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Chapter Nine

Profit Planning, Activity-Based Budgeting and e-Budgeting

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Purposes of Budgeting Systems

Budget
a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
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Planning Facilitating Communication and Coordination Allocating Resources Controlling Profit and Operations Evaluating Performance and Providing Incentives

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Types of Budgets
Detail Budget Detail Budget
Materials

Master Budget
Covering all phases of a companys operations.
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Detail Budget
Sales

Production

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Types of Budgets
Long Range Budgets
Capital budgets with acquisitions Capital budgets with acquisitions that normally cover several years. that normally cover several years.

Continuous or Rolling Budget 1999 2000

This budget is usually a twelve-month This budget is usually a twelve-month budget that rolls forward one month budget that rolls forward one month as the current month is completed. as the current month is completed.

2001

2002

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Sales of Services or Goods Ending Inventory Budget

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Work in Process Work in Process and Finished and Finished Goods Goods

Production Budget

Direct Materials Budget

Direct Labor Budget

Overhead Budget

Selling and Administrative Budget

Direct Materials Direct Materials

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Ending Inventory Budget

Sales of Services or Goods Ending Inventory Budget

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Work in Process Work in Process and Finished and Finished Goods Goods

Production Budget

Direct Materials Budget

Direct Labor Budget

Overhead Budget

Selling and Administrative Budget

Direct Materials Direct Materials

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Ending Inventory Budget

Cash Budget

Budgeted Financial Statements

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Sales Budget
Breakers, Inc. is preparing budgets for the Breakers, Inc. is preparing budgets for the
April April May May June June July July August August 20,000 units 20,000 units 50,000 units 50,000 units 30,000 units 30,000 units 25,000 units 25,000 units 15,000 units. 15,000 units.

quarter ending June 30. quarter ending June 30. Budgeted sales for the next five months are: Budgeted sales for the next five months are:

The selling price is $10 per unit. The selling price is $10 per unit.
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Sales Budget
April Budgeted sales (units) Selling price per unit Total Revenue 20,000 $ 10 $ May 50,000 10 $ June 30,000 10 $ Quarter 100,000 10

$200,000

$500,000

$300,000

$1,000,000

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Production Budget
Sales Budget Production Budget

d te e pl om C

Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
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Production Budget
The management of Breakers, Inc. wants The management of Breakers, Inc. wants ending inventory to be equal to 20% of the ending inventory to be equal to 20% of the following months budgeted sales in units. following months budgeted sales in units. On March 31, 4,000 units were on hand. On March 31, 4,000 units were on hand.

Lets prepare the production budget. Lets prepare the production budget.

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Production Budget
Sales in units Add: desired end. inventory Total needed Less: beg. inventory Units to be started April 20,000 May June Quarter

From sales budget

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Production Budget
Sales in units Add: desired end. inventory Total needed Less: beg. inventory Units to be started April 20,000 10,000 30,000 May June Quarter

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Production Budget
Sales in units Add: desired end. inventory Total needed Less: beg. inventory Units to be started April 20,000 10,000 30,000 4,000 26,000 May June Quarter

March 31 ending inventory

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Production Budget
Sales in units Add: desired end. inventory Total needed Less: beg. inventory Units to be started April 20,000 10,000 30,000 4,000 26,000 May 50,000 6,000 56,000 10,000 46,000 June Quarter

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Production Budget
Sales in units Sales in units Add: desired Add: desired end. inventory end. inventory Total needed Total needed Less: beg. Less: beg. inventory inventory Units to be Units to be started started April April 20,000 20,000 10,000 10,000 30,000 30,000 4,000 4,000 26,000 26,000 May May 50,000 50,000 6,000 6,000 56,000 56,000 10,000 10,000 46,000 46,000 June June 30,000 30,000 5,000 5,000 35,000 35,000 6,000 6,000 29,000 29,000 Quarter Quarter 100,000 100,000 5,000 5,000 105,000 105,000 4,000 4,000 101,000 101,000

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Direct-Material Budget
T At Breakers, five pounds of material are T At Breakers, five pounds of material are required per unit of product. required per unit of product. T Management wants materials on hand at the T Management wants materials on hand at the end of each month equal to 10% of the end of each month equal to 10% of the following months production. following months production. T On March 31, 13,000 pounds of material are on T On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. hand. Material cost $.40 per pound. Lets prepare the direct materials budget. Lets prepare the direct materials budget.
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Direct-Material Budget

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From our production budget

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Direct-Material Budget

10% of the following months production

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Direct-Material Budget

March 31 inventory
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Direct-Material Budget

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Direct-Material Budget
July Production Sales in units Add: desired ending inventory Total units needed Less: beginning inventory Production in units 25,000 3,000 28,000 5,000 23,000

June Ending Inventory July production in units 23,000 Materials per unit 5 Total units needed 115,000 Inventory percentage 10% June desired ending inventory 11,500

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Direct-Labor Budget
T At Breakers, each unit of product requires 0.1 hours of direct labor. T The Company has a no layoff policy so all employees will be paid for 40 hours of work each week. T In exchange for the no layoff policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). T For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. Lets prepare the direct labor budget.
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Direct-Labor Budget

From our production budget

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Direct-Labor Budget

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Direct-Labor Budget

This is the greater of labor hours required or labor hours guaranteed.

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Direct-Labor Budget

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Overhead Budget
Here is Breakers Overhead Budget for the quarter.

