ACCT 102

Management Accounting
Lecture 14

Master Budget and

Responsibility
Accounting
 2

Budgets
Budgets
The planning and control cycle involves:

 Planning
Planning the
the future
future activities
activities of
of the
the organization.
organization.

 Providing
Providing aa guide
guide toto employees
employees and and aa benchmark
benchmark
against
against which
which actual
actual results
results can
can bebe compared.
compared.

 Continuously
Continuously analyzing
analyzing variations
variations from
from plans
plans
and
and taking
taking corrective
corrective action
action as
as needed.
needed.

 Incorporating
Incorporating information
information on on changing
changing
circumstances
circumstances into
into future
future plans.
plans.
 3

Budgets
Budgets

A
A budget
budget isis aa formal
formal plan
plan
of
of action
action expressed
expressed inin
monetary
monetary terms.
terms.

An
An operational
operational budget
budget
concerns
concerns the
the development
development ofof
detailed
detailed plans
plans to
to guide
guide
operations
operations throughout
throughout the
the
budget
budget period.
period.
 4

Reasons
Reasons for
for Budgeting
Budgeting
 Budgets compel planning.
 Budgets improve communication and
coordination among organization
elements.
 Budgets provide a guide to action.
 Budgets provide a basis for performance
evaluation.
 5

General
General Approaches
Approaches
to
to Budgeting
Budgeting
Approaches
Approaches toto developing
developing aa budget
budget can
can
be
be placed
placed into
into two
two broad
broad categories.
categories.
 Budgeting with
unit cost drivers,
and
 Budgeting with
nonunit cost
drivers.
 6

General
General Approaches
Approaches
to
to Budgeting
Budgeting
Budgeting
Budgeting with
with unit
unit level
level cost
cost drivers
drivers
• Output/Input Approach

Budgeting
Budgeting with
with nonunit
nonunit level
level cost
cost drivers
drivers
• Incremental Approach
• Minimum Level Approach
• Zero-based Approach
 7

General
General Approaches
Approaches
to
to Budgeting
Budgeting
Budgeting
Budgeting with
with unit
unit level
level and
and nonunit
nonunit level
level
cost
cost drivers
drivers
• Activity-Based Approach
o Approach uses an activity cost hierarchy to
budget physical inputs and costs as a function of
planned activity
o Better control over nonunit level cost drivers
o Costs are budgeted on the anticipated
consumption of cost drivers
 8

Activity-Based
Activity-Based Budgeting
Budgeting -- Pdt
Pdt
Atlantic Magnetic, Inc.
Activity-Based Budget for Compact Disks
For the Year Ending December 31, 2002
Unit level costs:
Direct materials $180,000
Assembly 245,000
Packaging 380,000
Distribution 60,000 $ 865,000

Continued
Continued next
next slide
slide
 9

Activity-Based
Activity-Based Budgeting
Budgeting -- Pdt
Pdt
Batch level costs:
Procurement $ 30,000
Setup 80,000
Inspection 70,000 $ 180,000

Product level costs:

Development and design $ 50,000
Product advertising 120,000 170,000
Total product cots $1,215,000
 10

Activity-Based
Activity-Based Budgeting
Budgeting -- Dept
Dept
Atlantic Magnetic, Inc.
Activity-Based Budget for Purchasing Dept.
For the Year Ending December 31, 2002
Budgeted activities:
New vendors screened 130
Orders placed 1,200
Shipments received and inspected 1,400

Continued
Continued next
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slide
 11

Activity-Based
Activity-Based Budgeting
Budgeting -- Dept
Dept
Budgeted costs:
Vendor screening and quality
certification (unit level per vendor) $ 30,000
Procurement (unit level per pur. order):
Placing orders $50,000
Verifying orders 25,000
Receiving orders 16,000
Inspecting orders 8,000 99,000
General admin. & maint. 25,000
Total purchasing department costs $154,000
 12

Activity-Based
Activity-Based Budgeting
Budgeting
Activity-based
Activity-based budgeting
budgeting
focuses
focuses on
on redesigning
redesigning
products
products or
or improving
improving
processes
processes rather
rather than
than
simply
simply cutting
cutting costs.
costs.
 13

Continuous
Continuous Improvement
Improvement to
to
Budgeting
Budgeting
• Continuous improvement (Kaizen) approach
to budgeting
o Budgets include a target improvement
(reduction) in cost
o This approach may be used in conjunction with
any of the previously discussed approach to
budgeting
o When used with activity-based approach, the
focus is typically on redesigning products or
improving processes rather than simply cutting
costs
 14

