8 -1
CHAPTER
Functional
and ActivityBased
Budgeting
Planning
8 -2
Strategic Plan
Long-Term
Objectives
Short-Term
Objectives
Short-Term
Plan
Budgets
Feedback
Budgeting
and
Planning
and Control
Planning
Strategic Plan
Long-Term
Objectives
Control
Monitoring of
Actual Activity
Short-Term
Objectives
Short-Term
Plan
Budgets
Feedback
Comparison of
Actual with
Planned
Investigation
Corrective Action
8 -3
Advantages
Advantages of
of Budgeting
Budgeting
1. It forces managers to plan.
2. It provides information that can be used
to improve decision making.
3. It provides a standard for performance
evaluation.
4. It improves communication and
coordination.
8 -4
8 -5
The master budget is the comprehensive
financial plan for the organization as a whole.
Typically, the master budget is for a one-year
period corresponding to the fiscal year.
8 -6
A
Amaster
master budget
budget can
can be
be
dividing
dividing into
into operating
operating
and
and financial
financial budgets.
budgets.
8 -7
Financial
Financial budgets
budgets detail
detail the
the
Operating
budgets
describe
Operating
budgets
describe
inflows
and
outflows
of
inflows and outflows
of cash
cash
the
income-generating
the
income-generating
and
and the
the overall
overall financial
financial
activities
of
aa firm.
activities
of
position.
position.firm.
Preparing
Preparing the
the Operating
Operating Budget
Budget
Sales budget
Production budget
Direct materials purchases budget
Direct labor budget
Overhead budget
Selling and administrative expenses
budget
Ending finished goods inventory budget
Cost of goods sold budget
8 -8
8 -9
Schedule 1
Texas Rex, Inc.
Sales Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Year
Units
1,000
1,200
1,500
2,000
5,700
Unit selling price x $10 x $10 x $10 x $10 x $10
Budgeted sales $10,000 $12,000 $15,000 $20,000 $57,000
8 -10
Computing Units to be Produced
Units to be produced = Expected unit sales +
Units in ending
inventory Units in
beginning inventory
8 -11
Schedule 2
Texas Rex, Inc.
Production Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Sales (Schedule 1)
1,000 1,200
1,500
2,000
Desired ending
inventory
240
300
400
200
Total needs
1,240 1,500
1,900
2,200
Less: Beginning
inventory
-180
-240
-300
-400
Units to be
produced
1,060 1,260
1,600
1,800
Year
5,700
200
5,900
-180
5,720
8 -12
Computing Units to be Purchased
Purchases = Direct materials needed for
production + Desired
direct materials in ending
inventory Direct
materials in beginning
inventory
Plain
TShirts
Schedule 3
Texas Rex, Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Units to be produced
(Schedule 2)
1,060
Direct materials per
unit
x 1
Production needs 1,060
Desired ending
inventory
126
Total needs
1,186
8 -13
Year
1,260
1,600
1,800
5,720
x 1
1,260
x 1
1,600
x 1
1,800
x 1
5,720
160
1,420
180
1,780
106
1,906
106
5,826
Continued
Continued
8 -14
1
Total needs
Less: beginning
inventory
Direct materials to
be purchased
Cost per pound
Total purchase cost
plain t-shirts
Quarter
2
3
Year
1,186
1,420
1,780
1,906
5,826
-58
-126
-160
-180
-58
1,128
x $3
1,294
x $3
1,620
x $3
1,726
5,768
x $3 x
$3
$3,384
$3,882
$4,860
$5,178 $17,304
8 -15
Schedule 3
Texas Rex, Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Units to be produced
(Schedule 2)
1,060
Direct materials per
unit
x 5
Production needs 5,300
Desired ending
inventory
630
Total needs
5,930
Year
1,260
1,600
1,800
5,720
x 5
6,300
x 5
8,000
x 5
9,000
x
5
28,600
800
7,100
900
8,900
530
9,530
530
29,130
Continued
Continued
8 -16
Quarter
2
3
Year
Total needs
5,930
7,100
8,900
9,530 29,130
Less: beginning
inventory
-390
-630
-800
-900
-390
Direct materials to
be purchased
5,540
6,470
8,100
8,630 28,740
Cost per ounce
x $0.20 x $0.20 x $0.20 x $0.20 x $0.20
Total purchase
cost of ink
$ 1,108 $ 1,294 $ 1,620 $ 1,726 $ 5,748
Total direct
materials purchases cost
$4,492
$5,176
$6,480 $6,904 $23,052
8 -17
Schedule 4
Texas Rex, Inc.
