CH 6: Budgets

WHY BUDGET? PLANNING z COMMUNICATION z CONTROL:PERFORMANCE EVALUATION z MOTIVATING

z
z

Budget types
Master Budget
Operating Budget
Sales, Production [purchases], Operating Expense Budget. ProForma Income Statement

Financial Budget
Cash Budget, Capital Budget, ProForma Balance Sheet

Capital Budget
Forecast of Long term Goals and Objectives
equipment, building

HOW DO YOU COME UP WITH THE NUMBERS?

z

Budget Periods
Next year
By month or quarter

z z z z z

INPUT / OUTPUT APPROACH ACTIVITY BASED APPROACH INCREMENTAL APPROACH MINIMUM LEVEL APPROACH (zero based budgeting) KAIZEN APPROACH: continuous improvement

Next 5 years z Rolling or continuous budget

z

SALES BUDGET

NonManufacturing Organization

Sales BUDGET

Manufacturing Organization Production BUDGET

CASH RECEIPTS BUDGET

PURCHASES BUDGET

SELL & ADMIN. EXPENSE BUDGET

DM Materials Budget

CAPITAL BUDGET

Direct Labor Budget

Overhead Budget

CASH PAYMENTS BUDGET PRO FORMA FINANCIAL STATEMENTS CASH PAYMENTS BUDGET

CASH BUDGET

Sales Budget
Forecast units z Forecast sales price
z z
z

Example: Sales Budget

Sales Forecast in Units
Jan 100 Feb 200 Mar 300 April 400

Sales Forecast (units)

Who does this? Sales Budget = units x price

Forecasted Sales Price $30 per unit

Jan 100 $30 $3,000 Feb 200 $30 $6,000 March 300 $30 $9,000 TOTAL 600 $30 $18,000

Sales Forecast (units) Unit Sales Price

Cash Receipts Budget

z z z

Cash Receipts Budget:

Sales Forecast (units)

next year Jan 100

Feb 200

Mar 300

April 400

Sales Price per unit Collection Pattern

$30.00 80% 20% $ 220

Sales Budget Collection patterns Balance in Accounts Receivable

next year Jan 100 Feb 200 Mar 300 April 400

Accounts Receivable, Beg of Yr

Sales Forecast (units)

Sales Price per unit Collection Pattern Accounts Receivable, Beg of Yr

$30.00 80% 20% $ 220

Cash Receipts in January: 220 + .8 * 3000 = 2,620 February: +.2*3000 +.8* 6000 = 600+4,800 =5,400 March: +.2*6000 + .8*9000=1,200 + 7,200 = 8,400

Purchase Budget
Sales Budget Inventory Requirements z Current Inventory level z Unit cost of inventory
z z z

Example: Purchase Budget

Purchases (units)= Sales in units + Ending Inventory in units Beginning Inventory in units

January Purchases: Jan sales + End Inventory Beg. Inventory= 100 +.1*200 110/10 = 100+20 - 11 = 109 units

Purchases Budget
The Budge Company INVENTORY PURCHASES BUDGET Jan Feb Desired Ending Inventory 20 30 Plus:Unit Sales 100 200 Total needed 120 230 Less:Beg. Inventory 11 20 Unit Purchases 109 210 x unit cost $10.00 $10.00 Cost of Purchases $1,090 $2,100

PRODUCTION BUDGET
z

BUDGET OF PRODUCTION NEEDS

SALES + END INVENTORY BEG INVENTORY

March 40 300 340 30 310 $10.00 $3,100

TOTAL 40 600 640 11 629 $10.00 $6,290

BUDGET OF RM PURCHASES
PRODUCTION BUDGET + END INV OF RM BEG INV OF RM

z z

BUDGET OF DIRECT LABOR

PRODUCTION BUDGET X DLH/UNIT X DL RATE

BUDGET OF OVERHEAD
PRODUCTION BUDGET X DLH/UNIT X OH RATE PER DL HOUR

PRODUCTION BUDGET EXAMPLE

Sales Forecast (units) Inventory Requirements Inventory Costs: Inventory, Beg of YR next year Jan 100 Feb 200 Mar 300 April 400 May 400 10% of next month's sales $10.00 /UNIT 110

