null

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Planning and Budgeting Chapter 13

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives LO 13-1 Understand the role of budgets in overall organization plans. LO 13-2 Understand the importance of people in the budgeting process. LO 13-3 Estimate sales. LO 13-4 Develop production and cost budgets.

LO 13-5 Estimate cash flows. LO 13-6 Develop budgeted financial statements. LO 13-7 Explain budgeting in merchandising and service organizations. LO 13-8 Explain why ethical issues arise in budgeting. LO 13-9 Explain how to use sensitivity analysis to budget under uncertainty.

13-3

LO 13-1

Budgets LO 13-1 Understand the role of budgets in overall organization plans. We focus on the planning purpose of the budgeting process. For our purposes here, a budget is simply the plan, stated in financial terms, of how the organization expects to carry out its activities and meet the financial goals established in the planning process. We show how a master budget is developed and how it fits into the overall plan for achieving organization goals. Before we investigate the details of developing a master budget, we discuss the way that strategic planning can increase competitiveness and affect global operations.

13-4

LO 13-1

Overall Plan A master budget is part of an overall organization plan for the next year made up of three components: (1) the organization goals, (2) the strategic long-range profit plan, and (3) the tactical short-range profit plan. Top managers establish broad objectives, which serve as organization goals that company employees work to achieve. It is important to detail the specific steps required to achieve the goals. These steps are expressed in a strategic long-range plan. The plan for the coming year, which is more specific than long-range plans, is called the master budget, also known as the static budget, the budget plan, or the planning budget . 13-5

LO 13-1

Organizational and Individual Interaction: Developing the Master Budget

13-6

LO 13-2

Human Element in Budgeting LO 13-2 Understand the importance of people in the budgeting process. Organization goals

Goal congruence

Individual goals

Participative Budgeting Use of input from lower- and middle-management employees; also called grass roots budgeting

13-7

LO 13-3

Sales Forecasting LO 13-3

Estimate sales.

Forecasting sales is the most difficult aspect of budgeting.

Sales staff Market researchers Delphi technique Trend analysis Econometric models 13-8

LO 13-3

Forecasting by Sales Staff After evaluating the sales forecasts derived from various sources, the budgeting task force at Santiago Pants arrived at the following sales budget for the next budget year:

13-9

LO 13-4

Forecasting Production LO 13-4

Develop production and cost budgets.

A production budget is a plan of resources needed to meet current sales demand and ensure that inventory levels are sufficient for future sales.

Beginning balance + BB

Transfers in TI

–

Units in beginning + inventory

Required production

–

Transfers out = Ending balance TO

Budgeted sales

=

Units in ending inventory

13-10

LO 13-4

Production Budget Rearranging for required production: Budgeted sales

+

Units in ending inventory

–

Units in beginning = inventory

Required production

• Santiago Pants' sales budget is 160,000 units • Management estimates that there will be 5,000 units in beginning inventory and 15,000 in ending inventory. 160,000 units

+

15,000 units

–

5,000 units

=

170,000 units

13-11

LO 13-4

Production Budget

13-12

LO 13-4

Production Costs Direct materials

Direct labor

Manufacturing overhead

Indirect Indirect Other labor materials

13-13

LO 13-4

Direct Materials Example

13-14

LO 13-4

Direct Materials Example Santiago Pants Estimated Production Materials Data Yards needed:

13-15

LO 13-4

Direct Materials Example

$ $

13-16

LO 13-4

Direct Labor Example

13-17

LO 13-4

Overhead Example Santiago Pants Schedule of Budgeted Manufacturing Overhead For the Budget Year Ended December 31 Variable overhead needed to product 170,000 units: Indirect materials and supplies @ $0.30 per unit Materials handling @ $0.40 per unit Other indirect labor @ $0.10 per unit Total variable overhead

$ 51,000 68,000 $ 17,000 $136,000

Fixed manufacturing overhead (supervisory labor $102M, maintenance and repairs $50M, plant administration $85M, utilities $55M, depreciation $140M, insurance $30M, property taxes $60M, and other $22M) Total manufacturing overhead

$544,000 $680,000

13-18

LO 13-4

Cost of Goods Sold Example Santiago Pants Budgeted Statement of Cost of Goods Sold For the Budget Year Ended December 31 Beginning work-in-process inventory Manufacturing costs: Direct materials: Beginning inventory Purchases Materials available for manufacturing Less: Ending inventory Total direct materials costs Direct labor Manufacturing overhead Total manufacturing costs Less: Ending work-in-process Cost of goods manufactured Add: Beginning finished goods inventory Less: Ending finished goods inventory Cost of goods sold a

Management estimate

b

$

-0-

$

35,000 1,715,000 $1,750,000 (50,000) $1,700,000 1,870,000 680,000 $4,250,000 -0$4,250,000 120,000a (375,000)b $3,995,000

Estimate: (15,000 units × $25 value of finished goods) 13-19

LO 13-4

Marketing and Administrative Budget Example

13-20

LO 13-4

Income Statement Example

13-21

LO 13-5

Cash Budget LO 13-5

Estimate cash flows.

