6-1

Operational
and Financial
Budgeting
Prepared
Preparedby
by

Douglas
DouglasCloud
Cloud

Pepperdine
PepperdineUniversity
University

6-2

Objectives
Objectives
Explain how budgeting relates to the major functions
of management.After
After reading
reading this
this
Describe the components
and should
organization
of a
chapter,
chapter,you
you
should
comprehensive budget.
be
be able
able to:
to:
Describe several methods managers use to forecast
sales and some of the problems of using each method.
Describe two approaches to setting budget allowances
for costs and the types of costs for which each is
appropriate.

Continued
Continued

6-3

Objectives
Objectives
Describe behavioral problems associated with
budgeting.
Prepare a budgeted income statement, a
purchases budget, and a cash budget, and a
budgeted balance sheet.
Describe the leads and lags that complicate
the budgeting of cash receipts and
disbursement.
Continued
Continued

6-4

Objectives
Objectives
List several ways that managers might resolve
cash deficiencies revealed by a cash budget.
Describe similarities and differences between
budgeting in for-profit and not-for-profit
entities.
State how zero-based-budgeting and program
budgeting differ from other budgeting
processes.

6-5

Budgets
Budgets often
often
reveal
reveal
incompatibilities
incompatibilities
and
and conflicts.
conflicts.

6-6

Comprehensive
Comprehensive Budget
Budget
A comprehensive budget
or master budget is a
set of financial
statements and other
schedules showing the
expected, or pro forma,
results for a future
period.

Comprehensive
Comprehensive Budget
Budget
Sales forecast

Assumptions about
levels of inventory,
Balance
collections of
sheet at
receivables, and
+ beginning
payments of
of budget
expenses and
period
liabilities

+
Plans for long-term
financing and for
capital spending

Assumptions
about cost
behavior

6-7

Pro forma
income
statement

Budgets for
purchases and
production
Budgets for cash
and
requirements for
short-term
financing

Pro forma
balance
sheet

6-8

Continuous
Continuous Budgets
Budgets
Continuous budgets
are maintained by
adding a budget for a
month (or quarter) as
one of these periods
goes by. Thus, a 12month budget exists at
all times.

2006

6-9

Sales
Sales Forecasters
Forecasters
External Indicators
Historical Analysis
Judgment

6-10

Interim
Interim Period
Period Forecasts
Forecasts
Three distinct types of
sales forecasting
methods:
1. Annual forecasts
2. Longer-term forecasts
(three to five years)
3. Quarterly or monthly
forecasts

6-11

Expense
Expense Budget
Budget
Cost

Fixed Amount
per Month

Direct Labor
Hour

Indirect labor
Supplies
Maintenance
Depreciation
Miscellaneous
Total

$2,400
200
1,600
1,200
700
$6,100

$0.40
0.40
0.20
0.00
0.10
$1.10

6-12

Expense
Expense Budget
Budget
Flexible
budget = fixed cost +
per month
allowance

direct
variable
labor x cost per
hours
hour

Example:
Example: Indirect
Indirect labor
labor
Flexible
budget
$7,200 = $6,100 + (1,000 x $1.10)
allowance

6-13

Production
Production Performance
Performance Report
Report
Month____________________
March
Department________________
Mixing
Manager__________________
E. Jones
Budget Allowances
Budgeted Actual Actual Costs
Hours
Hours
Incurred
Variance
Direct labor hours
1,000
1,300
Indirect labor
$2,800
$2,920
$2,870
$50
Supplies
600
720
705
15
Maintenance
1,800
1,860
1,900
(40 )
Depreciation
1,200
1,200
1,200
0
Miscellaneous
800
830
840
(10 )
Total
$7,200
$7,530
$7,515
$15

6-14

Budgeting
Budgeting and
and Behavior
Behavior
Behavioral problems
arise when:
When managers interests
conflict
When budgets are
imposed from above
When stretch goals are
used
When budgets are viewed
as checkup devices

Conflict

6-15

Imposed
Imposed Budgets
Budgets
Imposed budgets are when senior
managers set performance goals
(budgets) without consulting the
individuals who will be responsible
for meeting those goals.
Serious behavioral problems
can arise (or be avoided)
depending on the attitudes of
managers imposing the
performance goals.

6-16

Stretch
Stretch Goals
Goals
Stretch goals
are exceptionally
ambitious targets not
likely to be achieved
without making
fundamental
changes in the way a
job is done.

