Libby, Libby and Short

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Budgeting for Planning and Control
Prepared by Douglas Cloud Pepperdine University
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Objectives
1. Define budgeting, and discuss its role in
planning, controlling, and decision
making. 2. Prepare the operating budget, identify
its major components, and explain the
interrelationships of the various
components. 3. Identify the components of the
financial budget, and prepare a cash
budget. 4. Describe the budgets for merchandise
and service firms.
After studying this chapter, you should be able
to
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The Master Budget and Its Interrelationships
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Purposes of Budgeting

• 1. It forces managers to plan.
• 2. It provides resource information that can be
  used to improve decision making.
• 3. It provides a standard for performance
  evaluation.
• 4. It improves communication and coordination.

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Two Dimensions of Budgeting
1. How is the budget prepared? 2. How is the
budget used to implement the organizations plan?
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Preparing the Operating Budget
1. Sales budget 2. Production budget 3. Direct
materials purchases budget 4. Direct labor
budget 5. Overhead budget 6. Ending finished
goods inventory budget 7. Cost of goods sold
budget 8. Marketing expense budget 9. Research
and development budget 10. Administrative expense
budget 11. Budgeted income statement
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The sales forecast is the basis for the sales
budget. The accuracy of the sales forecast
strongly affects the soundness of the entire
master budget.
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Computing Units to be Produced
Expected unit sales Units, ending inventory
Units, beginning inventory
Units to be produced
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Schedule 2 (in thousands) ABT, Inc. Production
Budget For the Year Ended December 31, 2004

Quarter
1 2 3 4
Year
Sales (Schedule 1) 2,000 6,000 6,000 2,000 16,000
Desired ending inventory 500 500
100 100 100 Total needs 2,500 6,500 6,100
2,100 16,100 Less Beginning inventory
100 500 500 100 100 Units to be
produced 2,400 6,000 5,600 2,000 16,000
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Schedule 3 (in thousands) ABT, Inc. Direct
Materials Purchases Budget For the Year Ended
December 31, 2004

Quarter
1 2 3 4
Year
Units to be produced (Schedule
2) 2,400 6,000 5,600 2,000 16,000 Direct
materials per unit (lbs.) x 26 x
26 x 26 x 26 x 26 Production
needs 62,400 156,000 145,600 52,000 416,000 Desire
d ending inventory (lbs.) 8,000
8,000 5,000 5,000 5,000 Total
needs 70,400 164,000 150,600 57,000 421,000
Continued
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Quarter
1 2 3 4
Year
Total needs 70,400 164,000 150,600 57,000 421,
000 Less beginning inventory 5,000
8,000 8,000 5,000 5,000 Direct
materials to be purchased (lbs.) 65,400 156,0
00 142,600 52,000 416,000 Cost per pound x
0.01 x 0.01 x 0.01 x 0.01 x 0.01 Total
purchase cost 654 1,560
1,426 520 4,160
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Schedule 4 (in thousands) ABT, Inc. Direct Labor
Budget For the Year Ended December 31, 2004

Quarter
1 2 3 4
Year
Units to be produced (Schedule
2) 2,400 6,000 5,600 2,000 16,000 Direct labor
time per unit (hrs.) x 0.015 x 0.015 x
0.015 x 0.015 x 0.015 Total hours
needed 36 90 84 30 240 Wage per hour x 8
x 8 x 8 x 8 x 8 Total
direct labor cost 288 720
672 240 1,920
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Schedule 5 (in thousands) ABT, Inc. Overhead
Budget For the Year Ended December 31, 2004

Quarter
1 2 3 4
Year
Budgeted direct labor hours (Schedule
4) 36 90 84 30 240 Variable overhead rate
x 8 x 8 x 8 x 8 x 8 Budgeted
variable overhead 288
720 672 240 1,920 Budgeted fixed overhead
320 320 320 320 1,280 Total
overhead 608 1,040 992 560 3,200
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Schedule 6 (in thousands) ABT, Inc. Ending
Finished Goods Inventory Budget For the Year
Ended December 31, 2004
Unit-cost computation Direct materials (26 lbs.
_at_ 0.01) 0.26 Direct labor (0.015 hr. _at_
8) 0.12 Overhead Variable (0.015 hr. _at_
8) 0.12 Fixed (0.015 hr. _at_ 5.33) 0.08 Total
unit cost 0.58

Units Unit Cost Total
Finished goods Concrete blocks 100
0.58 58
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Schedule 7 (in thousands) ABT, Inc. Cost of Goods
Sold Budget For the Year Ended December 31, 2004
Direct materials used (Schedule 3) 4,160 Direct
labor used (Schedule 4) 1,920 Overhead (Schedule
5) 3,200 Budgeted manufacturing
costs 9,280 Beginning finished goods
55 Goods available for sale 9,335 Less Ending
finished goods (Schedule 6) 58 Budgeted
cost of goods sold 9,277
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Schedule 8 (in thousands) ABT, Inc. Marketing
Expense Budget For the Year Ended December 31,
2004

