Chapter 13A
Budgeting
Budgeting
A budget is a financial plan for abusiness.
Objectives of budgeting:
•Establishing specific goals (Planning)
•Executing plans to achieve the goals(Directing)
•Periodically comparing actual results withthe goals (Controlling)
Human Behaviorand Budgeting
Importance of setting a reasonable budget:
•Budgets set too tightly discourage employeeswhen expectations are too high.
•Budgets set too loosely lead to budgetaryslack – called “padding” the budget.
•Goal conflict occurs when the employees’ ormanagers’ self-interest differs from thecompany’s goals or objectives.
Choosing the Budget Period
Operating BudgetOperating Budget
2011
2012
2013
2014
The annual operating budgetThe annual operating budget
may be divided into quarterlymay be divided into quarterly
or monthly budgets.or monthly budgets.
The annual operating budgetThe annual operating budget
may be divided into quarterlymay be divided into quarterly
or monthly budgets.or monthly budgets.
A continuous budget is a 12-month budget that rolls forwardone month as the current monthA continuous budget is a 12-month budget that rolls forwardone month as the current month
is completed. is completed.
A continuous budget is a 12-month budget that rolls forwardone month as the current monthA continuous budget is a 12-month budget that rolls forwardone month as the current month
is completed. is completed.
Developing Budget Estimates
Zero-based budgeting requiresmanagers to estimate sales, production,and other data as though operations arebeing started for the first time.
More common methods involve revisinglast year’s budget.
Master Budget
A master budget is a series of budgetsthat are linked together.
Major parts of a master budget include:
Relationship of the Various Income Statement Budgets
Sales Budget
Production Budget
Total units
to be
sold
Desired
ending
inventory
+
=
Total
units
needed
Total
units
needed
-
Expected
beginning
inventory
=
Units
to be
produced
Production Budget
Calculation of the Purchases Budget
Raw material
needed
for
production
Desired
ending
raw
material
inventory
+
=
Total
raw
material
needs
Total
raw
material
needs
-
Expected
raw
material
beginning
inventory
=
Raw
material
to be
purchased
Units to beProduced(ProductionBudget) * DMneeded for eachunit
Price of RawMaterials *Units ofRaw Materials
Raw Material Requirements
Wallet:
Leather: 0.30 square yard per unit
Lining: 0.10 square yard per unit
Handbag:
Leather: 1.25 square yards per unit
Lining: 0.50 square yard per unit
Direct Materials Purchases Budget
Direct Materials Purchases Budget
Direct Labor Requirements
Wallet:
Cutting Dept: 0.10 hour per unit
Sewing Dept: 0.25 hour per unit
Handbag:
Cutting Dept: 0.15 hour per unit
Sewing Dept: 0.40 hour per unit
Direct Labor Cost Budget
Factory OverheadCost Budget
Estimated Inventories
January 1, 2009:
Finished Goods: $1,095,600
Work in Process: $214,400
December 31, 2009:
Finished Goods: $1,565,000
Work in Process: $220,000
Selling and AdministrativeExpenses Budget
