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11-1

Chapte11
r
Operational
Operational
Budgeting
Budgeting
Prepared
Preparedby
by

Douglas
Douglas
Cloud
Cloud

Pepperdine
Pepperdine
University
University

11-2

Objectives
Objectives
1.
2.
3.
4.

Discuss whyAfter
budgets
are important.
studying
After studying this
this
Describe thechapter,
basic approaches
to budgeting.
you
chapter,
you should
should
Develop an activity-based
be
be able
able to:
to:budget.
Explain the interrelationships between the
elements of a master budget and develop a
basic budget.
5. Discuss the interrelationship between budget
development and human behavior.

11-3

General
General Approach
Approach to
to Budgeting
Budgeting
1. Budgeting with unit
level cost drivers
2. Budgeting with unit
and nonunit level
cost drivers

11-4

Reasons
Reasons for
for Budgeting
Budgeting
Budgets compel planning
Budgets improve communication and
coordination
Budgets provide a guide to action
Budgets provide a basis of performance

11-5

Some
Some of
of the
the Characteristics
Characteristics of
of aa
Good
Good Multi-User
Multi-User Budgeting
Budgeting System
System
1. Support changes to hierarchy to that different
levels of budgets can be examined.
2. Shared access to common data warehouses.
3. Automatic mapping of imported data for use in
multiple applications.
4. Lots of what-if commands.

11-6

In
In the
the output/input
output/input approach
approach
physical
physical inputs
inputs and
and costs
costs are
are
budgeted
aa function
of
budgeted
as
function approach
of planned
plannedbudgets
The
incremental
Theas
incremental
approach
budgets
unit
level
activities.
unit
level
activities.
costs
for
a
coming
period
as
aa dollar
costs for aUsing
coming
period
as
dollar
the
minimum
level
Using
the
minimum
level
or
percentage
change
from
the
or percentage
change
from
the
approach,
an
organization
approach,
an
organization
amount
budgeted
for
(or
spent
amount
budgeted
for
(or
spent
establishes
aa base
amount
for
establishes
base
amount
for
during)
some
previous
period.
during)budget
some items
previous
period.
budget items and
and requires
requires
explanation
explanation or
or justification
justification for
for any
any
budgeted
budgeted amount
amount above
above the
the
minimum
minimum (base).
(base).

11-7

Activity-Based
Activity-Based Budgeting
Budgeting
Atlantic Magnetic, Inc.
Activity-Based Budget for Compact Disks
For the Year Ending December 31, 2004
Unit level costs:
Direct materials
$180,000
Assembly
245,000
Packaging
380,000
Distribution
60,000 $ 865,000
Continued
Continued

11-8

Activity-Based
Activity-Based Budgeting
Budgeting
Batch level costs:
Procurement
Setup
Inspection

$ 30,000
80,000
70,000 $ 180,000

Product level costs:


Development and design $ 50,000
Product advertising
120,000
170,000
Total product costs
$1,215,000

11-9

Activity-Based
Activity-Based Budgeting
Budgeting
Atlantic Magnetic, Inc.
Activity-Based Budget for Purchasing Dept.
For the Year Ending December 31, 2004
Budgeted activities:
New vendors screened
130
Orders placed
1,200
Shipments received and inspected
1,400

Continued
Continued

11-10

Activity-Based
Activity-Based Budgeting
Budgeting
Activity-based budgeting
Budgeted costs: Activity-based budgeting
focuses
on
redesigning
focuses
on
redesigning
Vendor screening and quality
products
or
improving
products
or
improving
certification (unit level per
vendor)$ 30,000
processes
rather
than
processes
rather
Procurement (unit level per pur.than
order):
simply
cutting
costs.
simply
cutting
costs.
Placing orders
$50,000
Verifying orders
25,000
Receiving orders
16,000
Inspecting orders
8,000
99,000
General administration
and maintenance (facility level)
25,000
Total purchasing department costs
$154,000

11-11

The
The Master
Master Budget
Budget
The
The master
master budget
budget groups
groups all
all budgets
budgets and
and
supporting
supporting schedules
schedules together
together and
and
coordinates
coordinates all
all financial
financial and
and operational
operational
activities,
activities, placing
placing them
them into
into an
an organizationorganizationwide
wide set
set of
of budgets
budgets for
for aa given
given time
time period.
period.
A major goal of developing a master
budget is to ensure the smooth functioning
of a business throughout the budget period
and the organizations operation cycle.

11-12

Operating
Operating Cycle
Cycle of
of aa Manufacturing
Manufacturing
or
or Merchandising
Merchandising Operation
Operation

Purchases or
merchandise
function

Cash

Collection

Accts.
Rec.

