Chapter 15 - Bu. Controllin

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
The McGraw-Hill Companies, I nc., 2007

Budgeting as a
Tool for Planning
and Controlling
Chapter
15
100 Shares
$1 par value
Budget????

Learning Objectives
Describe the importance
and benefits of
budgeting.
Explain the process of
budget administration.
Describe a master
budget and the process
of preparing it.

Prepare each
component of a master
budget and link each to
the budgeting process.
Link both operating and
capital expenditures
budgets to budgeted
financial statements.

Budget Goals: Avoid

Setting budget goals
too tightly.
Setting budget goals
too loosely.
Setting conflicting
budget goals.
Purposes and Goals of Budgeting
Purposes of Budgeting

Establishing specific
future goals.
Executing plans to
achieve the goals.
Comparing actual
results to the goals.
Budgeting is the process of planning future
business actions and expressing them as
formal plans.
Budget is a formal statement of a companys
future plans.
The role of accounting during the budgeting
process is to:
(a) provide historical data on revenues, costs,
and expenses,
(b) express managements plans in financial terms
and
(c) prepare periodic budget reports.
Nature of Budgeting
Nature of Budgeting
Requires all management plan ahead.
Provides definite objectives for evaluating
performance.
Creates an early warning system for potential
problems.
Facilitates the coordination of activities within
the business.
Results in greater management awareness
of the entitys overall operations.
Motivates personnel throughout the
organization to meet planned objectives

Advantages
Communicates plans
and instructions
Promotes analysis and
a focus on the future
Motivates employees
Provides a basis for
evaluating performance against
past or expected results
Coordinates
business activities
Defines goals
and objectives
Budget Process
Budgeting is a detailed activity that requires
administration.
3 aspects that are important:
1. Budget Committee
2. Budget Reporting
3. Budget Period

Budget Adminstration
Provides central guidance to
ensure that individual
budgets submitted from all
departments are realistic and
coordinated.
Budget Committee
Consists of managers from all departments
of the organization.
Oversees the budget preparation.
Communication between originating
department and budget committee.

Flow of Budget Data is a bottom-up process.
Supervisor Supervisor
Middle
Management
Supervisor Supervisor
Middle
Management
Top Management
Budget Committee
Budget Reporting
Budget period coincides with the accounting
period.
Budget period pertains to the time period for
which the budget is prepared such as a year or
month.
Annual budget usually separated into quarterly
or monthly to allow management evaluate
performance and take action.
Managers compare actual results with
budgeted to identify variance.

2005 2006 2007 2008
Operating Budget
The annual operating budget
may be divided into quarterly
or monthly budgets.
Budget Timing
Continuous or
Rolling Budget
The budget may be a twelve-month
budget that rolls forward one month
as the current month is completed.
2005 2006 2007 2008
Budget Timing
Master Budget
A master budget is a formal overall plan for a
company consist of plans for business
operations, capital expenditure and financial
results.
Several individual budgets are linked with each
other and consists of 3 types budgeting:
Operating budgets show the individual
budgets that result in the preparation of the
budgeted income statement.
Capital expenditure budget is a planned
capital expenditure for fixed assets.
Financial Budget focus primarily on the cash
resources needed to fund expected operations
Financial Budgets

Cash Budget
Budgeted Income Statement
Budgeted Balance Sheet
Master Budget Components
Operating Budgets

Sales Budget
Merchandise Purchase
Budget (for Merchandiser)
Production Budget &
Manufacturing Budget (for
Manufacturer)
Selling Expense Budget
General and Administrative
Budget
Capital Expenditures
Budget

Master Budget Sequence
Prepare
Sales
budget
Prepare
Merchandise
Purchases and/or
Production and
Manufacturing
Budget.
Prepare financial
budgets:
cash
income
statement
balance sheet
Prepare
capital
expenditure
budget
Prepare
selling,
general and
administrative
budgets
Sales
Budget
Estimated
Unit Sales
Estimated
Unit Price
Analysis of economic and market conditions
+
Forecasts of customer needs from marketing personnel
Sales Budget
Sales Budget
The sales budget is the first budget prepared.
Each of the other budgets depends on the sales
budget.
It is derived from the sales forecast.
It represents managements best estimate of sales
revenue for the budget period.
Sales = Budgeted x Unit
Budget Unit Sales Price
Sales Budget
Sales budget always
followed by Budgeted
Cash Receipts or Cash
Receipts Schedule.

