2016-17 Term 1

ACCT112 Management Accounting

Week 5b

The Budgeting Process

2016-17-T1-Aug to Dec 2016

Seminar Outline
Understand the usefulness of
budgeting as a management tool
Understand the behavioral aspects of
budgeting
Prepare a master budget for a
manufacturing company

2016-17-T1-Aug to Dec 2016

What is a Master Budget?

Objective: Become market
leader in 5 Years Time

ra
g
n
Lo

e
g
n

Yr 2
tactical
plan

NOW

Yr 1
tactical
plan

an
l
p

Yr 5
tactical
plan
Yr 4
tactical
plan

Yr 3
tactical
plan

Master Budget is the plan

for the coming year:
A plan expressed
quantitatively
Includes also important
qualitative information

2016-17-T1-Aug to Dec 2016

Master Budget: set of Operational

budgets
(1) Sales
Sales
(1)

(2) Production
Production
(2)

(3) Non-Mfg
Non-Mfg Exp
Exp
(3)

(2a) Mat.
Mat.
(2a)
(2b) Lab.
Lab.
(2b)

(4) Cash
Cash
(4)

(2c) O/H
O/H
(2c)

(5) Budgeted
Budgeted Financial
Financial Statements
Statements
(5)
2016-17-T1-Aug to Dec 2016

Master Budget: Illustration

Retrieve the Excel file:

Week 05 Budget
Exercise 2016
Refer to the Assumptions
tab

2016-17-T1-Aug to Dec 2016

Assumptions

2016-17-T1-Aug to Dec 2016

Assumptions

2016-17-T1-Aug to Dec 2016

Balance Sheet

as at
Qty

December
Unit Costs

Assets:

Inventory

Finished Goods
2,000
$90
Raw Material
15,000
$5
Receivables
Machines

Historical Costs
$600,000
less Accum Deprec.
($240,000)
Cash
Total Asset

Liabilities

Accounts Payable
Bank Loan
Owners Equity

Capital
Retained Earnings
2016-17-T1-Aug to Dec 2016
8
Total Liab + Equity

2015
Amount

$180,000
$75,000
$217,600

$360,000
$100,000
$932,600

$75,000
$0
$500,000
$357,600
$932,600

(1) Sales Budget

Budgeted Sales = Bgt Sales Qty x Bgt
Selling Price

a) Actual sales last year 2015

(given):2015
Qty Amount
January 1,000 $320,000
February 1,200 $384,000
etc

Selling Price
$320
$320

b) Growth is sales quantity Bgt Sales Qty (2016) = Actual Sales

(2015)
x 1.04
= 4%
Bgt SP =
Actual SP in 2015
c)
Increase in selling price =
x1
0%
Refer toSales tab in budget exercise
spreadsheet Sales Budget for
2016
Quantity
Price
Amount
January
1,040
$320
$332,800
February
1,248
$320
$399,360
etc.
2016-17-T1-Aug to Dec 2016

(2) Production Budget

Shows forecasted quantity of finished units to
produce in a period
Recap:

Beg $FG + $COGM

= $COGS + End $FG

Beg FG qty + Qty FG to produce = Qty FG for sales +

Desired End FG qty

(e
(b
(a
)
)
Qty FG to produce )= Qty FG for sales
+ Desired End
Qty
Qty the
FG qty Beg FG qty
(c
Required
business
)
already
(f)

has

2016-17-T1-Aug to Dec 2016

10

(2) Production Budget

See Production tab in budget exercise spreadsheet

E.g Desired Ending FG inventory = 150% of next months

.
projected sales qty
Dec 2015 FG inventory (given in Balance Sheet) = Jan
2016 Beg Inventory
Production Budget
= 2,000 units
for 2016 No. of Units
(a)
(b)
(c)
(d)
(e)
(f)
Sales
Des E Total Qty Real E
Begin Producti
from
Inv
Reqd
Inv
Inv
on
Sales
(a + b) (e + f -a) (= d of (c e);
Budget
previous cannot
mth)
be
negative
January
February
etc

1,040
1,248

1.5*1,248
=1,872
2,912

2,340

3,588

2016-17-T1-Aug to Dec 2016

1,872
2,340

2,000
1,872
11

912
1,716

(2) Production Budget

Desired ending inventory: what the company
wishes
to have
Real
ending
inventory: what the company will
E.g have
Desired ending inventory = 10 units
.
Bgt sales = 40 units
Beg inventory = 5 units
Bgt production = 45 units [i.e. (40 + 10) - 5]
Real ending inventory = Beg inv 5 + Bgt prodn 45
Bgt sales
40ending
= 10 inventory = Real ending
Desired
inventory
E.g Desired ending inventory = 10 units
.
Bgt sales = 40 units
Beg inventory = 60 units
Bgt production = 0 unit Cannot produce ve! [(10 +
40)
= -10]
Real 60
ending
inventory = Beg inv 60+ Bgt prodn 0
BgtDesired
sales 40
= 20inventory Real ending
ending
What isinventory
the beginning inventory at the beginning of the
12
next period?
2016-17-T1-Aug to Dec 2016

