A. A budget is a realistic plan for the future expressed in quantitative terms
(Dollars or Units).


B. Purposes of Budgeting:
1. Planning Operations (Short - term and Long - term)
2. Controlling Operations
3. Motivating Employees
4. Communicating Goals to Employees
5. Evaluating Employee Performance




The budgeting process:


-Budgeting is an important part of an organization’s entire planning process.


Budgeting helps provide a focused direction or a path chosen from many alternatives.-


Budgets are the financial cumulation of predictions and assumptions about achieving -
Not only financial but also non financial goals and objectives.


How strategic planning is related to budgeting?


The budgeting and planning processes are concerned with all organizational resources
Such as (Raw material, inventory, supplies, personnel and facilities)
Managers engaging in strategic planning should identify key variables believed to be
The direct causes of the achievement or non achievement of organizational goals and objectives.




































The Budgeting Process for a manufacturing Company is as follows:


































































































Types of budgets:




Operating budget:
It is pro forma income statement and related budgets
It is expressed in both units and dollars.
1- When an operating budget relates to revenues, the units are presented.
2-when an operating budget relates to cost, the input units presented are transformed into output units or consumed.


Sales budget:
Presents sales in units at their projected selling price and is usually the first budget prepared
it establish targets for sales personnel
Sales volume affects production and purchasing levels, operating expenses ,and cash flow
Production budget is based on sales






Production budget :


Is based on the sales forecast in units plus or minus the desired inventory change
Stated in units instead of dollars







irect labor budget


Depends on wages rate amounts and types of production
The factory over head budget
Is a function of how factory overhead varies with particular cost driver



















Cost of good sold budget:
Reflect direct material usage, direct labor, factory overhead, and change in ending finished good inventory




Financial budget:
It indicates the funds to be generated or consumed during the budget period
Financial budgets include cash and capital budgets as well as projected or proforma financial statements.


Capital budget:
Is not apart of operating budget because it is not apart of normal operation


Cash budget:
Projects cash receipt and disbursements for planning a control purposes. Hence it helps prevent not only cash emergencies but also excessive idle cash
it cannot be prepared until the other budget have been prepared


















V. Flexible Budgeting:
A. Used to estimate revenue, costs, a group of costs, or profits at various levels of activity
B. Applies when operating within a relevant range.
C. Total fixed costs remain the same at all levels within range.









Fixed vs. variable budget
Fixed budget
is based no only one level of sales or production
It is not very useful if the expected level is not reached or is exceeded
Flexible budget
Is a series of budgets prepared for many levels of activity.
- At the end of the period management can compare actual performance with the appropriate budgeted level in the flexible budget.


Developing an Operating Budget-An Example


This example is designed to provide an overview of the process of developing an operating budget. In our example, Snyder Corporation is developing a financial plan for the year ending Dec.31. 2004. The company has tow primary products. Product A and Product B. Based on an assessment of the projected economic conditions. Management has developed forecasted sales of product A of 25,000 units at a sales price of $100. and forecasted sales of product B of 30,000 units at a sales price of $120.Therefore ,Total forecasted sales is$6,100,000.
Assume that management wants an inventory of 1,200 units of product A and 1,000 units of product B at year-end. The beginning inventory is shown in the following schedule.
Schedule 1-Beginning Finished Goods Inventory


Product A Product B Total
Units 1,200 1,200
Cost per unit $ 70 $ 80

Total cost $84,000 $96,000 $180,000
There was no work-in-process beginning inventory and none is anticipated at the end of year. This information can then be used to prepare the production schedule shown below.
Schedule 2-Production Schedule
Product A Product b
Projected unit sales 25,000 30,000
Desired ending inventory 1,200 1,000
Beginning inventory (1,200) (1,200)


Units to be produced 25,000 29,000




MODULE 45 PLANING, CONTROL, AND ANALYSIS
Once the production schedule is developed, management can develop raw materials usage budgets for labor and overhead. Information to develop these schedules can be obtained from the following product specifications schedule.
Schedule 3-Product Specifications


Product A Product B Estimated Cost
Materials
Silver 7 oz. 6 oz. $5.15 per oz.
Red Oak 1 b.f. $3.95 per b.f.
Teak 1 b.f. $6.10 per b.f.
Direct Labor 1/2 hour 3/4 hour $40 per hour


