3. Establishing specific goals
Executing plans to achieve the goals
Periodically comparing actual
results to the goals
Objectives of Budgeting
PLANNING DIRECTING CONTROLLING
Nature and Objectives of Budgeting
5. Continuous Budgeting
One-Year Budget
Add February 2007
Mar.
2006
Apr.
2006
May
2006
June
2006
July
2006
Aug.
2006
Sep.
2006
Oct.
2006
Nov.
2006
Dec.
2006
Jan.
2007
Feb.
2007
6. Static Budgets
Description: A budget that does not
reflect potential changes in
volume or activity level
Strength: It is simple—all expenses
are budgeted as fixed costs
Weakness: It does not reflect changes in
revenues and expenses that
occur as volumes change
Typical usage: Service organizations or
administrative departments of
retailers and manufacturers
7. Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Direct labor $40,000
Electric Power 5,000
Supervisor salaries 15,000
Total department costs $60,000
Static Budgets
8. Flexible Budgets
Description: A budget that shows revenues and
expenses for a variety of volumes or
activity levels
Strength: Provides information needed to
analyze the impact of volume
changes on actual operating results
Weakness: Requires greater research into
costs—must differentiate fixed and
variable costs
Typical usage: Operational departments of
retailers and manufacturers whose
costs change with sales and
production
9. Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable cost:
Direct labor $40,000 $45,000 $50,000
Electric power 4,000 4,500 5,000
Total variable cost $44,000 $49,500 $55,000
Cost per unit is $5.50 at all levels of activity
10. Variable cost:
Direct labor $40,000 $45,000 $50,000
Electric power 4,000 4,500 5,000
Total variable cost $44,000 $49,500 $55,000
Fixed cost:
Electric power $ 1,000 $ 1,000 $ 1,000
Supervisor salaries 15,000 15,000 15,000
Total fixed cost $16,000 $16,000 $16,000
Units of production 8,000 9,000 10,000
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
11. Units of production 8,000 9,000 10,000
Variable cost:
Direct labor $40,000 $45,000 $50,000
Electric power 4,000 4,500 5,000
Total variable cost $44,000 $49,500 $55,000
Fixed cost:
Electric power $ 1,000 $ 1,000 $ 1,000
Supervisor salaries 15,000 15,000 15,000
Total fixed cost $16,000 $16,000 $16,000
Total department costs $60,000 $65,500 $71,000
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
14. Master Budget
Budgeted Income
Statement
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases
budget
Direct labor cost budget
Selling and administrative
expense budget
16. Sales
Budget Production Budget
Expected units of sales
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
17. Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
–Est. beginning materials inventory
Direct materials to be purchased
Sales
Budget
18. Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
Cost of Goods
Sold Budget
Selling &
Administrative
Expenses
Budget
Sales
Budget
19. Elite Accessories Inc.
Sales Budget
For the Year Ending December 31, 2010
Wallet:
East……………….. 287,000 $12.00 $ 3,444,000
West………………. 241,000 12.00 2,892,000
Total……………. 528,000 $ 6,336,000
Handbag:
East……………….. 156,400 $25.00 $ 3,910,000
West………………. 123,600 25.00 3,090,000
Total……………. 280,000 $ 7,000,000
Total revenue from
Sales……………….. $13,336,000
Unit Sales Unit Selling Total
Product and Region Volume Price Sales
20. Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2010
Expected units to be sold 528,000 280,000
From sales budget
Units
Wallet Handbag
21. Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2010
Expected units to be sold…………. 528,000 280,000
Plus desired ending inventory,
December 31, 2010……………. 80,000 60,000
Total 608,000 340,000
Units
Wallet Handbag
22. Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2010
Expected units to be sold…………. 528,000 280,000
Plus desired ending inventory,
December 31, 2010……………. 80,000 60,000
Total………………………………. 608,000 340,000
Less estimated beginning inventory,
January 1, 2010…………………. 88,000 48,000
Total units to be produced………… 520,000 292,000
Units
Wallet Handbag
23. Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2010
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)………………….. 156,000 52,000
Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.
Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.
24. Square yards required for production:
Wallet (Note A)……..……..…….. 156,000 52,000
Handbag (Note B)……………….. 365,000 146,000
Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.
Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.
Direct Materials
Leather Lining Total
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2010
25. Square yards required for production:
Wallet (Note A)……....………….. 156,000 52,000
Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2010 20,000 12,000
Total……………………………… 541,000 210,000
Direct Materials
Leather Lining Total
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2010
26. Square yards required for production:
Wallet (Note A) …………………. 156,000 52,000
Handbag (Note B) ………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2010 20,000 12,000
Total……………………………… 541,000 210,000
Less estimated inventory, Jan. 1, 2010 18,000 15,000
Total square yards to be produced.. 523,000 195,000
Direct Materials
Leather Lining Total
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2010
27. Square yards required for production:
Wallet (Note A)………………….. 156,000 52,000
Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2010 20,000 12,000
Total……………………………… 541,000 210,000
Less estimated inventory, Jan. 1, 2010 18,000 15,000
Total square yards to be produced.. 523,000 195,000
Unit price (per square yard)…………. x $4.50 x $1.20
Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500
Direct Materials
Leather Lining Total
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2010
28. Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2010
Cutting Sewing Total
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Hours required for production:
Wallet (Note A)…………. 52,000 130,000
29. Cutting Sewing Total
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Hours required for production:
Wallet (Note A)…………. 52,000 130,000
Handbag (Note B)……….. 43,800 116,800
.
Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2010
30. Cutting Sewing Total
Hours required for production:
Wallet (Note A)…………. 52,000 130,000
Handbag (Note B)……….. 43,800 116,800
Total……………………... 95,800 246,800
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs..
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2010
31. Cutting Sewing Total
Hours required for production:
Wallet (Note A)…………. 52,000 130,000
Handbag (Note B)……….. 43,800 116,800
Total……………………... 95,800 246,800
Hourly rate…………………… x $12.00 x $15.00
Total direct labor cost………… $1,149,600 $3,702,000 $4,851,600
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2010
32. Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending December 31, 2010
Indirect factory wages……………………... $ 732,800
Supervisory salaries………………………... 360,000
Power and light…………………………….. 306,000
Depreciation of plant and equipment………. 288,000
Indirect materials…………………………… 182,800
Maintenance………………………………... 140,280
Insurance and property taxes………………. 79,200
Total factory overhead cost………………... $2,089,080
33. Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2010
Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd $81,000
Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000
Direct materials
inventory,
January 1, 2010 $99,000
Finished goods inventory, January 1 ,2010….. $ 1,095,600
Work in process inventory, January 1, 2010… $ 214,400
Direct materials:
Direct materials inventory, January 1, 2010
(Note A)…………………………………. $ 99,000
34. Finished goods inventory, January 1 ,2010…. $ 1,095,600
Work in process inventory, January 1, 2010... $ 214,400
Direct materials:
Direct materials inventory, January 1, 2010
(Note A)…………………………………. $ 99,000
Direct materials purchases (Slide 27)…….. 2,587,500
Cost of direct materials available for use…. $2,686,500
Less direct materials inventory,
December 31, 2010 (Note B)……………. 104,400
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2010
Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd $ 90,000
Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400
Direct materials inventory, December 31, 2010 $104,400
35. Finished goods inventory, January 1 ,2010…. $ 1,095,600
Work in process inventory, January 1, 2010... $ 214,400
Direct materials:
Direct materials inventory, January 1, 2010
(Note A)…………………………………. $ 99,000
Direct materials purchases (Slide 27)…….. 2,587,500
Cost of direct materials available for use…. $2,686,500
Less direct materials inventory,
December 31, 2010 (Note B)……………. 104,400
Cost of direct materials placed in production $2,582,100
Direct labor (Slide 31)………………………. 4,851,600
Factory overhead (Slide 32)………………….. 2,089,080
Total manufacturing costs……………………. 9,522,780
Total work in process during period…………. $9,737,180
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2010
36. Less work in process inventory, December 31, 2010 220,000
Cost of goods manufactured………………………... 9,517,180
Cost of finished goods available for sale…………... $10,612,780
Less finished goods inventory, December 31, 2010.. 1,565,000
Cost of goods sold………………………………….. $ 9,047,780
Finished goods inventory, January 1 ,2010………... $ 1,095,600
Work in process inventory, January 1, 2010……….. $ 214,500
Total manufacturing costs………………………….. 9,522,780
Total work in process during period……………….. $9,737,180
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2010
37. Elite Accessories Inc.
Selling and Administrative Expenses Budget
For the Year Ending December 31, 2010
Selling expenses:
Sales salaries expense…………………………. $715,000
Advertising expense…………………………... 360,000
Travel expense…………………………………. 115,000
Total selling expenses………………………... $1,190,000
Administrative expenses:
Officers’ salaries expense………………………. $360,000
Office salaries expense…………………………. 258,000
Office rent expense……………………………... 34,500
Office supplies expense…………………………. 17,500
Miscellaneous administrative expense………….. 25,000
Total administrative expenses………………… 695,000
Total selling and administrative expenses………… $1,885,000
38. Revenue from sales (slide 19) $13,336,000
Cost of goods sold (slide 36) 9,047,780
Gross profit $ 4,288,220
Selling & administrative expenses:
Selling expenses (slide 37) $1,190,000
Administrative expenses (slide 37) 695,000
Total sell. & Admin. Expenses 1,885,000
Income from operations $ 2,403,220
Other income:
Interest revenue $ 98,000
Other expense:
Interest expense 90,000 8,000
Income before income tax $ 2,411,220
Income tax 600,000
Net income $ 1,811,220
Elite Accessories Inc.
Budgeted Income Statement
For the Year Ending December 31, 2010
