The budget committee is also responsible for ensuring that the budget is linked to the organization's strategic plan. Most organizations prepare the budget for the coming year during the last four or five months of the current year.
Ending Finished Goods Inventory Budget
Cost of Goods Sold Budget
M arketing Expense Budget
Research and Development Expense Budget
Administrative Expense Budget
Budgeted Income Statement
Operating Budgets for M erchandising and Service Firms
In a nonprofit service provider, the sales budget is replaced by a budget that identifies the levels of different services that will be offered in the coming year and the associated funds that will be allocated to the services. Both for-profit and non-profit service organizations do not have inventory budgets for end products.
Preparing the Financial Budget
The sales budget identifies each service and the quantity of it that will be sold. A non-profit service organization's income statement is replaced by a statement of sources and uses of funds.
The Cash Budget
Because there are no inventories of finished goods, the services produced will be identical to the services sold. Activity-based budgets can be more accurate for planning and are more useful for control.
Components of the Cash Budget
The cash available section consists of the beginning cash balance and the expected cash receipts. Remember that the minimum cash balance is subtracted to find the cash surplus or deficit.
Cash Budgeting Example
Quarterly data indicate the need for short-term borrowing both due to the purchase of new equipment and the temporal dynamics of the company's cash flows. Once the plans for using the surplus cash are finalized, the cash budget should be revised to reflect those plans.
Budgeted Balance Sheet
At least the excess cash should be invested in short-term marketable securities.
Shortcomings of the Traditional M aster Budget Process
Departmental Orientation
Zero-based budgeting is an alternative approach.2 Unlike incremental budgeting, the previous year's budget level is not taken for granted. For a detailed discussion of the approach, see Peter Pyhrr, Zero-Base Budgeting (New York: Wiley, 1973).
Results Orientation
A reasonable compromise might be to use a zero-based budget every three to five years to eliminate waste and inefficiency. Especially during a period of intense competition and renewal, zero-base budgeting can force managers to "break the streak" and see their units from a different perspective.
Flexible Budgets for Planning and Control
Proponents of the incremental approach argue that incremental budgeting also uses broad and in-depth reviews, but not as often because they are not justified on a cost-benefit basis.
Static Budgets versus Flexible Budgets
Static Budgets
The actual costs for the production of 3 million concrete blocks are being compared with the planned costs for the production of 2.4 million. Thus, even if cost control were perfect for the production of 3 million units, unfavorable variances would be produced for all variable costs.
Flexible Budgets
The security department consisted of a receptionist, two administrative assistants and Brad – the managing partner of the department. The third activity is "reconciliation of accounts." The administrative assistants performed this activity and it took about 30 minutes per account every month.
The Behavioral Dimension of Budgeting
For example, perhaps the monthly reports could, with the help of appropriate security, be posted on the Internet. This negative behavior can be manifested in numerous ways, but the overall effect is to undermine the organization's goals.
Characteristics of a Good Budgetary System
Dysfunctional behavior involves individual behavior that is fundamentally at odds with the goals of the organization. Any dysfunctional actions regarding budgets that a manager may take may have an unethical aspect.
Frequent Feedback on Performance
For example, a manager who deliberately understates sales and overstates costs in order to make the budget easier to achieve is engaging in unethical behavior. It is the company's responsibility to create budget incentives that do not encourage unethical behavior.
M onetary and Nonmonetary Incentives
Participative Budgeting
Realistic Standards
Flexible budgets, for example, are used to ensure that budgeted costs provide standards that are consistent with the actual level of activity. From time to time, senior management makes arbitrary cuts to the previous year's budgets in the belief that the cuts will reduce the fat or inefficiencies that supposedly exist.
Controllability of Costs
A blanket reduction without any formal evaluation may reduce the ability of some units to carry out their tasks. For example, Kodak confidently predicted for years that their film business would grow by 8 percent, while the industry was only growing by 4 percent.7 The predicted growth did not materialize.
M ultiple M easures of Performance
The master budget, the comprehensive financial plan for an organization, consists of the operating and financial budgets. The financial budget includes the cash budget, the investment budget and the budgeted balance sheet.
S ALES , P RODUCTIO N , D IRECT M ATERIALS ,
These schedules include the sales budget, the production budget, the direct materials purchases budget, the direct labor budget, the overhead budget, the ending goods inventory budget, the cost of goods sold budget, the marketing expense budget, the research and development expense budget, and the administrative expense budget. The budgeted (or pro forma) balance sheet gives the expected ending balances of the asset, liability and equity accounts if budgeted plans hold.
The projected income statement describes the net profit that will be realized if the planned plans are realized. In particular, traditional master budgeting (1) does not recognize interdependencies between departments, (2) is static, and (3) is results-oriented rather than process-oriented.