Schedule 4-Direct Materials Usage Budget
Physical Units Silver Red Oak b.f. Teak b.f. Total
Product A
Silver 175,000
Red Oak 25,000
Product B
Silver 178,800
Teak 29,800

To be used in production 353,800 25,000 29,800


Cost Budget
Available from beginning inventory
Silver 4, 00 oz. @ $5.00 per oz. $ 20,000
Red Oak 1,000 b.f. @ $4.00 per b.f. $ 4,000
Teak 1,000 b.f. @ $6.00 per b.f. $ 6,000


From purchases
Silver $5.15 * (353,800 - 4,000) 1,801,470
Red Oak $3.95 * (25,000 – 1,000) 94,800
Teak $6.10 * (29,800 – 1,000) 175,680



Cost of Direct materials to be used $ 1,821,470 $98,800 $181,680 $2,101,950


Schedule 5-Direct Manufacturing Labor Budget
Product A
(25,000 * 1/2 hour * $40 per hour) $ 500,000
Product B
(29,800 * 3/4 hour * $40 per hour) 894,000



$ 1,394,000












Schedule 6-Manufacturing Overhead Budget (at 34,850 bdgeted direct labor hour)
Variable overhead costs :
Supplies $ 60,000
Indirect labor 135,000
Maintenance 50,000
Electrisity 100,000
Miscellaneous 30,000


Fixed overhead costs :
Depreciation $306,000
Insurance 40,000
Plant supervisor 90,000
Miscellaneous 25,000


Total manufacturing overhead $836,400

Overhead application rate :
Direct labor hours
Product A (25,000 * 1/2hour) 12,500
Product B (29,800 * 3/4hour) 22,350


Total direct labor hours 34,850


Application rate ($836,400 / 34,850) $ 24 per hour


Based on the budget amounts of materials, labor, and overhead. Management can now determine the unit production cost, and the ending inventories and costs of goods sold budget as shown below.




MODULE 45 PLANNING, CONTROL, AND ANALYSIS


Schedule 7-Unit Production costs:
Product A Product B
Materials $40 $37
Direct labor 20 30
Manufacturing over head 12 18
$72 $85


Schedule 8-Cost of Goods Sold Budget

Schedule
Beginning finished goods inventory 1 $ 180,000
Direct materials used 4 $ 2,101,950
Direct labor 5 1,394,000
Manufacturing overhead 6 836,400
Cost of goods manufactured 4,332,350


Cost of goods available for sale 4,512,350
Deduct ending finished goods inventory 171,400


Cost of goods sold $4,340,950


With estimates of sales and general and administrative expenses and the tax rate, management can now prepare the pro forma income statement for next period as shown below.


Snyder Corporation
PRO FORMA INCOME STATEMENT
For the Ending December 31, 2004


Sales $6.100.000
Cost of goods sold 4.340.950


Gross profit 1.759.050
General & administrative expenses 1.020.000


Operating income (EBIT) 739.050
Interest expense 260.000


Earnings before taxes 479.050
Taxes (30%) 143.715


Net income $ 335.335









1. For example, assume that accompany had budgeted sales of $9,000 for January, $9,700 for February, and $13,500 for March. Its monthly cash budgets might appear as follows (payment of principal and interest are assumed not to be due during the quarter) :
Sample company
CASH BUDGET
For Quarter Ending March 31

January February March
Beginning cash balance $ 80 $ 20 $ 1,975
Receipts :
Collection from sales* 6,800 9,350 11,825


Total cash available $ 6,880 $9,370 $13,782


Payments:
Purchases** $3,150 $2,750 $3,960
Sales salaries 1,350 1,455 2,093
Supplies 360 388 588
Utilities 120 110 100
Administrative salaries 1,800 1,800 1,800
Advertising 80 80 80
Equipment purchases 0 820 3,000


Total payments $ 6,860 $ 7,413 $ 11,591

Desired ending balance 5,000 5,000 5,000


Total required $ 11,860 $ 12,413 $ 16,591
Cash available 6,880 9,370 13,782


Financing required $ 4,980 $ 3,043 $ 2,809


* Sales are 50% cash and 50% on credit (net 30). Thus, 50% of each month's sales are collected in the month of the sale, and 50% are collection in the following month.
For example the February collections equaled $9,350 [(50% * $9,000) + (50% * $9,700)].


** Purchase terms are net 30. thus, purchases are paid for in the month following the purchase. The amount paid in February ($2,760) equaled the total purchases for January.