Operational Budgeting

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Operational Budgeting

• June 26, 2000

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Budget

• A detailed plan
• Expressed in Quantitative Terms
• That specifies how an organization
• Will acquire and use resources
• During a particular period of time.

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Purposes Served by Budgeting

• Quantify Planning
• Facilitating Communication
• Allocating Resources
• Controlling Operations
• Providing Motivation and Incentives
• Evaluating Performance

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If Done Right

• Incorporates sufficient information
• From all key functions at all important levels
• To construct an operating model
• Of the relationships and interdependencies
• Within the Organization
• And between the organization and its
  constituencies...
• During the period(s) being budgeted.

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Participatory Budgeting

• ADVANTAGES
• Data origins
• More accurate/precise
• Communications
• Ownership of budget
• Motivation
• Basis for consequences

• DISADVANTAGES
• Misunderstandings
• Guaranteed Success
• Lack of Aggressiveness
• Reinforce Status Quo
• Second Guessing
• De-motivation

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Master Budget
Sales Forecast
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Master Budget
Sales Forecast
Pro-Forma Income Statement
Pro-Forma Balance Sheet
Pro-Forma Cash Flow Statement
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Master Budget
Sales Forecast
Pro-Forma Income Statement
BUDGETING SYSTEM
Pro-Forma Balance Sheet
Pro-Forma Cash Flow Statement
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Retailers Master Budget
Purchasing Schedule
Sales Forecast by Product Line
Operations Budget
BUDGETING SYSTEM
Selling Expense Budget
Administrative Expense Budget
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Units x Selling Price Revenue (Sales)
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Sales Budget
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Takes into account the Sales Terms AND the
payment behavior of customers
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Cash Collections Schedule
Net 15 Day Terms
½ of January Collectable Sales 0.5 x
8,316,000 ½ of February Collectable Sales
0.5 x 5,123,250
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Cash Collections Schedule
Net 15 Day Terms
½ of February Collectable Sales 0.5 x
5,123,250 ½ of March Collectable Sales
0.5 x 7,840,800
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Cash Collections Schedule
Net 15 Day Terms
Check your mastery Assuming the bad debt
percentage remained 1 of sales, what would you
project to be the previous Decembers sales and
bad-debt write-off?
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Cash Collections Schedule
Net 15 Day Terms
½ of December Collectable Sales 0.5 x
??? ½ of January Collectable Sales 0.5
x 8,316,000
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Cash Collections Schedule
Net 15 Day Terms
½ of December Collectable Sales 0.5 x
6,184,000 ½ of January Collectable Sales
0.5 x 8,316,000
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Production Budget
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Finished Goods Inventory
BB TI TO EB
Sales
Production
Need to know something about inventory levels
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Production Schedule
Assume company desires to maintain ending FG
inventory level equivalent to 5 of the next
months sales
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Production Schedule
Assume company desires to maintain ending FG
inventory level equivalent to 5 of the next
months sales
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Production Schedule
Assume company desires to maintain ending FG
inventory level equivalent to 5 of the next
months sales
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Production Schedule
Check your mastery What is Aprils expected
Sales volume?
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Production Budget
Raw Materials Budget
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Raw Materials Schedule
Assuming each unit of finished good requires four
pounds of plastic for manufacture
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Raw Materials Inventory
BB TI TO EB
Material Purchased
Material Used in Prodn
Need to know something about inventory levels
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Raw Materials Schedule
Assume ending RM inventory level equal to 10 of
next months production requirements
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Raw Materials Schedule
Assume ending RM inventory level equal to 10 of
next months production requirements
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Raw Materials Schedule
Check your mastery how many pounds of plastic
are expected to be needed for Aprils production?
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Raw Materials Schedule
Assume plastic will cost 0.45 per pound for
January, and 0.50 per pound for February and
March
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Raw Materials Budget
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Production Budget
Raw Materials Budget
Cash Disbursements Schedule (matl)
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Cash Disbursements Schedule
Net 30 Day Terms
Commonly, 30-day terms merely shifts payment 1
month
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Materials Budgets
Need a budget for every material
Plastic Epoxy Rubber Tin Etc
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Production Budget
Raw Materials Budget
Cash Disbursements Schedule (matl)
Direct Labor Budget
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Direct Labor Budget
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Direct Labor Budget
Some organizations include consideration of the
lags between earnings and payday and budget for
accruals
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Direct Labor Budget
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Production Budget
Raw Materials Budget
Cash Disbursements Schedule (matl)
Direct Labor Budget
Overhead Budget
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Overhead Budget
Y mX b Fixed and Variable Components Or Act
ivity Based Costing
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Overhead Budget
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Overhead Budget
Some organizations also include consideration of
the payment behavior of the overhead costs and
shift the payments between months (electricity,
for example)
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Manufacturers Master Budget
Sales Forecast
Sales Budget
Cash Collections Schedule
Production Budget
Raw Materials Budget
Cash Disbursements Schedule (matl)
Direct Labor Budget
Cash Disbursements Schedule (labor)
Overhead Budget
Cash Disbursements Schedule (o/h)
Production Summary
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Production Summary
Labor Rate increases in February, large overhead
charge in March, material cost increases in
February, etc
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Selling Expense Budget
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Admin Expense Budget
Most organizations will also consider the payment
arrangements of administrative costs. For
example, interest payments may be due quarterly,
although expensed monthly.