6-17

Checkup
Checkup Devices
Devices
Behavioral problems
arise when managers
compare budgeted and
actual results and
subsequently evaluate
the performance of their
subordinates.

6-18

Spend
Spend IT
IT or
or Lose
Lose It
It
Expense budgets set limits on
levels of costs to be incurred,
allowances managers are not
supposed to exceed. If managers
view their budget allowance as
strict limits on spending, they may
spend either too little or too much.

6-19

Budgeting
Budgeting and
and Ethics
Ethics
Managers in some areas might consider
preparingand ask management accountants to
help them in doing sobudgets with a great
deal of slack so that managers will be able to
meet them with minimum effort.
Top-level management impose budgets on
subordinates so tight that there is little chance of
achieving them.
Ethical issues also arise about the reporting of
actual results for a budget period.

6-20

Exhibit 6-3
Month
January
February
March
April
May

Sales Budget
$400
500
800
700
600

Cost of goods sold will be 60% of sales dollars.

Total fixed costs will be $150, of which $15 per
month is depreciation expense.

6-21

Exhibit 6-4

Budgeted Income Statement

Sales
Cost of goods sold
Gross profit and
320680
Fixed costs
Income

Three-Month
January February March
Total
$400$500 $800$1,700
240 300

480 1,020

contribution margin160
150 150

150

450

$ 10$ 50 $170$ 230

200

6-22

Exhibit 6-5

Purchases Budget
January
Cost of goods sold
Budgeted ending inven.
Total requirements
Beginning inventory
Purchases

February

Three-Month
March
Total

$ 240

$ 300

$ 480

$1,020

780

900

780

780

1,020

1,200

1,260

1,800

540

780

900

540

$ 480

$ 420

$ 360

$1,260

6-23

Exhibit 6-6

Cash Receipts Budget

Sales

Three-Month
March
Total

January

February

$400

$500

$880

$1,700

$310

$120

$150

$ 580

280

350

560

1,190

$590

$470

$710

$1,770

Collections:
From prior years, 30%
From current month, 70%
Total receipts

6-24

Exhibit 6-7

Cash Disbursements for Purchases

From prior month, 40%

Three-Month
March
Total

January

February

$195

$192

$168

$ 555

288

252

216

756

$483

$444

$384

$1,311

From current month,

60% Total receipts
Total

6-25

Exhibit 6-8

Cash Disbursements Budget

For merchandise,
see Exhibit 6-7
Fixed costs requiring
cash

Three-Month
March
Total

January

February

$483

$444

$384

$1,311

135
$618

135
$579

135
$519

405
$1,716

6-26

Exhibit 6-9

Cash Budget
Beginning balance,
Exhibit 6-3
Cash receipts,
Exhibit 6-6
Total available
Cash disbursements,
Exhibit 6-8
Indicated balance
Excess (deficiency)
Borrow
Repay
Ending balance

January

February

Three-Month
March
Total

$ 80

$ 52

$ 50

590
$670

470
$522

710
$760

1,770
$1,850

618
$ 52
2

579
$(57 )
(107 )
107

519
$241
191

1,716
$ 134

$ 52

$ 50

107
$134

80

107
107
$ 134

Exhibit 6-10
Pro Forma Balance Sheet
As of March 31, 20X6
Assets
Cash (Exhibit 6-9)
Accounts receivable (March sales x 30%)
Inventory (Exhibit 6-5)
Fixed assets (beginning balance less $45
depreciation for 3 months)
Total assets
Equities
Accounts payable (March purchases x 40%)
Stockholders equity
Total equities

6-27

$ 134
240
780
1,535
$2,689
$ 144
2,545
$2,689

6-28

Zero-based
Zero-based budgeting
budgeting
means
means that
that managers
managers must
must
justify
justify every
every dollar
dollar they
they
request
request in
in aa budget
budget proposal
proposal
for
for aa given
given year.
year.

6-29

Program
Program budgeting
budgeting requires
requires that
that aa
budget
budget indicate
indicate not
not only
only how
how the
the
requested
requested funds
funds are
are to
to be
be spent,
spent, but
but
also
also why
why the
the funds
funds are
are to
to be
be spent
spent in
in
those
those ways.
ways.

6-30

Chapter 6
The
The End
End

6-31