The budget for a merchandiser differs from a budget for a manufacturer because

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Budgetary Planning

13 WILEY

Kimmel ● Weygandt ● Kieso

Survey of Accounting, First Edition

13-3

CHAPTER OUTLINE

State the essentials of effective budgeting and the components of the

master budget.1

LEARNING OBJECTIVES

Prepare budgets for sales, production, and direct materials.2

Prepare budgets for direct labor, manufacturing overhead, and selling

and administrative expenses, and a budgeted income statement.3

Prepare a cash budget and a budgeted balance sheet.4

Apply budgeting principles to nonmanufacturing companies.5

13-4

Budget: a formal written statement of management’s plans for

a specified future time period, expressed in financial terms.

 Primary method of communicating agreed-upon objectives

throughout the organization.

 Promotes efficiency.

 Control device - important basis for performance evaluation

once adopted.

LO 1

LEARNING

OBJECTIVE

State the essentials of effective budgeting and

the components of the master budget.1

13-5

 Historical accounting data on revenues, costs, and

expenses help in formulating future budgets.

 Accountants normally responsible for presenting

management’s budgeting goals in financial terms.

 The budget and its administration are the responsibility

of management.

BUDGETING AND ACCOUNTING

LO 1 13-6

Primary benefits of budgeting:

1. Requires all levels of management to plan ahead.

2. Provides definite objectives for evaluating performance.

3. Creates an early warning system for potential problems.

4. Facilitates coordination of activities within the business.

5. Results in greater management awareness of the entity’s

overall operations.

6. It motivates personnel throughout organization to meet

planned objectives.

THE BENEFITS OF BUDGETING

LO 1

13-7

Which of the following is not a benefit of budgeting?

a. Management can plan ahead.

b. An early warning system is provided for potential

problems.

c. It enables disciplinary action to be taken at every level of

responsibility.

d. The coordination of activities is facilitated.

Question

THE BENEFITS OF BUDGETING

LO 1 13-8

 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.

ESSENTIALS OF EFFECTIVE BUDGETING

LO 1

13-9

 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.

Length of the Budget Period

LO 1

ESSENTIALS OF EFFECTIVE BUDGETING

13-10 LO 1

13-11

 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.

The Budgeting Process

LO 1

ESSENTIALS OF EFFECTIVE BUDGETING

13-12

 Factors considered in Sales Forecasting:

1. General economic conditions

2. Industry trends

3. Market research studies

4. Anticipated advertising and promotion

5. Previous market share

6. Price changes

7. Technological developments

LO 1

ESSENTIALS OF EFFECTIVE BUDGETING

The Budgeting Process

13-13

Participative Budgeting: Each level of management

should be invited to participate.

 May inspire higher levels of performance or discourage

additional effort.

 Depends on how budget developed and administered.

Budgeting and Human Behavior

LO 1

ESSENTIALS OF EFFECTIVE BUDGETING

13-14

 Advantages:

► More accurate budget estimates because lower level

managers have more detailed knowledge of their area.

► Tendency to perceive process as fair due to involvement

of lower level management.

 Overall goal - produce budget considered fair and

achievable by managers while still meeting corporate

goals.

Participative Budgeting

Budgeting and Human Behavior

LO 1

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 Disadvantages:

► Can be time consuming and costly.

► Can foster budgetary “gaming” through budgetary

slack.

Participative Budgeting

LO 1

Budgeting and Human Behavior

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ILLUSTRATION 13-1 Flow of budget data under

participative budgeting

LO 1

Budgeting and Human Behavior

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Three basic differences :

1. Time period involved

2. Emphasis

3. Detail presented

Time period:

Budgeting is short-term –

usually one year.

Long range planning – at

least five years.

Budgeting and Long-Range Planning

LO 1

ESSENTIALS OF EFFECTIVE BUDGETING

13-18

The essentials of effective budgeting do not include:

a. Top-down budgeting.

b. Management acceptance.

c. Research and analysis.

d. Sound organizational structure.

Question

LO 1

ESSENTIALS OF EFFECTIVE BUDGETING

13-19

 Set of interrelated budgets that constitutes a plan of

action for a specified time period.

 Contains two classes of budgets:

► Operating budgets.

► Financial budgets.

Individual budgets that result

in the preparation of the

budgeted income statement

– establish goals for sales

and production personnel.

THE MASTER BUDGET

LO 1 13-20

 Set of interrelated budgets that constitutes a plan of

action for a specified time period.

 Contains two classes of budgets:

► Operating budgets.

► Financial budgets.

THE MASTER BUDGET

The capital expenditures

budget, the cash budget,

and the budgeted balance

sheet – focus primarily on

cash needs to fund

operations and capital

expenditures.

LO 1

13-21

THE

MASTER

BUDGET

ILLUSTRATION 13-2 Components of the

master budget

LO 1 13-22

1. A sales forecast shows potential sales for the industry

and a company’s expected share of such sales.

2. Operating budgets are used as the basis for the

preparation of the budgeted income statement.

Use this list of terms to complete the sentences that follow.

LO 1

DO IT! 1 Budget Terminology

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3. The master budget is a set of interrelated budgets that

constitutes a plan of action for a specified time period.

4. Long-range planning identifies long-term goals, selects

strategies to achieve these goals, and develops policies

and plans to implement the strategies.

Use this list of terms to complete the sentences that follow.