Operating
Operating Cycle
Cycle of
of aa Manufacturing
Manufacturing
or
or Merchandising
Merchandising Operation
Operation
Purchases or
merchandise
Cash
Collection function

Accts. Inven-
Rec. tory

The master budget is Sales or

merely a detailed model Services
of the firm’s operating cycle
that include all internal processes.
 15

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
organization-wide
organization-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 organization’s operation cycle.
 16

The
The Master
Master Budget
Budget
22 classes
classes of
of budgets
budgets in
in the
the Master
Master Budget
Budget
• Operational budgets include the individual
budgets for the preparation of the budgeted
income statement
• Financial budgets include the cash budget,
budgeted income statement and the budgeted
balance sheet
 17

Overview
Overview of
of Master
Master Budget
Budget of
of aa
Merchandising
Merchandising Firm
Firm
Sales Budget

Purchases Selling Expense General and

Budget Budget Administrative
Expense Budget

Cash Budget

Continued
Continued on
on next
next slide
slide
 18

Overview
Overview of
of Master
Master Budget
Budget of
of aa
Merchandising
Merchandising Firm
Firm
from Sales Budget from Purchases,
Selling Expense,
Cash Budget
and General and
Administrative
Other Special Budgets: Expense Budgets
Taxes, Dividends, Capital
Improvements, etc.

Pro Forma Statements:

Income Statement and
Balance Sheet
 19

Initial
Initial Balance
Balance Sheet
Sheet
Backpacks Galore, Inc. (BGI)
Balance Sheet
December 31, 2000 Continued
Continuedon on
Assets next
nextslide
slide
Current assets:
Cash $ 15,000
Accounts receivable (net) 21,600
Inventory
School backpacks $ 50,000
Hiking backpacks 96,000 146,000 $182,600
Property and equipment:
Land 60,000
Buildings and equipment 260,000
Less accum. depreciation 124,800 135,200 195,200
Total assets $377,800
 20

Initial
Initial Balance
Balance Sheet
Sheet
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 40,000
Stockholders’ equity:
Capital stock $150,000
Retained earnings 187,800 337,800
Total liabilities and stockholders’
equity $377,800
 21

Sales
Sales Budget
Budget

•• The
The sales
sales budget
budget contains
contains aa forecast
forecast ofof unit
unit sales
sales
volume
volume andand sales
sales revenue,
revenue, and
and itit may
may also
also contain
contain
aa forecast
forecast of
of sales
sales collections.
collections.
•• Because
Because sales
sales drive
drive almost
almost all
all activities,
activities,
developing
developing aa sales
sales budget
budget isis the
the starting
starting point
point in
in
the
the budget
budget process.
process.
•• Managers
Managers use use the
thebest
best information
information available
available toto
accurately
accurately forecast
forecast future
future market
market conditions.
conditions.
 22

Sales
Sales Budget
Budget
Backpacks Galore, Inc.
Sales Budget
For the Year Ending December 31, 2001
First Second Third Four Year
Quarter Quarter 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
 23

Purchases
Purchases Budget
Budget

•• The
The purchases
purchases budget
budget indicates
indicates the
the merchandise
merchandise that that
must
must bebe acquired
acquired to
to meet
meet sales
sales needs
needs and
and ending
ending
inventory
inventory requirements
requirements
•• ItIt may
may be
be referred
referred to
to as
as the
themerchandise
merchandise budget
budget ifif itit
contains
contains only
only purchases
purchases of of merchandise
merchandise forfor sale.
sale.
However,
However, itit often
often contains
contains office
office and
and selling
selling
supplies.
supplies.
•• For
For simplicity,
simplicity, BGI’s
BGI’s purchases
purchases budget
budget includes
includes only
only
merchandise.
merchandise.
 24

Assumptions
Assumptions for
for
Purchases
Purchases Budget
Budget
•• Management
Management desires desires toto have
haveallall inventory
inventory needed
needed
to
to fill
fill the
thefollowing
following quarter’s
quarter’s sales
sales in
in stock
stock at
at the
the
end
end ofof the
the previous
previous quarter.
quarter.
•• To
To provide
providefor for aa possible
possible delay
delay in inthe
thereceipt
receiptofof
inventory,
inventory, BGI BGI also
also carries
carries aa safety
safety stock
stock of
of 1,000
1,000
school
school backpacks
backpacks and and 500
500 hiking
hiking backpacks.
backpacks.