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Selling and Administrative Expense Budget

T At Breakers, variable selling and T At Breakers, variable selling and administrative expenses are $0.50 per unit administrative expenses are $0.50 per unit sold.. sold T Fixed selling and administrative expenses T Fixed selling and administrative expenses are $70,000 per month. are $70,000 per month. T The $70,000 fixed expenses include T The $70,000 fixed expenses include $10,000 in depreciation expense that does $10,000 in depreciation expense that does not require a cash outflows for the month. not require a cash outflows for the month.
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Selling and Administrative Expense Budget

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From our Sales budget

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Selling and Administrative Expense Budget

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Cash Receipts Budget

T At Breakers, all sales are on account. T At Breakers, all sales are on account. T The companys collection pattern is: T The companys collection pattern is:
70% collected in the month of sale, 70% collected in the month of sale, 25% collected in the month following sale, 25% collected in the month following sale, 5% is uncollected. 5% is uncollected.

T The March 31 accounts receivable T The March 31 accounts receivable balance of $30,000 will be collected in full. balance of $30,000 will be collected in full.

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Cash Receipts Budget

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Cash Receipts Budget

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Cash Disbursement Budget

T Breakers pays $0.40 per pound for its T Breakers pays $0.40 per pound for its materials. materials. T One-half of a months purchases are paid for in T One-half of a months purchases are paid for in the month of purchase; the other half is paid in the month of purchase; the other half is paid in the following month. the following month. T No discounts are available. T No discounts are available. T The March 31 accounts payable balance is T The March 31 accounts payable balance is $12,000. $12,000.

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Cash Disbursement Budget

140,000 lbs. $.40/lb. = $56,000

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Cash Disbursement Budget

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Cash Disbursement Budget

Continued Breakers: Breakers:
Maintains a 12% open line of credit for $75,000. Maintains a 12% open line of credit for $75,000. q Maintains a minimum cash balance of $30,000. q Maintains a minimum cash balance of $30,000.
q q

Borrows and repays loans on the last day of the Borrows and repays loans on the last day of the month. month. q Pays a cash dividend of $25,000 in April. q Pays a cash dividend of $25,000 in April.
q q

Purchases $143,700 of equipment in May and Purchases $143,700 of equipment in May and $48,300 in June paid in cash. $48,300 in June paid in cash. q Has an April 1 cash balance of $40,000. q Has an April 1 cash balance of $40,000.
q q
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Cash Disbursement Budget

Continued

From our Cash Receipts Budget

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Cash Disbursement Budget

Continued

From our Cash Disbursements Budget

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Cash Disbursement Budget

Continued

From our Direct Labor Budget

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Cash Disbursement Budget

Continued

From our Overhead Budget

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Cash Disbursement Budget

Continued

From our Selling and Administrative Expense Budget

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Cash Disbursement Budget

Continued

To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of credit.

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Cash Disbursement Budget

Financing and Repayment

Ending cash balance for April is the beginning May balance.

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Cash Disbursement Budget

Continued

Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000.

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Cash Disbursement Budget

Financing and Repayment

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Cash Disbursement Budget

Continued
At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at 12%.

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Cash Disbursement Budget

Financing and Repayment

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Cash Disbursement Budget

Continued

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Cash Disbursement Budget

Financing and Repayment

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Budgeted Income Statement

Cash Budget
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Budgeted Income Statement

After we complete the cash budget, we can prepare the budgeted income statement for Breakers.
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Budgeted Ending Inventory

Manufacturing overhead is applied on the basis of direct labor hours.
Production costs per unit Direct materials Direct labor Manufacturing overhead Quantity 5.00 lbs. 0.10 hrs. 0.10 hrs. Cost $ 0.40 $ 8.00 $18.02 $ Total 2.00 0.80 1.80 4.60

$ Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory

5,000 $ 4.60 $23,000

Total overhead $191,000 = $18.02 per hr.* Total labor hours 10,600 hrs.
*rounded
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Budgeted Income Statement

Breakers, Inc. Budgeted Income Statement For the Three Months Ended June 30 Revenue (100,000 $10) Cost of goods sold (100,000 $4.60) Gross margin Operating expenses: Selling and admin. Expenses Interest expense Total operating expenses Net income $ 1,000,000 460,000 540,000 $ 260,000 838 $ 260,838 279,162

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Budgeted Balance Sheet

Breakers reports the following account Breakers reports the following account balances on June 30 prior to preparing its balances on June 30 prior to preparing its budgeted financial statements: budgeted financial statements:
Land -- $50,000 Land $50,000 q Building (net) - $148,000 q Building (net) - $148,000 q Common stock - $200,000 q Common stock - $200,000 q Retained earnings - $46,400 q Retained earnings - $46,400
q q

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25%of June sales of $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit.

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50% of June purchases of $56,800

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Budget Administration
The Budget Committee is a standing The Budget Committee is a standing committee responsible for .. .. .. committee responsible for
overall policy matters relating to the budget. overall policy matters relating to the budget. q coordinating the preparation of the budget. q coordinating the preparation of the budget.
q q

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Zero-Base Budgeting
To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness.

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International Aspects of Budgeting

Firms with international operations face special Firms with international operations face special problems when preparing a budget. problems when preparing a budget.
Fluctuations in foreign currency exchange Fluctuations in foreign currency exchange rates. rates. High inflation rates in some foreign countries. High inflation rates in some foreign countries. Differences in local economic conditions. Differences in local economic conditions.

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Behavioral Impact of Budgets

Budgetary Slack: Padding the Budget
People often perceive that their performance will look better in their superiors eyes if they can beat the budget.

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Participative Budgeting
T M o p M a n a g e m M e n t

M S

i d d l e a n a g e m

e n t M

i d d l e a n a g e m

e n

u p e r v Si s u o p r e r v Si s u o p r e r v Si s u o p r e r v i s

Flow of Budget Data

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End of Chapter 9

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