LO 1

DO IT! 1 Budget Terminology

13-24

5. Lower-level managers are more likely to perceive results

as fair and achievable under a participative budgeting

approach.

6. Financial budgets focus primarily on the cash resources

needed to fund expected operations and planned capital

expenditures.

Use this list of terms to complete the sentences that follow.

LO 1

DO IT! 1 Budget Terminology

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 First budget prepared.

 Derived from the sales forecast.

► Management’s best estimate of sales revenue for

the budget period.

 Every other budget depends on the sales budget.

 Prepared by multiplying expected unit sales volume for

each product times anticipated unit selling price.

SALES BUDGET

LO 2

LEARNING

OBJECTIVE

Prepare budgets for sales, production, and

direct materials.2

13-26

 Expected sales volume: 3,000 units in the first quarter with

500-unit increases in each succeeding quarter.

 Sales price: $60 per unit.

Illustration – Hayes Company

SALES BUDGET

ILLUSTRATION 13-3 Sales budget

LO 2

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 Shows units that must be produced to meet anticipated

sales.

 Derived from sales budget plus the desired change in

ending finished goods inventory.

 Essential to have a realistic estimate of ending inventory.

PRODUCTION BUDGET

ILLUSTRATION 13-4 Production requirements formula

LO 2

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Hayes Co. believes it can meet future sales needs with an ending

inventory of 20% of next quarter’s budgeted sales volume.

ILLUSTRATION 13-5 Production budget

LO 2

PRODUCTION BUDGET

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 Shows both the quantity and cost of direct materials to be

purchased.

 Formula for direct materials quantities.

ILLUSTRATION 13-6

 Budgeted cost of direct materials to be purchased = required

units of direct materials x anticipated cost per unit.

 Inadequate inventories could result in temporary shutdowns

of production.

DIRECT MATERIALS BUDGET

ILLUSTRATION 13-6 Formula for direct

materials quantities

LO 2

13-31

Because of its close proximity to suppliers,

 Hayes Company maintains an ending inventory of raw

materials equal to 10% of the next quarter’s production

requirements.

 The manufacture of each Rightride requires 2 pounds of

raw materials, and the expected cost per pound is $4.

 Assume that the desired ending direct materials amount is

1,020 pounds for the fourth quarter of 2017.

 Prepare a Direct Materials Budget.

Illustration – Hayes Company

LO 2

DIRECT MATERIALS BUDGET

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ILLUSTRATION 13-7 Direct materials budget

LO 2

DIRECT MATERIALS BUDGET

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Soriano Company is preparing its master budget for 2017. Relevant data

pertaining to its sales, production, and direct materials budgets are as

follows:

Sales: Sales for the year are expected to total 1,200,000 units. Quarterly

sales are 20%, 25%, 30%, and 25% respectively. The sales price is

expected to be $50 per unit for the first three quarters and $55 per unit

beginning in the fourth quarter. Sales in the first quarter of 2018 are

expected to be 10% higher than the budgeted sales for the first quarter of

2017.

Production: Management desires to maintain ending finished goods

inventories at 25% of next quarter’s budgeted sales volume.

Direct materials: Each unit requires 3 pounds of raw materials at a cost of

$5 per pound. Management desires to maintain raw materials inventories

at 5% of the next quarter’s production requirements. Assume the

production requirements for the first quarter of 2018 are 810,000 pounds.

LO 2

DO IT! 2 Sales, Production, and Direct

Materials Budgets

13-35

Prepare the sales, production, and direct materials budgets by

quarters for 2017.

LO 2

DO IT! 2 Sales, Production, and Direct

Materials Budgets

13-36 LO 2

DO IT! 2 Sales, Production, and Direct

Materials Budgets

Prepare the sales, production, and direct materials budgets by

quarters for 2017.

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Prepare the sales, production, and direct materials budgets.

LO 2

DO IT! 2 Sales, Production, and Direct Materials

Budgets

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 Shows both the quantity of hours and cost of direct labor

necessary to meet production requirements.

 Critical in maintaining a labor force that can meet

expected production.

 Total direct labor cost formula:

DIRECT LABOR BUDGET

ILLUSTRATION 13-8 Formula for direct labor cost

LO 3

LEARNING

OBJECTIVE

Prepare budgets for direct labor, manufacturing

overhead, and selling and administrative

expenses, and a budgeted income statement. 3

13-39

Illustration: Direct labor hours are determined from the

production budget. At Hayes Company, two hours of direct

labor are required to produce each unit of finished goods. The

anticipated hourly wage rate is $10.

DIRECT LABOR BUDGET

ILLUSTRATION 13-9 Direct labor budget

LO 3 13-40

 Shows the expected manufacturing overhead costs for

the budget period.

 Distinguishes between fixed and variable overhead

costs.

MANUFACTURING OVERHEAD BUDGET

LO 3

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Illustration: Hayes Company expects variable costs to fluctuate

with production volume on the basis of the following rates per

direct labor hour: indirect materials $1.00, indirect labor $1.40,

utilities $0.40, and maintenance $0.20. Thus, for the 6,200

direct labor hours to produce 3,100 units, budgeted indirect

materials are $6,200 (6,200 x $1), and budgeted indirect labor

is $8,680 (6,200 x $1.40). Hayes also recognizes that some

maintenance is fixed. The amounts reported for fixed costs are

assumed.