Profit Planning,Activity-Based Budgeting and e-Budgeting

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Profit Planning,Profit Planning,Activity-Based Budgeting Activity-Based Budgeting and e-Budgetingand e-Budgeting

9Chapter NineChapter Nine

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Purposes of Budgeting Systems

BudgetBudgeta detailed plan, a detailed plan,

expressed in expressed in quantitative terms, quantitative terms, that specifies how that specifies how resources will be resources will be

acquired and used acquired and used during a specified during a specified

period of time.period of time.

PlanningPlanning Facilitating Facilitating

Communication and Communication and CoordinationCoordination

Allocating ResourcesAllocating Resources Controlling Profit and Controlling Profit and

OperationsOperations Evaluating Performance Evaluating Performance

and Providing Incentivesand Providing Incentives

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Activity-Based Costing versus Activity-Based Budgeting

Resources

Cost objects:products and services

produced, andcustomers served.

Activities

Resources

Forecast of productsand services to be

produced andcustomers served.

Activities

Activity-BasedCosting (ABC)

Activity-BasedBudgeting (ABB)

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Types of Budgets

DetailDetailBudgetBudget



MasterMasterBudgetBudget

Covering allphases of

a company’soperations.

Sales

Production

Mater ials

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Types of Budgets

1999 2000 2001 2002

Continuous or Continuous or Rolling BudgetRolling Budget

This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.

L o n g R a n g e B u d g e t sL o n g R a n g e B u d g e t s

Capital budgets with acquisitions that normally cover several years.

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DirectDirectMaterialsMaterialsBudgetBudget

Sales of Services or GoodsSales of Services or Goods

EndingEndingInventoryInventoryBudgetBudget

Work in ProcessWork in Processand Finishedand Finished

GoodsGoods

ProductionProductionBudgetBudget

Selling andSelling andAdministrativeAdministrative

BudgetBudget

DirectDirectLaborLabor

BudgetBudgetOverheadOverhead

BudgetBudget


Direct MaterialsDirect Materials

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Budgeted Financial Statements

DirectDirectMaterialsMaterialsBudgetBudget

Cash BudgetCash Budget

Sales of Services or GoodsSales of Services or Goods


Work in ProcessWork in Processand Finishedand Finished

GoodsGoods


Selling andSelling andAdministrativeAdministrative

BudgetBudget

DirectDirectLaborLabor

BudgetBudgetOverheadOverhead

BudgetBudget


Direct MaterialsDirect Materials

Exh. 9-1

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Sales BudgetBreakers, Inc. is preparing budgets for the Breakers, Inc. is preparing budgets for the

quarter ending June 30.quarter ending June 30.Budgeted sales for the next five months are:Budgeted sales for the next five months are:

April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.

The selling price is $10 per unit.The selling price is $10 per unit.

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Sales Budget

April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10$ 10$ 10$ 10$ Total Revenue 200,000$ 500,000$ 300,000$ 1,000,000$

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Production Budget

Sales Sales BudgetBudget


Completed

Completed

Production must be adequate to meet budgetedProduction must be adequate to meet budgetedsales and provide for sufficient ending inventory.sales and provide for sufficient ending inventory.

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Production Budget

The management of Breakers, Inc. wants The management of Breakers, Inc. wants ending inventory to be equal to 20% of the ending inventory to be equal to 20% of the following month’s budgeted sales in units.following month’s budgeted sales in units.

On March 31, 4,000 units were on hand.On March 31, 4,000 units were on hand.

Let’s prepare the production Let’s prepare the production budget.budget.

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April May June QuarterSales in units 20,000 Add: desired end. inventoryTotal neededLess: beg. inventoryUnits to be started

Production Budget

From salesbudget

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April May June QuarterSales in units 20,000 Add: desired end. inventory 10,000 Total needed 30,000 Less: beg. inventoryUnits to be started

Production Budget

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April May June QuarterSales in units 20,000 Add: desired end. inventory 10,000 Total needed 30,000 Less: beg. inventory 4,000 Units to be started 26,000

Production Budget

March 31March 31ending inventoryending inventory

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April May June QuarterSales in units 20,000 50,000 Add: desired end. inventory 10,000 6,000 Total needed 30,000 56,000 Less: beg. inventory 4,000 10,000 Units to be started 26,000 46,000

Production Budget

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April May June QuarterSales in units 20,000 50,000 30,000 100,000 Add: desired end. inventory 10,000 6,000 5,000 5,000 Total needed 30,000 56,000 35,000 105,000 Less: beg. inventory 4,000 10,000 6,000 4,000 Units to be started 26,000 46,000 29,000 101,000

Production Budget

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Direct-Material BudgetAt Breakers, five pounds of material are At Breakers, five pounds of material are

required per unit of product.required per unit of product.Management wants materials on hand at the Management wants materials on hand at the

end of each month equal to 10% of the end of each month equal to 10% of the following month’s production.following month’s production.

