Budgetary Planning

1. Budgetary Planning

2. Management Functions • Planning • Directing and Motivating • Controlling

3. Budget A formal written statement of management’s plans • for a specific future time period • expressed in financial terms.

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

5. 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 ofactivities within the organization. • Results in greater managementawareness of entity’s overall operation. • Motivates personnel throughout the organization to meet planned objectives.

6. 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.

7. Illustration 6-1 Flow of Information to Top of Organization

8. 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

9. Master Budget A set of interrelated budgets that constitutes a plan of action for a specific time period.

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

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

12. Illustration 6-2 Components of Master Budget

13. Sales Forecast The projection of potential sales for the industry and the company’s expected share of such sales.

14. Hayes CompanySales BudgetFor the Year Ending December 31, 2002 Quarter Expected unit salesUnit selling price Total sales 1 3,000 x $60 $180,000 2 3,500 x $60 $210,000 3 4,000 x $60 $240,000 4 4,500 x $60 $270,000 Year 15,000 x $60 $900,000 Illustration 6-3 Sales Budget An estimate of expected sales for the budget period.

15. Illustration 6-5 Hayes CompanyProduction BudgetFor the Year Ending December 31, 2002 2 3,500 8004,300 700 3,600 4 4,500 1,000b5,500 900 4,600 Year 15,400 1 3,000 700 3,700 600c 3,100 3 4,000 9004,900 800 4,100 Quarter Expected unit sales (sales budget)Add: Desired ending FG unitsaTotal required unitsLess: Beginning FG units Required production units a20% of next quarter’s salesbExpected 2003 first-quarter sales, 5000 units x 20%c20% of estimated first-quarter 2002 sales units Production Budget A projection of the units that must be produced to meet anticipated sales…including a realistic estimate of ending inventory.

16. Illustration 6-7 Direct Materials Budget An estimate of the quantity and cost of direct materials to be purchased, including a realistic estimate of ending inventory. Hayes CompanyDirect Materials BudgetFor the Year Ending December 31, 2002 Quarter 1 3,100 x 2 6,200 720 6,920 620 6,300 x $4 $25,200 3 4,100 x 2 8,200 920 9,120 820 8,300 x $4 $33,200 4 4,600 x 2 9,200 1,020 10,220 920 9,300 x $4 $37,200 Year $124,800 2 3,600 x 2 7,200 820 8,020 720 7,300 x $4 $29,200 Units to be produced (Illustration 6-5)Direct materials per unitTotal pounds needed for productionAdd: Desired ending Direct MaterialsTotal materials requiredLess:Beginning Direct Materials Direct materials purchasesCost per pound Total cost of DM purchases

17. Illustration 6-8 Year $308,000 1 3,100 x 26,200 x $10 $62,000 Direct Labor Budget A projection of the quantity and cost of direct labor to be incurred to meet production requirements. Hayes CompanyDirect Labor BudgetFor the Year Ending December 31, 2002 Quarter 2 3,600 x 27,200 x $10 $72,000 3 4,100 x 28,200 x $10 $82,000 4 4,600 x 29,200 x $10 $92,000 Units to be produced (from production budget Ill 6-5)Direct labor time (hours) per unitTotal required direct labor hoursDirect labor cost per hour Total direct labor cost

18. Manufacturing Overhead Budget • Shows the expected manufacturing overhead costs for the budget period. • Distinguishes between fixedandvariable 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

19. Illustration 6-9 $ 8.00 Manufacturing overhead rate per direct labor hour ($246,400  30,800) Manufacturing Overhead Budget Hayes CompanyManufacturing BudgetFor the Year Ending December 31, 2002 Quarter 1 $ 6,2008,6802,480 1,240 18,60020,0003,8009,000 5,700 38,500 $57,100 2 $ 7,20010,0802,880 1,440 21,60020,0003,8009,000 5,700 38,500 $60,100 3 $ 8,20011,4803,280 1,640 24,60020,0003,8009,000 5,700 38,500 $63,100 4 $ 9,20012,8803,680 1,840 27,60020,0003,8009,000 5,700 38,500 $66,100 Year $ 30,80043,12012,320 6,160 92,40080,00015,20036,000 22,800 154,000 $246,400 Variable Costs Indirect materials ($1.00 per DLH) Indirect labor ($1.40 per DLH) Utilities ($ .40 per DLH) Maintenance ($.20 per DLH) Total variableFixed costs Supervisory salaries Depreciation Property tax and insurance Maintenance Total fixed Total manufacturing overhead 7,200 Direct Labor hours 6,200 8,200 9,200 30,800

20. Selling and Administrative Expense Budget • Is a projection of anticipated operating expenses. • Distinguishes between fixedandvariable 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

21. Year $ 45,000 15,000 60,00020,00060,00030,0004,000 6,000 120,000 $180,000 1 $ 9,000 3,000 12,0005,00015,0007,5001,000 1,500 30,000 $42,000 2 $ 10,500 3,500 14,0005,00015,0007,5001,000 1,500 30,000 $44,000 3 $ 12,000 4,000 16,0005,00015,0007,5001,000 1,500 30,000 $46,000 4 $ 13,500 4,500 18,0005,00015,0007,5001,000 1,500 30,000 $48,000 Illustration 6-10 Selling and Administrative Expense Budget Hayes CompanySelling & Administrative BudgetFor the Year Ending December 31, 2002 Quarter Variable Costs Sales commissions ($3 per unit) Freight-out ($1 per unit) Total variableFixed costs Advertising Sales salaries Office Salaries Depreciation Property taxes and insurance Total selling and administrative expenses Total fixed

22. Illustration 6-12 Hayes CompanyBudgeted Income StatementFor the Year Ending December 31, 2002 Sales (Illustration 6-3)Cost of goods sold (15,000 x $44)Gross profitSelling & administrative expensesIncome from operationsInterest expenseIncome before income taxesIncome tax expense Net income $900,000 660,000240,000 180,00060,000 10059,900 12,000 $ 47,900 Budgeted Income Statement An estimate of the expected profitability of operations for the budget period.

23. Financial Budgets Consist of: • Capital Expenditure Budget • Cash Budget • Budget Balance Sheet

24. Illustration 6-13 Cash Budget A projection of anticipated cash flows. Any CompanyCash Budget $x,xxx x,xxxx,xxx x,xxxx,xxx x,xxx $x,xxx Beginning cash balanceAdd: Cash receipts (itemized)Total cash availableLess: Cash disbursements (itemized)Excess (deficiency) of available cash over cash disbursementsFinancing Ending cash balance

25. Budgeted Balance Sheet A projection of financial position at the end of the budget period.

26. ASSETS Cash Accounts receivable Finished goods inventory Raw materials inventory Buildings & Equipment Less: Accumulated Depreciation Total assets $ 37,900108,00044,0004,080 144,000 $337,980 $ 192,000 48,000 94,380$337,980 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 18,600225,000 Accounts payable Common stock Retained earnings Total liabilities and stockholders’ equity Illustration 6-17 Hayes CompanyBudgeted Balance SheetDecember 31, 2002

27. Merchandise Purchases Budget The estimated cost of goods to be purchased by a merchandiser to meet expected sales.

28. Nonmanufacturing Companies such as service enterprises and not-for-profit organizations also need budgeting!

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