(2) Production Budget

Production Budget
for 2016 No. of Units
(a)
Sales

January
February
etc

1,040
1,248

Real E Inv =
Begin Inv +
Production Sales

(b)
(c)
(d)
(e)
(f)
Des E Total Qty Real E
Begin Producti
Inv
Reqd
Inv
Inv
on
(a + b) (e + f -a) (= d of (c - e;
previous cannot
mth)
be
negative
)
1.5*1,248
=1,872
2,912

2,340

3,588

2016-17-T1-Aug to Dec 2016

Real E 912
1,872 From
2,000
of previous
2,340 Inv 1,872
1,716
period

13

(2a) DM Budget

Shows the budgeted qty and $ of materials to

purchase
Materials are used for production, not sales
Recap:

Beg DM$ + Purchases = End DM$ + DM$ used for

production
(g
(c
(f)
(b
) Purchases = End
)
DM Qty
DMDM
Qty + )DM Qty for
Total
DMprodn
(d
Beg DM Qty
needed
already
)
on hand

DM Qty Purchases = End DM Qty + FG Qty for sale

Beg DM Qty
DM Qty Purchases = End DM Qty + FG Qty for prodn
2016-17-T1-Aug to Dec 2016
14
Beg DM Qty

(2a) DM Budget
See DM & DL tab in budget exercise spreadsheet. E.g.:
4 m2 of DM is required to produce a finished unit
Desired Ending DM inventory = 200% of next month's
production requirement
DM as at 31 Dec 2015 = DM as at 1 Jan 2016 = 15,000 m2
Budgeted cost of DM
= Budget
$5/m2 for 2016
DM
a
b
c
d
e
f
from
Prod
Bgt;
NOT
Sales
(a x
(f + g bgt
4m2)
(b + c)
b)
Finishe DM
Desire
d units reqd for d End
to
prodn
DM
Total DM Real E Begin
produc needs
Inv
needs
Inv
DM Inv
e
(m2)
(m2)
(m2)
(m2)
(m2)
Jan 912
3,648 13,728 17,376
13,728 15,000
Feb 1,716 6,864 18,720
25,584
13,728
2016-17-T1-Aug
to Dec18,720
2016
15

(d f)
cannot
be
negativ
e)
(g x $5)

Purcha
se
Purchas
(m2)
e$
2,376 $11,880
11,856 $59,280

(2a) DM Budget
DM Budget for 2016
a

from
Prod
(a x
Bgt
4m2)
Finishe DM
Desire
d units reqd for d End
to
prodn
DM
produc needs
Inv
e
(m2)
(m2)
Jan 912
3,648 13,728
When
needs
Feb
1,716 Total
6,864DM
18,720
etc

(b + c)

(f + g b)

g
h
(d f)
cannot
be
negativ
e)
(g x $5)

Total DM Real E Begin Purcha

needs
Inv
DM Inv
se
Purchas
(m2)
(m2)
(m2)
(m2)
e$
17,376
13,728 15,000 2,376 $11,880
(d)
< Beg18,720
DM Inv13,728
i.e. (d-f)11,856
is negative,
25,584
$59,280

Purchase = 0;
Real End Inv = Beg Inv + Purchase (0) DM reqd for prodn
needs
i.e. Real End Inv = (f) (b) because g = 0

Beg Inv at the next2016-17-T1-Aug

period = to
Real
End Inv of current
period
Dec 2016
16

(2b) DL Budget
From
Production
Budget; NOT
Sales Budget

Direct Labour
Budget
Units to Produce
DL hours per unit
Total DL needed
DL cost per hr

P units
H hr
P x H hrs
$r
(P x H hrs) x
Total DL cost $
$r
Production Budget (FG to
produce)
Sales quantity
Q units
Desired Ending
inventory
E units
Units required
Q+E
Less Beginning
inventory
B units
P= Q + E
2016-17-T1-Aug to Dec 2016
17
Units to produce
-B

(2b) DL Budget
See DM & DL tab in budget exercise
spreadsheet
E.g. Each finished unit requires 3 hr of DL @
$10 per hr
DL Budget for 2016
Finished
units to
DLH
Direct
produce Required Labour
(units)
(hours)
$
January
912
2,736
$27,360
Februar
y
1,716
5,148
$51,480
etc

2016-17-T1-Aug to Dec 2016

18

(2c) Manufacturing Overhead Budget

Fixed Manufacturing Overhead
Rental of factory
Insurance of factory
Depreciation of prod eqpt
etc.
Total Planned FOH for the year
Variable Manufacturing Overhead
Indirect materials
Power
etc.
Total Planned VOH for the year

POR
=

(Total Planned FOH + Total

Planned VOH)
Planned Cost Allocation Base

May compute PORs for FOH and VOH separately

2016-17-T1-Aug to Dec 2016

19

(2c) Manufacturing Overhead Budget

See Manu OH tab in budget exercise spreadsheet
Assumption #2: Budgeted fixed manufacturing overhead is
$50,000 per month, which includes $10,000 of depreciation
on production machinery.
Budgeted variable
overhead is $10 per DLH.
DLH is manufacturing
the
cost driver
for VOH