Production Budget Sales plus End Inv less Beg Inv Production in Units RM Purchase Budget Prod Needs plus Ending Inv less BEG Inv Total Purchases (units) Unit cost

Jan 100 20 (11) 109

Feb 200 30 (20) 210

Mar 300 40 (30) 310

APR 400 40 (40) 400

RM Inventory, Beg. Of Yr $ RM Unit Cost $ RM units per FG RM Inventory Requirements Direct Labor per unit of FG OH per Unit of FG $ $

30.00 2.00 3 5% (round up to whole units) 3.00 1.00

$ $

Jan Feb Mar 327 630 930 32 47 60 (15) (32) (47) 344 645 943 2.00 $ 2.00 $ 2.00 688 $ 1,290 $ 1,886

Selling and Admin. Expense Budget

Direct Labor Budget production DL cost per Unit $ $ Jan 109 3.00 327 Jan 109 1.00 109 Feb 210 $ 3.00 $ 630 Feb 210 $ 1.00 $ 210 Mar 310 $ 3.00 $ 930 Mar 310 $ 1.00 $ 310

OH Budget production OH cost per Unit

Sales Budget z Variable Expenses z Fixed Expenses z Cost equation

z Cost = Variable Rate (units) + Fixed Cost

$ $

Example: Selling and Admin. Expense Budget

Sales Forecast (units) Jan 100 Feb 200 Mar 300 April 400

Example: Selling and Admin. Expense Budget (cont)

SELLING AND ADMINISTRATIVE EXPENSE BUDGET Jan Feb March Commissions $150 $300 $450 Delivery 100 200 300 Sales Salaries 1,000 1,000 1,000 Administrative Supplies 200 400 600 Administrative Salaries 1,500 1,500 1,500 Admininstrative Depreciation 50 50 50 Total $3,000 $3,450 $3,900

Selling and Administrative Expense Commissions 5% Delivery $ 1 Sales Salaries $ 1,000 Administrative Supplies $ 2 Administrative Salaries $ 1,500 50 Admininstrative Depreciatio $
Sales price per unit = $30

per unit per unit per month per unit per month per month

Cash Payments Budget

Purchases Budget z Selling and Administrative Expense Budget z Payment patterns z Account Payable balance
z

g p y INVENTORY PURCHASES BUDGET Jan Feb March Desired Ending Inventory 20 30 40 Plus:Unit Sales 100 200 300 SELLING AND Total needed 120 230 340 ADMINISTRATIVE EXPENSE BUDGET Jan Feb March Less:Beg. Inventory 11 20 30 Commissions $150 $300 $450 Unit Purchases 109 210 310 Delivery $10.00 100 200 300 x unit cost $10.00 $10.00 Sales Salaries 1,000 1,000 1,000 Cost of Purchases $1,090 $2,100 $3,100 Administrative Supplies 200 400 600 Administrative Salaries 1,500 1,500 1,500 Admininstrative Depreciation 50 50 50 Total $3,000 $3,450 $3,900

Cash Payments Budget Example

Cash Payments History Purchases All other Accounts Payable, beg of YR

90% in month purchased 10% in month following purchase 100% in month incurred $900

Cash Payments Budget

z

Cash Payments for Purchases in January:

January Purchases x .9 + Accounts Pay,Dec 31 1090 x .9 + 900 =981 + 900 = 1,881

Cash Payments Budget

The Budge Company SCHEDULE OF CASH PAYMENTS Jan
Purchases Current Month Prior Month Total CP for Purchases Selling and Adm. Expens Less: Depreciation Total S&A Cash Paymen Total Cash Payments