Preparing a Cash
Receipts Schedule from
customers is useful in
preparing a cash budget.
In September 2006, Hockey Den sold 700
hockey sticks at $100 each. Hockey Den
prepared the following sales budget for the next
four months:
Sales Budget - Illustration
Sales Budget
HOCKEY DEN
MONTHLY SALES BUDGET
OCTOBER 2006 JANUARY 2007
Budgeted Budgeted Budgeted
Unit Sales Unit Price Total Sales
September 2006 (actual) 700 100 $ 70,000 $
October 2006 1,000 100 $ 100,000 $
November 2006 800 100 80,000
December 2006 1,400 100 140,000
Total 3,200 100 $ 320,000 $
January 2007 900 100 $ 90,000 $
Merchandise Purchases Budget
It is prepared based on sales budget.
It estimates the quantity of merchandises
needed in order to fulfill the estimated sales.
It also depends on the estimated beginning
inventory and the desired ending inventory as
a preparation for the following sales.
Inventory
to be
purchased
=
Budgeted
ending
inventory
+
Budgeted
cost of sales
for the period

Budgeted
beginning
inventory
Purchase budget always
followed by Budgeted
Cash Disbursements for
Purchases or Cash
Disbursement Schedule.

Preparing a Cash
Disbursements Schedule
to suppliers is useful in
preparing a cash budget.
The quantity purchased is affected by:
Just-in-time inventory systems that enable
purchases of smaller, frequently delivered
quantities.
Safety stock inventory systems that provide
protection against lost sales caused by
delays in supplier shipments.
Merchandise Purchases Budget -
Illustration
Hockey Den buys hockey sticks for $60.00 each
and maintains an ending inventory equal to 90
percent of the next months budgeted sales. 900
hockey sticks are on hand on September 30.

Lets prepare the purchases budget for Hockey Den.
HOCKEY DEN
MERCHANDISE PURCHASE BUDGET
OCTOBER 2006 DECEMBER 2006
October November December
Next month's unit sales 800 1,400 900
Ending inventory percentage 90% 90% 90%
Budgeted ending inventory units 720 1,260 810
Add: current month's unit sales
Total units needed
Less: beginning inventory units
Number of units to be purchased
Budgeted cost per unit
Budgeted cost of purchases
HOCKEY DEN
MERCHANDISE PURCHASES BUDGET
Add current month's unit sales 1,000 800 1,400
Total units needed 1,720 2,060 2,210
Less: beginning inventory units
Number of units to be purchased
Budgeted cost per unit
Budgeted cost of purchases
HOCKEY DEN
Less: beginning inventory units (900)
Number of units to be purchased 820
Budgeted cost per unit $ 60
Budgeted cost of purchases 49,200 $
Beginning inventory is last month's ending inventory.
HOCKEY DEN
Less: beginning inventory units (900) (720) (1,260)
Number of units to be purchased 820 1,340 950
Budgeted cost per unit $ 60 $ 60 $ 60
Budgeted cost of purchases 49,200 $ 80,400 $ 57,000 $
Beginning inventory is last month's ending inventory.
Lets prepare the selling expense budget for Hockey Den.
Hockey Den pays sales
commissions equal to 10
percent of total sales.
Hockey Den pays a
monthly salary of $2,000
to its sales manager.
Selling Expense Budget - Illustration
From Hockey Dens sales budget
Selling Expense Budget
HOCKEY DEN
SELLING EXPENSE BUDGET
October November December Total
Budgeted sales 100,000 $ 80,000 $ 140,000 $ 320,000 $
Sales commission % 10% 10% 10% 10%
Sales commission 10,000 $ 8,000 $ 14,000 $ 32,000 $
Sales manager salary 2,000 2,000 2,000 6,000
Total selling expenses 12,000 $ 10,000 $ 16,000 $ 38,000 $
Lets prepare the general and administrative
expense budget for Hockey Den.
General and
administrative salaries are
$4,500 per month.
Depreciation of equipment
is $1,500 per month.
General and Administrative Expense
Budget - Illustration
General and Administrative Expense
Budget
HOCKEY DEN
GENERAL AND ADMINISTRATIVE EXPENSE BUDGET
October November December Total
Administrative salaries 4,500 $ 4,500 $ 4,500 $ 13,500 $
Equipment depreciation 1,500 1,500 1,500 4,500
Total 6,000 $ 6,000 $ 6,000 $ 18,000 $
Operating Budgets : Merchandiser
Sales
Budget
Schedule
Cash Disbursements
Schedule
Cash Receipts Schedule
Merchandise Purchase
Budget
Selling, General and
Administrative
Expenses Budget
Operating Budgets : Manufacturer
Sales
Budget
Schedule