Continued
Continuednext
nextslide
slide
 25

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 thethe safety
safety
stock.
stock.
•• Budgeted
Budgeted purchases
purchases are
are computed
computed as as total
total
inventory
inventory needs
needs less
less the
thebeginning
beginning inventory.
inventory.
 26

Partial
Partial Purchases
Purchases Budget
Budget
Backpacks Galore, Inc.
Purchases Budget
For the Year Ending December 31, 2001
First Second Third Four Year
Quarter Quarter Quarter Quarter Total
Purchases (units):
School backpacks:
Current qtr. sales 4,000 3,400 3,650 3,950
Desired end. inv. 4,400 4,650 4,950 5,100
Total needs 8,400 8,050 8,600 9,050
Less beg. inv. -5,000 -4,400 -4,650 -4,950
Purchases 3,400 3,650 3,950 4,100 15,100
 27

Other
Other Budgets
Budgets

•• The
The selling
selling expense
expense budget
budget presents
presents the
the expenses
expenses
that
that the
the organization
organization plans
plans to
to incur
incur in
in connection
connection
with
with sales
sales and
and distribution
distribution

•• The
The general
general andand administration
administration expense
expense budgets
budgets
presents
presents the
the expenses
expenses thetheorganization
organization plans
plans to
to
incur
incur in
in connection
connection with
withthe
thegeneral
general
administration
administration of of the
the organization
organization
 28

Selling
Selling Expense
Expense Budget
Budget
Backpacks Galore, Inc.
Selling Expense Budget
For the Year Ending December 31, 2001
First Second Third Four 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 expense$12,100 $13,620 $17,420 $12,860 $56,000
 29

Cash
Cash Budget
Budget

•• The
The cash
cash budget
budget summarizes
summarizes all all cash
cash
receipts
receipts and
and disbursements
disbursements expected
expected toto
occur
occur during
during thethe budget
budget period.
period.
•• The
The cash
cash budget
budget shows
shows thethe cash
cash
operating
operating deficiencies
deficiencies and
and surpluses
surpluses
expected
expected to to occur.
occur. This
This information
information isis
used
used to
to plan
plan for
for borrowing
borrowing and and loan
loan
repayment.
repayment.
•• Cash
Cash isis critical
critical to
to survival.
survival.
 30

Assumptions
Assumptions for
for
Cash
Cash Budget
Budget
75% collected in the current period
50% cash 24% collected in the next period
Sales 1% uncollected
50% credit
•• Payment
Payment for
for purchases
purchases are
are made
made 50%
50% in in the
the quarter
quarter
purchased
purchased and
and 50%
50% in
in the
the next
next quarter
quarter
•• Information
Information onon cash
cash expenditures
expenditures for for selling
selling
expenses
expenses isis based
based on
on budgets
budgets for
for these
these items.
items.

Continued
Continuednext
nextslide
slide
 31

Assumptions
Assumptions for
for
Cash
Cash Budget
Budget
•• Tax
Tax information
information provided
provided by by BGI’s
BGI’s accountant
accountant
•• Dividend
Dividend information
information provided
provided by by BGI’s
BGI’s BOD BOD
•• The
The cash
cash maintenance
maintenance policypolicy for
for BGI
BGI specifies
specifies aa
minimum
minimum balance
balance of of $15,000
$15,000
•• BGI
BGI has
has aa line
line of
of credit
credit with
with aa bank,
bank, withwith any
any
interest
interest on
on borrowed
borrowed funds
funds computed
computed at at aa simple
simple
interest
interest of
of 12%
12% per
per year,
year, or
or 11 %
% per
per month.
month. All All
necessary
necessary borrowing
borrowing isis assumed
assumed to to occur
occur at at the
the start
start
of
of each
each quarter
quarter in in increments
increments of of $1,000.
$1,000.
Repayments
Repayments are are assumed
assumed to to occur
occur atat the
the end
end of of the
the
quarter.
quarter. Interest
Interest isis paid
paid when
when loan
loan isis repaid.
repaid.
 32

Partial
Partial Cash
Cash Budget
Budget
Backpacks Galore, Inc.
Cash Budget
For the Year Ending December 31, 2001

