Chapter Ten

1
Chapter Ten
Budgetary Planning and Control
2
Expense Budget

• An expense budget states the acceptable limits
  for costs the manager may incur in accomplishing
  assigned tasks.
• The two general ways to develop budget allowances
  for expenses are
• Static budget
• Flexible budget

3
Flexible Budget

• Fixed
  Amount Variable Amount
  per
• Cost per Month Direct Labor Hour
• Indirect labor 2,400 0.40
• Supplies 200 0.40
• Maintenance 1,600 0.20
• Depreciation 1,200 0.00
• Miscellaneous 700 0.10
• Total 6,100 1.10
• The Company is expecting to work 1,000 direct
  labor hours for the month, but does work 1,300.

4
Flexible Budget Performance Report

• Budget for Budget
  for Variance
• Budgeted Actual Actual
  Costs Favorable
• Hours Hours Incurred
  (Unfavorable)
• Direct labor hours 1,000 1,300
• Indirect labor 2,800 2,920 2,870 50
  
• Supplies 600 720 705 15
• Maintenance 1,800 1,860 1,900 (40)
• Depreciation 1,200 1,200 1,200 0
• Miscellaneous 800 830 840 (10)
• Total 7,200
  7,530 7,515 15

5
KEY CONCEPT

• Budgets must be adjusted to reflect the costs
  that should have been incurred given the actual
  level of activity before performance evaluation
  can take place

6
Master Budget

• A master budget is a set of financial statements
  and other schedules showing the expected, or pro
  forma, results for a future period.

7
Master Budget

• A set of interrelated budgets that allows for
  planning and control throughout the organization
• Driven by the sales forecast
• Includes sales budget, production budget, labor
  and overhead budgets, purchases budget,
  collections budget, capital spending budget, cash
  budget, and pro forma balance sheet and income
  statements

8
Master Budget

Assumptions about cost behavior
Pro forma income statement
Sales Forecast

Assumptions about levels of inventory, collections
of receivables, and payments of expenses and
liabilities
Budgets for purchases and production

Balance sheet at beginning of budget period
Budgets for cash and requirements for short-term
financing

Plans for long-term financing and for capital
spending
Pro forma balance sheet
9
Organization of Budgets

• Continuous budgets are maintained by adding a
  budget for a month (or quarter) as one of these
  periods goes by. Thus, a 12-month budget exists
  at all times.
• Project budgets reflect expectations for various
  stages of completing specific projects.

2005
10
Methods Used to Forecast Sales

• Indicator methods
• Historical analysis
• Judgmental methods

Your sales will be...
11
Interim Period Forecasts
Three types of sales forecasts 1. Annual
forecasts 2. Longer-term forecasts (3 to 5
years) 3. Quarterly or monthly forecasts
12
Budget Example

• Sales budgets by month
• January 400
• February 500
• March 800
• April 700
• May 600
• Cost of goods sold will be 60 percent of sales
  dollars.
• Inventory should be 40 of next months cost of
  sales
• Total fixed costs will be 150, of which 15 per
  month is depreciation expense.

13
Lag Information

• Other data
• Home effects collects 70 of its sales in the
  month of sales, 30 in the following month.
• Home effects pays for purchases 60 in the month
  of purchase, 40 in the following month.
• Home effects pays all other expenses requiring
  cash disbursements as incurred.
• Home effects tries to keep at least 50 cash as a
  buffer against unexpected cash needs.

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Home Effects Balance Sheet December 31, 2003

• Assets Liabilities
• Cash 80 Accounts payable 195
• Accounts receivable 120 Stockholders
  equity 1,131
• Inventory 96
• Fixed assets, net 1,030
• Total 1,326 Total 1,326

15
Purchases Budget

• 
  Three-months January Februar
  y March Total
• Cost of goods sold 240 300 480 1,020
• Budgeted ending inventory 120 192 168 168
• Total requirements 360 492 648 1,188
• Beginning inventory 96 120 192 96
• Purchases 264 372 456 1,092

16
Cash Receipts

• 
  Jan. Feb. Mar. Total
• Sales for the month 400 500 800 1,700
• From prior month, 30 120 120 150 390
• From current month, 70 280 350 560 1,190
• Total receipts 400 470 710 1,580

17
Cash Disbursements for Purchases

• Jan. Feb. Mar. Tot
  al
• From prior month, 40 195 105.6 148.8
  449.4
• From current month, 60 158.4 223.2 273.6 65
  5.2
• Total 353.4 328.8 384 1104.6
• from beginning of balance sheet

18
Cash Disbursements-Total Costs

• Jan. Feb. Mar. Total
• For merchandise 353.4 328.8 422.4 1,104.6
• Fixed costs requiring cash 135 135 135 405
• Total 488.4 463.8 557.4 1,509.6

19
Minimum-Cash-Balance Policies

• Financial managers devote considerable attention
  to determining the needed minimum level of cash.
  As with most decisions, a trade-off between two
  conflicting factors is involved. A small minimum
  balance would lead to a higher probability of
  running out of cash, while too large a minimum
  balance would lead to little or no return.

20
Cash Budget

• 
  Jan. Feb. Mar. Total
• Beginning balance 80 50.6 50.68 80
• Cash receipts 400 470 710 1,770
• Total available 480 520.6 760.68 1,850
• Cash disbursements 488.4 463.8 557.4 1509.6
• Indicated balance (8.4) 56.8 203.28 203.28
• Excess (deficiency 58.4 6.8 153.28 153.28
• Borrow 59 59
• Interest(at 12) .12 1.59 1.71
• Repay 6 53 59
• Ending balance 50.6 50.68 98.69 98.69

21
Budgeted Income Statement

• Jan. Feb. March To
  tal
• Sales 400 500 800 1,700
• Cost of goods sold 240 300 480 1,020
• Gross profit and contribution
  margin 160 200 320 680
• Fixed costs 150 150 150 450
• Income before interest 10 50 170 230
• Interest 0.59 0.59 0.53 1.71
• Net Income 9.41 49.41 169.47 228.29

22
Ending Balance Sheet
Assets Liabilities Cash 148.69 Accounts
payable 182.4 Accounts receivable 240 Stockholde
rs EQ1,359.29 Inventory 168 Fixed assets,
net 985 Total 1541.69 Total 1,541.69