Chapter 3
Information for budgeting,
planning and control purposes
Advantages of Budgets
Goals and
Budgets
Objectives
Advantages of Budgets
Compels managers
to think ahead
Aids managers in coordinating
their efforts
Provides definite expectations that are the
best framework to evaluate performance
Types of Budgets
Strategic Plan Long-Range Plan
Capital Budget Master Budget
Continuous Budget
Strategic Plan
The most forward-looking budget is the
strategic plan, which sets the overall goals
and objectives of the organization.
Long-Range Plan
The strategic plan leads to long-range
planning, which produces forecasted
financial statements for five- to ten-year
periods.
Capital Budget
Long-range plans…
are coordinated with capital budgets,
which detail the planned expenditures
for facilities, equipment, new products,
and other long-term investments.
Master Budget…
Sales
summarizes the Production
planned activities
of all subunits of Distribution
an organization.
Finance
Master Budget
Operating Budget
Financial Budget
Master Budget
Sales Budget
Master Budget
Purchases Schedules Costs
Components of Master Budget
Inventory
Inventory
Budget
Budget
____
____ ____
____
____ ____
____ ____
____
____
____ ____
____
____
____ ____
____
____
____ ____
Sales
Sales Purchases
Purchases Cost
Costof
of Operating
Operating Budgeted
Budgeted
Budget
Budget Budget
Budget Goods
GoodsSold
Sold Expenses
Expenses Income
Income
____
____ ____
____ ____
____ ____
____ Budget Budget Statement
____ ____ ____ ____ Budget
____ ____ Budget
____ ____ Statement
____ ____
____ ____
____ ____ ____ ____
____ ____ ____ ____ ____ ____ ____ ____
____ ____
____ ____ ____
____ ____ ____
____ ____
____ ____ ____
____ ____
____ ____ ____
____ ____
____
____
____ ____
____ ____
____ ____
____ ____ ____ ____
____ ____ ____ ____
____ ____ ____ ____
____ ____ ____ ____
____ ____
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
Operating Budget
Components of Master Budget
Cash
Cash
Budget
Budget
_____
_____ _____
_____
_____ _____
_____ _____
_____
Capital _____
_____ _____
_____
Capital _____
Budget
Budget_____ _____ _____
_____ _____
_____
_____ _____
_____ _____ _____
_____
_____ _____
_____ Financial
_____
_____ _____
_____
_____
_____ _____
_____ Budget
_____
_____ _____ Budgeted
Budgeted
Balance
Balance
Sheet
Sheet _____
_____
_____ _____
_____
_____
_____ _____
_____ _____
_____ _____
_____
_____
_____ _____
_____
_____
_____ _____
Operating Budget
Cash collections
Sales Budget from customers
Disbursements
Purchases Budget for purchases
Disbursements
Operating Expenses Budget for operating
expenses
Cash Collections
It is easiest to prepare budgeted cash
collections at the same time as the sales
budget.
Cash collections include the current
month’s cash sales plus the previous
month’s credit sales.
Purchases Budget
Budgeted purchases = Desired ending inventory
+ Cost of goods sold – Beginning inventory
Disbursements for Purchases
For example, 50% of the current month’s
purchases and 50% of the previous month’s
purchases may be included.
The total disbursements are then used in
preparing the cash budget.
Operating Expense Budget
The budgeting of operating expenses
depends on several factors.
Month-to-month changes in sales volume
and other cost-driver activities directly
influence many operating expenses.
Operating Expense Budget
Expenses driven by sales volume include
sales commissions and many delivery
expenses.
Operating Expense Budget
Other expenses are not influenced by sales
or other cost-driver activity and are
regarded as fixed, within appropriate
relevant ranges.
Rent Depreciation
Insurance Salaries
Operating Expense
Disbursements
Disbursements for
operating expenses
are based on the
operating expense
budget.
Operating Expense
Disbursements
For example, 50% of last month’s and this
month’s wages and commissions plus
miscellaneous and rent expenses may be
included.
The total of these disbursements is then
used in preparing the cash budget.
Budgeted Income Statement
The income statement will be complete
after addition of the interest expense,
which is computed after the cash budget
has been prepared.
Budgeted Income Statement
Budgeted income from operations
is often a benchmark for judging
management performance.
Cash Budget
The cash budget has the following major sections:
– total cash available before financing
– cash disbursements
– minimum cash balance desired
– financing requirements
– ending cash balance
Cash Budget
Total cash available before financing =
Beginning cash balance + Cash receipts
Cash receipts depend on collections from
customers’ accounts receivable and cash sales
and on other operating income sources.
Cash Budget
Cash disbursements for purchases depend on
the credit terms extended by suppliers and the
bill-paying habits of the buyer.
Payroll depends on wages, salaries,
commission terms, and payroll dates.
Cash Budget
Disbursements for some costs and expenses
depend on contractual terms for installment
payments, mortgage payments, rents, leases,
and miscellaneous items.
Other disbursements include outlays for
fixed assets, long-term investments,
dividends, and the like.
Cash Budget
Management determines the minimum
cash balance desired depending on the
nature of the business and credit arrangements.
Cash Budget
Financing requirements depend on how
the total cash available compares with
the total cash needed.
Needs include the disbursements plus
the desired ending cash balance.
Cash Budget
Ending cash balance
= Total cash available before financing
– Total disbursements + Cash from financing
The cash from financing can be either
positive (borrowing) or negative (repayment).
Budgeted Balance Sheet
The final step in preparing the master budget
is to construct the budgeted balance sheet
that projects each balance sheet item in
accordance with the business plan as
expressed in the previous schedules.
Sales Forecast
A sales forecast is a prediction of sales
under a given set of conditions.
Factors to Consider When
Forecasting Sales
1 Past patterns of sales
2 Estimates made by the sales force
3 General economic conditions
4 Competitors’ actions
Factors to Consider When
Forecasting Sales
5 Changes in the firm’s prices
6 Changes in product mix
7 Market research studies
8 Advertising and sales promotion plans
Importance of Budgets
to Managers
The budgetary process compels managers to
think and to prepare for changing conditions.
Importance of Budgets
to Managers
Budgets are aids in planning, communicating, setting
standards of performance, motivating personnel
toward goals, measuring results, and directing
attention to problem areas that need investigation.
End of Chapter 3
