Magna IncACG 2071Module 9: BudgetingBudgets – charts a course for a business by outlining the plans of the business in financial termsObjectives:- Establishing specific goals- Executing plans to achieve goals- Periodically comparing actual results with goalsManagement objectives:- Planningo A set of goals is often necessary to guide and focusindividual and group actions.o Budgeting supports the planning process by requiring all organizational units to establish their goals for the upcoming period.o Planning not only motivates employees to attain goals but also improves overall decision making.- Directingo Once the budget plans are in place, they can be useto direct and coordinate operations in order to achieve the stated goals.o Responsibility centers are led by a manager who has the authority over and the responsibility for theunit’s performance.- Controllingo Actual performance of an operation can be compared against the planned goals Provides prompt feedback to employees about their performance.Created by: M. MariFall 2007Page 1 of 12ACG 2071Module 9: Budgeting Comparing actual results to the plan also helps prevent unplanned expenditures.Budgeting Systems vary among businesses because of such factors as organizational structure, complexity of operations, and management philosophy. Differences in budget systems are even more significant among different types of business such as manufacturers and service businesses. Types of Budgetso Continuous budgeting – maintains a 12-month projection into the future. The 12-month budge is continually revised by removing the data for the period just ended and adding estimated budget data for the same period next year.o Zero based budgeting – requires manager to estimate sales, production, and other operating data as though operations are being started for the first time.o Static Budget – shows expected results of a responsibility center for only one activity level. Once the budget has been determined, it is not changed, even if the activity changes.o Flexible budget – shows expected results of a responsibility center for several activity levels.Master Budgeto Manufacturing operations require a series of budgets that are linked together in the master budget.o Major parts of the master budget are:o Budgeted income statement Sales budget Cost of goods sold budget- Production budget- Direct materials purchases budget- Direct labor cost budget- Factory overhead cost budget Selling and administrative expense budgeto Budgeted balance sheetCreated by: M. MariFall 2007Page 2 of 12ACG 2071Module 9: Budgeting Cash budget Capital expenditure budgetThese budgets must be prepared in a specific order since the information from a prior budget is needed to prepare the next budget.Budgeted Income Statement – Sales Budgeto Indicates for each product  the quantity of estimated sales and  expected selling price.o In estimating the quantity of sales for each product, past sales volumes are often used as the starting point. They are revised for factors that are expected to affect future sales. Once sales volume is obtained, sales revenues can be computed.o Example: Brite Lite sells two products in United States and Canada. Product A is estimated to sell 5,000 units in the United States and 10,000 units in Canada at $100 per unit. Product B sells 20,000 units in United States and 6,000 units inCanada at $50 per unit. Brite Lite Sales Budget For year 2006Product A Product BUnits sold: United States 5,000 20,000 Canada 10,000 6,000Total units sold 15,000 26,000Sales price per unit X $100 X $50Total sales $1,500,000 1,300,000 $2,800,000Once the sales budget is completed, the Production budget is prepared.Created by: M. MariFall 2007Page 3 of 12ACG 2071Module 9: BudgetingProduction Budget:o Coordinates with sales budget to ensure that production and sales are kept in balance during the periodo Number of units manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.o Formula:Expected units to be sold+ Desired ending inventory-Estimated beginning inventoryTotal units to be producedExample: Brite Lite expects to have beginning inventory of 3,000 units of Product A and 5,000 units of Product B. The company would like its ending inventory to be 10% of estimated sales.Product A Product BExpected sales (in units) 15,000 26,000 Plus desired ending inventory + 1,500 + 2,600Minus estimated beginning inventory - 3,000 - 5,000Total production 13,500 23,600Expected sales came in from the Sales Budget.Desired ending inventoryProduct A: Estimated sales 15,000 x 10% = 1,500 unitsProduct B: Estimated sales 26,000 x 10% = 2,600 unitsBeginning inventory given in problem.Direct Materials Purchase Budget:- The production budget is the starting point for determining the estimated quantities of direct materials to be purchased.- Estimates purchase levels for the next year and costs.- Formula:Created by: M. MariFall 2007Page 4 of 12ACG 2071Module 9: BudgetingMaterials required for production+ Desired ending materials inventory-Estimated beginning materials inventoryDirect materials to be purchasedX cost per unitTotal direct materials costExample: Product A uses 2 lbs. of plastic and 3 lbs. of aluminum. Product B uses ½ lb. of plastic, 1 lb. of aluminum, and 2 lbs. of paper. Aluminum sells for $5 per lb. Plastic sells for $10 per lbs, and paper sells for $2 per lbs. Beginning inventory is 7,300, 3,600, and 5,200 lbs. Ending inventory is 4,000 lbs, 6,000 lbs, and 8,000 lbs. Ending Inventory (lbs) Beginning inventory(lbs.)Plastic 4,000 7,300Aluminum 6,000 3,600Paper 8,000 5,200Required: Prepare a direct material purchase budget.Created by: M. MariFall 2007Page 5 of 12ACG 2071Module 9: BudgetingDirect Materials Purchase BudgetAL Plastic Paper TotalProduct A (13,500 units) 13,500 x 3 lbs. 40,500 13,500 x 2 lbs. 27,000 13,500 x 0 lbs. 0Product B (23,600 units) 23, 600 x 1lbs. 23.600 23,600 x ½ lbs. 11,800 23,600 x 2 lbs. 47,200Total needed for production 64,100 38,800 47,200 + Desired Ending inventory 4,000 6,000 8,000Total units needed 68,100 44,800 55,200- Beginning Inventory -7,300 -3,600 -5,200Total direct materials purchased 60,800 41,200 50,000Unit cost for material X $5 X $10 X $2Total costs $304,000