The cash budget is a statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period. • Cash receipts: – Collection of accounts receivable – Cash sales – Sales of assets – Borrowing – Issuing stock – Other 13-22

LO 13-5

Cash Budget Some cash disbursements: – Materials purchases – Manufacturing costs – Operating activities – Debt repayment – Acquisition of new assets – Income taxes – Dividends – Other activities

13-23

LO 13-5

Cash Budget Santiago Pants Cash Budget For the Budget Year Ended December 31 Cash balance beginning of period $ 830,000 Receipts: Collections on accounts $6,840,000 Collections employee loans 100,000 Total receipts 6,940,000 Less: Disbursements: Payments for accounts payable 1,694,000 Direct labor 1,870,000 Manufacturing overhead less noncash depreciation charges 540,000 Marketing and administrative costs less noncash charges 1,422,000 Payments for federal income taxes 350,000 Dividends 30,000 Reduction in long-term debt 23,000 Acquisition of new assets 1,470,000 Total disbursements 7,399,000 Budgeted ending cash balance $ 371,000 13-24

LO 13-5

Cash Collections Example Santiago Pants Monthly Collection Experience Sales on Credit

Expected Sales for Three Months

13-25

LO 13-5

Cash Collections Example Santiago Pants Multiperiod Schedule of Cash Collections For the Quarter Ended March 31 Month January Beginning accounts receivable, January 1, $540,000 January sales, $500,000a February sales, $450,000b March sales, $600,000c Total cash collections

$540,000 100,000 $640,000

February

$375,000 90,000 $465,000

March

Total for Quarter

$337,500 120,000 $457,500

$ 540,000 475,000 427,500 120,000 $1,562,500

a

20% collected in January, 75% collected in February, and 5% not collected 20% collected in February, 75% collected in March, and 5% not collected c 20% collected in March, 75% collected in April, and 5% not collected b

13-26

LO 13-5

Cash Disbursements Example Santiago Pants Monthly Disbursements for Purchases Experience Cash disbursement for current month's purchases Cash disbursement for prior month's purchases Cash discounts taken Total cash disbursement for purchases

50% 48 2 100%

Expected Purchases for Three Months January sales $120,000 February sales $200,000 March sales $250,000

13-27

LO 13-5

Cash Disbursements Example Santiago Pants Multiperiod Schedule of Cash Disbursements For the Quarter Ended March 31 Month January Beginning accounts payable, January 1, $256,000 January purchases, $120,000a February purchases, $200,000b March purchases, $250,000c Additional cash payments Total cash disbursements

$256,000 60,000 250,000 $566,000

February

$ 57,600 100,000 250,000 $407,600

March

Total for Quarter

$ 96,000 125,000 250,000 $471,000

$ 256,000 117,600 196,000 125,000 750,000 $1,444,600

a

50% paid in January, 48% paid in February, and 2% discounts taken 50% paid in February, 48% paid in March, and 2% discounts taken c 50% paid in March, 48% paid in April, and 2% discounts taken b

13-28

LO 13-6

Budgeted Balance Sheet Example LO 13-6

Develop budgeted financial statements.

Santiago Pants Budget Balance Sheet For the Budget Year Ended December 31 ($000) Budget Year

Assets Current assets: Cash Accounts receivable Inventories Other current assets Total current assets Long-term assets: Property, plant, equipment Less: Accumulated depreciation Total assets

Balance Jan 1

Additions Subtractions

Balance Dec 31

$ 830 540 155 161 $1,686

$ 6,940 7,200 4,265 -0$18,405

$ 7,399 6,840 3,995 100 $18,334

$ 371 900 425 61 $1,757

1,866 (1,246) $2,306

1,470 -0(220) -0$19,651 $18,334

3,336 (1,470) $3,623 13-29

LO 13-6

Budgeted Balance Sheet Example Santiago Pants Budget Balance Sheet For the Budget Year Ended December 31 ($000) Budget Year Balance Jan 1

Liabilities and Shareholders Equity Current liabilities: Accounts payable Taxes payable Current portion of long-term debt Total current liabilities Long-term liabilities Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders Total liabilities and shareholders equity

Additions Subtractions

Balance Dec 31

$ 256 187 23 $ 466 258 $ 724

$1,715 550 23 $2,288 -0$2,288

$1,694 350 23 $2,067 23 $2,090

$ 277 387 23 $ 687 235 $ 922

$ 437 1,145 $1,582 $2,306

$ -01,149 $1,149 $3,437

$ -030 30 $2,120

$ 437 2,264 $2,701 $3,623 13-30

LO 13-6

Assembling the Master Budget for a Manufacturing Firm

13-31

LO 13-7

Budgeting in Service Organizations

LO 13-7 Explain budgeting in merchandising and service organizations. Sales forecast

Budgeted cost of services

Budgeted income statement

Cash budget

Marketing and administrative cost budget

Budgeted balance sheets

13-32

LO 13-7

Budgeting Retail and Wholesale Organizations Sales forecast Marketing and administrative cost budget

Purchases Budgeted income statement Cash budget Budgeted balance sheets

13-33

LO 13-7

Budgeting Retail and Wholesale Organizations Castro Audio & Video, Inc. Estimated Information for Retail Operations

13-34

LO 13-7

Budgeting Retail and Wholesale Organizations

13-35

LO 13-8

Ethical Problems in Budgeting LO 13-8

Explain why ethical issues arise in budgeting.

Budgets can create serious ethical issues for many people.

The company must recognize the trade-off between encouraging unbiased reporting by managers and the use of budget information in performance evaluation and rewards.

13-36

LO 13-9

Budgeting Under Uncertainty LO 13-9 Explain how to use sensitivity analysis to budget under uncertainty.

Budgets allow management to explore many alternatives.

Spreadsheets are helpful in preparing budgets and quantifying “what-if” conditions. Questions like what if labor costs are 10 percent higher (or lower) than projected?

13-37

LO 13-9

Alternative Budgeting Scenarios Santiago Pants Alternative Budget Scenarios

13-38

End of Chapter 13

13-39