Inventory
Sales or
Services

Overview
Overview of
of Budget
Budget Assembly
Assembly
Process
Process in
in aa Merchandising
Merchandising Firm
Firm

11-13

Sales Budget
Purchases
Budget

Selling Expense
Budget

Cash Budget
Continued
Continued

General and
Administrative
Expense Budget

Overview
Overview of
of Budget
Budget Assembly
Assembly
Process
Process in
in aa Merchandising
Merchandising Firm
Firm
from Sales Budget
Cash Budget
Other Special Budgets:
Taxes, Dividends, Capital
Improvements, etc.

11-14

from Purchases,
Selling Expense,
and General and
Administrative
Expense Budgets

Pro Forma Statements:


Income Statement and
Balance Sheet

Initial
Initial Balance
Balance Sheet
Sheet
Backpacks Galore, Inc.
Balance Sheet
December 31, 2004
Assets
Current assets:
Cash
Accounts receivable (net)
Inventory
School backpacks
Hiking backpacks
Property and equipment:
Land
Buildings and equipment
Less accum. depreciation
Total assets

11-15

Continued
Continuedon
on
next
nextslide
slide
$ 15,000
21,600
$ 50,000
96,000

146,000

$182,600

60,000
260,000
124,800

135,200

195,200
$377,800

Initial
Initial Balance
Balance Sheet
Sheet
Liabilities and stockholders equity
Current liabilities:
Accounts payable
Stockholders equity:
Capital stock
Retained earnings
Total liabilities and stockholders
equity

11-16

$ 40,000
$150,000
187,800

337,800
$377,800

11-17

Sales
Sales Budget
Budget
Backpacks Galore, Inc.
The
The sales
sales budget
budget
Sales Budget
contains
aa forecast
contains
forecast
For the Year Ending December 31, 2005
First
Quarter

Second
Quarter

of
of unit
unit sale
sale volume
volume
Third
Fourth
Year
and
revenue.
and sale
sale
revenue.

Quarter

Quarter

Total

Sales (units);
School backpacks
4,000
3,400
3,650
3,950
15,000
Hiking backpacks
1,100
1,600
2,500
1,300
6,500
Sales (dollars):
School backpacks $ 80,000 $ 68,000 $ 73,000 $ 79,000 $300,000
Hiking backpacks 110,000 160,000 250,000 130,000 650,000
Total
$190,000 $228,000 $323,000 $209,000 $950,000

Assumptions
Assumptions for
for
Purchases
Purchases Budget
Budget
Management
Management desires
desires to
to have
have all
all inventory
inventory
needed
needed to
to fill
fill the
the following
following quarters
quarters sales
sales
in
in stock
stock at
at the
the end
end of
of the
the previous
previous quarter.
quarter.
To
Toprovide
provide for
for aa possible
possible delay
delay in
in the
the
receipt
receipt of
of inventory,
inventory, BGI
BGI also
also carries
carries aa
safety
safety stock
stock of
of 1,000
1,000 stock
stock backpacks
backpacks and
and
500
500 hiking
hiking backpacks.
backpacks.
Continued
Continued

11-18

Assumptions
Assumptions for
for
Purchases
Purchases Budget
Budget
The
The total
total inventory
inventory needs
needs are
are equal
equal to
to
current
current sales
sales plus
plus desired
desired ending
ending inventory,
inventory,
including
including the
the safety
safety stock.
stock.
Budgeted
Budgeted purchases
purchases are
are computed
computed as
as total
total
inventory
inventory needs
needs less
less the
the beginning
beginning
inventory.
inventory.

11-19

11-20

Partial
Partial Purchases
Purchases Budget
Budget
Backpacks Galore, Inc.
Purchases Budget
For the Year Ending December 31, 2005
First
Second Third
Quarter Quarter Quarter
Purchases (units):
School backpacks:
Current qtr. sales
Desired end. inv.
Total needs
Less beg. inv.
Purchases

4,000
4,400
8,400
-5,000
3,400

3,400
4,650
8,050
-4,400
3,650

3,650
4,950
8,600
-4,650
3,950

Four
Year
Quarter Total

3,950
5,100
9,050
-4,950
4,100 15,100

11-21

Partial
Partial Selling
Selling Expense
Expense Budget
Budget
Backpacks Galore, Inc.
Selling Expense Budget
For the Year Ending December 31, 2005
First
Second
Third
Fourth
Year
Quarter Quarter Quarter
Quarter
Total
Budgeted sales
$190,000 $228,000 $323,000 $209,000 $950,000
Variable costs:
Setup/Display
$ 1,900 $ 2,280 $ 3,230 $ 2,090 $ 9,500
Commissions
3,800
4,560
6,460
4,180 19,000
Miscellaneous
1,900
2,280
3,230
2,090
9,500
Total
7,600
9,120 12,920
8,360 18,000
Fixed costs (total)
4,500
4,500
4,500
4,500
4,500
Total selling exp.
$12,100 $13,620 $17,420 $12,860 $56,000

11-22

Assumptions
Assumptions for
for Cash
Cash Budget
Budget

The
The cash
cash budget
budget
summarizes
summarizes all
all cash
cash
receipts
receipts and
and
disbursements
disbursements expected
expected
to
to occur
occur during
during the
the
budget
budget period.
period.