VOH
DLH
(DLH x
FOH
(hours)
$10)
2,736 $27,360 $50,000
5,148 $51,480 $50,000

$77,360
$101,480

$1,368,672

January
February
etc
Total
76,867

Total OH

POR = $1,368,672/76,867 DLH

= $17.81 per DLH
2016-17-T1-Aug to Dec 2016

20

Ending Finished Goods Inventory

Budget

E.g. See Production tab in budget exercise

spreadsheet
Standard per Unit:
DM
DL
Applied OH
(POR x 3
DLH)

4 m2
3 hr

@
@

Cost per
unit
$5
per m2
$20
$10
per hr
$30
per
$17.81 DLH
$53

Ending FG Inventory = 1,622

$103 = $167,784
(rounded)

2016-17-T1-Aug to Dec 2016

$103

units x

21

(3) Non-Manufacturing Costs Budget

See Non Mfg Exp tab in budget exercise
spreadsheet.
Assumptions #4, #5, #6, #7:

Admin: $200,000 per month + $3 per qty sold

Marketing: $100,000 per month + 5% of Sales $
Logistics: $50,000
Finance: $150,000 + 2% monthly interest on Bank
Loan
Finance
Sales
Qty

(before
interest
Logistic exp)

Sales $ Admin
Mkt
$203,12 $116,64
January 1,040 $332,800
0
0
$50,000 $150,000
$203,74 $119,96
February 1,248 $399,360
4
8
$50,000 $150,000
etc
2016-17-T1-Aug
to Dec 2016
22
Year
$2,478,
$1,616, $600,00
$1,800,0

(4)
Cash
Budg
et

Cash Budget
Opening Balance
Collections from Sales
Other cash receipts
Total Cash Available

(1)

Less Disbursements
Payment for direct materials purchase
Payment for direct labour
Payment for overhead (DO NOT include
Depreciation)
Payment for selling and admin expenses
Payment for purchase of assets
(2)
(3)
(4) = (2) + (3)
(5) = (1) - (4)
(6)

Other payment
Total Disbursements
Minimum cash balance
Total Cash Needs
Excess (deficiency) of cash available
over needs

Financing:
2016-17-T1-Aug
to Dec 2016
Borrowings

23

Cash Budget: E.g.

Cash available
$1,000
Disbursements
$800
Minimum cash balance $500
How much borrowing is required?
What is the ending cash balance?

2016-17-T1-Aug to Dec 2016

24

(4) Cash Budget

See Cash tab in budget exercise spreadsheet
Assumptions #8, #9, #10:
a) Credit and Cash Policies

Sales Receivable Collection:

60% in month of Sales
30% 1 month after Sales
10% 2 months after Sales

Payment:
Payment for Material Purchased: 1 month after purchase
All Other Expenses (except depreciation): Paid in month of
incurrence. Note: Depreciation of Machine = $10,000 per
mth

Minimum Cash Balance (end of month): $20,000

b) Borrowing and Repayment are made at the end of the month.

c) Interest is 2% per month and is payable at the end of each month
during the loan period.
2016-17-T1-Aug to Dec 2016
25

(5) Budgeted Financial Statements

See Master tab in budget exercise
spreadsheet

2016-17-T1-Aug to Dec 2016

26

Budget: Not just about numbers

E.g. Production Budget showing planned production
quantity (units) for the next 8 months:
Jan
Feb Mar Apr May Jun
Jul
2,000 3,300 3,000 10,00 2,500 4,000 5,000
units units units 0
units units units
units
As a manager, would you produce
according to the Production Budget ?

2016-17-T1-Aug to Dec 2016

27

Aug
10,50
0
units

Budgets and Human Behaviour

Example
Bravo Co. uses the budget for allocating of
resources and performance evaluation.
Resources are allocated to the dept managers
based on the budget.
At the end of the period, managers are rewarded if
they do better than the budget.

As a sales dept manager, how would you

prepare the budget?
As a prodn dept manager, how would you
prepare the budget?
2016-17-T1-Aug to Dec 2016

28

Budgets and Human Behaviour

Goal congruence: Goal of individual
managers are aligned with
organisational goals and manager will
to achieve
them.
drive
Dysfunctional
behaviour:
Individual
behaviour conflicts with organisational
goals e.g. padding the
budget/building budgetary slack
Budget lapsing: any unused budget
after the financial year-end has lapsed
cannot be carried forward to the
following year
Top-down
or
Participative
approach?
2016-17-T1-Aug to Dec 2016

29

Budgeting as a Management Tool

The five primary purposes are:

1.
2.
3.
4.

Planning
Facilitating Communication and Coordination
Allocating Resources
Managing Financial and Operational
Performance
5. Evaluating Performance and Providing
Incentives

2016-17-T1-Aug to Dec 2016

30

Features of a Good Budgeting System

Features of budgeting system that
encourages goal congruence:
Frequent feedback on performance
Flexible budgeting capabilities
Monetary and nonmonetary incentives
Participation
Realistic standards
Controllability of costs

2016-17-T1-Aug to Dec 2016

31