Feb $ $ $ $ $ 1,890 109 1,999 3,450 (50) 3,400 5,399 $ $ $ $ $

March 2,790 210 3,000 3,900 (50) 3,850 6,850 $ $ $ $ $

TOTAL 5,661 1,219 6,880 10,350 (150) 10,200 17,080

$ $ $ $ $

Cash Payments for Selling and Adm. Expenses January Expenses x 100% - depreciation = 3,000 50 = 2,950

981 900 1,881 3,000 (50) 2,950 4,831

Cash Budget
Cash Receipts Budget Cash Payments Budget z Beginning Cash Balance z Capital Budget, Dividend Policy z Minimum Cash Balance Requirements z Borrowing policy
z z

Example: Cash Budget

Cash Budget
March TOTAL $7,200 $14,400 $1,200 $2,020 $8,400 $16,420
Feb $ $ $ $ $ 1,890 109 1,999 3,450 (50) 3,400 5,399 $ $ $ $ $ March 2,790 210 3,000 3,900 (50) 3,850 6,850 $ $ $ $ $ TOTAL 5,661 1,219 6,880 10,350 (150) 10,200 17,080

SCHEDULE OF CASH RECEIPTS Jan Feb Current Qtr $2,400 $4,800 Prior Qtr $220 $600 $5,400 g p $2,620 y
SCHEDULE OF CASH PAYMENTS Jan
Purchases Current Month Prior Month Total CP for Purchases Selling and Adm. Expens Less: Depreciation Total S&A Cash Paymen Total Cash Payments

$ $ $ $ $

981 900 1,881 3,000 (50) 2,950 4,831

Minimum Cash Balance Borrows and repays in multiples of Interest Rate Jan Equipment Purchases Dividend Payments Cash, Dec 31, 2000

$500 $100 Borrow at beg. of month, repay at end of month 0.00% per annum, interest is due at end of each month Feb Mar $1,000 $0 $0 $0 $200 $0 $518

Cash Budget
CASH BUDGET
Beginning Cash Balance Add: Cash Receipts Total Available Less: Cash Payments Purchases Selling & Admin Equipment Dividends Total Cash payments Cash Balance Before Financing Borrowing Repayments Interest Cash Balance,Ending

Jan $518 2,620 3,138 $1,881 2,950 1,000 0 5,831 (2,693) 3,200 0 0 507

Feb $507 5,400 5,907 $1,999 3,400 0 200 5,599 308 200 0 0 508

March $508 8,400 8,908 $3,000 3,850 0 0 6,850 2,058 0 1,500 0 558

TOTAL $518 16,420 16,938 $6,880 $10,200 $1,000 200 18,280 (1,342) $3,400 $1,500 $0 558

Pro Forma Income Statement

INCOME STATEMENT Jan-March
Sales Less: CGS GROSS MARGIN LESS: SELLING & ADM. EXPENSES Income Before Tax

$18,000 6,000 12,000 10,350 1,650

PRO FORMA BALANCE SHEET

The Budge Company Balance Sheet Last year (historical) Cash $518 Accounts Receivable 220 Inventory 110 Land 10,000 Building, Equipment 30,000 less:Accum. Depreci (15,000) Accounts Payable Notes Payable $900

The Budge Company Balance Sheet Cash Accounts Receivable Inventory Land Building, Equipment less:Accum. Depreciation

Mar 31,2001 $558 1,800 400 10,000 31,000 (15,150) $28,608 Accounts Payable NOTES PAYABLE Capital Stock Retained Earnings $310 1,900 20,000 6,398 $28,608

Capital Stock Retained Earnings

20,000 4,948

$25,848

$25,848

Pro Forma Balance Sheet: Land = 10,000 Building = 30,000 + 1,000 (from capital budget) Accumulated Depreciation = 15000+50*3 =15,150 ($50 from S&A Budget)

Balance Sheet
z

Common Stock = $20,000

Historical Balance Sheet

Retained Earnings = $6,398

Beg. Ret. Earnings (Historical Balance Sheet) + Net Income - Dividends