8 -1

CHAPTER

Functional
and ActivityBased
Budgeting

Planning

8 -2

Strategic Plan
Long-Term
Objectives
Short-Term
Objectives
Short-Term
Plan
Budgets
Feedback

Budgeting
and
Planning
and Control

Planning
Strategic Plan
Long-Term
Objectives

Control
Monitoring of
Actual Activity

Short-Term
Objectives
Short-Term
Plan
Budgets
Feedback

Comparison of
Actual with
Planned
Investigation
Corrective Action

8 -3

Advantages
Advantages of
of Budgeting
Budgeting
1. It forces managers to plan.
2. It provides information that can be used
to improve decision making.
3. It provides a standard for performance
evaluation.
4. It improves communication and
coordination.

8 -4

8 -5

The master budget is the comprehensive

financial plan for the organization as a whole.
Typically, the master budget is for a one-year
period corresponding to the fiscal year.

8 -6

A
Amaster
master budget
budget can
can be
be
dividing
dividing into
into operating
operating
and
and financial
financial budgets.
budgets.

8 -7

Financial
Financial budgets
budgets detail
detail the
the
Operating
budgets
describe
Operating
budgets
describe
inflows
and
outflows
of
inflows and outflows
of cash
cash
the
income-generating
the
income-generating
and
and the
the overall
overall financial
financial
activities
of
aa firm.
activities
of
position.
position.firm.

Preparing
Preparing the
the Operating
Operating Budget
Budget
Sales budget
Production budget
Direct materials purchases budget
Direct labor budget
Overhead budget
Selling and administrative expenses
budget
Ending finished goods inventory budget
Cost of goods sold budget

8 -8

8 -9

Schedule 1
Texas Rex, Inc.
Sales Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Year
Units
1,000
1,200
1,500
2,000
5,700
Unit selling price x $10 x $10 x $10 x $10 x $10
Budgeted sales $10,000 $12,000 $15,000 $20,000 $57,000

8 -10

Computing Units to be Produced

Units to be produced = Expected unit sales +
Units in ending
inventory Units in
beginning inventory

8 -11

Schedule 2
Texas Rex, Inc.
Production Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Sales (Schedule 1)
1,000 1,200
1,500
2,000
Desired ending
inventory
240
300
400
200
Total needs
1,240 1,500
1,900
2,200
Less: Beginning
inventory
-180
-240
-300
-400
Units to be
produced
1,060 1,260
1,600
1,800

Year
5,700
200
5,900
-180
5,720

8 -12

Computing Units to be Purchased

Purchases = Direct materials needed for
production + Desired
direct materials in ending
inventory Direct
materials in beginning
inventory

Plain
TShirts

Schedule 3
Texas Rex, Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4

Units to be produced
(Schedule 2)
1,060
Direct materials per
unit
x 1
Production needs 1,060
Desired ending
inventory
126
Total needs
1,186

8 -13

Year

1,260

1,600

1,800

5,720

x 1
1,260

x 1
1,600

x 1
1,800

x 1
5,720

160
1,420

180
1,780

106
1,906

106
5,826

Continued
Continued

8 -14

1
Total needs
Less: beginning
inventory
Direct materials to
be purchased
Cost per pound
Total purchase cost
plain t-shirts

Quarter
2
3

Year

1,186

1,420

1,780

1,906

5,826

-58

-126

-160

-180

-58

1,128
x $3

1,294
x $3

1,620
x $3

1,726
5,768
x $3 x
$3

$3,384

$3,882

$4,860

$5,178 $17,304

8 -15

Schedule 3
Texas Rex, Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Units to be produced
(Schedule 2)
1,060
Direct materials per
unit
x 5
Production needs 5,300
Desired ending
inventory
630
Total needs
5,930