Cash Disbursements
Schedule

Production
Budget
Manufacturing Budget :
Direct Materials, Direct labor,
Factory Overhead
Selling, General and
Administrative
Expenses Budget
Cash
Budget
Expected
Receipts
and
Disbursements
Budgeted
Income
Statement
Budgeted
Balance
Sheet
Financial Budgets
Cash Receipts Schedule - Illustration
Forty percent of Hockey
Dens sales are for cash.
The remaining sixty percent
are credit sales that are
collected in full in the month
following sale.
Lets prepare the cash receipts budget for Hockey Den.
HOCKEY DEN
CASH RECEIPTS SCHEDULE
September October November December
Budgeted sales 70,000 $ 100,000 $ 80,000 $ 140,000 $
Accounts receivable
Cash receipts from:
Cash sales
Collection of receivables
Total cash receipts
60 percent of September sales are collected in October
From Hockey Dens sales budget
HOCKEY DEN
Budgeted sales 70,000 $ 100,000 $ 80,000 $ 140,000 $
Accounts receivable 42,000 $ 60,000 $ 48,000 $ 84,000 $
Cash receipts from:
Cash sales 40,000 $ 32,000 $ 56,000 $
Collection of receivables
Total cash receipts
40% of sales
60% of sales
HOCKEY DEN
Budgeted sales 70,000 $ 100,000 $ 80,000 $ 140,000 $
Accounts receivable 42,000 $ 60,000 $ 48,000 $ 84,000 $
Cash receipts from:
Cash sales 40,000 $ 32,000 $ 56,000 $
Collection of receivables 42,000 60,000 48,000
Total cash receipts 82,000 $ 92,000 $ 104,000 $
Hockey Dens purchases of
merchandise are entirely on
account.
Full payment is made in the
month following purchase.
The 30 September balance
of Accounts Payable is
$58,200.
Lets look at cash disbursements
for purchases for Hockey Den.
Cash Disbursements Schedule -
Illustration
HOCKEY DEN
CASH DISBURSEMENTS SCHEDULE
OCTOBER 2006 - DECEMBER 2006
October payments (30 September balance) 58,200 $
November payments (October purchases) 49,200
December payments (November purchases) 80,400
From merchandise purchases budget
Cash Disbursements Schedule
Hockey Den:
will pay a cash dividend of $3,000 in November.
will purchase $25,000 of equipment in
December.
has an income tax liability of $20,000 from the
previous quarter that will be paid in October.
has a 30 September cash balance of $20,000.
has an agreement with its bank for loans at the
end of each month to enable a minimum cash
balance of $20,000.
Cash Budget - Illustration
Hockey Den:
pays interest equal to one percent of the prior
months ending loan balance.
repays loans when the ending cash balance
exceeds $20,000.
owes $10,000 on this loan arrangement on
September 30.
has 40 percent income tax rate.
will pay taxes for current quarter next year.
Lets prepare the cash budget for Hockey Den.
Cash Budget
HOCKEY DEN
CASH BUDGET
Beginning cash balance 20,000 $
