What is a budget?
– a detailed plan for the acquisition and use of financial and other resources over a specified period of time.
– formal and quantitative plan for the future
What is a master budget?
– many interdependent budgets, each of which is classified as either an operating budget, a capital budget, or a financial budget
Advantages of budgeting:
– assists in planning & controlling
– communication of mgmt plans throughout org
– allocation of resources
– uncovers bottlenecks before they occur
– defines goals & objectives
– motivates mgrs & employees to meet budget
– establishes benchmarks
Master Budget ========> Sales
Budget
(operating bud)
LT Sales
Budget
(capital bud)
Production
Budget
Cap Expenditure (operating bud)
Budget
(capital bud)
DM DL MOH SGA Exp
Budget Budget Budget Budget
(operating bud) (operating bud) (operating bud) (operating bud)
Cash
Budget
(financial bud)
Budgeted
F/S I/S is operating bud
B/S is financial bud
Chapter 8 – Master Budgeting
ACCO 1031 – Melis
Sales Budget:
– budgeted sales in units and dollars
– includes a Schedule of Expected Cash Collections (based on collection history)
Production Budget:
– after sales budget is prepared, production requirements can be determined
– budget of production in units to fulfill sales budget and provide adequate FG inventories
budgeted sales in units
+ desired ending FG inventory in units
total needs in units
– beginning FG inventory in units
required production in units
DM Budget:
– budget of the RM that must be purchased to fulfill production budget and provide adequate RM inventories
– includes a Schedule of Expected Cash Disbursements
required production in units
* amount of RM per unit of FG
RM needed to meet production budget in units
+ desired ending RM inventory in units
total RM needs in units
– beginning RM inventory in units
RM to be purchased in units
* cost per unit
Cost of RM to be purchased
Inventory Purchases Budget:
– for a merchandiser
– budget of goods to be purchased during the period to fulfill sales budget and provide adequate inventories
– includes a Schedule of Expected Cash Disbursements
budgeted COGS in dollars
+ desired ending merchandise inventory in dollars
total needs
– beginning merchandise inventory in dollars
required merchandise purchases
Cash Budget: beginning cash balance
– budgets how cash will be acquired and used + cash receipts
cash available
– cash disbursements
excess or (deficiency)
financing:
borrowings
repayments
interest
total financing
ending cash balance
Definitions:
continuous (or perpetual) budget – a 12-month budget that rolls forward one month as the current month ends
zero-based budget – a budget in which all expenses must be justified in each new period
participatvie (or self-imposed) budget – a budget that is prepared with participation from managers at all levels
Inventory Purchases Budget
Garden Sales, Inc. is a retailer of garden supplies. The company is budgeting
inventory purchases for the second quarter.
Sales are budgeted as follows:
April $600,000
May 900,000
June 500,000
July 400,000
The company has a gross profit ratio of 30%.
Each month’s ending inventory must equal 20% of the cost of merchandise
to be sold in the following month.
Merchandise inventory at March 31 is $84,000.