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, youre more likely to get there.
Plan Perform Evaluate Report

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)

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?

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
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The Master Budget

The master budget is a set of budgets that consolidates an organizations financial information into budgeted financial statements The master budget includes:
Operating budgets Budgeted balance sheet Cash Budget Capital Expenditure Budget

Manufacturing Budget
Operations budget for a manufacturing organization include:
Sales Production Direct material purchase Direct Labor Manufacturing Overhead Selling and Administrative Expenses
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Preparation of the Master Budget for a Manufacturing Organization

Team Work Exercise

E5

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Sales Budget

Sales in units x Selling price Sales in dollars

Next Budgets Production
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Team Work
Prepare a Sales Budget using Exercise SE4

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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!

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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.
January February March

Desired sales in units Desired ending finished goods inventory Desired total units Desired Beginning finished goods inventory Production needs

5,000 2,000 7,000 2,500 4,500

4,000

6,000

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Answer: production budget for the quarter Prepare the following

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.
January February March

Desired sales in units Desired ending finished goods inventory Desired total units Desired Beginning finished goods inventory Production needs

5,000 2,000 7,000 2,500 4,500

4,000 3,000 7,000 2,000 5,000

6,000 3,500 9,500 3,000 6,500

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Team Work - More Practice

Prepare a Production Budget. Exercise SE5.

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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
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Budget Preparation and Teamwork

Materials Budget E7, E8 Labor Budget E10

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The Cash Budget

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

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

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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.

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Solution
Alberta Limited
Cash Budget November

Cash receipts (30% of November Sales) (65% of October Sales) Total Cash Receipts Cash Payments: General Expenses ($25,000 - $2000) Purchases (Oct $15,000 + Nov $20,000) Office furniture Sales Commissions Total Cash Payments Change in Cash Beginning Cash Borrowing Repayments Ending Cash

$18,000 52,000 $70,000 23,000 35,000 4,000 12,000 $74,000 $4,000) 6,000 2,000 $4,000
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Cash Budgets and Teamwork

SE8 SE9

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Homework
P2 in its entirety Based on Chapter

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