Budgeting

• Budget


  A plan of the resources needed to achieve the organization's goals
• Operating budget


  A short-term budget (typically one year) that focuses on the daily operations of the organization
• Planning phase of budgeting

  1. Communicate plans to employees

  2. Help employees coordinate activities across the organization
• Organization has no budget


  Inefficiencies occur, cash flow may suffer, company may run out of product and cash
• Organization has a budget

  Allows planning for increased production, arranging short-term financing
• Control phase of budgeting

  Evaluate performance by comparing budget to actual results
• Top-down budgeting approach is less effective than bottom-up approach
• Budget committee


  A group within the organization responsible for overseeing and approving the master budget
• Master budget


  A series of budget schedules outlining the organization's plans for the upcoming period (typically a year)
• Components of the master budget

  • Sales
  • Production
  • Selling and administrative
  • Direct materials
  • Direct labor
  • Manufacturing overhead
  • Capital expenditures
  • Income statement
  • Cash
  • Balance sheet
• Developing a master budget


  Start with the components shown in Figure 9.1
• Planning and Controlling Operations
• Budget


  A plan of the resources needed to achieve the organization's goals
• Budgets


  • They help organizations communicate their plans to employees
  • They help employees coordinate activities across the entire organization
• If production has no forewarning of an increase in customer demand

  Inefficiencies will occur as Lynn struggles to keep pace with demand
• If Jerry's Ice Cream does have a budget in place for the coming year

  The budget communicates the organization's plans to Lynn and Michelle, who can then plan accordingly
• Top-down budgeting


  Upper management establishes the budget with little input from other employees
• Bottom-up budgeting


  Involves the input of various employees within the organization, not just upper management
• Budget committee


  A group within the organisation responsible for overseeing and approving the master budget
• Master budget


  A series of budget schedules outlining the organization's plans for the upcoming period
• Components of the master budget

  • Sales
  • Production
  • Selling and administrative
  • Direct material
  • Direct labor
  • Manufacturing overhead
  • Capital expenditures
  • Income statement
  • Cash
  • Balance sheet
• Sales budget


  An estimate of units of product the organisation expects to sell times the expected sales price per unit
• Production budget


  An estimate of units to be produced based on sales projections plus an estimate of desired ending finished goods inventory less beginning finished goods inventory
• Direct materials purchases budget


  An estimate of raw materials needed to achieve a desired level of production
• Two pounds of material are required to produce one unit of product
• The amount of materials required to produce 40,800 units of ice cream is 81,600 pounds
• Sugar is the only material used to produce ice cream in this example
• Direct Materials Purchases Budget


  An estimate of the materials required to achieve a desired level of production
• To simplify this example, assume sugar is the only material used. However, other materials, such as cream and vanilla, are typically required to produce ice cream.
• Direct Materials Purchases Budget for Jerry's Ice Cream


  • Units to be produced
  • Materials required per unit (pounds)
  • Materials needed in production
  • Add desired ending inventory
  • Materials needed in inventory
  • Deduct beginning inventory
  • Direct materials to be purchased (pounds)
  • Cost of materials per pound
  • Cost of materials to be purchased
  • Direct materials cost per unit
• Key Equation for Direct Materials Purchases

  Materials to be purchased = Materials needed in production + Desired ending inventory - Materials in beginning inventory
• Jerry's will not purchase 16,320 pounds of materials because inventory will be left over from the fourth quarter of last year.
• Direct materials purchased in the first quarter will total 84,960 pounds.
• The cost of purchasing 84,960 pounds of material is $84,960 (84,960 pounds x $1 per pound).
• Direct Labor Budget


  An estimate of direct labor hours, and related costs, necessary to achieve a desired level of production
• Direct Labor Budget for Jerry's Ice Cream


  • Units to be produced
  • Direct labor hours per unit
  • Total direct labor hours needed in production
  • Labor rate per hour
  • Total direct labor cost
  • Direct labor cost per unit
• 4,080 hours of direct labor will be required to produce 40,800 units of product (40,800 units x 0.10 direct labor hours per unit).
• The direct labor cost for the first quarter totals $53,040 (4,080 hours x $13 per hour).
• Manufacturing Overhead Budget


  An estimate of all production costs, other than direct materials and direct labor, necessary to achieve a desired level of production
• Manufacturing Overhead Budget for Jerry's Ice Cream

  • Units to be produced
  • Variable overhead costs (indirect materials, indirect labor, other)
  • Fixed overhead costs (salaries, rent, depreciation)
  • Total overhead costs
  • Deduct depreciation
  • Cash payments for overhead
  • Manufacturing overhead per unit