Financial & Managerial Accounting

1. The Basis for Business Decisions Financial & Managerial Accounting FOURTEENTH EDITION Williams Haka Bettner Carcello

2. Chapter23 OPERATIONAL BUDGETING

3. Learning Objective To explain how acompany can be“profit rich, yet cash poor.” LO1

4. Profit Rich, Yet Cash Poor Conditions leading to cashshortages when profits are high. Large investmentsin assets to supportrapid revenue growth. Long operating cycles(cash-to-cash cycles). Consider the following cash-to-cash cycle

5. Cash InventoriesDMWIPFG166 days 247 Days Accounts Receivable81 days Cash Profit Rich, Yet Cash Poor Even if salesare growing rapidly,cash is tied up in inventory andreceivables for so long that a cashshortage will bethe likely result.

6. Learning Objective To discuss the benefitsthat a company may derive from a formalbudgeting process LO2

7. Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisitionand use of resources. Budgeting: The Basis forPlanning and Control A budget is a comprehensive financialplan for achieving the financial andoperational goals of an organization.

8. Benefits Derived from Budgeting Enhanced managementresponsibility Coordinationof activities Performanceevaluation Benefits Assignment of decision-making responsibilities

9. Learning Objective To explain two philosophiesthat may be used insetting budgeted amounts. LO3

10. Budget Problems Perceived unfair or unrealistic goals. Poor management-employee communications. Solution Reasonable and achievable budgets. Employee participation in budgeting process. Establishing Budgeted Amounts: Behavioral Approach

11. Establishing Budgeted Amounts: Total Quality Management Approach A commitment to thegoal of completelyeliminating inefficiency. Budgeted amounts setat levels representingabsolute efficiency. Small failures toachieve budgetedamounts directmanagement toareas where improvement ispossible.

12. Participation in Budget Process Flow of Budget Data

13. 2005 2006 2007 2008 C a p i t a l B u d g e t s The Budget Period The annual operating budget may be divided into quarterly or monthly budgets. A continuous budgetis usually a twelve-month budget that adds one month as the current month is completed.

14. Ethics, Fraud, andCorporate Governance Budgets are often included in documents given to investors when governmental and not-for-profit entities seek to obtain debt financing. Material misstatements in these budgets act as a fraud upon the purchasers of bonds issued by the governmental or not-for-profit entities and expose both individuals and organizations to civil and criminal penalties.

15. Learning Objective To describe the elementsof a master budget. LO4

16. Cost of goodsmanufacturedand soldbudget Salesbudget Productionbudgets • Financial budgets: • cash flow • income • balance sheet Cashbudget Selling andadministrative budget The Master Budget

17. Learning Objective To prepare the budgets andsupporting schedulesincluded in amaster budget. LO5

18. EstimatedUnit Sales EstimatedUnit Price Analysis of economic and market conditions+Forecasts of customer needs from marketing personnel Preparing the Master Budget SalesBudget

19. Basket, Inc. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for the next four months are: April 20,000 magnets @ $10 = $200,000 May 50,000 magnets @ $10 = $500,000 June 30,000 magnets @ $10 = $300,000 July 25,000 magnets @ $10 = $250,000 Preparing the Master Budget The Sales Budget July is needed for June ending inventory computations.

20. Sales Budget Production Budgets Completed The Production Budget

21. The management of Basket wants ending inventory to be 20 percent of the next month’s budgeted sales in units. 4,000 units were on hand March 31. Let’s prepare the production budget. The Production Budget

22. Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. • Budgeted product sales in units • + Desired product units in ending inventory • = Total product units needed • – Product units in beginning inventory • = Product units to produce The Production Budget

23. The Production Budget

24. The Production Budget

25. The Production Budget

26. Production Budget Units Production Budgets MaterialPurchases Completed The Production Budget

27. Units to produce • × Material needed per unit • = Material needed for units to produce • + Desired units of material in ending inventory • = Total units of material needed • – Units of material in beginning inventory • = Units of material to purchase The Production BudgetMaterial Purchases The material purchases budget is based on production quantity and desired material inventory levels.

28. Five pounds of material are needed for each unit produced. The management at Basket wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. The Production BudgetMaterial Purchases

29. The Production BudgetMaterial Purchases

30. The Production BudgetMaterial Purchases

31. The Production BudgetMaterial Purchases

32. Materials used in production cost $0.40per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance onMarch 31 is $12,000. Cash Payments forMaterial Purchases

33. Cash Payments forMaterial Purchases

34. Cash Payments forMaterial Purchases

35. Cash Payments forMaterial Purchases

36. Cash Payments forMaterial Purchases

37. Production Budget UnitsMaterial Production Budget Labor Completed The Production Budget

38. Each unit produced requires 3 minutes (.05 hours) of direct labor. Basket employs 30 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour. The Production BudgetDirect Labor

39. Cash Payments forDirect Labor

40. Cash Payments forDirect Labor

41. Production Budget UnitsMaterialLabor Production Budget ManufacturingOverhead Completed The Production Budget

42. Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is $50,000 per month. Fixed manufacturing overhead includes $20,000 in depreciation which does not require a cashoutflow. The Production BudgetManufacturing Overhead

43. Cash Payments forManufacturing Overhead

44. Cash Payments forManufacturing Overhead

45. Cash Payments forManufacturing Overhead

46. Production Budget SellingandAdministrativeExpenseBudget Completed Selling and Administrative(S&A) Expense Budget

47. Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries. Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices. Selling and Administrative(S&A) Expense Budget

48. Variable selling and administrative expenses are $0.50 per unitsoldand fixed selling and administrative expenses are $70,000 per month. Fixed selling and administrative expenses include $10,000 in depreciation which does not require a cash outflow. Cash Payments for(S&A) Expenses

49. Cash Payments for(S&A) Expenses

50. Cash Payments for(S&A) Expenses