Quarter
1 2 3
4 Year
Planned sales in units (Schedule
1) 2,000 6,000 6,000 2,000 16,000 Variable
marketing expenses per unit x0.05 x0.05 x
0.05 x0.05 x0.05 Total variable expenses
100 300 300 100 800
Continued
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Quarter
1 2 3
4 Year
Fixed marketing expenses Salaries 10
10 10 10 40 Advertising 10 10 10 10 40
Depreciation 5 5 5 5 20 Travel 3 3
3 3 12 Total fixed expenses
28 28 28 28 112 Total
marketing expenses 128 328 328 128 912
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Schedule 9 (in thousands) ABT, Inc. Research and
Development Expenses Budget For the Year Ended
December 31, 2004

Quarter
1 2 3
4 Year
Sales 18 18 18 18 72 Prototype design and
development 10 10 10 10 40 Total R
D expenses 28 28 28 28 112
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Schedule 10 (in thousands) ABT,
Inc. Administrative Expense Budget For the Year
Ended December 31, 2004

Quarter
1 2 3
4 Year
Salaries 25 25 25 25 100 Insurance --- --- 15
--- 15 Depreciation 10 10 10 10 40 Travel
2 2 2 2 8 Total
administrative expenses 37 37 52 37 163

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Schedule 11 (in thousands) ABT, Inc. Cost of
Goods Sold Budget For the Year Ended December 31,
2004
Sales (Schedule 1) 12,000 Less Cost of goods
sold (Schedule 7) 9,277 Gross margin
2,723 Less Marketing expenses (Schedule
8) -912 R D expenses (Schedule 9) -112
Administrative expenses (Schedule 10)
-163 Operating income 1,536 Less Interest
expense (Schedule 12) 42 Income before
taxes 1,494 Less Income taxes
600 Net income 894
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Schedule 11 (in thousands) ABT, Inc. Cost of
Goods Sold Budget For the Year Ended December 31,
2004
Sales (Schedule 1) 12,000 Less Cost of goods
sold (Schedule 7) 9,277 Gross margin
2,723 Less Marketing expenses (Schedule
8) -912 R D expenses (Schedule
9) -112 Administrative expenses (Schedule 10)
-163 Operating income 1,536 Less
Interest expense (Schedule 12)
42 Income before taxes 1,494 Less Income
taxes 600 Net income 894
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The Financial Budgets

• The usual financial budgets prepared are
• The cash budget
• The budgeted balance sheet
• The budgeted statement of cash flows
• The budget for capital expenditures

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The Cash Budget
Beginning cash balance Cash receipts
Cash available - Cash disbursements - Minimum
cash balance
Excess or deficiency of cash - Repayments
Loans Minimum cash balance
Ending cash balance
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Schedule 12 (in thousands) ABT, Inc. Cash
Budget For the Year Ended December 31, 2004

• 
  Quarter
• 1 2 3 4 Year
• Beginning cash balance 120 113
  152 1,334 120
• Cash collections 1,490 3,780 4,710
  2,080 12,060
• Total cash available 1,610 3,893 4,862 3,414
  12,180
• Total disbursements 2,097 3,317 3,310 2,079
  10,803
• Minimum cash balance 100 100 100
  100 100
• Total cash needs 2,197 3,417 3,410 2,179 10,9
  03
• Excess (deficiency) of cash - 587
  476 1,452 1,235 1,277
• Add Borrowings 600 --- --- --- 600
• Less Repayments --- 400 200 --- 600
• Less Interest paid --- 24
  18 --- 42
• Ending cash balance 13
  52 1,234 1,235 1,235
• Plus Minimum cash balance 100 100
  100 100 100
• Ending cash balance 113 152 1,334 1,335
  1,335

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ABT, Inc. Schedule of Cash Receipts (in thousands)
Source Quarter 1 Quarter 2
Quarter 3 Quarter 4
Cash sales 700 2,100 2,400 800 Received
on account from sales in Quarter 4,
2003 300 Quarter 1, 2004 490 210 Quarter 2,
2004 1,470 630 Quarter 3, 2004 1,680 720 Qu
arter 4, 2004 560 Total
cash receipts 1,490 3,780 4,710 2,080
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ABT, Inc. Balance Sheet (in thousands) December
31, 2003
Note that this is the actual balance sheet for
2003
Assets Current assets Cash 120 Accounts
receivable 300 Material inventory 50 Finished
goods inventory 55 Total current
assets 525 Property, plant, and
equipment Land 2,500 Building and
equipment 9,000 Accumulated depreciation
-4,500 Total property, plant, and equipment
7,000 Total assets 7,525
Continued
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Liabilities and Stockholders Equity Current
liabilities Accounts payable
100 Stockholders equity Common stock, no par
600 Retained earnings 6,825 Total
stockholders equity 7,425 Total liabilities
and stockholders equity 7,525
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Schedule 13 (in thousands) ABT, Inc. Budgeted
Balance Sheet December 31, 2004
Assets Current assets Cash 1,335 Accounts
receivable 240 Material inventory 50 Finished
goods inventory 58 Total current
assets 1,683 Property, plant, and
equipment Land 2,500 Building and
equipment 9,600 Accumulated depreciation
-5,360 Total property, plant, and equipment
6,740 Total assets 8,423
Continued
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Liabilities and Stockholders Equity Current
liabilities Accounts payable
104 Stockholders equity Common stock, no par
600 Retained earnings 7,719 Total
stockholders equity 8,319 Total liabilities
and stockholders equity 8,423
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End of
Chapter
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