First
First
Quarter
Quarter
 33

Partial
Partial Cash
Cash Budget
Budget
Cash balance, beginning $ 15,000
Collection on sales:
Cash sales $ 95,000
From credit sales:
Current quarter 71,250
Prior quarter 21,600
Total $187,850
Total available from operations $202,850

continued
continuedon
onnext
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 34

Partial
Partial Cash
Cash Budget
Budget
Total available from operations $202,850
Less budgeted disbursements:
Purchasing, current quarter $ 65,000
Purchasing, previous quarter 40,000
Total $105,000
Selling 12,100
General and administrative 31,000
Other:
Income taxes 22,000
Dividends 20,000
Total disbursements $(190,100)
continued
continuedon
onnext
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 35

Partial
Partial Cash
Cash Budget
Budget
Total disbursements $ (190,100)
Excess cash available for disbursements $ 12,750
Short-term financing:
New loans $ 3,000
Net cash flow from financing $ 3,000
Cash balance, ending $ 15,750

This amount becomes the

beginning balance for the
second quarter.
 36

Budgeted
Budgeted Financial
Financial Statements
Statements

•• The
The preparation
preparation ofof the
the master
master budget
budget culminates
culminates in in
the
the preparation
preparation ofof budgeted
budgeted financial
financial statements.
statements.
•• Budgeted
Budgeted financial
financial statements
statements areare hypothetical
hypothetical
statements
statements that
that reflect
reflect the
the “as
“as if”
if” effects
effects of
of the
the
budgeted
budgeted activities
activities onon the
thefinancial
financial position
position of
of the
the
organization.
organization.
 37

Budgeted
Budgeted Income
Income Statement
Statement
Backpacks Galore, Inc.
Budgeted Income Statement (Functional Format)
For the Year Ending December 31, 2001
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 56,000
General and administrative 132,000
Bad debt expense 4,750 -732,750
Income from operations $217,250
continued
continuedon
onnext
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 38

Budgeted
Budgeted Income
Income Statement
Statement
Income from operations $217,250
Other expenses:
Interest expense - 1,590
Net income before taxes $215,660
Allowance for income taxes - 77,200
Net income $138,460
 39

Budgeted
Budgeted Balance
Balance Sheet
Sheet
Backpacks Galore, Inc.
Budgeted Balance Sheet
December 31, 2001
Assets
Current assets:
Cash $ 77,480
Accounts receivable (net) 25,080
Merchandise inventory 153,000 $255,560
Property and equipment:
Land $ 60,000
Building and equipment $260,000
Less accumulated depreciation - 132,800 127,200 187,200
Total assets $442,760

continued
continuedon
onnext
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 40

Budgeted
Budgeted Balance
Balance Sheet
Sheet
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 56,500
Stockholders’ equity:
Capital stock $150,000
Retained earnings 236,260 386,260
Total liabilities and stockholders’ equity $442,760
 41

Finalizing
Finalizing the
the Budget
Budget
Before
Before finalizing
finalizing the
the
budget,
budget, two
two questions
questions
must
must be
be addressed.
addressed.

Is
Is the
the proposed
proposed budget
budget
feasible?
feasible?

Is
Is the
the proposed
proposed budget
budget
acceptable?
acceptable?
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
42

Manufacturing
Manufacturing Firm
Firm
Sales Budget

Production Selling/Admin.
Budget Expense Budget

Direct Materials Direct Labor Manufacturing

Budget Budget Overhead Budget

Cash Budget

Budgeted Income Budgeted

Statement Balance Sheet
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
43

Manufacturing
Manufacturing Firm
Firm
Sales Budget

A schedule of
projected sales
over the
budget period.
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
44

Manufacturing
Manufacturing Firm
Firm
Sales Budget

Production
Budget

A schedule of production
requirements for the
budget period.
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
45

Manufacturing
Manufacturing Firm
Firm
Sales Budget

Production
Budget

A schedule of direct
Direct Materials
materials to be used
Budget
and purchased during
the budget period.
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
46

Manufacturing
Manufacturing Firm
Firm
Sales Budget

Production
A schedule of
Budget
direct labor
requirements for
the budget
Direct Materials Direct Labor period.
Budget Budget
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
47

Manufacturing
Manufacturing Firm
Firm
Sales Budget A schedule of
other production
costs during a
Production budget period.
Budget

Manufacturing
Direct Materials Direct Labor
Overhead
Budget Budget Budget
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
48