On March 31, 13,000 pounds of material are on On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound.hand. Material cost $.40 per pound.

Let’s prepare the direct materials budget.Let’s prepare the direct materials budget.

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Direct-Material Budget

From ourproduction

budget

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10% of the following month’s production


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March 31 inventory


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June Ending InventoryJuly production in units 23,000 Materials per unit 5 Total units needed 115,000 Inventory percentage 10%June desired ending inventory 11,500

Direct-Material BudgetJuly Production

Sales in units 25,000 Add: desired ending inventory 3,000 Total units needed 28,000 Less: beginning inventory 5,000 Production in units 23,000

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Direct-Labor Budget At Breakers, each unit of product requires 0.1 hours At Breakers, each unit of product requires 0.1 hours

of direct labor.of direct labor. The Company has a “no layoff” policy so all The Company has a “no layoff” policy so all

employees will be paid for 40 hours of work each employees will be paid for 40 hours of work each week.week.

In exchange for the “no layoff” policy, workers agreed In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours to a wage rate of $8 per hour regardless of the hours worked (No overtime pay).worked (No overtime pay).

For the next three months, the direct labor workforce For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month.will be paid for a minimum of 3,000 hours per month.

Let’s prepare the direct labor budget.Let’s prepare the direct labor budget.

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From ourproduction

budget

Direct-Labor Budget

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Direct-Labor Budget

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This is the greater oflabor hours required orlabor hours guaranteed.

Direct-Labor Budget

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Direct-Labor Budget

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Overhead BudgetHere is Breakers’ Overhead Budget for the quarter.Here is Breakers’ Overhead Budget for the quarter.

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Expense BudgetAt Breakers, variable selling and At Breakers, variable selling and

administrative expenses are $0.50 per unit administrative expenses are $0.50 per unit soldsold..

Fixed selling and administrative expenses Fixed selling and administrative expenses are $70,000 per month.are $70,000 per month.

The $70,000 fixed expenses include The $70,000 fixed expenses include $10,000 in depreciation expense that does $10,000 in depreciation expense that does not require a cash outflows for the month.not require a cash outflows for the month.

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Expense Budget

From ourSales budget

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Expense Budget

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Expense Budget

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At Breakers, all sales are on account.At Breakers, all sales are on account.The company’s collection pattern is:The company’s collection pattern is:

70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% is uncollected.5% is uncollected.

The March 31 accounts receivable The March 31 accounts receivable balance of $30,000 will be collected in full.balance of $30,000 will be collected in full.

Cash Receipts Budget

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Cash Disbursement BudgetBreakers pays $0.40 per pound for its Breakers pays $0.40 per pound for its

materials.materials.One-half of a month’s purchases are paid for in One-half of a month’s purchases are paid for in

the month of purchase; the other half is paid in the month of purchase; the other half is paid in the following month.the following month.

No discounts are available.No discounts are available.The March 31 accounts payable balance is The March 31 accounts payable balance is

$12,000.$12,000.

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140,000 lbs. × $.40/lb. = $56,000

Cash Disbursement Budget

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Cash Disbursement Budget

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ContinuedBreakers:Breakers:

Maintains a 12% open line of credit for $75,000.Maintains a 12% open line of credit for $75,000. Maintains a minimum cash balance of $30,000.Maintains a minimum cash balance of $30,000. Borrows and repays loans on the last day of the Borrows and repays loans on the last day of the

month.month. Pays a cash dividend of $25,000 in April.Pays a cash dividend of $25,000 in April. Purchases $143,700 of equipment in May and Purchases $143,700 of equipment in May and

$48,300 in June paid in cash.$48,300 in June paid in cash. Has an April 1 cash balance of $40,000Has an April 1 cash balance of $40,000..

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From our CashFrom our CashReceipts BudgetReceipts Budget

Cash Disbursement BudgetContinued

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From our CashFrom our CashDisbursementsDisbursements

BudgetBudget


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From our DirectFrom our DirectLabor BudgetLabor Budget


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From ourFrom ourOverhead BudgetOverhead Budget


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From ourFrom ourSelling and AdministrativeSelling and Administrative

Expense BudgetExpense Budget


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To maintain a cashbalance of $30,000,

Breakers must borrow$35,000 on its line of credit.


