ACCOUNTING FOR MANAGERS

Chapter 15
Budgetary Planning
Animated Version With Audio

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 Learning Objectives

 State The Essentials Of Effective Budgeting and The Components Of

The Master Budget
 Prepare Budgets For Sales, Production, and Direct Materials
 Prepare Budgets For Direct Labor, Manufacturing Overhead, and
Selling and Administrative Expenses, and a Budgeted Income
Statement
 Prepare a Cash Budget
 Apply Budgeting Principles To Nonmanufacturing Companies

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 Budgeting

 Budgeting is the process of planning future business actions and

expressing them as formal plans
 The budget is the formal statement of the company’s future plans
 All business’s should engage in planning (budgeting) because it is
absolutely necessary if the business is to succeed in the long term
 Most effective if the budgeting process is carried out as a “bottom-
up” (participative) design rather than a “top-down” design
• Responsibility Accounting
• Zero-Based Budgeting

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 Benefits of Budgeting

 Promotes study, research, and a focus on the future

 Provides a basis for evaluating performance
 Can be a source of motivation if designed properly
 Is a means of coordinating business activities
 Is a method of communicating plans and instructions

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 Essentials Of Effective Budgeting
 Depends on a sound organizational structure with authority and
responsibility for all phases of operations clearly defined
 Based on research and analysis with realistic goals
 Accepted by all levels of management
 Length of the budget period
• May be prepared for any period of time
 Most common - one year
 Supplement with monthly and quarterly budgets
 Different budgets may cover different time periods
• Long enough to provide an attainable goal and minimize seasonal or cyclical
fluctuations
• Short enough for reliable estimates
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 Essentials Of Effective Budgeting
The Budgeting Process
 Base budget goals on past performance
• Collect data from organizational units
• Begin several months before end of current year
 Develop budget within the framework of a sales forecast
• Shows potential industry sales
• Shows company’s expected share
 Factors considered in Sales Forecasting
• General economic conditions
• Industry trends
• Market research studies
• Anticipated advertising and promotion
• Previous market share
• Price changes
• Technological developments
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 Essentials Of Effective Budgeting

The Budgeting Process

 General economic conditions
 Industry trends
 Market research studies
 Anticipated advertising and promotion
 Previous market share
 Price changes
 Technological developments

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 Budgets Components
 Master Budget
• Sales Budget
• Production Budget
• Direct Materials Purchases Budget
• Direct Labour Budget Operating Budgets
• Manufacturing Overhead Budget
• Ending Finished Goods Budget
• Selling and Administration Budget
• Cash Budget
• Budgeted Income Statement
Financial Budgets
• Budgeted Balance Sheet
• (Capital Expenditures Budget)
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 The Master Budget: An Overview

Sales budget

Selling and
Ending inventory administrative
Production budget
budget budget

Direct materials Direct labour Manufacturing

budget budget overhead budget

Cash Budget

Budgeted
Budgeted
income
balance sheet
statement

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 Master Budget

A comprehensive or overall formal plan for a business that includes

specific plans for expected sales units of production, materials to be
purchased, cash to be borrowed or repaid
• Also includes a budgeted Income Statement and Balance sheet

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 Sales Budget

A Plan showing the units of goods to be sold and the revenue derived
from the sales
• The starting point in the budgeting process
• Includes a Schedule of Expected Cash Receipts

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 Sales Budget – Example

April May June July

Prior month’s sales 952
_______ 1,000
_______ 1,050
_______ 1,103
_______

5
Plus_____% growth

1,000 1,050 1,103 1,158

Budgeted Unit Sales _______ _______ _______ _______

$15 $15 $16 $16

Budgeted Selling Price per Unit _______ _______ _______ _______

$15,000 $15,750 $17,648 $18,528

Budgeted Sales Revenue _______ _______ _______ _______

$48,398
Budgeted Sales Revenue for the Quarter
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 Schedule of Expected Cash Receipts - Example