Manufacturing
Manufacturing Firm
Firm
A schedule of all Sales Budget
nonproduction
spending expected
Selling and
to occur during the Production
Administrative
budget period. Budget Expense Budget

Manufacturing
Direct Materials Direct Labor
Overhead
Budget Budget Budget
 Overview
Overview of
of Master
Master Budget
Budget of
of aa
49

Manufacturing
Manufacturing Firm
Firm
A schedule of
Sales Budget
expected cash
receipts and
disbursements Selling and
during the Production
Administrative
budget period. Budget Expense Budget

Manufacturing
Direct Materials Direct Labor
Overhead
Budget Budget Budget

Cash Budget
 50

Production
Production Budget
Budget

Expected sales. . . . . . . . . . . . . . .110

Add desired ending inventory. . . .105
Total number of ‘X’ needed . . . . 215
Less beginning inventory . . . . . . . 80
‘X’ to be produced . . . . . . . . . . . .135
 51

Direct
Direct Materials
Materials Budget
Budget

Direct materials usage:

Direct Per Amount Unit

Materials Unit Required Cost

Metal 20lbs 2,700 lbs $2.00/lb

Plastic 3lbs 405 lbs $1.00/lb
 52

Direct
Direct Materials
Materials Budget
Budget

Direct materials purchases:

Metal Plastic
Desired ending inventory. . . . . 2,100 315
Needed for production. . . . . . . 2,700 405
Total needed . . . . . . . . . . . . . . 4,800 720
Less beginning inventory. . . . . 2,800 210
Materials to be purchased . . . . 2,000 510
Unit cost. . . . . . . . . . . . . . . . . . x $2 x $1
Total direct material cost . . $4,000 $ 510
 53

Direct
Direct Labor
Labor Budget
Budget

Number of ‘X’ to produce. . . . . . . 135

Direct labor hours per ‘X’. . . . . x 3
Total hours required. . . . . . . . . 405
Rate per hour. . . . . . . . . . . . . . . x $5
Total direct labor cost. . . . . . .$2,025
 54

MOH
MOH Budget
Budget
Variable costs:
Indirect materials costs. . . . . . . . . $ 220
Indirect labor costs . . . . . . . . . . . . 600
Total variable costs. . . . . . . . . . . $ 820

Fixed costs:
Insurance expense. . . . . . . . . . . . 200
Depreciation expense. . . . . . . . . . $ 600
Total fixed costs . . . . . . . . . . . . . $ 800
Total manufacturing overhead . $1,620
Var OH per DLH = $820/405 = $2.02
Fixed OH per DLH = $800/405 = $1.98
 55

Cost
Cost Per
Per Unit
Unit
Product cost:
Input Required Cost
Cost Inputs per ‘X’
Metal $2.00/lb. 20 $40.00
Plastic $1.00/lb. 3 3.00
Direct labor $5.00/hr. 3 15.00
Fixed MOH $1.98/hr. 3 5.94
Variable MOH $2.02/hr. 3 6.06
Total unit cost. . . . . . . . . . . . . . . . $70.00
 56

Selling
Selling and
and Administration
Administration Budget
Budget
Variable expenses:
Sales commissions . . . . . . . . . . . . . . $ 400
Total variable expenses. . . . . . . . . . $ 400

Fixed expenses:
Salaries expense . . . . . . . . . . . . . . . $1,000
Depreciation . . . . . . . . . . . . . . . . . . . 100
Advertising expense. . . . . . . . . . . . . 200
Total fixed expenses. . . . . . . . . . . . $1,300
Total selling and
administrative expenses. . . . . . . $1,700
 Cash
Cash Budget
57
Budget
Cash balance, beginning . . . . . . . . . $ 6,500
Add collections from customers . . . . 10,100
Total cash available. . . . . . . . . . $16,600
Less disbursements for:
Direct materials . . . . . . . . . . . . . $ 3,000
Direct labor. . . . . . . . . . . . . . . . . 2,025
Factory Overhead . . . . . . . . . . . 1,020*
Equipment purchase . . . . . . . . . 980
Selling and administration , , , , 1,600*
Total disbursements. . . . . . . . . . $ 8,625
Cash balance . . . . . . . . . . . . . . . . . 7,975
Financing needed . . . . . . . . . . . . 0
Ending cash balance $ 7,975
•excludes depreciation
•minimum cash balance policy $6,000
 58

