PP For Chapter 9 - Budgeting - Final

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Accounting: A Malaysian Perspective, 4
th
ed
(Adapted from Accounting 22
nd
ed)
Warren, Reeve and Duchac
9
Budgeting and
Controlling
Tools
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1. Describe budgeting, its objectives,
and its impact on human behavior.
2. Describe the basic elements of
the budget process, the two
major types of budgeting, and the
use of computers in budgeting.
After studying this chapter, you
should be able to:
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3. Describe the master budget for a
merchandising business.
4. Prepare the basic income
statement budgets for a
5. Prepare balance sheet budgets
for a merchandising business.
After studying this chapter, you
should be able to:
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Describe budgeting, its
objectives, and its impact on
human behavior.
Objective 1
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A budget charts a course for a business by
outlining the plans of the business in financial
terms.
Establishing specific goals
Executing plans to achieve the goals
Periodically comparing actual results to the goals
Objectives of Budgeting
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Housing
30%
Utilities
5%
Food
20%
Medical
5%
Other
4%
Clothing
7%
Transportation
15%
Entertainment
6%
Savings
8%
Estimated Portion of Your Total Monthly
Income That Should Be Budgeted for
Various Living Expenses
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Budgeting processes
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Planning
Budgeting supports the planning process by
requiring all organizational units to establish
their goals for the upcoming period. These
goals motivate individuals and groups to
perform at high levels. Planning also
motivates employees to attain goals and
improve overall decision making.
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Directing
The budget can be used to direct and
coordinate operations in order to
achieve the stated goals.
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The budgetary units of an organization are
called responsibility centers. Each
responsibility center is led by a manager who
has the authority over and responsibility for the
units performance.
Responsibility Centers
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Controlling Through Feedback
As time passes, the actual performance of
an operation can be compared against the
planned goals. This provides prompt
feedback to employees about their
performance. If necessary, employees can
use such feedback to adjust their activities
in the future.
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Human behavior problems can
arise if
1. the budget goal is too
tight and very hard for
the employee to achieve.
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arise if
2. the budget goal is too loose
and very easy for the
employee to achieve.
It is undesirable to set lower
goals than is attainable. Such
budget padding is termed
budgetary slack.
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arise if
3. the budget goals of a
business conflict with the
objectives of the employees.
Goal conflict occurs when individual self-
interest differs from business objectives or
when different departments are given
conflicting objectives.
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Describe the basic elements of
the budget process, the two
major types of budgeting, and
the use of computers in
budgeting.
Objective 2
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A variation of fiscal-year budgeting,
called continuous budgeting,
maintains a twelve-month projection
into the future.
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One-Year Budget
Feb.
2008
Mar.
2008
Apr.
2008
May
2008
June
2008
July
2008
Aug.
2008
Sep.
2008
Oct.
2008
Nov.
2008
Dec.
2008
Jan.
2009
Delete on February 28
20 Add February 2009
Feb.
2008
Feb.
2009
Continuous Budgeting
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Zero-based budgeting requires
managers to estimate sales,
production, and other operating
data as though operations are
being started for the first time.
Zero-Based Budgeting
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Static Budget
A static budget shows the expected
results of a responsibility center for only
one activity level. The budget does not
change even if the activity changes.
A static budget is used by many service
companies and for some administrative
functions of merchandising companies.
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Colter Manufacturing Company
Assembly Department Budget
For the Year Ending July 31, 2008
Direct labor $40,000
Electric power 5,000
Supervisor salaries 15,000
Total department costs $60,000

Static Budget
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Strength:
A static budget is simpleall expenses are
budgeted as fixed costs.
Weakness:
A static budget does not adjust for changes in
revenues and expenses that occur as volumes
change.
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Flexible Budget
Flexible budgets show the
expected results of a responsibility
center for several activity levels.
A flexible budget is especially useful
in estimating and controlling factory
costs and operating expenses.
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Flexible Budget
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Strength:
Flexible budgeting provides information needed
to analyze the impact of volume changes on
actual operating results.
Weakness:
Flexible budgeting requires greater research into
costs. There must be a differentiation between
fixed and variable costs.
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Static and Flexible Budgets
If Coulter Manufacturing Companys Assembly
Department spent $72,000 to produce 10,000
units, how much over or under budget would
the department manager be using a static
budget? A flexible budget?
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Over Budget
Static
Budget
$60,000
$72,000
Actual
Results
Static and Flexible Budgets

(Continued)
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8,000
units

$60,000
9,000
units

$65,500
10,000
units

$71,000
Over
Budget
Flexible Budget
$72,000
Actual
Results
(Concluded)
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Describe the master
budget for a
Objective 3
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Budgeted Balance Sheet
Cash budget
Capital expenditures
budget
Budgets That Are Linked Together in a Master Budget
Budgeted Income Statement
Sales budget
Purchase budget
Inventory budget
Cost of goods sold budget
Selling and administrative
expense budget
9-3
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Income Statement
Budgets
Sales Budget
Purchases Budget