Direct Labor Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Units to be produced
(Schedule 2)
1,060
1,260
1,600
1,800
Direct labor time
per unit (hr.)
x 0.12 x 0.12 x 0.12 x 0.12
Total hours needed 127.2
151.2
192
216
Average wage per
hour
x $10 x $10 x $10 x $10
Total direct labor
cost
$1,272 $1,512 $1,920 $2,160
Year
5,720
x 0.12
686.4
x $10
$6,864
8 -18
Schedule 5
Texas Rex, Inc.
Overhead Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Budgeted direct labor
hours (Schedule 4) 127.2
Variable overhead
rate
x $5
Budgeted variable
overhead
$ 636
Budgeted fixed
overhead
1,645
Total overhead $2,281
151.2
x
$5
192
x
$5 x
Year
216
$5
686.4
x
$5
$ 756
$ 960 $1,080 $ 3,432
1,645
$2,401
1,645 1,645
6,580
$2,605 $2,725 $10,012
8 -19
Schedule 6
Texas Rex, Inc.
Ending Finished Goods Inventory Budget
For the Year Ended December 31, 2004
Unit-cost computation:
Direct materials ($3 + $1)
Direct labor (0.12 hr. @ $10)
Overhead:
Variable (0.12 hr. @ $5)
Fixed (0.12 hr. @ $9.59)
Total unit cost
$4.00
1.20
0.60
1.15
$6.95
Units Unit Cost
Finished goods: Logo T-shirts
200
$6.95
Total
$1,390
8 -20
Schedule 7
Texas Rex, Inc.
Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Direct materials used (Schedule 3)
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Beginning finished goods
Goods available for sale
Less: Ending finished goods (Sched. 6)
Budgeted cost of goods sold
$22,880
6,864
10,012
$39,756
1,251
$41,007
- 1,390
$39,617
8 -21
Schedule 8
Texas Rex, Inc.
Selling and Administrative Expenses Budget
For the Year Ended December 31, 2004
1
Quarter
2
3
Year
Planned sales in units
(Schedule 1)
1,000 1,200 1,500 2,000 5,700
Variable selling and
administrative
expenses per unit
x $0.10 x $0.10 x $0.10 x $0.10 x $0.10
Total variable
expenses
$ 100 $ 120 $ 150 $ 200 $ 570
Continued
Continued
8 -22
Quarter
2
3
Year
Fixed selling and administrative expenses:
Salaries
$1,420 $1,420 $1,420 $1,420 $5,680
Utilities
50
50
50
50
200
Advertising
100
200
300
500 1,100
Depreciation
150
150
150
150
600
Insurance
----500
--500
Total fixed expenses $1,720 $1,820 $2,420 $2,120 $8,080
Total selling and administrative expenses
$1,820 $1,940 $2,570 $2,320 $8,650
8 -23
Schedule 9
Texas Rex, Inc.