April May June July

Budgeted Sales Revenue _______
$15,000 _______
$15,750 _______
$17,648 _______
$18,528
Ending A/R (____%)
90 _______
$13,500 _______
$14,175 _______
$15,883 _______
$16,675
Cash Receipts
Cash Sales (____%)
10 _______
$1,500 _______
$1,575 $1,765
_______ $ 1,853
_______
Collection of prior
months A/R _______
$12,857 _______
$13,500 _______
$14,175 _______
$15,883
Total Cash to be collected _______
$14,357 _______
$15,075 _______
$15,940 _______
$17,736
Total Cash Collected in Quarter _______
$45,372
(March Sales were $14,286)
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 Production Budget

A plan that states the number of units to be manufactured during each

future period covered by the budget
• Based on budgeted sales and the level of inventory required to
support future sales

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 Production Budget - Example

April May June July

Budgeted Unit Sales 1,000
_______ 1,050
_______ 1,103
_______ 1,158
_______
Add Desired Ending Finished
Goods Inventory (____%)
20 210
_______ 221
_______ 232
_______ 243
_______
Total Needs 1,210
_______ 1,271
_______ 1,335
_______ 1,401
_______
Less Beginning Finished
Goods Inventory 200 _______
_______ 210 _______221 _______
232
Required Production 1,010
_______ 1,061
_______ 1,114
_______ 1,169
_______

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 Direct Materials Purchases Budget

A plan that states the units or costs of merchandise to be purchased for

the production process
• Includes a Schedule of Expected Cash Disbursements for Materials

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 Direct Materials Purchases Budget - Example
April May June Quarter
Units to be produced 1,010
_______ 1,061
_______ 1,114
_______ 3,185
_______
RM needed per Unit (kgs) 2
_______ 2
_______ 2
_______ 2
_______
Production needs (kgs) _______
2,020 _______
2,122 2,228
_______ 6,370
_______
Add Desired Ending RM
Inventory ( 20 % ) 424
_______ 446
_______ 468
_______ 468
_______
Total Needs (kgs) 2,444
_______ 2,568
_______ 2,696
_______ 6,838
_______
Less Beg RM Inv (kgs) _______
404 _______
424 _______
446 404
_______

RM to be Purchased (kgs) 2,040

_______ 2,144
_______ 2,250
_______ 6,434
_______
Budgeted Cost per kg _______
$1.50 _______
$1.50 _______
$1.50 _______
$1.50
Cost of RM to be Purchased $3,060
_______ _______
$3,216 $3,375
_______ $9,651
_______
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 Schedule of Expected Cash Disbursements – Example
April May June Quarter
Beginning Accts Pay Bal $2,448
_______ 2,448
(3,060 – 612) or (80% X 3,060)
Pay 20% month of purchase,
& 80% next month
April Purchases (20% X 3,060) 612
_______ $2,448
_______ _______ _______
3,060
May Purchases (20% X 3,216) _______ _______
643 $2,573
_______ 3,216
_______
June Purchases (20% X 3,375) _______ _______ 675
_______ 675
_______
Total Cash Disbursements $3,060
_______ $3,091
_______ $3,248
_______ $9,399
_______

(Assume March Purchases were the same as April $3,060 X 80% = 2,448)

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 Direct Labour Budget

A plan that shows the predicted costs for direct labour

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 Direct Labour Budget - Example
April May June Quarter
Units to be produced 1,010
_______ 1,061
_______ 1,114
_______ 3,185
_______
(per Production Budget)
Direct Labour Hours per Unit 0.5
_______ 0.5
_______ 0.5
_______ _______
Total Direct Labour Hours 505
_______ 531
_______ 557
_______ 1,593
_______
Direct Labour Hourly Cost $10.00
_______ $10.00
_______ $10.00
_______ $10.00
_______
Total Direct Labour Cost $5,050
_______ $5,310
_______ $5,570
_______ $15,930
_______

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 Manufacturing Overhead Budget

A plan that shows the predicted costs for manufacturing overhead

• Should be broken down by cost behaviour
• Determine a variable overhead rate to apply MOH to units of product
or direct labour hours etc. throughout the budget period