Inventory Budget
Cost of Goods Sold
Budget
Budgeted Income
Statement
Selling and Administrative
Expenses Budget
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Balance
Sheet
Budgets
Elite Sports Enterprise
Balance Sheet on December 31, 2009
Assets RM RM
Current assets
Cash
Accounts receivable
Merchandise inventory
Prepaid rent

190,000
370,080
378,000
6,000

944,080
Fixed assets
Equipment and other
Accumulated depreciation

140,000
36,000

104,000
Total Assets 1,048,080

Liabilities and Owners Equity
Current liabilities
Accounts payable
Accrued commissions payable

133,050
154,200

287,250
Long term liability
Owners equity
200,000
560,830
Total Liabilities and Owners Equity 1,048,080
9-3
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Prepare the basic income
statement budgets for a
Objective 4
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Sales Budget
The sales budget normally indicates for
each product
(1) the quantity of estimated sales and

(2) the expected unit selling price.
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Factors Expected to Affect Future
Sales include
backlog of unfilled sales orders
planned advertising and promotion
expected industry and general economic
conditions
productive capacity
projected pricing policy
findings of market research studies
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Sales Budget (Exhibit 1)
Sales Budget
For the Months of January, February and March
Month Forecasted Sales
Volume
Unit Selling
Price
Total Sales
January 2,700 RM400 RM1,080,000
February 3,100 RM400 RM1,240,000
March 2,425 RM400 RM 970,000
Total revenue from sales RM3,290,000
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Purchase Budget
Purchase budget is used to estimate the quantity of
merchandises needed to be purchased in order to
fulfill the targeted sales demand. Use the following
formulation to determine total purchase needed.
Budgeted Cost of goods sold
(+) Desired Ending inventory
Total inventory needed
(-) Estimated Beginning inventory
Total Purchase needed
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Purchases Budget (Exhibit 2)
Purchases Budget
January February March Total
Cost of goods sold
(50% of current sales)

540,000

620,000

485,000

1,645,000
Plus Desired ending inventory
(70% of next month cost of goods sold)

434,000

339,500

*420,000

420,000
Total inventory needed 974,000 959,500 905,000 2,065,000
Less Beginning inventory # 378,000 434,000 339,500 378,000
Total Purchases (RM) 596,000 525,500 565,500 1,687,000
Note
* : RM420,000 = (3,000 x 400) x 50% x 70%
# : RM378,000 = given as December 31, 2009, Accounts Receivable balance, or
= 70% x January cost of goods sold of RM540,000

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Selling and administrative expense
The sales budget is often used as the
starting point for estimating the selling and
administrative expenses.

For example, a budgeted increase in sales
may require more advertising. Other
examples of expenses driven by sales
volume are sales commissions, packaging
and delivery expenses.
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Salaries (paid at the end of month).
Commission (paid at early of the
following month)..
Advertising .
Other selling expenses..

Rent
Depreciation for fixed assets ..
Miscellaneous expenses ...........
RM2,000 / month

15% of sales
2% of sales, paid as incurred
RM10,000 per month, paid as
incurred
RM2,000 expiration per month
RM6,000 per month
1% of sales, paid as incurred
Consider the following assumption in preparing
selling and administrative expense:
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Selling and Administrative Expense Budget
(Exhibit 3)
Selling and Administrative Expenses Budget
January February March Total
Administrative expenses:
Salaries (fixed)
Rent
Depreciation
Miscellaneous expenses
20,000
2,000
6,000
10,800
20,000
2,000
6,000
12,400
20,000
2,000
6,000
9,700
60,000
6,000
18,000
32,900
Total administrative expenses 38,800 40,400 37,700 116,900
Selling expenses:
Commissions
Advertising
Others
162,000
21,600
10,000
186,000
24,800
10,000
145,500
19,400
10,000
493,500
65,800
30,000
Total selling expenses 193,600 220,800 174,900 589,300
Total selling and
administrative expenses
232,400 261,200 212,600 706,200
9-4
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Budgeted Income Statement (exhibit 4)
Budgeted Income Statement
For the Three Months Ending March 31, 2010
RM RM
Revenue from sales (from Exhibit 1)
Cost of goods sold (from Exhibit 2)
3,290,000
(1,645,000)
Gross profit 1,645,000
Selling and Administrative expenses:
Selling expenses (from Exhibit 3)
Administrative expenses (from Exhibit 3)

589,300
116,900
(706,200)
Income from operations 938,800
Other expense:
Interest expense (from Exhibit 7)

(24,825)
Net Income 913,975
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Prepare balance sheet
budgets for a
Objective 5
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Cash Budget
The cash budget is one of the most
important elements of the budgeted
balance sheet. The cash budget
presents the expected receipts
(inflows) and payments (outflows) of
cash for a period of time.
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Receipts from cash sales:
Cash sales (10% x current
months salesNote A) $108,000 $124,000 $97,000
January February March
Note A: $108,000 = $1,080,000 x 10%
$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10%
Determine estimated Cash Receipts from cash sales
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months salesNote A). $108,000 $124,000 $ 97,000
Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance
$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40%
Receipts from sales on account:
Collections from prior months
sales (40% of previous months
credit salesNote B).. $370,000 $388,800 $446,400