Receipts from customers 82,000 92,000 104,000
Total cash available 102,000 $
Disbursements
Payments for merchandise
Sales commissions
Sales salaries
Administrative salaries
Income taxes
Dividends
Interest
Equipment purchase
Total disbursements
Preliminary balance
From Cash Receipts Schedule
HOCKEY DEN
CASH BUDGET
Disbursements
Payments for merchandise 58,200 $ 49,200 $ 80,400 $
Sales commissions
Sales salaries
Income taxes
Dividends
Interest
Equipment purchase
Total disbursements
Preliminary balance
From Cash Disbursements
Schedule
HOCKEY DEN
CASH BUDGET
Disbursements
Sales commissions 10,000 8,000 14,000
Sales salaries 2,000 2,000 2,000
Income taxes
Dividends
Interest
Equipment purchase
Total disbursements
Preliminary balance
From Selling Expense Budget
HOCKEY DEN
CASH BUDGET
Disbursements
Administrative salaries 4,500 4,500 4,500
Income taxes
Dividends
Interest
Equipment purchase
Total disbursements
Preliminary balance
From General and
Administrative Expense Budget
Depreciation is a
non-cash expense.
HOCKEY DEN
CASH BUDGET
Disbursements
Income taxes 20,000
Dividends
Interest 100
Equipment purchase
Total disbursements 94,800 $
Preliminary balance 7,200 $
0.01 $10,000
Because Hockey Den
maintains a minimum
cash balance of $20,000,
the company must
borrow $12,800.
HOCKEY DEN
CASH BUDGET
Preliminary balance 7,200 $
Additional borrowing 12,800
Loan repayment
Ending cash balance 20,000 $
Ending loan balance 22,800 $
Ending cash balance for October
is the beginning November balance.
Cash Budget Continued
HOCKEY DEN
CASH BUDGET
Beginning cash balance 20,000 $ 20,000 $
Total cash available 102,000 $ 112,000 $
Disbursements
Income taxes 20,000
Dividends 3,000
Interest 100 228
Equipment purchase
Total disbursements 94,800 $ 66,928 $
Preliminary balance 7,200 $ 45,072 $
0.01 $22,800
Cash balance
is sufficient
to repay the
$22,800 loan.
HOCKEY DEN
CASH BUDGET
Preliminary balance 7,200 $ 45,072 $
Additional borrowing 12,800
Loan repayment (22,800)
Ending cash balance 20,000 $ 22,272 $
Ending loan balance 22,800 $ $ 0
Ending cash balance for November
is the beginning December balance.
HOCKEY DEN
CASH BUDGET
Beginning cash balance 20,000 $ 20,000 $ 22,272 $
Total cash available 102,000 $ 112,000 $ 126,272 $
Disbursements
Income taxes 20,000
Dividends 3,000
Interest 100 228
Equipment purchase 25,000
Total disbursements 94,800 $ 66,928 $ 125,900 $
Preliminary balance 7,200 $ 45,072 $ 372 $
HOCKEY DEN
CASH BUDGET
Preliminary balance 7,200 $ 45,072 $ 372 $
Additional borrowing 12,800 19,628
Loan repayment (22,800)
Ending cash balance 20,000 $ 22,272 $ 20,000 $
Ending loan balance 22,800 $ $ 0 19,628 $
Lets prepare the budgeted income
statement for Hockey Den.
Cash
Budget