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 Manufacturing Overhead Budget - Example
April May June Quarter
Budgeted DL Hours 505
_______ 531
_______ 557
_______ 1,593
_______
(From Direct Labour Budget)
$1.00
Variable OH Rate (Assumed) _______ $1.00
_______ $1.00
_______ $1.00
_______
$505 $531 $557 $1,593
Variable MOH _______ _______ _______ _______
$500 $500 $500 $1,500
Fixed MOH (Assumed) _______ _______ _______ _______
$1,005 $1,031 $1,057 $3,093
Total MOH _______ _______ _______ _______
($200) ($200) ($200) ($600)
Less Depreciation (Assumed)_______ _______ _______ _______
$805 $831 $857 $2,493
Cash Dispersed for MOH _______ _______ _______ _______
$3,093
Total MOH _______
1,593
(From DL Budget)
Budgeted DL Hours _______
$1.94/DLH 22
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 Ending Finished Goods Inventory Budget

Required to know how much to charge as Cost of Goods Sold on the

Budgeted Income Statement
• How much to place on the Budgeted Balance Sheet

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 Ending Finished Goods Inventory Budget - Example
Item Quantity Cost Total
Production Cost per Unit:
2 kgs $1.50 per kg $3.00
Direct Materials (From DM Purch Bud)
___________ ____________ _____
(From DL Budget) 0.5 hours $10.00 per hour $5.00
Direct Labour ___________ ____________ _____
0.5 hours $1.94 per hour $0.97
Manufacturing Overhead ___________ ____________ _____
$8.97
Unit Product cost From MOH Budget _____

Budgeted Finished Goods Inventory: 232

Ending FG Inventory in Units _________
(per Production Budget) X $8.97
Unit Product Cost $2,081
_________
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Ending FG Inventory in Dollars shared, uploaded or distributed" _________
 Selling and Administrative Expense Budget

A plan that lists the types and amounts of Selling & Administrative
expenses expected during the budget period

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 Selling and Administrative Expense Budget - Example
April May June Quarter
Budgeted Sales Units 1,000
_________ 1,050
_________ 1,103
_________ 3,153
__________
Variable Sell/Admin/Unit $0.50
_________ $0.50
_________ $0.50
_________ $0.50
__________
Budgeted Variable Cost $500
_________ $525
_________ $552
_________ $1,577
__________
Budgeted Fixed Sell/Admin Exp:
Advertising $2,000
_________ $2,003
_________ $2,009
_________ $6,012
__________
Insurance _________
$1,000 $1,000
_________ $1,000
_________ $3,000
__________
Depreciation _________
$1,000 $1,000
_________ _________
$1,000 $3,000
__________
Total Budgeted Fixed Sell/Admin Exp _________
$4,000 _________
$4,003 _________
$4,009 __________
$12,012
Total Budgeted Sell/Admin Exp _________
$4,500 $4,528
_________ $4,561
_________ __________
$13,589
Less Insurance Exp ($1,000)
_________ ($1,000)
_________ _________
($1,000) __________
($3,000)
Add Actual Insurance Premium Payment _________ _________
$600 _________
$2,400 $3,000
__________
Less Depreciation Exp _________
($1,000) _________
($1,000) _________
($1,000) __________
($3,000)
Cash Disbursements for Sell/Admin Exp _________
$2,500 _________
$3,128 _________
$4,961 __________
$10,589
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 Cash Budget

A plan that shows the expected cash inflows and outflows during the
budget period
• Includes normal ongoing receipts and disbursements
• Includes receipts from loans required to maintain a minimum cash
balance if necessary
• Includes repayments of loans plus interest