Year

1,260

1,600

1,800

5,720

x 5
6,300

x 5
8,000

x 5
9,000

x
5
28,600

800
7,100

900
8,900

530
9,530

530
29,130

Continued
Continued

8 -16

Quarter
2
3

Year

Total needs
5,930
7,100
8,900
9,530 29,130
Less: beginning
inventory
-390
-630
-800
-900
-390
Direct materials to
be purchased
5,540
6,470
8,100
8,630 28,740
Cost per ounce
x $0.20 x $0.20 x $0.20 x $0.20 x $0.20
Total purchase
cost of ink
$ 1,108 $ 1,294 $ 1,620 $ 1,726 $ 5,748
Total direct
materials purchases cost

$4,492

$5,176

$6,480 $6,904 $23,052

8 -17

Schedule 4
Texas Rex, Inc.
Direct Labor Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Units to be produced
(Schedule 2)
1,060
1,260
1,600
1,800
Direct labor time
per unit (hr.)
x 0.12 x 0.12 x 0.12 x 0.12
Total hours needed 127.2
151.2
192
216
Average wage per
hour
x $10 x $10 x $10 x $10
Total direct labor
cost
$1,272 $1,512 $1,920 $2,160

Year
5,720
x 0.12
686.4
x $10
$6,864

8 -18

Schedule 5
Texas Rex, Inc.
Overhead Budget
For the Year Ended December 31, 2004
Quarter
1
2
3
4
Budgeted direct labor
hours (Schedule 4) 127.2
Variable overhead
rate
x $5
Budgeted variable
overhead
$ 636
Budgeted fixed
overhead
1,645
Total overhead $2,281

151.2
x

$5

192
x

$5 x

Year

216
$5

686.4
x

$5

$ 756

$ 960 $1,080 $ 3,432

1,645
$2,401

1,645 1,645
6,580
$2,605 $2,725 $10,012

8 -19

Schedule 6
Texas Rex, Inc.
Ending Finished Goods Inventory Budget
For the Year Ended December 31, 2004
Unit-cost computation:
Direct materials ($3 + $1)
Direct labor (0.12 hr. @ $10)
Overhead:
Variable (0.12 hr. @ $5)
Fixed (0.12 hr. @ $9.59)
Total unit cost

$4.00
1.20
0.60
1.15
$6.95

Units Unit Cost

Finished goods: Logo T-shirts

200

$6.95

Total
$1,390

8 -20

Schedule 7
Texas Rex, Inc.
Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Direct materials used (Schedule 3)
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Beginning finished goods
Goods available for sale
Less: Ending finished goods (Sched. 6)
Budgeted cost of goods sold

$22,880
6,864
10,012
$39,756
1,251
$41,007
- 1,390
$39,617

8 -21

Schedule 8
Texas Rex, Inc.
Selling and Administrative Expenses Budget
For the Year Ended December 31, 2004
1

Quarter
2
3

Year

Planned sales in units

(Schedule 1)
1,000 1,200 1,500 2,000 5,700
Variable selling and
administrative
expenses per unit
x $0.10 x $0.10 x $0.10 x $0.10 x $0.10
Total variable
expenses
$ 100 $ 120 $ 150 $ 200 $ 570
Continued
Continued

8 -22

Quarter
2
3

Year

Fixed selling and administrative expenses:

Salaries
$1,420 $1,420 $1,420 $1,420 $5,680
Utilities
50
50
50
50
200
Advertising
100
200
300
500 1,100
Depreciation
150
150
150
150
600
Insurance
----500
--500
Total fixed expenses $1,720 $1,820 $2,420 $2,120 $8,080
Total selling and administrative expenses
$1,820 $1,940 $2,570 $2,320 $8,650

8 -23

Schedule 9
Texas Rex, Inc.
Budgeted Income Statement
For the Year Ended December 31, 2004
Sales (Schedule 1)
Less: Cost of goods sold (Schedule 7)
Gross margin
Less: Selling and administrative
expenses (Schedule 8)
Operating income
Less: Interest expense (Schedule 10)
Income before taxes
Less: Income taxes (Schedule 10)
Net income

$57,000
-39,617
$17,383
-8,660
$ 8,733
- 60
$ 8,673
-2,550
$ 6,123

8 -24

The Usual
Financial Budgets
The cash budget
The budgeted balance
sheet
The budget for
capital expenditures

