Planning –
develop objectives and prepare various budgets to achieve these objectives

Control –
steps taken by management to increase the likelihood that objectives will be met.
One way is to compare budgets to actual results and make adjustments as required.

Budget –
a detailed plan for using financial and other resources in a specific time period

Master Budget –
summary of the company’s plans and goals for the future

1) provide a means of communicating management’s plans
2) force managers to think about and plan for the future
3) provides a means for allocating resources where they can be used most efficiently
4) uncover potential bottlenecks before they occur
5) integrate the plans of various parts of the company and help coordinate plans
6) define goals and objectives that can serve as benchmarks

Operating Budgets –
Usually cover a one year period, divided into 4 quarters

Self Imposed/Participative Budget:
Top management issues broad goals in terms of overall profits and sales –
budgets are prepared to meet these goals.
Prepared with the cooperation and participation of all managers at all levels.

Traditional Approach to Budgeting:
Start with last year’s budget and change it for anticipated additional needs and changes in the business plan

Zero Based Budgeting:
Start from scratch, justify all budgeted expenditures

Continuous Budget –
Includes 12 months and as one month passes, another month is added to always show 12 months into the future

The Master Budget: Consists of these individual budgets

1. Sales Budget
2. Production Budget
3. Direct Materials Budget – Quantity and Dollars
4. Direct Labor Budget
5. Manufacturing Overhead Budget
6. Ending Finished Goods Inventory Budget
7. Selling and Administrative Expense Budget
8. Schedule of Cash Collections
9. Schedule of Cash Disbursements for Direct Materials
10. Cash Budget
11. Budgeted Income Statement
12. Budgeted Balance Sheet

Budgeting begins with a sales budget. The company should produce only what it can sell. The production budget is determined by the sales budget. Resources required for production (materials, labor, and overhead) are determined by the budgeted number of units to be produced. The sales and general and administrative expense budgets consist of resources required to support the customer and general operations of the company.

Sales Budget

Budgeted Sales in Units
X Sales Price per Unit
= Total Sales Dollars

Production Budget

   Budgeted Sales in Units
+ Desired Ending Inventory in Units
– Beginning Inventory in Units
= Required Production in Units

Direct Materials Budget

Required Production in Units
X Quantity Required Per Unit
= Required Units of Raw Material for Production
+ Desired Ending Inventory of Raw Materials
– Beginning Inventory of Raw Materials
= Raw Materials to be Purchased
X $ Per Unit
= Total Raw Material Dollars to Purchase

Direct Labor Budget

Required Production in Units
X Direct Labor Hours to Make One Unit
=Total Direct Labor Hours Required
X Direct Labor Cost Per Hour
=Total Direct Labor Cost

Manufacturing Overhead Budget

Required Production in Units
X Quantity of Activity Required per Unit
= Total quantity of activity required
X Variable Overhead Rate per Activity
= Variable Manufacturing Overhead
+ Fixed Manufacturing Overhead (total)
= Total Manufacturing Overhead
– Depreciation (not paid)
= Cash Disbursements for Manufacturing Overhead

Ending Finished Goods Inventory Budget

Ending Finished Goods Inventory Units (see production budget)
X Finished Goods Cost Per Unit (material + labor + M O/H
= Ending Finished Goods Inventory in Dollars

Selling and Administrative Expense Budget

Budgeted Sales in Units
X Variable Selling/Administrative Cost Per Unit
= Budgeted Variable Expense
+ Fixed Selling/Administrative Expenses
= Total Budgeted Selling and Administrative Expense
– Administrative/Selling Depreciation Expense (not paid)
= Cash Disbursements for Selling and Administrative Expense

Cash Collections Budget

         Sales          Collect:    January      February      March
         January 
         February             % collected that month x sales $ on the same row
         March

Accounts Receivable = all amounts not yet been collected

Schedule of Cash Disbursements for Raw Materials

         Purchases          Pay in:      January      February      March
         January 
         February                  % paid for that month x purchase $ on the same row
         March

Accounts Payable = all amounts not yet paid

Cash Budget

Beginning Cash Balance
+ Receipts for the Period from the Schedule of Cash Collections
=Total Cash Available
– Disbursements for Material
– Disbursements for Labor
– Disbursements for Manufacturing Overhead
– Disbursements for Selling and Administrative
= Cash Available / (Deficit)
– Expenditures for Property/Plant/Equipment
– Dividends Paid to Shareholders
= Excess(Deficiency) of cash available over budgeted expenditures
+ Borrowings
– Repayment of Borrowings
– Interest Expense Paid
= Cash Balance, End of Period

Income Statement

Sales
– Cost of Goods Sold
= Gross Profit
– Selling and Administrative Costs
= Operating Income
– Income Tax
= Net Income

units sold x price per unit
units sold x cost per unit
from selling & administrative budget
Income tax is a percentage of income before tax

Balance Sheet

See your class notes:

Your instructor most likely puts the most emphasis on the sales budget, the production budget, the cash collections budget, the cash disbursements budget, and the cash budget. Practice tests will focus on these budgets.

Some instructors do not cover the balance sheet and income statement. Check your notes to determine if you will need to do the financial statements.