Slide 1Slide 2Budgeting BasicsBenefits of Budgeting STUDY OBJECTIVE 1Essentials of Effective Budgeting STUDY OBJECTIVE 2Length of the Budget PeriodThe Budgeting ProcessSlide 8Budgeting and Human BehaviorBudgeting and Long-Range Plans Are DifferentThe Master Budget STUDY OBJECTIVE 3Components of the Master BudgetTwo Classes of Budgets in the Master BudgetPreparing the Operating Budgets: Sales BudgetSales BudgetProduction BudgetSlide 17Direct Materials BudgetSlide 19Direct Labor BudgetManufacturing Overhead and Selling and Administrative BudgetManufacturing Overhead BudgetSlide 23Selling and Administrative Expense BudgetBudgeted Income Statement STUDY OBJECTIVE 4Computation of Total Unit CostBudgeted Income StatementPreparing the Financial Budgets STUDY OBJECTIVE 5Basic Form of a Cash BudgetSlide 30Slide 31Collections from CustomersPayments for Direct MaterialsCash BudgetCash BudgetSlide 36Slide 37Budgeted Balance SheetSlide 39Slide 40Budgeting in Non-manufacturing Companies STUDY OBJECTIVE 6Merchandise Purchases FormulaComputation of Required Merchandise PurchasesService EnterprisesSlide 45Not-for-Profit OrganizationsChapter 24Chapter 24Budgetary PlanningAdapted forAccounting 212CHAPTER 24BUDGETARY PLANNINGThe goals in studying this chapter, are to:1 Indicate the benefits of budgeting.2 State the essentials of effective budgeting.3 Identify the budgets that comprise the master budget.4 Describe the sources for preparing the budgeted income statement.5 Explain the principal sections of a cash budget.6 Indicate the applicability of budgeting in non-manufacturing companies.Budgeting Basics•Budget –formal written statement of management’s plans for a specified future time period, expressed in financial terms.a) provide historical data on revenues, costs, and expenses,b) express management’s plans in financial terms, andc) prepare periodic budget reports.Benefits of BudgetingSTUDY OBJECTIVE 1a) All levels of management plan ahead.b) Definite objectives for evaluating performance.c) Early warning system for potential problems.d) Coordination of activities within the business.e) Management awareness of the entity’s overall operations.f) Motivates personnel throughout organization to meet planned objectives.Essentials of Effective BudgetingSTUDY OBJECTIVE 2•Sound organizational structure –authority and responsibility for all phases of operations are clearly defined.•Based on research and analysis –realistic goals that will contribute to the growth and profitability of the company.•Directly related acceptance by all levels of management.Length of the Budget Period•Most common budget period –one year–budget may be prepared for any period of time• A continuous twelve-month budget–drops the month just ended and adds a future month •Annual budget –supplemented by monthly and quarterly budgetsThe Budgeting ProcessBudget committee•Responsible for coordinating the preparation of the budget•ordinarily includes–the president, treasurer, chief accountant (controller), and management personnel from each major area of the companyFlow of Budget DataBudgeting and Human Behavior•Strong positive influence on a manager when:–Each level of management is invited and encouraged to participate in developing the budget.–Criticism of a manager’s performance is tempered with advice and assistance.–Top management is sensitive to the behavioral implications of its actions.Budgeting and Long-Range Plans Are Different•Budgeting –the achievement of specific short-term goals•Long-range planning –identifies and selects strategies to achieve goals and develop policies and plans to implement the strategies •Long-range plans–contain less detailThe Master BudgetSTUDY OBJECTIVE 3•A set of interrelated budgets that constitutes a plan of action for a specified time period. •Developed within the framework of a sales forecast.Components of the Master BudgetTwo Classes of Budgets in the Master Budget•Operating budgets –the individual budgets that result in the preparation of the budgeted income statement•Financial budgets–focus on the cash resources needed to fund expected operations and planned capital expendituresPreparing the Operating Budgets:Sales Budget•The first budget prepared is the sales budget. •Each of the other budgets depends on the sales budget.•It is derived from the sales forecast. It represents management’s best estimate of sales revenue for the budget period.Sales Budget $180,000 $210,000 $240,000 $270,000 $900,000 The sales budget is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price. For Hayes Company, sales volume is expected to be 3,000 units in the first quarter with 500-unit increments in each succeeding year. Based on a sales price of $60 per unit, the sales budget for the year by quarters is shown below:Production Budget•Shows the units that must be produced to meet anticipated sales. •Derived from the budgeted sales units (per sales budget) plus the desired ending finished goods less the beginning finished goods units.•The production requirement formula is:Desired Ending Finished Goods UnitsBeginning Finished Goods UnitsBudgeted Sales UnitsRequired Production UnitsProduction BudgetRequired production units 3,100 3,600 4,100 4,600 15,40020% of next quarter’s salesExpected 2003 1st Q sales5,000 units x 20%Hayes believes it can meet future sales requirements by maintaining an ending inventory equal to 20% of the next quarter’s budgeted sales volume. The production budget is shown below.Per sales budgetDirect Materials BudgetDesired Ending Direct Material UnitsBeginning DirectMaterialsUnitsDirect Materials Units Required for ProductionRequired Direct Materials PurchasesUnits•Shows both the quantity and cost of direct materials to be purchased. •It is derived from the direct materials units required for production (per production budget) plus the desired ending direct materials units less the beginning direct materials units.Direct Materials BudgetHayes has found that an ending inventory of raw materials equal to 10% of the next quarter’s production is sufficient. The manufacture of Kitchen-mate requires 2 pounds of raw materials and the expected cost per pound is $4. The direct materials budget is shown below: Total cost of direct materials purchases