Budgeted
Income
Statement
Budgeted Income Statement
HOCKEY DEN
BUDGETED INCOME STATEMENT
FOR THE THREE MONTHS ENDED 31 DECEMBER 2006
Sales (3,200 units @ $100) 320,000 $
Cost sales (3,200 units @ $60) 192,000
Gross profit 128,000 $
Operating expenses
Sales commissions (32,000) $
Sales salaries (6,000)
Administrative salaries (13,500)
Equipment depreciation (4,500)
Interest expense (328)
Profit before taxes 71,672 $
Income tax expense (28,669)
Profit for the period 43,003 $
From the Sales Budget
HOCKEY DEN
Sales (3,200 units @ $100) 320,000 $
Cost of sales (3,200 units @ $60) 192,000
Operating expenses
From the Merchandise
Purchases Budget
HOCKEY DEN
Sales (3,200 units @ $100) 320,000 $
Operating expenses
From the Selling
Expense Budget
HOCKEY DEN
Sales (3,200 units @ $100) 320,000 $
Operating expenses
Interest expense 328
From the General and Administrative
Expense Budget
Depreciation is a non-cash expense.
HOCKEY DEN
Sales (3,200 units @ $100) 320,000 $
Operating expenses
Interest expense 328
From the Cash Budget
HOCKEY DEN
Sales (3,200 units @ $100) 320,000 $
Operating expenses
Interest expense (328) 56,328
$71,672 0.40
Lets prepare the budgeted balance
sheet for Hockey Den.
Budgeted
Balance
Sheet
Budgeted
Income
Statement
Budgeted Balance Sheet
Hockey Den reports the following account
balances on 30 September prior to
preparing its budgeted financial statements:
Equipment $200,000
Accumulated depreciation $ 36,000
Common stock $150,000
Retained earnings $ 41,800
Lets prepare the budgeted balance
sheet for Hockey Den.
Preparing a Budgeted
Balance Sheet
HOCKEY DEN
BUDGETED BALANCE SHEET
AS AT 31 DECEMBER 2006
ASSETS
Non Current Assets
Equipment $225,000
Accumulated depreciation - Equipment (40,500) $184,500
Total non current assets $184,500
Current Assets
Cash $20,000
Accounts receivable 84,000
Inventory 48,600
Total current assets $152,600
Total Assets $337,100
EQUITY AND LIABILITIES
Equity
Common shares $150,000
Retained earnings 81,803 $231,803
Total Equity $231,803
Non Current Liabilities
Bank loan payable $19,628 $19,628
Total non current liabilities $19,628
Current Liabilities
Accounts payable $57,000
Income taxes payable 28,669
Total current liabilities $85,669
Total Liabilities $105,297
Total Equity and Liabilities $337,100
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
From the Cash Receipts
Schedule
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
From the Merchandise Purchases Budget
8,100 units @ $6
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
$200,000 30 September balance plus the
$25,000 December acquisition
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
$36,000 30 September balance plus the $4,500
from the General and
Administrative Expense Budget
$105,297 Total Liabilities
$85,669 Total current liabilities
$19,628 $19,628 Bank loan payable
$19,628 Total non current liabilities
Current Liabilities
$57,000 Accounts payable
$337,100 Total Equity and Liabilities
28,669 Income taxes payable
$231,803 Total Equity
$231,803 81,803 Retained earnings
$150,000 Common shares
Equity
$337,100 Total Assets
$152,600 Total current assets
48,600 Inventory
84,000 Accounts receivable
$20,000 Cash
Current Assets
$184,500 Total non current assets
$184,500 (40,500) Accumulated depreciation - Equipment
$225,000 Equipment
Non Current Assets
ASSETS
HOCKEY DEN
From the Merchandise
Purchases Budget
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
From the Budgeted
Income Statement
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
HOCKEY DEN
ASSETS
Non Current Assets
Equipment $225,000
Current Assets
Cash $20,000
Inventory 48,600
Equity
Current Liabilities
Beginning retained earnings 41,800 $
Add net income 43,003
Deduct dividends (3,000)
Ending retained earnings 81,803 $
End of Chapter 15

Chapter 15 - Bu. Controllin

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Chapter 15 - Bu. Controllin

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Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, I nc., 2007

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