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Chapter 21 The Budget Process

Chapter 21 The Budget Process. Learning Objectives. Why Budget? Types of Budgets Budget Process Budget Preparation. Why Budget? If you know where you are going, you’re more likely to get there…. Plan Perform Evaluate Report. The Budgeting Planning Stage. Budgeting is a planning tool

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Chapter 21 The Budget Process

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  1. Chapter 21The Budget Process

  2. Learning Objectives • Why Budget? • Types of Budgets • Budget Process • Budget Preparation

  3. Why Budget?If you know where you are going, you’re more likely to get there…. • Plan • Perform • Evaluate • Report

  4. The Budgeting Planning Stage • Budgeting is a planning tool • A budget needs to tied to the organizations goals and objectives • A budget can be prepare for : • Long Term (5 years) • Short Term (1 year)

  5. What are your goals? • In a piece of paper write down a goal you would like to accomplished in the next one to four years?

  6. What is Involved in Preparing the Annual Budget • What is involved? • Forecasting sales and profit targets by product and service • Define human resources needs • Plan for introduction of new products or services • Set time timetable • Who is involved? • Executive Team • Department Managers • Other employees

  7. The master budget is a set of budgets that consolidates an organization’s financial information into budgeted financial statements The master budget includes: Operating budgets Budgeted balance sheet Cash Budget Capital Expenditure Budget The Master Budget

  8. Manufacturing Budget • Operations budget for a manufacturing organization include: • Sales • Production • Direct material purchase • Direct Labor • Manufacturing Overhead • Selling and Administrative Expenses

  9. Preparation of the Master Budget for a Manufacturing Organization

  10. Team Work Exercise • E5

  11. Sales Budget Sales in units x Selling price Sales in dollars Next Budgets— Production

  12. Team Work • Prepare a Sales Budget using Exercise SE4

  13. Production Budget Sales in units + Desired Ending Finished Goods in units Total Needs in units -Beginning Finished Goods in units Production in units Next Budgets— Material Purchases, Direct Labor, and Overhead!

  14. Production Budget Prepare the following production budget for the quarter assuming the company maintains finished goods inventory equal to one half of the next month's sales.  Budgeted sales for April are 7,000 units.

  15. Answer: Prepare the following production budget for the quarter assuming the company maintains finished goods inventory equal to one half of the next month's sales.  Budgeted sales for April are 7,000 units.

  16. Team Work - More Practice • Prepare a Production Budget. Exercise SE5.

  17. Direct Material Budget • Once you know the number of units needed in production you could calculate the Materials Cost. • Units x Direct Materials cost • The total $$ will be used in calculating the Cash Budget

  18. Budget Preparation and Teamwork Materials Budget E7, E8 Labor Budget E10

  19. The Cash Budget • The Cash Budget is a projection of the cash an organization will receive and the cash it will pay out.

  20. Cash Budgets Cash Receipts -Cash Disbursements Change in Cash +Beginning Cash +Borrowings -Repayments________________ Desired Ending Cash Balance

  21. Alberta Limited needs a cash budget for the month of November.  The following information is available: • The cash balance on November 1 is $6,000. • Sales for October and November are $80,000 and $60,000 respectively.  Cash collections on sales are 30 percent in the month of sale, 65 percent in the following month, and 5 percent uncollectible. • General expenses are budgeted to be $25,000 for November (depreciation represents $2,000 of this amount). • Inventory purchases will total $30,000 in October and $40,000 in November.  Half of the inventory purchases are always paid for in the month of purchase.  The remainder are paid for in the following month. • Office furniture costing $4,000 will be purchased for cash in November, and sales commissions are budgeted at $12,000 for November. • The company must maintain a minimum ending cash balance of $4,000 and can borrow from the bank in multiples of $100.  All loans are repaid after 60 days. • Prepare a cash budget in good form for Alberta Limited for November. 

  22. Solution Alberta Limited Cash Budget November Cash receipts (30% of November Sales) $18,000 (65% of October Sales) 52,000 Total Cash Receipts $70,000 Cash Payments: General Expenses ($25,000 - $2000) 23,000 Purchases (Oct $15,000 + Nov $20,000) 35,000 Office furniture 4,000 Sales Commissions 12,000 Total Cash Payments $74,000 Change in Cash $4,000) Beginning Cash 6,000 Borrowing 2,000 Repayments - Ending Cash $4,000

  23. Cash Budgets and Teamwork SE8 SE9

  24. Homework • P2 in its entirety • Based on Chapter

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