Man Accounting 3 Budgeting Plan for a period of time Helps management determine how to use resources Used to estimate future cots Develop Strategy Plane Act Control On going process Long term goals o 5 10 years in future Setting key strategies for goals Putting into action Analyzing Rolling Budget Participative Budget Involves all levels of management Benefits Continuous budget is updated so that the next 12 months is always budgeted o Lower level managers are closer to the action and should have a more detailed knowledge for creating realistic budgets o Managers are more likely to accept and be motivated by budgets they helped to create Cons o Process is more complex and time consuming and more people o Managers may slack on the budget in their area of operations by over budgeting expenses and under budgeting revenue Developing the budget 1 Prior year s budget or actual results 2 Zero based budgeting a All managers begun with a budget of zero and must justify every dollar they put in the budget b Approach is time consuming c Companies may use it to keep their expenses in check Benefits of budgeting Forces managers to plan Promotes coordination and communication Provides a benchmark Master Budget Comprehensive planning document for entire organization Supporting all budgets Operating Budget Sales Production Direct materials direct labor MOH Operating expense Budgeted income statement Capital Expenditures and Financial Budgets Balance Sheet Budgeted income statement Financial Capital expenditures cash budgeted balance sheet Plan for sales revenues in future periods Number of total units to be sold sales prices per unit total sales revenue Sales Budget S9 3 Sports Physician Sales Budget July Sep Unit Sales Basic Sales Price Sales Rev Basic Unit Sales Ext Sales price Sales Rev Ext July 200 75 00 15 000 160 140 00 22 400 August 220 75 00 16 500 190 140 00 26 600 September Quarter 100 75 00 7 500 520 75 00 39 000 80 140 00 11 200 430 140 00 60 200 Total Sales Rev 37 400 43 100 18 700 99 200 Production Budget Units need for sales Desired Ending Inventory Total Units Needed Units in beginning inventory Units to produce S9 6 Tucson Tortilla Production Budget End of Quarter Unit Sales from sales Budget Plus Desired Ending Inv Total Needed Less Beg In Unit to produce S9 4 Thomas Cysles Production Budget April June Unit Sales from sales Budget Plus Desired Ending Inv Total Needed Less Beg In Jan 30 000 Feb 20 000 March 25 000 1st Quarter 75 000 2 000 32 000 3 000 29 000 2 500 22 500 2 000 20 500 3 200 28 200 2 500 25 700 3 200 78 200 3 000 75 200 April 1050 119 1169 280 May 1190 136 1326 119 June 1360 124 1484 136 Quarter 3600 124 3724 280 889 1207 1348 Unit to produce Direct Materials Budgeted Quantity of DM needed for production not sales Desired DM EI TQ of DM needed DM BI Quantity of DM to purchase 9 7 Tucson Tortilla DM Budget for Corn Flour End of Quarter 3444 Unit to be produced Quantity Q needed for production desired EI of DM Total Q needed BI of DM Q to purchase Cost per pound Total cost of DM purchases S9 5 Jan 29 000 5 145 000 10 250 155 250 14 500 140 750 1 50 211 125 Feb 20 500 5 102 500 12 850 115 350 10 250 105 100 1 50 157 650 March 25 700 5 128 500 16 150 144 650 12 850 131 800 1 50 197 700 1st Quarter 75 200 5 376 000 16 150 392 150 14 500 377 650 1 50 566 475 July 1480 50 740 194 934 75 859 3 2577 Aug 1940 50 970 172 1142 194 948 3 2844 Unit to be produced Quantity Q needed for production desired EI of DM Total Q needed BI of DM Q to purchase Cost per pound Total cost of DM purchases Direct Labor Budget Units to be Produced x DLH per unit total DLH needed x Cost per DLH Total DLC 9 8 Tucson Tortilla DM Budget for Corn Flour End of Quarter Quarter 5140 50 2570 140 2710 75 2635 3 7905 Sep 1720 50 860 140 1000 172 828 3 2484 Jan 29 000 05 1450 22 31 900 Feb 20 500 05 1025 22 22 550 March 25 700 05 1285 22 28 270 1st Quarter 75 200 05 3760 22 82 720 Unit to be produced DLH per unit Total Hours required direct labor cost per hour Total direct labor cost Financial Budget Components Capital expenditures Budget Cash Collections Budget Cash Payments Budget Jan 120 000 Feb 80 000 March 100 000 1st Quarter 300 000 425 000 408 000 272 000 1 105 000 67 200 70 000 67 200 204 400 612 200 558 000 439 200 1 609 400 Combined Cash Budget Budgeted Balance Sheet 9 14 Tucson Tortilla Cash Collections End of Quarter Cash Sales Collection on Credit 85 of credit sales last month 14 of credit sales 2 months ago Total CC S9 11 Centennial Corporation Cash Payments Budget For the Month Cash Payments for direct materials Last month s Purchases Cash Payments for direct materials purchases Next month s Cash payments for direct labor Cash payments for manufacturing overhead Cash payments for operating expenses Cash payments for income taxes Total payments S9 12 Cash Budget Henderson Cash Budget Month Ended January 31 Beginning Cash Balance Cash Collection from customers Cash available before financing Total cash payments Ending cash balance financing Minimum cash balance desired Cash deficiency Month 37 500 43 500 36 000 33 800 36 900 7 800 195 500 8 300 548 430 556 730 575 160 18 430 7 300 25 730 Sensitivity Analysis A what if technique that asks what a result will be if a predicted amount is not achieved or id an underlying assumption changes Sustainability and budgeting Goals for sustainability reflected in company s budgets Benchmark for judging performance Long term sustainability goals affect shorter term budgets Merchandising Companies Sales Budget COGS inventory and purchases budget Operating expense budget Budgeted income statement The financial budgets are the same COGS inventory and Purchases Budget COGS desired EI Total inventory needed BI Purchases of Inventory Service companies No merchandise inventory and purchase budget Operating Budget o Sales budget o Operating expense budget o Budgeted income statement o Financial Budgets are the same Credit and Debit card Implications Benefits o Credit card companies and their issuing banks charger merchants a transaction fee for each purchase made using plastic o Merchant receives entire amount of purchase less transaction fee o Lost sales if didn t allow customers to use credit or debit cards o Decreases the cost associated with bounced checks misappropriation of cash and the activities associated with preparing and transporting cash deposits o Receive cash quickly improves cash flow Store Credit Cards o No transaction fee Merchant assumes risk