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Managerial Accounting

The Budgeting Process


Chapter 20

The Budgeting Process

Budgeting:
The process of identifying, gathering, summarizing and communicating financial and non-financial information
about an organization.

Budget:
A plan of action that forecasts future transactions, activities, and events financial and non-financial. Budgets
are prepared by all types of organizations, for profit, non-profit, etc.

Budgets allows an organization to establish the following:

1. The minimum desired level of revenue, or target level of revenues


2. The corresponding spending for the creation of the desired revenue.

Long Term Goals:


Annual operating plans cannot be made unless the people preparing the budget, such as budget analysts,
department managers, members of the executive teams, etc. know the future direction that has been
established for the company. Therefore, managers must be careful to ascertain that the budget works in
conjunction with the long-term goals of the organization.
Long-term goal may consist of a 1 to 5 years organizational plan

Short-Term Goals:
Short-term goals are prepared after long-term goals have been developed. Short-term goal involves planning,
in detail, every part of the enterprise and is much more detailed that long-term goals.

Once management has set the short-term goals, the controller or budget director takes charge of preparing the
budget. A timetable for the preparation is established with specific deadlines for the operational plans that will
be developed together with the managers of every department.

The Importance of Participation:


The success of a budget depends on the information obtained. Therefore close participation with all
department managers; as well other key, people of the organization will insure that accurate data, and buying in
the entire budget process. Participative Budgeting is a process in which personnel at all levels of an
organization meaningfully and actively takes part in the creation of budgets. The premise is that, if every
manager has a had a voice in setting the goals of his or her unit, every manager will feel personally motivated
to endure the success of the budgeting process.

The Master Budget:

A master budget is a set of budgets that consolidates and organization’s financial information into budgeted
financial statements for a future period of time.
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A master budget includes an operational budget and a financial budget. As an example a Manufacturing
budget will look like this:

A Master Budget for a Retail Organization:

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Master Budget for a Retail Organization:

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Service Organization Master Budget may look like the following:

The Operating Budget:

The Sales Budget:

This budget may be prepared in both unit and dollars, depending on the organization.

Sales managers use this information to plan sales and marketing –related activates and to determine
human, physical, and technical resources needs.

Preparing a sales budget:

Total Budgets Sales =


Estimated Selling Price per unit * Estimated Sales units
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The estimated selling price may be the current selling price, or it may change in response
to such factors as expected demand and competition.

Sales Budget:

A projections of sales demand is prepared and may include the following factor:

External factors:
1. The state of the local and the national or international economy.
2. The state of the industry’s economy
3. The nature of the competition, their sales volume, and their selling price.

Internal Factors:
1. The number of units sold in prior periods
2. The organization’s credit policies
3. The organization’s collection policies
4. The organizations pricing policies
5. Any new product the organization plans to introduce into the market
6. The capacity of the organization’s manufacturing facilities.

In-Class: SE4

Production Budget:

A production budget is a detail schedule that identifies the production or services that must be produced or
provided to meet budget sales and inventory needs. This information is used by managers to plan the
materials and human resources needed to complete production–related activities.

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Formula =
Total Production Units =

Budget Sales Units + Finishes Inv. – Beginning Inventory


Qtr-1 Qtr-2 Qtr-3 Qtr-4 Total for the
Year
Sale in Units 10,000 30,000 10,000 40,000 90,000
Add desired Units of
Ending Finished Goods
Inventory

3,000 1,000 4,000 1,500 1,500


Desired total Units 13,000 31,000 14,000 41,500 91,500

Less Desired Units of


Beginning Finished
Goods Inventory 1,000 3,000 1,000 4,000 1,000

Total Production Units 12,000 28,000 13,000 37,500 90,500

In-Class: SE5

Detail Materials Purchase Budget:

The direct materials purchases budget identifies the purchases required for budgeted production and
inventory needs as well as the cost associates with those purchases. The purchasing department uses this
information to plan purchase of direct materials. Accounting then can estimated the cost of those materials.

