

Budgeted units sales xxxx

Add: desired Ending Inventory xxxx

Total Needs xxxx

Less: Beginning Inventory xxxx

Required Production xxxx

PROFIT PLANNING

MERCHANDISE PURCHASE BUDGET- it shows the amount of goods to be

purchased from suppliers during the period.

Budgeted Sales Xxxx

Add: Desired ending Mdse. Inventory

Xxxx

Total Needs Xxxx

Less: Beginning Mdse. Inventory

Xxxx

Required Purchases xxxx

PROFIT PLANNING

DIRECT MATERIALS BUDGET-prepared after the production requirements

have been computed.- details the raw materials that must be

purchased to fulfill the production budget an to provide for adequate inventories.

Raw materials needed to meet the production schedule

Xxxx

Add: Desired ending inventory of raw materials

Xxxx

Total raw materials needs Xxxx

Less: Beginning Inventory of Raw materials

Xxxx

Raw materials to be purchased xxxx

PROFIT PLANNING

DIRECT LABOR BUDGET-shows the direct labor-hours required

to satisfy the production budget.

PROFIT PLANNING

MANUFACTRING OVERHEAD BUDGET- lists all costs of production other

than direct materials and direct labor.

PROFIT PLANNING

ENDING FINISHED GOODS INVENTORY BUDGET - shows the computation of the carrying cost of the unsold units.

PROFIT PLANNING

SELLING AND ADMINISTRATIVE EXPENSES- lists the budgeted expenses for

areas other than manufacturing.

PROFIT PLANNING

Selected information concerning sales and production for Cabot Co. For July are summarized as follows:

A. Estimated sales:Product K: 40, 000 units at ₱ 30 per unitProduct L: 20, 000 units at ₱ 65 per unit

B. Estimated Inventories, July 1, 2013Material A: 4, 000 lbs Product K: 3, 000 units @ ₱ 17 per unit ₱ 51, 000 Material B: 3, 500 lbs Product L: 2, 700 units @ ₱ 35 per unit 94, 500There were no work in process inventories estimated for July 1, 2012 ₱ 145, 000C. Desired inventories at July 31, 2012Material A: 3, 000 lbs Product K: 2, 500 @ ₱ 17 per unit ₱ 42, 500Material B: 2, 500 lbs Product L: 2, 000 @ ₱ 35 per unit 70, 000There were no work in process inventories desired for July 31, 2013 ₱ 112, 500

D. Direct Materials used in production: Product K Product L

Material A: 0. 7 lb per unit 3.35 lb per unitMaterial B: 1.2 lbs per unit 1.8 lbs per unit

E. Unit Costs for Direct Material:Material A: ₱ 4 per lbMaterial B: ₱ 2 per lb

F. Direct Labor Requirements: Department 1 Department 2

Product K 0.4 hr per unit 0.15 hr per unitProduct L 0.6 hr per unit 0.25 hr per unit Department 1 Department 2Direct Labor Rate ₱ 12 per hr ₱ 16 per hr

H. Estimated factory overhead costs for July:Indirect factory wages $200,000Depreciation of plant and equipment

40,000Power of light 25,000Indirect materials

34,000Total $299,000

Instructions:1.Prepare a sales budget for

July.2.Prepare a production

budget for July.3.Prepare a direct materials

purchases budget for July.4.Prepare a direct labor costs

for July.

A B C D

1 Cabot Co.

2 Sales Budget

3 For the Month Ending July 31, 2012

4 Product Unit Sales Volume

Unit Selling Price

Total Sales

5 Product K 40,000 $30.00 $1,200,000

6 Product L 20,000 65.00 1,300,000

7 Total revenue from sales

$2,500,000

Sales Budget

A B C

1 Cabot Co.

2 Production Budget

3 For the Month Ending July 31, 2012

4 Units

5 Product K Product L

6 Sales 40,000 20,000

7 Plus desired inventories at July 31, 2012 2,500 2,000

8 Total 42,500 22,000

9 Less estimated inventories, July 1, 2012 3,000 2,700

10

Total Production 39,500 19,300

A B C D E F G

1 Cabot Co.

2 Direct Materials Purchases Budget

3 For the Month Ending July 31, 2012

4 Direct Materials

5 Material A Material B Total

6 Units required for production:

7 Product K (39,500X lbs. per unit) 27,650 lbs* 47,400 lbs*

8 Product L (19,300X lbs. per unit) 67,550 ** 34,740 **

9 Plus desired units of inventory,

10 July 31, 2012 3,000 2,500

11 Total 98,200 lbs. 84,640 lbs.

12 Less estimated units of inventory,

13 July 1, 2012 4,000 3,500

14 Total units to be purchased 94,200 lbs. 81,140 lbs.

15 Unit Price X $4.00 X $2.00

16 Total Direct Materials $ 376,800 $162,280 $539,080

17

18 *27,65=39,500x0.7 47,400=39,500x1.2

19 **67,550=19,300x3.5 34,740=19,300x1.8

A B C D E F G

1 Cabot Co.

2 Direct Labor Cost Budget

3 For the Month Ending July 31, 1012

4 Department 1

Department 2

Total

5 Hours required for Production

6 Product K (39,500X lbs. per unit)

15,800 * 5,925 *

7 Product L (19,300X lbs. per unit)

11,580 ** 4,825 **

8 Total 27,380 10,750

9 Hourly rate X$12.00 x$16.00

10

Total Direct Labor cost $328,560 $172,000 $500,060

11

12

*15,800=39,500x0.4 5,925=39,500x0.15

13

**11,580=19,300x0.6

4,825=19,300x0.25