R e quir e d
L UTIO N
F LEXIBLE B UDGETI N G
If you were responsible for developing the master budget, how, if at all, would you be affected by this knowledge.
P RODUCTIO N B UDGET
Prepare a separate production budget for each product for each of the first three quarters of the year.
D IRECT M ATERIALS P URCHASES B UDGET , D IRECT L ABOR B UDGET
The target price for this model is $180; unit sales are estimated to equal 2500 per month. Audio-2-Go believes that the price of the Model A-3 must be reduced by 20 percent to maintain unit sales at 2006 levels.
P URCHASES B UDGET
In preparation for the phase-out of this model, Audio-2-Go, Inc. plans to reduce advertising for this model and increase the price by 30 percent. Audio-2-Go released this model to match competitors' audio players, but the price is so much higher than other Audio-2-Go products that sales are disappointing.
S CHEDULE OF C ASH R ECEIPTS
The money will be credited to his account no later than the fifth day of the following month. American Express: Rick collects these receipts throughout the month and sends them to American Express for payment on the last day of the month.
C ASH B UDGET
VISA/MasterCard: Rick will collect these credit card receipts throughout the month and submit them in one bundle for payment on the last day of the month. He likes to have $2,000 on hand at the end of the month and is concerned about the potential balance at the end of October.
Credit sales are collected over a 3-month period: 50 percent in the month of sale, 30 percent in the second month, and 15 percent in the third month. Credit sales not paid for until the second month after the sale are considered delinquent and are subject to a 2 percent late fee.
P RODUCTIO N , P URCHASES ,
The company's policy is to produce enough tables to ensure that 40 percent of next month's sales are in finished goods inventory. Rokat also purchases enough materials to ensure that its material inventory reaches 60 percent of the next month's planned production.
F LEXIBLE B UDGET
Disregarding your answer to Requirement 1, assume the required units of production for August and September are 1,600 and 1,800, respectively, and the July 31, 2007 materials inventory is 4,200 units.
A CTIVITY -B ASED B UDGET
Of the $21,000 for office supplies and miscellaneous, $5,000 can be allocated to telephone costs, which can be divided equally between dispatch and labor activities. Based on the budget prepared in Requirement 1, advise Gene on actions that can be taken to reduce expenses.
Inventory policy dictates that there are sufficient materials on hand at the beginning of the month to produce 50 percent of the month's estimated sales. If the company develops a shortage of cash at the end of the month, sufficient cash is borrowed to cover the shortage.
Required
The average direct labor cost per hour is $15. Overhead costs are estimated each month using a flexible budget formula.
The lease for a new storage facility is expected to begin on November 2. The company has a policy of maintaining a minimum cash balance of $10,000. Bernard wants to see how the company is doing before the start of December.
P RODUCTION , D IRECT L ABOR , D IRECT M ATERIALS , S ALES B UDGETS , B UDGETED C ONTRIBUTION M ARGIN
Round the overhead rate to the nearest cent and estimate the overhead to the nearest dollar.). Round the intercept and coefficient to the nearest cent and estimate the overhead to the nearest dollar.).
F LEXIBLE B UDGET , M ULTIPLE R EGRESSION
Calculate a flat rate based on machine hours using total overhead cost and total machine hours. Prepare a flexible overhead budget for 12 months using the results of this regression equation.
F LEXIBLE B UDGET FOR A S ERVICE F IRM
After much discussion, she estimates that each patient spends about $5 of medical supplies for each 15-minute time slot. In the coming month, it is estimated that doctors will see 800 patients, who will use a total of 1,200 15-minute time slots.
A CTIVITY -B ASED B UDGET FOR A S ERVICE F IRM
When a patient calls for an appointment, the receptionist determines how long the appointment should last and assigns one, two, three or four 15-minute time slots. For example, an initial visit may take 30 minutes, or two 15-minute periods, but a follow-up visit may only take one 15-minute period.
P ARTICIPATIVE VERSUS I MPOSED B UDGETING
The driving force is the number of claims filed, and the cost is $9.27 per claim filed. For the month of May, the following amounts are estimated for each driver: 875 telephone calls for orders, 800 patient examinations, 400 procedures performed, 650 insurance claims filed and 40 disputed claims.
I NFORMATION FOR B UDGETING , E THICS
Explain why Marge and Pete behave this way and describe the benefits they expect to realize from using the slack budget. As a management accountant, Scott Ford believes that the behavior described by Marge and Pete may be unethical and that he may have an obligation not to support this behavior.
C OLLABORATIVE L EARNING E XERCISE
The amount of cost of goods sold that will appear on Karmee Company's pro forma income statement for the month of February. The total cash disbursements that Karmee Company will make for operating expenses (excluding cost of goods sold) during the month of April.
C YBER R ESEARCH C ASE