What do you need to know to prepare a material-purchasing budget?

You need to know the production needs for the year.

Formula:

Total Units of Direct material to be purchase =


Total Production needs in units + Desired units in ending inventory – Desired units of beginning inventory

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Needles 2008 8/6/07
Qtr-1 Qtr-2 Qtr-3 Qtr-4 Total for the
Year
Total production units 12,000 28,000 13,000 37,500 90,000
Ounces per unit 10 10 10 10 10
Total Production Needs 120,000 280,000 130,000 375,000 905,000
Add desired Ounces of
Ending Direct materials 56,000 26,000 75,000 30,000 30,000
Inventory
Desired total Units 176,000 306,000 205,000 405,000 935,000

Less Desired Units of


Beginning Finished
Goods Inventory 24,000 56,000 26,000 75,000 24,000

Total Ounces of Direct


Material to Be purchased 152,000 250,000 179,000 330,000 911,00
* Cost per Ounce $ .05 $ .05 $ .05 $ .05 $ .05
Total Production Units 7,600 12,500 8,950 16,500 45,550

In-Class: E7, E8

Direct Labor Budget:

A labor budget identifies all labor needs for the future. Production Department uses direct labor to
schedule the number of employees and the hours that each will work, the accountant can, then, estimated
its cost.

Qtr-1 Qtr-2 Qtr-3 Qtr-4 Total for the


Year
Total production units 12,000 28,000 13,000 37,500 90,000

Direct Labor Hours per .1 .1 .1 .1 .1


Unit
Total Direct labor needed 1,200 2,800 1,300 3,750 9,050

Labor hour cost $6 $6 $6 $6 $6

Total direct labor cost 7,200 16,800 7,800 22,500 54,300

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In-Class: E9,
The Manufacturing Overhead Budget:

The Manufacturing Overhead Budget, is a forecast or detail schedule of anticipated manufacturing costs,
other than direct materials and direct labor.

See page 906 of textbook for example

The two main purpose of the manufacturing overhead are:

1. Integrate the overhead cost budgets developed by the managers of production


2. To group information for the calculation of manufacturing overhead rates for the forthcoming
accounting period.

In-Class: E10

Selling and Administrative Expense budget:

Detail plan of operating expenses. It will include:

1. Variable Selling and Administrative Expenses


2. Fixed Selling and Administrative expenses.

The Budgeted Income Statement:


The estimation of revenues and expenses using the information from other operational budgets.

In-Class: E15

The Cash Budget:

A cash budget is a projection of the cash an organization will receive and the cash transactions considered
in the master budget. The information that the cash budget provides managers to plan for short term loans
when the cash balance is low and for short-term investments when the cash balance is high.

In the example below the following:


Cash sales represent 20% of the company’s expected sales; the other 80% are credit sales. Experience
has shown that 60% of all credit sales in the quarter o sale, 30% in the quarter following the sale, and 10%
in the second quarter following the sale.

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Cash Budget
Qtr-1 Qtr-2 Qtr-3 Qtr-4 Total for the
Year
Accounts receivable, Dec. 38,000 10,000 - - 48,000
31 2006
Cash Sales 10,000 30,000 10,000 40,000 90,000
Collections of credit sales:
First quarter (40,000) 24,000 12,000 4,000 0 40,000
Second quarter (120,000) 0 72,000 36,000 12,000 120,000
Third quarter (40,000) 0 0 24,000 12,000 36,000
Fourth quarter (160,000) 0 0 0 96,000 96,000

Total cash to be collected 72,000 124,000 74,000 160,000 430,000


from customers

Exercise SE8, SE9

Balance Sheet Budget:

Balance sheet Accounts Budget

Most of the balance sheet accounts needed to be budget are:

1. Capital expenditures budget


Outlines the capital expenditures for a future period
2. Cash budgeting
Is a projection of cash payments? It summarizes the cash flow of planned transactions from the
master budget.

Homework for chapter 20: P2.

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