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Ending cash balance for Aprilis the beginning May balance.

Cash Disbursement BudgetFinancing and Repayment

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Continued

Breakers mustborrow an

addition $13,800to maintain acash balance

of $30,000.

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Financing and Repayment

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At the end of June, Breakers has enough cash to repay

the $48,800 loan plus interest at 12%.


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Continued

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Budgeted Income Statement

Cash Cash BudgetBudget

BudgetedBudgetedIncomeIncome

StatementStatement

Completed

After we complete the cash budget, we can prepareAfter we complete the cash budget, we can preparethe budgeted income statement for Breakers.the budgeted income statement for Breakers.

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Budgeted Ending Inventory

Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.10 hrs. 8.00$ 0.80 Manufacturing overhead 0.10 hrs. 18.02$ 1.80

4.60$ Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.60$ Ending finished goods inventory 23,000$

Total overhead $191,000 Total labor hours 10,600 hrs.= $18.02 per hr.*

*rounded

Manufacturing overhead is applied on the basis of direct labor hours.Manufacturing overhead is applied on the basis of direct labor hours.

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Budgeted Income Statement

Revenue (100,000 × $10) 1,000,000$ Cost of goods sold (100,000 × $4.60) 460,000 Gross margin 540,000 Operating expenses: Selling and admin. Expenses 260,000$ Interest expense 838 Total operating expenses 260,838 Net income 279,162$

Breakers, Inc.Budgeted Income Statement

For the Three Months Ended June 30

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Budgeted Balance Sheet

Breakers reports the following account Breakers reports the following account balances on June 30 prior to preparing its balances on June 30 prior to preparing its

budgeted financial statements:budgeted financial statements: Land - $50,000Land - $50,000 Building (net) - $148,000Building (net) - $148,000 Common stock - $200,000Common stock - $200,000 Retained earnings - $46,400Retained earnings - $46,400

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25%of Junesales of $300,000

11,500 lbs. at11,500 lbs. at$.40 per lb.$.40 per lb.

5,000 units at$4.60 per unit.

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50% of June50% of Junepurchases purchases of $56,800of $56,800

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Budget Administration

The Budget Committee is a standing The Budget Committee is a standing committee responsible for . committee responsible for . . .. .

overall policy matters relating to the budget.overall policy matters relating to the budget. coordinating the preparation of the budget.coordinating the preparation of the budget.

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E-Budgeting

Employees throughout an organizationEmployees throughout an organizationcan submit and retrieve budget can submit and retrieve budget

information electronically. This tends to information electronically. This tends to streamline the entire budgeting process.streamline the entire budgeting process.

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Firewalls and Information Security

Budget information is extremely sensitive and Budget information is extremely sensitive and confidential. A firewall is a computer or router confidential. A firewall is a computer or router

placed between a company’s internal placed between a company’s internal network and the internet to control all network and the internet to control all

information between the outside world and information between the outside world and the company’s local network.the company’s local network.

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Zero-Base Budgeting

To receive funding during the budgeting To receive funding during the budgeting process, each activity must be justified in process, each activity must be justified in

terms of its continued usefulness.terms of its continued usefulness.

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International Aspects of Budgeting

Firms with international operations face special Firms with international operations face special problems when preparing a budget.problems when preparing a budget.

Fluctuations in foreign currency exchange Fluctuations in foreign currency exchange rates.rates.

High inflation rates in some foreign countries.High inflation rates in some foreign countries. Differences in local economic conditions.Differences in local economic conditions.

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Budgeting Product Life-Cycle CostsProduct planning

and conceptDesign.

Preliminarydesign.

Detailed designand testing.Production.

Distributionand customer

service.

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Behavioral Impact of Budgets

Budgetary Slack: Padding the BudgetBudgetary Slack: Padding the BudgetPeople often perceive that their performance People often perceive that their performance

will look better in their superiors’ eyes if will look better in their superiors’ eyes if they can “beat the budget.”they can “beat the budget.”

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Participative Budgeting

Flow of Budget DataFlow of Budget Data

Supervisor Supervisor

M id d leM anagement

Supervisor Supervisor

M id d leM anagement

Top Managem ent

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End of Chapter 9

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Profit Planning,Activity-Based Budgeting and e-Budgeting

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