Cash
Cash isis critical
critical to
to
survival.
survival.

11-23

Partial
Partial Cash
Cash Budget
Budget
Backpacks Galore, Inc.
Cash Budget
For the Year Ending December 31, 2005

First
First
Quarter
Quarter

11-24

Partial
Partial Cash
Cash Budget
Budget
Cash balance, beginning
Collection on sales:
Cash sales
From credit sales:
Current quarter
Prior quarter
Total
Total available from operations
Continued
Continued

$ 15,000
$ 95,000
71,250
21,500
$187,850
$202,850

11-25

Total available from operations


Less budgeted disbursements:
Purchasing, current quarter
Purchasing, previous quarter
Total
Selling
General and administrative
Other:
Income taxes
Dividends
Total disbursements
Continued
Continued

$202,850
$ 65,000
40,000
$105,000
12,100
31,000
22,000
20,000
-$190,100

11-26

Total disbursements
Excess cash available for disbursements
Short-term financing:
New loans
Net cash flow from financing
Cash balance, ending

-$190,100
$ 12,750
$ 3,000
$ 3,000
$ 15,750

This amount becomes the


beginning balance for the
second quarter.

11-27

Budgeted
Budgeted Income
Income Statement
Statement
Backpacks Galore, Inc.
Budgeted Income Statement (Functional Format)
For the Year Ending December 31, 2005
Sales
$950,000
Expenses:
Cost of goods sold:
Beginning inventory
$146,000
Purchases
547,000
Cost of merchandise avail. $693,000
Ending inventory
-153,000 $540,000
Selling operations
56,000
General and administrative
132,000
Bad debt expense
4,750 -732,750
Income from operations
$217,250
continued
continued

11-28

Income from operations


Other expenses:
Interest expense
Net income before taxes
Allowance for income taxes
Net income

$217,250
- 1,590
$215,660
- 77,200
$138,460

11-29

Budgeted
Budgeted Balance
Balance Sheet
Sheet
Backpacks Galore, Inc.
Budgeted Balance Sheet
December 31, 2005
Assets
Current assets:
Cash
Accounts receivable (net)
Merchandise inventory
Property and equipment:
Land
Building and equipment
Less accumulated depr.
Total assets

$ 77,480
25,080
153,000 $255,560
$ 60,000
$260,000
- 132,800

continued
continued

127,200

187,200
$442,760

11-30

Liabilities and stockholders equity


Current liabilities:
Accounts payable
Stockholders equity:
Capital stock
Retained earnings
Total liabilities and stockholders equity

$ 56,500
$150,000
236,260

386,260
$442,760

11-31

Finalizing
Finalizing the
the Budget
Budget
Is
the
IsBefore
the proposed
proposed
finalizing
the
Before
finalizing
the
Is
the
proposed
Is
the
proposed
budget
budget,
budget
two
questions
budget,
two
questions
budget
feasible?
budget
feasible?
acceptable?
acceptable?
must
must be
be addressed.
addressed.

Types
Types of
of Forecasts
Forecasts
Used
Used in
in Budgeting
Budgeting
The
The sales
sales forecast
forecast isis primary
primary to
to most
most

organizations.
organizations.
The
The collection
collection period
period for
for sales
sales on
on account.
account.
Percent
Percent of
of uncollectible
uncollectible sales
sales on
on account.
account.
Cost
Cost of
of materials,
materials, supplies,
supplies, utilities,
utilities, etc.
etc.
Employee
Employee turnover.
turnover.
Time
Time required
required to
to perform
perform activities.
activities.
Interest
Interest rates.
rates.
Development
Development time
time for
for new
new products
products or
or
services.
services.

11-32

11-33

Developing
Developing Budgets
Budgets that
that Work
Work
1. Emphasize the importance of budgeting as
a planning device.
2. Encourage wide participation in budget
preparation at all levels of the organization.
3. Demonstrate that the budget has the
complete support of top management.
4. Recognize that the budget is not
unalterable.
Continued
Continued

11-34

Developing
Developing Budgets
Budgets that
that Work
Work
5. Use budget performance reports not just to
identify poor performers, but also to
recognize good performance.
6. Conduct programs in budget education to
provide new managers with information
about the purposes of budgets and to dispel
erroneous misconceptions that may exist.

11-35

Chapte11
r
The
The
End
End

11-36