Budgeted Income Statement
For the Year Ended December 31, 2004
Sales (Schedule 1)
Less: Cost of goods sold (Schedule 7)
Gross margin
Less: Selling and administrative
expenses (Schedule 8)
Operating income
Less: Interest expense (Schedule 10)
Income before taxes
Less: Income taxes (Schedule 10)
Net income
$57,000
-39,617
$17,383
-8,660
$ 8,733
- 60
$ 8,673
-2,550
$ 6,123
8 -24
The Usual
Financial Budgets
The cash budget
The budgeted balance
sheet
The budget for
capital expenditures
8 -25
The
The Cash
Cash Budget
Budget
Beginning cash balance
Add: Cash receipts
Cash available
Less: Cash disbursements
Less: Minimum cash balance
Cash surplus (deficiency)
Add: Cash from loans
Less: Loan repayments
Add: Minimum cash balance
Ending cash balance
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
The
The Cash
Cash Budget
Budget
Texas Rex, Inc. 1st Quarter
Beginning cash balance
$ 5,200
Add: Cash receipts (cash and credit sales) 10,600
Total cash available
15,800
Less: Cash disbursements
-15,777
Less: Minimum cash balance
- 1,000
Total cash needs
-16,777
Excess or deficiency (-) of cash
- 977
Add: Cash from loans
1,000
Less: Loan repayments
---Ending cash balance
$ 1,023
$1,000 (loan) - $977 + $1,000
(minimum cash balance)
8 -26
8 -27
Source
Texas Rex, Inc.
Cash Receipts Pattern for 2004
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Cash sales
$ 2,500
Received on
account from:
Quarter 4, 2003
1,350
Quarter 1, 2004
6,750
Quarter 2, 2004
$ 3,000
$ 5,000
750
8,100
Quarter 3, 2004
Quarter 4, 2004
$ 3,750
900
10,125
1,125
----
----
---
13,500
Total cash receipts $10,600
$11,850
$14,775
$19,625
Schedule 11
Texas Rex, Inc.
Budgeted Balance Sheet
December 31, 2004
8 -28
Assets
Current assets:
Cash
Accounts receivable
Materials inventory
Finished goods inventory
Total current assets
Property, plant, and equipment:
Land
Building and equipment
Accumulated depreciation
Total property, plant, and equipment
Total assets
Continued
Continued
$ 7,503
1,500
424
1,390
$10,817
$ 1,100
36,500
-7,760
29,840
$40,657
8 -29
Liabilities and Owners Equity
Current liabilities:
Accounts payable
Owners equity:
Retained earnings
$39,276
Total owners equity
Total liabilities and owners equity
$ 1,381
39,276
$40,657
8 -30
Sales Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Budget
Cash
Budget
Overhead
Budget
The
The Master
Master
Budget
Budget
8 -31
Sales Budget
Production Budget
Direct Materials
Purchases Budget
Ending FG
Inventory Budget
Direct Labor
Budget
Overhead
Budget
(Unit
cost)
Cash
Budget
The
The Master
Master
Budget
Budget
8 -32
Sales Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Budget
Ending FG
Inventory Budget
Overhead
Budget
Selling and
Administrative
Expenses
Budget`
Cost of Goods
Sold Budget
Budgeted IS
Cash
Budget
The
The Master
Master
Budget
Budget
8 -33
Static Budgets versus Flexible Budgets
A static budget is a budget for a particular level of
activity.
A flexible budget is a budget that provides a firm with
the capability to compute expected costs for a range of
activity.
Performance Report Quarterly
Production Costs
Actual
Units produced
Direct materials cost
Direct labor costs
Fixed overhead:
Variable:
Supplies
Power
Fixed:
Supervision
Depreciation
Total
8 -34
Budgeted Variance
1,200
1,060
140 F
$4,830
1,440
$4,240
1,272
$590 U
168 U
535
170
477
159
58 U
11 U
1,055
540
$8,570
1,105
540
$7,793
-50 F
--$777 U
8 -35
The Uses of Flexible Budget
The flexible budget can be used to prepare the budget
before the fact for the expected level of activity.
Flexible budgeting can be used to compute what costs
should have been for the actual level of activity.
Flexible budgeting can help managers deal with
uncertainty by allowing them to see the expected
outcomes for a range of activities.