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 Cash Budget - Example
April May June Quarter
Cash Balance, Beginning $15,000
_________ $10,000
_________ $10,000
_________ $15,000
_________
Add Cash Receipts:
Collections From Customers (13) 14,357
_________ 15,075
_________ 15,940
_________ 45,372
_________
Total Cash Available $29,357
_________ $25,075
_________ $25,940
_________ $60,372
_________
Less Cash Disbursements: 3,060 3,091 3,248 9,399
Direct Materials (18) _________
5,050 _________
5,310 _________
5,570 _________
15,930
Direct Labour (20) _________
805 _________
831 _________
857 _________
2,493
Manufacturing Overhead (22) _________
2,500 _________
3,128 _________
4,961 _________
10,589
Selling/Admin Expenses (26) _________
1,500 _________
1,500 _________
1,500 _________
4,500
Income Taxes _________
3,000 _________
0 _________
0 _________
3,000
Equipment Purchases _________
5,000 _________
0 _________
0 _________
5,000
Dividends _________
$20,915 _________
$13,860 _________
$16,136 _________
$50,911
Total Disbursements _________
$8,442 _________
$11,215 _________
$9,804 _________
$9,461
Excess (shortage) of Cash Available _________
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 Cash Budget – Example (continued)
April May June Quarter
Cash Balance, Beginning $15,000
_________ $10,000
_________ $10,000
_________ $15,000
_________
Add Cash Receipts:
Collections From Customers 14,357
_________ 15,075
_________ 15,940
_________ 45,372
_________
Total Cash Available 29,357
_________ 25,075
_________ 25,940
_________ 60,372
_________
Total Disbursements $20,915
_________ $13,860
_________ $16,136
_________ $50,911
_________
Excess (shortage) of Cash Available $8,442
_________ $11,215
_________ $9,804
_________ $9,461
_________
Financing:
Borrowings (at beginning of month) 1,558
_________ 0
_________ 203
_________ 1,761
_________
Repayments (at end of month) 0
_________ (1,209)
_________ 0
_________ (1,209)
_________
0
Interest paid (5% at beginning of next month) _________ (6)
_________ (7)
_________ (13)
_________
Total Financing 1,558
_________ (1,215)
_________ 196
_________ 539
_________
Cash Balance, Ending $10,000
_________ $10,000
_________ $10,000
_________ $10,000
_________

$10,000
Management desires a minimum cash balance of $____________ at the beginning of each month
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 Budgeted Income Statement

A managerial accounting report that presents predicted amounts of the

business’s revenues and expense for the budget period

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 Budgeted Income Statement - Example
From
3,153
Sales_______units Sales Budget $48,398
___________
Less COGS______units
3,153 X ______
$8.97 FG Inventory Budget (28,282)
___________
Gross Margin 20,116
___________
Less Sell/Admin Exp Sell/Admin Budget (13,589)
___________
Operating Income 6,527
___________
Less Interest Expense Cash Budget (19)
___________
Net Income Before Income Taxes ___________
6,508
Income Taxes Cash Budget 4,500
___________
Net Income $2,008
___________
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 Budgeted Balance Sheet
A managerial accounting report that presents predicted amounts of the
company’s assets, liabilities, and shareholder’s equity as at the end of
the budget period
• Includes these items from previous budget components
• Cash balance is from the Cash Budget
• Accounts Receivable is calculated from the Schedule of Expected Cash
Receipts
• Raw Materials Inventory is calculated from the Direct Materials Purchases
Budget
• Finished Goods Inventory is from the Ending Finished Goods Inventory Budget
• Accumulated Depreciation is changed by the depreciation expense from the
Selling & Administrative Budget
• Accounts Payables is from the Direct Materials Purchases Budget
• Retained Earnings includes the Budgeted Net Income and Dividends paid
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 Budgeted Balance Sheet - Example
Assets
Current Assets:
10,000 From Cash Budget
Cash 15,883 From Schedule of Expected Cash Receipts
Accounts Receivable (468 X $1.50) 702 From Direct Materials Purchases Budget
Raw materials Inventory 2,081 From Ending FG Inventory Budget
Finished Goods Inventory 28,666
Total Current Assets
Plant and Equipment From Previous Balance Sheet
Land From Cash Budget added to previous balance
Buildings and Equipment From Selling/Admin Budget and MOH
Budget added to previous balance
Accumulated depreciation
Plant and equipment, net
Liabilities and Shareholders’ Equity From DM Purchases Budget – add
Current Liabilities: ($3,375 X 80%) to previous balance
Accounts Payable From Previous Balance Sheet
Shareholders’ Equity: From Cash Budget reduce the previous R/E
Common Shares balance by the Dividends Paid from the Cash
Retained Earnings Budget and add the Net Income from the
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 Budgeting In Not-For-Profit Entities

