Budgeting Lecture - this helps you to do a production budget and much more. by Mrs. Sterling PDF

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this helps you to do a production budget and much more. by Mrs. Sterling...

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1

BUDGETING

LEARNING OBJECTIVES At the end of this topic, students should be able to: 1.

Define budgeting and discuss its role in planning, control, and decision making.

2.

Define and prepare the master budget, identify its major components, and explain the interrelationships of the various components.

3.

Explain and illustrate the use and relevance of cash budgeting as a planning aid in the coordination of business activity

4.

Prepare the budgeted income statement and balance sheet and its supporting budget schedules.

KEY TOPICS 1.

Description of budgeting

2.

Preparing the master budget

3.

Preparing the cash budget

4.

Preparing the budgeting income statement and balance sheet

1.

DESCRIPTION OF BUDGETING BUDGETING DEFINED

A Master (comprehensive) budget is a formal statement of management's expectation regarding sales, costs, output, and other financial transactions of the firm for the coming period. Simply put, a budget is a set of projected or planned financial statements. It consists basically of a pro forma income statement, a pro forma balance sheet, and a cash budget. A budget is a tool used for both planning and control. At the beginning of the period, the budget is a plan or standard; at the end of the period it serves as a control device to help management measure its performance against the plan so that future performance may be improved Budgeting is a planning and control tool used by managers. Planning Tool

Control Tool

Identify objectives.

Compare actual results with budgeted (planned) amounts.

Identify actions needed to achieve objectives.

Corrective action can be taken, if needed.

The steps involved in the planning and control process are as follows: 

Develop a strategic plan. A strategic plan identifies strategies for future activities and operations, generally covering at least five years.



Translate the strategic plan into long-term and short-term objectives.



From the objectives, develop short-term plans.



Develop budgets based upon the short-term plans.

Compare actual results with planned (budgeted) amounts.  Take corrective action, if necessary. 

Advantages of Budgeting Advantages of budgeting include the following: 

Budgets force managers to plan.

2  Budgets provide information that can be used to improve decision making.

2.



Budgets provide standards used for performance evaluation and control. Control involves comparing actual results with budgeted amounts and taking corrective action whenever actual performance deviates significantly from planned performance.



Budgets improve communication and coordination.

PREPARING THE BUDGET

Most budgets are for a one-year period, further broken down into quarterly and/or monthly budgets. A continuous budget is a moving twelve-month budget. As a month expires in the budget, an additional month is added so that the company always has a twelve-month plan on hand. A.

The Master Budget

The master budget is a comprehensive financial plan consisting of various individual budgets. Master Budget

Operating Budgets

Financial Budgets

Definition:

budgets concerned with cash flows and budgets concerned with income-generating financial position at end of period activities

Examples:

sales budget production budget direct materials purchases budget direct labor budget overhead budget selling and administrative expenses budget ending finished goods inventory budget cost of goods sold budget budgeted income statement

cash budget budgeted balance sheet budget for capital expenditures

The major steps in preparing the master budget are: 1.

Prepare a sales forecast.

2.

Determine production volume.

3.

Estimate manufacturing costs and operating expenses.

4.

Determine cash flow and other financial effects.

5.

Formulate projected financial statements.

B.

Preparing the Master Budget

THE SALES BUDGET The sales forecast is the basis for the sales budget and is usually the responsibility of the marketing department.

The sales budget is the starting point in preparing the master budget, since estimated sales volume influences nearly all other items appearing throughout the master budget. The sales budget ordinarily indicates the quantity of each product expected to be sold. Basically, there are three ways of making estimates for the sales budget: 1 . Make a statistical forecast on the basis of an analysis of general business conditions, market conditions, and product growth curves.

2. 3.

3 Make an internal estimate by collecting the opinions of executives and salespersons. Analyze the several factors that affect sales revenue and then predict the future behavior of each of these factors.

After sales volume has been estimated, the sales budget is constructed by multiplying the expected sales in units by the expected unit sales price. Generally, the sales budget includes a computation of expected cash collections from credit sales, which will be used later for cash budgeting. The sales budget is the projection of expected sales in units and dollars. Sales Budget Jan

Feb

Mar

Apr

Expected Sales in units x Unit Selling Price Total Sales Production Budget The production budget indicates the number of units of finished product to be produced in order to meet: 

sales needs



inventory requirements

If production is related to sales of the next period, production needs for a manufacturer can be calculated as follows: Production Budget Jan

Feb

Mar

Apr

Budgeted sales in units + Desired ending inventory in units = Total units needed – Beginning inventory (units on hand) = Units to be produced Direct Materials Purchases Budget The direct materials purchases budget is a budget of the expected usage of materials in production and the purchase of the direct materials required. The steps involved in preparing a direct materials purchases budget are as follows: 1. 2. 3.

Determine the amount of direct materials necessary to manufacture the number of units to be produced. Determine the quantity of direct materials to be purchased. Determine the cost of the direct materials to be purchased by multiplying the quantity of direct materials to be purchased by the expected cost per unit of direct material. Materials Budget Jan

Units to be produced x Material requirement per unit = Quantity of direct materials needed for production

Feb

Mar

Apr

+ Desired ending inventory of direct materials = Total quantity of direct materials needed – Beginning inventory of direct materials Q

i

f di

i l

b

h

d

4

x Price per kg/lb = Purchases

Direct Labor Budget The direct labor budget is a budget of planned expenditures for direct labor. The direct labor budget indicates the rate per hour and the number of hours necessary to meet production requirements. Labour Budget Jan

Feb

Mar

Apr

Units to be produced x Labour hours required per unit = Total Labour hours needed for production x Standard labour rate per unit = Total labour cost

Overhead Budget The overhead budget shows the expected cost of all manufacturing costs other than direct materials and direct labor. Budgeted variable overhead costs are based on a budgeted variable overhead rate multiplied by budgeted activity. Budgeted fixed overhead costs remain unchanged as the activity level changes within the relevant range. Overhead Budget Jan

Feb

Mar

Total labour hours needed for production x Variable overhead rate per hour = Total Variable Overhead + Fixed Production overheads = Total Production overheads

Cost of Goods Sold Budget The cost of goods sold budget calculates the expected costs of the goods to be sold. Budgeted cost of goods sold is calculated as follows: Cost of Direct materials used + Cost of Direct labor used + Total Production overhead = Budgeted manufacturing costs + Beginning finished goods

Apr...