Flexible Production Budget
Production Costs
Variable overhead:
Direct materials
Direct labor
Variable overhead:
Supplies
Power
Total variable costs
Fixed overhead:
Supervision
Depreciation
Total fixed costs
Total production costs
Variable Cost
per Unit
8 -36
Range of Production (units)
1,000
1,200
1,400
$4.00
1.20
$4,000
1,200
$4,800 $5,600
1,440 1,680
0.45
0.15
$5.80
450
150
$5,800
540
630
180
210
$6,960 $8,120
$1,105
540
$1,645
$7,445
$1,105 $1,105
540
540
$1,645 $1,645
$8,605 $9,765
Performance Report Quarterly
Production Costs
Units produced
Direct materials
Direct labor
Variable overhead:
Supplies
Power
Total variable costs
8 -37
Actual
Budget
1,200
1, 200
$4,830
1,440
$4,800
1, 440
$30 U
----
535
170
$6,975
540
180
$6,960
-5 F
-10 F
$15 F
Continued
Continued
Variance
----
Performance Report Quarterly
Production Costs
8 -38
Actual
Budget
1,200
1, 200
----
Fixed overhead:
Supervision
1,055
Depreciation
540
Total fixed costs
$1,595
Total production costs $8,570
1,105
540
$1,645
$8,605
-50 F
---$50 F
$35 U
Units produced
Variance
8 -39
Behavior Dimensions of Budgeting
Goal congruence
Dysfunctional behavior
Frequent feedback on performance
Monetary and nonmonetary incentives
Participative budgeting
Realistic standards
Controllability of costs
Multiple measures of performance
8 -40
Participative budgeting has three
potential problems:
1. Setting standards that are either too high
or too low.
2. Building slack into the budget.
3. Pseudoparticipation.
Activity-Based Budgeting
Activity flexible
budgeting is the
prediction of what
activity costs will
be as activity
output changes.
8 -41
8 -42
Flexible Budget: Direct Labor Hours
Cost Formula
Fixed
Variable
Direct Labor Hours
10,000
20,000
Direct materials
---
$10
$100,000
$200,000
Direct labor
---
80,000
160,000
$ 20,000
50,000
80,000
Machining
15,000
25,000
35,000
Inspections
120,000
---
120,000
120,000
50,000
---
50,000
50,000
220,000
---
220,000
220,000
$425,000
$22
$645,000
$865,000
Maintenance
Setups
Purchasing
Total
Activity Flexible Budget
Driver: Direct Labor Hours
Formula
Fixed
Level of Activity
Variable
Direct materials
---$10 $100,000$200,000
Direct labor
---
Subtotal
10,000
20,000
8,000
16,000
80,000 160,000
$0$18 $180,000$360,000
Driver: Machine Hours
Maintenance
Machining
Subtotal
Fixed
Variable
$20,000$5.50$64,000
$108,000
15,000 2.00 31,000
47,000
$35,000$7.50$95,000
$155,000
Continued
Continued
8 -43
Activity Flexible Budget
Driver: Number of Setups
Fixed
Inspections
$80,000$2,100$132,500
Setups
Subtotal
Variable
--- 1,800
2530
$143,000
45,000
54,000
$80,000$3,900$177,500
$197,000
Driver: Number of Orders
Fixed
Purchasing
Total
Variable
$211,000$
1$226,000
$678,500$948,000
15,000
$236,000
25,000
8 -44
8 -45
Activity-Based
Activity-Based Performance
Performance Report
Report
Actual Costs
Budgeted Costs
Budget Variance
$101,000
$100,000
$ 1,000 U
Direct labor
80,000
80,000
---
Maintenance
55,000
64,000
9,000 F
Machining
29,000
31,000
2,000 F
Inspections
125,500
132,500
7,000 F
46,500
45,000
1,500 U
220,000
226,000
6,000 F
$657,000
$678,500
$21,500 F
Direct materials
Setups
Purchasing
Total
8 -46
Variances for the Inspection Activity
Activity
Actual Cost
Budgeted Cost
Variance
Inspection:
Fixed
Variable
Total
$ 82,000
$ 80,000
$2,000 U
43,500
52,500
9,000 F
$125,500
$132,500
$7,000 F
8 -47
Chapter Eight
The
The End
End
8 -48