8 -25

The
The Cash
Cash Budget
Budget
Beginning cash balance
Add: Cash receipts
Cash available
Less: Cash disbursements
Less: Minimum cash balance
Cash surplus (deficiency)
Add: Cash from loans
Less: Loan repayments
Add: Minimum cash balance
Ending cash balance

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

The
The Cash
Cash Budget
Budget
Texas Rex, Inc. 1st Quarter
Beginning cash balance
$ 5,200
Add: Cash receipts (cash and credit sales) 10,600
Total cash available
15,800
Less: Cash disbursements
-15,777
Less: Minimum cash balance
- 1,000
Total cash needs
-16,777
Excess or deficiency (-) of cash
- 977
Add: Cash from loans
1,000
Less: Loan repayments
---Ending cash balance
$ 1,023

$1,000 (loan) - $977 + $1,000

(minimum cash balance)

8 -26

8 -27

Source

Texas Rex, Inc.

Cash Receipts Pattern for 2004
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Cash sales

$ 2,500

Received on
account from:
Quarter 4, 2003

1,350

Quarter 1, 2004

6,750

Quarter 2, 2004

$ 3,000

$ 5,000

750
8,100

Quarter 3, 2004
Quarter 4, 2004

$ 3,750

900
10,125

1,125

----

----

---

13,500

Total cash receipts $10,600

$11,850

$14,775

$19,625

Schedule 11
Texas Rex, Inc.
Budgeted Balance Sheet
December 31, 2004

8 -28

Assets
Current assets:
Cash
Accounts receivable
Materials inventory
Finished goods inventory
Total current assets
Property, plant, and equipment:
Land
Building and equipment
Accumulated depreciation
Total property, plant, and equipment
Total assets
Continued
Continued

$ 7,503
1,500
424
1,390
$10,817
$ 1,100
36,500
-7,760
29,840
$40,657

8 -29

Liabilities and Owners Equity

Current liabilities:
Accounts payable
Owners equity:
Retained earnings
$39,276
Total owners equity
Total liabilities and owners equity

$ 1,381
39,276
$40,657

8 -30

Sales Budget
Production Budget
Direct Materials
Purchases Budget

Direct Labor
Budget

Cash
Budget

Overhead
Budget

The
The Master
Master
Budget
Budget

8 -31

Sales Budget
Production Budget
Direct Materials
Purchases Budget
Ending FG
Inventory Budget

Direct Labor
Budget

Overhead
Budget

(Unit
cost)

Cash
Budget

The
The Master
Master
Budget
Budget

8 -32

Sales Budget
Production Budget
Direct Materials
Purchases Budget

Direct Labor
Budget

Ending FG
Inventory Budget

Overhead
Budget

Selling and
Administrative
Expenses
Budget`

Cost of Goods
Sold Budget
Budgeted IS
Cash
Budget

The
The Master
Master
Budget
Budget

8 -33

Static Budgets versus Flexible Budgets

A static budget is a budget for a particular level of
activity.
A flexible budget is a budget that provides a firm with
the capability to compute expected costs for a range of
activity.

Performance Report Quarterly

Production Costs
Actual
Units produced
Direct materials cost
Direct labor costs
Fixed overhead:
Variable:
Supplies
Power
Fixed:
Supervision
Depreciation
Total

8 -34

Budgeted Variance

1,200

1,060

140 F

$4,830
1,440

$4,240
1,272

$590 U
168 U

535
170

477
159

58 U
11 U

1,055
540
$8,570

1,105
540
$7,793

-50 F
--$777 U

8 -35

The Uses of Flexible Budget

The flexible budget can be used to prepare the budget

before the fact for the expected level of activity.

Flexible budgeting can be used to compute what costs

should have been for the actual level of activity.

Flexible budgeting can help managers deal with

uncertainty by allowing them to see the expected

outcomes for a range of activities.