No Profit Motive
 Profit motive is replaced with a service orientation
 Typically no relationship exist between revenues expected to be
received and expenditures expected to be incurred
 Budget information is gathered to assist in decisions regarding what
programs and expenditures the entity will undertake
• Overspending is often illegal

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 Budgeting In Merchandisers

The major differences between the master budgets of a merchandiser

and a manufacturer are that a merchandiser
 Uses a merchandise purchases budget instead of a production budget
 Does not use the manufacturing budgets (direct materials, direct labor, and
manufacturing overhead)

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 Budgeting In Service Organizations

In service enterprises, such as a public accounting firm, a law office, or

a medical practice, the critical factor in budgeting is coordinating profes­
sional staff needs with anticipated services
 If a firm is overstaffed, several problems may result
• Labour costs are disproportionately high
• Profits are lower because of the additional salaries
• Staff turnover may increase because of lack of challenging work
 If a service enterprise is understaffed, it may lose revenue because
existing and prospective client needs for service cannot be met
• Also, professional staff may seek other jobs because of excessive work loads

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 Sales Budget – In Class

April May June July

Prior month’s sales _______ _______ _______ _______

Plus_____% growth

Budgeted Unit Sales _______ _______ _______ _______

Budgeted Selling Price per Unit _______ _______ _______ _______

Budgeted Sales Revenue _______ _______ _______ _______

Budgeted Sales Revenue for the Quarter

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 Schedule of Expected Cash Receipts – In Class

April May June July

Budgeted Sales Revenue _______ _______ _______ _______
Ending A/R (____%) _______ _______ _______ _______
Cash Receipts
Cash Sales (____%) _______ _______ _______ _______
Collection of prior
months A/R _______ _______ _______ _______
Total Cash to be collected _______ _______ _______ _______

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 Production Budget – In Class

April May June July

Budgeted Unit Sales _______ _______ _______ _______
Add Desired Ending Finished
Goods Inventory (____%) _______ _______ _______ _______
Total Needs _______ _______ _______ _______
Less Beginning Finished
Goods Inventory _______ _______ _______ _______
Required Production _______ _______ _______ _______

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Direct Materials Purchases Budget – In Class
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April May June Quarter
Units to be produced _______ _______ _______ _______
RM needed per Unit (kgs) _______ _______ _______ _______
Production needs (kgs) _______ _______ _______ _______
Add Desired Ending RM
Inventory (____%) _______ _______ _______ _______
Total Needs (kgs) _______ _______ _______ _______
Less Beg RM Inv (kgs) _______ _______ _______ _______

RM to be Purchased (kgs) _______ _______ _______ _______

Budgeted Cost per kg _______ _______ _______ _______
Cost of RM to be Purchased _______ _______ _______ _______ 40
 Schedule of Expected Cash Disbursements – In Class
April May June Quarter
Beginning Accts Pay Bal _______
Pay 20% month of purchase,
& 80% next month
April Purchases _______ _______ _______ _______
May Purchases _______ _______ _______ _______
June Purchases _______ _______ _______ _______
Total Cash Disbursements _______ _______ _______ _______

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 Direct Labour Budget – In Class
April May June Quarter
Units to be produced _______ _______ _______ _______
(per Production Budget)
Direct Labour Hours per Unit _______ _______ _______ _______
Total Direct Labour Hours _______ _______ _______ _______
Direct Labour Hourly Cost _______ _______ _______ _______
Total Direct Labour Cost _______ _______ _______ _______