Determine estimated Cash Receipts: sales on account
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months salesNote A) $108,000 $124,000 $ 97,000
Receipts from sales on account:
Collections from prior months
sales (40% of previous months
credit salesNote B)... $370,000 $388,800 $446,400

Collections from current
months sales (60%) (see Note
C) 583,200 669,600 523,800

Note C: $583,200 = $1,080,000 x 90% x 60%
$669,600 = $1,240,000 x 90% x 60%
$523,800 = $ 970,000 x 90% x 60%
Cash Receipts from current month credit sales
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Schedule
of
Collections
from Sales
(exhibit 5)
Schedule of Collections from Sales
For the three months ending March 31, 2010

2009
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Schedule of Payments for purchase
Estimated cash payments are planned reductions in cash
from cost of goods purchased, selling and administrative
expenses, capital expenditures, and other sources, such as
buying securities or paying interest or dividends. A
supporting schedule can be used in estimating the cash
payments for purchases.
Consider the following assumption to determine
estimated cash payment for purchase: Firm expects to
pay 75% of the purchases in the month in which they
are incurred and the balance in the following month.
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Schedule of Payments for purchase (exhibit 5)
Schedule of Payments for Purchases
Payments of current months purchases
(75% x current months purchases) Note A

447,000

394,125

424,125
Payments of prior months purchases
(25% x previous months purchases) Note B

133,050

149,000

131,375
Total payments 580,050 543,125 555,500
Note A: 75% x 596,000 = 447,000
75% x 525,500 = 394,125
75% x 565,500 = 424,125
Note B: 133,050 given as December 31, 2009 Accounts payable balance, or
25% x Dec. purchases =[(2,570 x 400) x 50%] + [70% x 540,000]
[70% x 514,000)] = 532,200 x 25% = 133,050
25% x 596,000 = 149,000
25% x 525,500 = 131,375
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Schedule of Payments for selling and
administrative expenses (exhibit 6)
Schedule of Payments for Selling and Administrative Expenses
Selling and Administrative Expenses:
Salaries (fixed)
Miscellaneous expenses
20,000
10,800
20,000
12,400
20,000
9,700
Commissions (previous months)
Advertising
Others
154,200
21,600
10,000
162,000
24,800
10,000
186,000
19,400
10,000
Total Payments 216,600 229,200 245,100
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Completing the Cash Budget
Consider additional information as given below in
preparing cash budget:
1. pay a new year bonus of RM280,000 on January
10
2. Pay a quarterly interest expense of RM22,500 on
March 31.
3. The company plans to buy a new warehouse
costing RM145,000 in early January (assume that
the depreciation of the warehouse is already
included in the depreciation of the fixed assets).

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Completing the Cash Budget
Consider additional information as given below in
preparing cash budget:

4. The company requires a minimum of RM200,000
as a cash balance at the end of each month.
5. Loan-related information:
Assume that firm can borrow or repay
loans in multiples of RM1,000.
Loan interest rate of 10% per year,
Borrowing occurs at the beginning and repayment
at the end of the months.
Firm will borrow only when necessary and will
repay as promptly as possible.
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Cash Budget
January
RM
February
RM
March
RM
Beginning cash balance 190,000 200,630 205,380
Estimated cash receipts from sales
(from Exhibit 3)

953,280

1,058,400

970,200
Total available cash (a) 1,143,280 1,259,030 1,175,580
Estimated cash payments for:
Merchandise purchases (from Exhibit 5)
Selling and administrative expenses
(from Exhibit 6)
Interest expense
New year bonus
Acquisition of a new warehouse
580,050

216,600

280,000
145,000
543,125

229,200
555,500

245,100
22,500
Total payments 1,221,650 772,325 823,100
Completing the Cash Budget (exhibit 7)
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Cash Budget
For the Three Months Ending March 31, 2010 (cont..)
Total payments (from previous slide) 1,221,650 772,325 823,100
Minimum cash balance desired (b) 200,000 200,000 200,000
Total cash needed (c) 1,421,650 972,325 1,023,100
Excess (deficiency) of cash (a - c) = (d) (278,370) 286,705 152,480
Financing:
Borrowing
Repayments
Interest

279,000

(279,000)
* (2,325)
Total cash from financing (e) 279,000 (281,325)
Ending cash balance (b + d + e) 200,630 205,380 352,480

Note * : Interest expense for a month
= 279,000 x 10% x 1/12 = 2,325
Completing the Cash Budget (cont) (Exhibit 7)
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Budgeted Balance Sheet
The budgeted balance sheet
estimates the financial condition at
the end of a budget period.
9-5

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