Flexible Production Budget

Production Costs

Variable overhead:
Direct materials
Direct labor
Variable overhead:
Supplies
Power
Total variable costs
Fixed overhead:
Supervision
Depreciation
Total fixed costs
Total production costs

Variable Cost
per Unit

8 -36

Range of Production (units)

1,000
1,200
1,400

$4.00
1.20

$4,000
1,200

$4,800 $5,600
1,440 1,680

0.45
0.15
$5.80

450
150
$5,800

540
630
180
210
$6,960 $8,120

$1,105
540
$1,645
$7,445

$1,105 $1,105
540
540
$1,645 $1,645
$8,605 $9,765

Performance Report Quarterly

Production Costs
Units produced
Direct materials
Direct labor
Variable overhead:
Supplies
Power
Total variable costs

8 -37

Actual

Budget

1,200

1, 200

$4,830
1,440

$4,800
1, 440

$30 U
----

535
170
$6,975

540
180
$6,960

-5 F
-10 F
$15 F

Continued
Continued

Variance
----

Performance Report Quarterly

Production Costs

8 -38

Actual

Budget

1,200

1, 200

----

Fixed overhead:
Supervision
1,055
Depreciation
540
Total fixed costs
$1,595
Total production costs $8,570

1,105
540
$1,645
$8,605

-50 F
---$50 F
$35 U

Units produced

Variance

8 -39

Behavior Dimensions of Budgeting

Goal congruence
Dysfunctional behavior
Frequent feedback on performance
Monetary and nonmonetary incentives
Participative budgeting
Realistic standards
Controllability of costs
Multiple measures of performance

8 -40

Participative budgeting has three

potential problems:
1. Setting standards that are either too high
or too low.
2. Building slack into the budget.
3. Pseudoparticipation.

Activity-Based Budgeting
Activity flexible
budgeting is the
prediction of what
activity costs will
be as activity
output changes.

8 -41

8 -42

Flexible Budget: Direct Labor Hours

Cost Formula
Fixed
Variable

Direct Labor Hours

10,000
20,000

Direct materials

---

$10

$100,000

$200,000

Direct labor

---

80,000

160,000

$ 20,000

50,000

80,000

Machining

15,000

25,000

35,000

Inspections

120,000

---

120,000

120,000

50,000

---

50,000

50,000

220,000

---

220,000

220,000

$425,000

$22

$645,000

$865,000

Maintenance

Setups
Purchasing
Total

Activity Flexible Budget

Driver: Direct Labor Hours
Formula

Fixed

Level of Activity

Variable

Direct materials

---$10 $100,000$200,000

Direct labor

---

Subtotal

10,000

20,000

8,000

16,000

80,000 160,000

$0$18 $180,000$360,000

Driver: Machine Hours

Maintenance
Machining
Subtotal

Fixed

Variable

$20,000$5.50$64,000

$108,000

15,000 2.00 31,000

47,000

$35,000$7.50$95,000

$155,000

Continued
Continued

8 -43

Activity Flexible Budget

Driver: Number of Setups
Fixed
Inspections

$80,000$2,100$132,500

Setups
Subtotal

Variable

--- 1,800

2530
$143,000

45,000

54,000

$80,000$3,900$177,500

$197,000

Driver: Number of Orders

Fixed
Purchasing
Total

Variable

$211,000$

1$226,000

$678,500$948,000

15,000
$236,000

25,000

8 -44

8 -45

Activity-Based
Activity-Based Performance
Performance Report
Report
Actual Costs

Budgeted Costs

Budget Variance

$101,000

$100,000

$ 1,000 U

Direct labor

80,000

80,000

---

Maintenance

55,000

64,000

9,000 F

Machining

29,000

31,000

2,000 F

Inspections

125,500

132,500

7,000 F

46,500

45,000

1,500 U

220,000

226,000

6,000 F

$657,000

$678,500

$21,500 F

Direct materials

Setups
Purchasing
Total

8 -46

Variances for the Inspection Activity

Activity

Actual Cost

Budgeted Cost

Variance

Inspection:
Fixed
Variable
Total

$ 82,000

$ 80,000

$2,000 U

43,500

52,500

9,000 F

$125,500

$132,500

$7,000 F

8 -47

Chapter Eight

The
The End
End

8 -48