Budgeted
Budgeted Income
Income Statement
Statement
Sales revenue . . .(110 x $90.90 ) . . . . . . . . . . . . . . . $10,000
Cost of goods sold:
Beginning finished goods inventory. . . . . . . . $ 4,900
Costs of Goods Manufactured:
Direct materials used. . . . . . . . . . . . . . . . . . $ 5,805
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . 2,025
Manufacturing overhead . . . . . . . . . . . . . . . 1,620 9,450
Total cost of goods available for sale . . . . . . $14,350
Less ending finished goods inventory. (105 x $70). . . . (7,350)
Cost of goods sold. . . . . . . . . . {$4,900* + (30 x 70)}. . (7,000)
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000
Selling and administrative expenses. . . . . . . 1,700
Net Operating profit . . . . . . . . . . . . . . . . . . . . . $ 1,300
Interest expense . . . . . . . . . . . . . . . . . . . . . . 0
Net Profit before taxes . . . . . . . . . . . . . . . . . . . $ 1,300
* 80 units @ $61.25 which is the cost per unit of the beginning inventory
 59

Budgeted
Budgeted Balance
Balance Sheet
Sheet
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,975
Trade Debtors . . . . . . . . . . . . . . . . . . . . . 1,000
Finished goods . . . . . . . . . . . . . . . . . . . . . 7,350
Raw Material . .({2100 x 2} + {315 x 1}) . . 4,515 $ 20,840
Fixed assets:
Plant & Equipment. . . . . . . . . . . . . . . . . . . $ 12,000
Less accumulated depreciation. . . . . . .. . . (3,300) 8,700
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 29,540
 60

Budgeted
Budgeted Balance
Balance Sheet
Sheet
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade Creditors . . . . . . . . . . . . . . . . . . . . .$ 2,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . - $
2,000
Stockholders’ equity:
Share Capital . . . . . . . . . . . . . . . . . . . . $20,340
Retained earnings . . . . . . . . . . . . . . . . . . 7,200 27,540
Total liabilities and stockholders’ equity. . . . . . . $ 29,540
Assuming no taxes and no dividends, retained earnings of $7,200
= retained earnings at the start of the period of $5,900 + profits of
$1,300 for the year.
 61

Budget
Budget Development
Development and
and Human
Human
Behavior
Behavior
• Budgeting should be used to promote
productive employee behavior directed
toward meeting the organizational goals
• Participation in budgeting is viewed as a
process in which individuals (in
organisations) are involved in, and have
influence on, the setting of the budget
 62

Budget
Budget Development
Development and
and Human
Human
Behavior
Behavior
• 2 approaches to employee participation in
budgeting that represent possible ends on a
continuum:
• Top-down or imposed budget: Top
management decides on the budget and
communicates them to lower management
levels
• Bottom-up or participative budget: Managers
at all levels, and in some cases, even non-
managers, are involved in the budgeting
process
 63

Budget
Budget Development
Development and
and Human
Human
Behavior
Behavior
• Advantages of participative budgeting
– Setting of realistic goals through a better
understanding of how goals can be achieved
– Ensure that important issues are considered
and employees understand the importance of
their roles in meeting organizational goals
– Provides opportunities for problem solving
and fosters commitment to agreed-upon goals
 64

Budget
Budget Development
Development and
and Human
Human
Behavior
Behavior
• Disadvantages of participative budgeting
– Time-consuming
– Competition occurs between units for a given
quantity of resource commitments
– Political behaviour and dysfunctional reactions
– Pad budget estimates - Slack
 65

Developing
Developing Budgets
Budgets that
that Work
Work
 Emphasize the importance of budgeting as
a planning device.
 Encourage wide participation in budget
preparation at all levels of the organization.
 Demonstrate that the budget has the
complete support of top management.
 Recognize that the budget is not
unalterable.
 66

Developing
Developing Budgets
Budgets that
that Work
Work
 Use budget performance reports not just to
identify poor performance, but also to
recognize good performance.
 Conduct programs in budget education to
provide new managers with information
about the purposes of budgets and to dispel
erroneous misconceptions that may exist.
 67

Limitations
Limitations of
of Budgets
Budgets
• Conflicting uses – Planning and Evaluation
• Attainment of budget is just one financial
performance criterion
• A budget that is not overspent does not mean it was
well-spent
• Budgeting can lead to negative behaviour, e.g.
manipulation of figures
• Too tight a budget is a pressure device (stress)
• When you are controlled by a budget, you are not
controlling the business