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Budgeting

Budgeting. ACG 2071 Chapter 21 Module 9 Fall 2007. Budgets. Charts a course for a business by outlining the plans of the business in financial terms. Budgets. Objectives Establishing specific goals Executing plans to achieve goals Periodically comparing actual results with goals.

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Budgeting

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  1. Budgeting ACG 2071 Chapter 21 Module 9 Fall 2007

  2. Budgets • Charts a course for a business by outlining the plans of the business in financial terms

  3. Budgets • Objectives • Establishing specific goals • Executing plans to achieve goals • Periodically comparing actual results with goals

  4. Management meets objectives • Planning • Directing • Controlling

  5. Budgeting Systems • Continuous Budget • Static budget • Flexible budget • Zero Based Budgeting

  6. Master Budget • Manufacturing Company • Parts • Budgeted income statement • Sales budget • Cost of goods sold budget • Production budget • Direct materials purchases budget • Direct labor cost budget • Factory overhead cost budget • Selling and administrative expense budget • Budgeted balance sheet • Cash budget • Capital Expenditure Budget

  7. Sales Budget • Indicates for each product the quantity of sales and expected selling price • Example 1: Brite Lite sells two products in United States and Canada. Product A is estimated to sell 5,000 units in the United States and 10,000 units in Canada at $100 per unit. Product B sells 20,000 units in United States and 6,000 units in Canada at $50 per unit

  8. Sales Budget Brite Lite Sales Budget For year 2008

  9. Production Budget • Coordinates with sales budget to ensure that production and sales are kept in balance during the period • Number of units manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.

  10. Production Budget Formula Expected units to be sold + Desired Ending Inventory -Estimated Beginning Inventory Total units to be produced

  11. Production budget • Brite Lite expects to have beginning inventory of 3,000 units of Product A and 5,000 units of Product B. The company would like its ending inventory to be 10% of estimated sales

  12. Production Budget Brite Lite Production Budget For year 2008

  13. Example 2 Class problem • Geo produces three products X, Y, and Z. • Sales: • 10,000 units to X, • 15,000 units to Y • 25,000 to Z. B • 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 • 4,000 to Z. Complete production budget.

  14. Direct Materials Budget • The production budget is the starting point for determining the estimated quantities of direct materials to be purchased. • Estimates purchase levels for the next year and costs. • Formula:

  15. Direct Materials Budget Formula Materials required for production +Desired Ending Materials Inventory -Estimated Beginning Materials Inventory Direct materials to be purchased X Cost per unit Total Direct Materials Cost

  16. Direct Materials Purchases Budget • Estimates purchase levels for the next year and costs • Materials required for production plus ending inventory minus beginning inventory

  17. Direct Materials • Product A uses 2 lbs. of plastic and 3 lbs. of aluminum. Product B uses ½ lb. of plastic, 1 lb. of aluminum, and 2 lbs. of paper. Aluminum sells for $5 per lb. Plastic sells for $10 per lbs, and paper sells for $2 per lbs.

  18. Direct Labor Budget • Production budget also provides the starting point for preparing the direct labor cost budget. • Example: Department 1 has a labor cost of $10 per hour. Product A uses 6 hours in Department 1 and Product B uses 4 hours. Department 2 has a labor cost of $7 per hours. Production A uses 2 hours of Department 2’s labor and Product B uses ½ hour. Prepare a direct labor budget.

  19. Example

  20. Factory Overhead Budget Indirect labor $25,000, utilities $45,000, maintenance $40,000 and insurance $60,000

  21. Cost of goods sold budget: • Is composed of the budgets for production, direct materials, direct labor and factory overhead

  22. Selling and Administrative Budget: • Sales budget is often used as the starting point for estimating the selling and administrative expenses.

  23. Budgeted Income Statement:

  24. Balance Sheet Budgets • Cash Budget • Capital Expenditure Budget

  25. Capital Expenditures Budget • Lists dollar amounts to be both received from plant asset disposals and spent to purchase additional plant assets to carry out the budgeted business activities

  26. Cash Budget • Is one of the most important elements of budgets • Presents the expected receipts and payments of cash for a period of time • Three parts of the budget” • Cash receipts • Cash payments • Other items • We prepare a schedule for cash receipts and cash payments

  27. Schedule of Cash Receipts • : Magna Corporation has estimated sales of January $1,080,000, February $1,240,000, and March $970,000. Accounts receivable has a balance on January 1 of $370,000. The company expects that 10% of its sales will be in cash and the remainder in credit. Of the credit sales, 60% will be collected in the next month and the remainder the following month. • Required: Prepare a schedule of cash receipts..

  28. Calculations * 60% of Credit sales = $972,000 x 60%

  29. Calculations

  30. Calculations

  31. Schedule of Cash Receipts

  32. Schedule of Cash Payments • Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expenses • Example: Magna Company has manufacturing costs of $840,000 in January, $780,000 in February, and $812,000 for March. The beginning balance in accounts payable is $190,000. Depreciation expense is $24,000 per month which is included in manufacturing costs. Manufacturing costs payments are allocated at 75% in month incurred and remainder the next month.

  33. Schedule of Cash Payments

  34. Completing the Cash Budget • After preparing the schedule of cash receipts and the schedule of cash payments, we review additional items and prepare the formal cash budget.

  35. Completing the Budget • Cash balance on January 1 - $280,000 • Quarterly tax due on March 31 - $150,000 • Quarterly interest paid to creditors on January 10 - $22,500 • Selling and administrative expenses: • January $160,000 • February $165,000 • March $145,000 • Interest revenue to be received on March 21 - $24,500 • Capital expenditures on equipment payable on February 28 - $274,000 • Minimum cash balance of $340,000 is required by the corporation’s Board of Directors

  36. Cash Budget

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