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 Manufacturing Overhead Budget – In Class
April May June Quarter
Budgeted DL Hours _______ _______ _______ _______
(From Direct Labour Budget)
Variable OH Rate _______ _______ _______ _______
Variable MOH _______ _______ _______ _______
Fixed MOH _______ _______ _______ _______
Total MOH _______ _______ _______ _______
Less Depreciation _______ _______ _______ _______
Cash Dispersed for MOH _______ _______ _______ _______

Total MOH _______

Budgeted DL Hours _______
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 Ending Finished Goods Inventory Budget – In Class
Item Quantity Cost Total
Production Cost per Unit:
Direct Materials ___________ ____________ _____
Direct Labour ___________ ____________ _____
Manufacturing Overhead ___________ ____________ _____
Unit Product cost _____

Budgeted Finished Goods Inventory:

Ending FG Inventory in Units _________
(per Production Budget)
Unit Product Cost _________
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Ending FG Inventory in Dollars distributed" _________
 Selling and Administrative Expense Budget – In Class
April May June Quarter
Budgeted Sales Units _________ _________ _________ __________
Variable Sell/Admin/Unit _________ _________ _________ __________
Budgeted Variable Cost _________ _________ _________ __________
Budgeted Fixed Sell/Admin Exp
Advertising _________ _________ _________ __________
Insurance _________ _________ _________ __________
Depreciation _________ _________ _________ __________
Total Budgeted Fixed Sell/Admin Exp _________ _________ _________ __________
Total Budgeted Sell/Admin Exp _________ _________ _________ __________
Less Insurance Exp _________ _________ _________ __________
Add Insurance Premium Payment _________ _________ _________ __________
Less Depreciation Exp _________ _________ _________ __________
Cash Disbursements for Sell/Admin Exp _________ _________ _________ __________
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 ©TEdwards 2022 "This content is
Cash Budget – In Class
protected and may not be shared,
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April May June Quarter
Cash Balance, Beginning _________ _________ _________ _________
Add Cash Receipts:
Collections From Customers _________ _________ _________ _________
Total Cash Available _________ _________ _________ _________
Less Cash Disbursements:
Direct Materials _________ _________ _________ _________
Direct Labour _________ _________ _________ _________
Manufacturing Overhead _________ _________ _________ _________
Sell/Admin Exp _________ _________ _________
_________
Income Taxes _________ _________ _________ _________
Equipment Purchases _________ _________ _________ _________
Dividends _________ _________ _________ _________
Total Disbursements _________ _________ _________ _________
46
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April May June Quarter
Cash Balance, Beginning _________ _________ _________ _________
Add Cash Receipts:
Collections From Customers _________ _________ _________ _________
Total Cash Available _________ _________ _________ _________
Total Disbursements _________ _________ _________ _________
Excess (shortage) of Cash Available _________ _________ _________ _________
Financing:
Borrowings (at Beginning of Month) _________ _________ _________ _________
Repayments (at End of Month) _________ _________ _________ _________
Interest (at 6% per annum) _________ _________ _________ _________
Total Financing _________ _________ _________ _________
Cash Balance, Ending _________ _________ _________ _________

Management desires a minimum cash balance of $____________ at the beginning of each month 47
 Budgeted Income Statement – In Class
From

Sales_______units Sales Budget ___________

Less COGS ______units X ______ FG Inventory Budget ___________
Gross Margin ___________
Less Sell/Admin Exp Sell/Admin Budget ___________
Operating Income ___________
Less Interest Expense Cash Budget ___________
Net Income Before Income Taxes ___________
Income Taxes Cash Budget ___________
Net Income ___________
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ared, uploaded or distributed"
 Chapter 15 Homework Assignment using WileyPlus

 DO IT! Exercises DO IT!15.1

 DO IT! Exercises DO IT!15.3
 Exercise E15.11
 Exercise E15.20
 Problem P15.1
 Problem P15.4

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ared, uploaded or distributed"