Chapter 21(7) Budgeting 394
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GROUP LEARNING ACTIVITY—Direct Materials Purchases Budget
The direct materials purchases budget follows the same basic format as the production budget. The only
modification is that this budget must be prepared in both units and dollars because the cost of materials
purchased is used in the cost of goods sold budget.
The direct materials purchases budget is prepared as follows:
Materials Required for Production
+ Desired Ending Materials Inventory
– Estimated Beginning Materials Inventory
= Direct Materials to Be Purchased
Unit Price
= Total Direct Materials Purchases
the following additional information:
1. Each unit requires 2 pounds of materials.
2. Materials cost $0.60 per pound.
3. Miles estimates that it will have 4,000 pounds of materials inventory on January 1.
4. Miles’ desired ending inventory for materials is 5,000 pounds.
The solution to this activity is presented on TM 21(7)-8.
LECTURE AID—Direct Labor and Overhead Budgets
Because the direct labor and overhead budgets are used in the cost of goods sold budget, you may want to
quickly review their format.
The direct labor cost budget is prepared as follows:
Units to Be Produced (from production budget)
Hours Required per Unit
= Total Hours Required for Production
Hourly Rate
= Total Direct Labor Cost
A direct labor budget is illustrated in text Exhibit 12. Emphasize that the production and direct labor
budgets must be closely coordinated. If a failure to properly budget labor time results in a labor shortage,
the business may be forced to pay significant amounts of overtime, delay production, or use untrained
workers whose output is poor in quality.
To prepare an overhead budget, expected overhead costs are listed and totaled. Exhibit 13 illustrates an
overhead budget. Point out that real-world organizations normally have detailed schedules to support each
item presented on an overhead budget.
Chapter 21(7) Budgeting 395
GROUP LEARNING ACTIVITY—Cost of Goods Sold Budget
The cost of goods sold budget is complex enough to merit a brief explanation plus an in-class practice
problem. Use TM 21(7)-9 to review the basic format of the cost of goods sold budget. This TM
emphasizes that the budget combines the calculation of three amounts: (1) total manufacturing costs, (2)
cost of goods manufactured, and (3) cost of goods sold. Keep in mind that since this edition of the
textbook emphasizes the perpetual inventory system, your students will not have practiced calculating
cost of goods sold. They also have not previously seen the cost of goods manufactured statement.
While reviewing TM 21(7)-9, stress the sources for the following information:
Information Source
Beginning Finished Goods Inventory Management’s estimate
Beginning Work in Process Inventory Management’s estimate
Beginning Direct Materials Inventory Direct materials purchases budget
(no. of units unit price)
Direct Materials Purchases Direct materials purchases budget
Ending Direct Materials Inventory Direct materials purchases budget
(no. of units unit price)
Direct Labor Direct labor cost budget
Factory Overhead Factory overhead cost budget
Ending Work in Process Inventory Management’s desired ending inventory
Ending Finished Goods Inventory Management’s desired ending inventory
Handout 21(7)-1 presents information that your students can use to practice preparing a cost of goods sold
budget. Ask them to complete this budget as a group activity. The solution is displayed on TM 21(7)-10.
OBJECTIVE 5
Prepare financial budgets for a manufacturing company.
SYNOPSIS
Operating budgets reflect the operating activities of the company; the financial budgets reflect the
financing and investing activities. Two of these are the cash budget and the capital expenditures budget.
The cash budget covers both the inflows and outflows of cash. The primary source of cash receipts is
from cash sales and collection on account. Using the sales budget, cash receipts are estimated for each
month. To estimate cash payments, budgeted cash payments for any month are the sum of the cash paid
from the previous month’s manufacturing costs and the cash from the current month’s manufacturing
costs. Add to these costs, estimated payments for selling and administrative expenses, interest expense,
income taxes, and any capital payments to complete the estimated cash payments. The completed cash
budget showing both cash receipts and cash payments is in Exhibit 19. The capital expenditures budget
summarizes plans for acquiring fixed assets. Capital expenditures budgets are often prepared for five to
ten years.
Chapter 21(7) Budgeting 396
Key Terms and Definitions
Capital Expenditures Budget—The budget summarizing future plans for acquiring plant
facilities and equipment.
Cash Budget—A budget of estimated cash receipts and payments.
Relevant Check Up Corner and Exhibits
Exhibit 17—Schedule of Collections from Sales
Exhibit 18—Schedule of Payments for Manufacturing Costs
Exhibit 19—Cash Budget
Exhibit 20—Capital Expenditures Budget
Check Up Corner 21(7)-3 – Cash Budget
SUGGESTED APPROACH
The two balance sheet budgets presented under this objective are the cash budget and the capital
expenditures budget. The capital expenditures budget, which summarizes plans for acquiring fixed assets,
is illustrated in Exhibit 20 in the text. Refer your students to this illustration. Emphasize that most
companies budget capital expenditures for several years into the future, due to the large dollar amounts
associated with these expenditures and the variation in need for capital improvements from year to year.
The cash budget is very important because managers must effectively manage cash to maintain a
favorable credit rating, keep borrowing costs to a minimum, and maximize investment income. A sample
cash budget is illustrated in text Exhibit 19. Review the basic outline of the cash budget using TM 21(7)-
11. Emphasize that the final line of the budget (excess or deficiency) allows companies to gauge whether
they will need to arrange for a line of credit to meet cash shortages or whether they will have excess cash
to invest. Next, use the group learning activities below to guide students through the calculation of cash
receipts and cash payments.
GROUP LEARNING ACTIVITY—Cash Receipts
The portion of the cash budget that tends to be the most difficult for students is determining the cash
receipts from sales. The difficulty occurs because credit sales are frequently collected over two or more
months.
TM 21(7)-12 presents information for your students to use in preparing the cash receipts portion of a cash
budget. This TM contains data and a basic “shell” format for determining the collections on credit sales.
Divide the class into groups and ask them to complete this exercise. TM 21(7)-13 shows the correct
solution.
GROUP LEARNING ACTIVITY—Cash Payments
TMs 21(7)-14 and 21(7)-15 present an opportunity for your students to practice preparing a schedule of
cash payments. Prior to assigning this activity, remind students that financial accounting recognizes
Chapter 21(7) Budgeting 397
expenses when they are incurred, not when they are paid. A cash budget reports expenses in the month
they are paid. The solution to this exercise is shown on TM 21(7)-16.
ADM OBJECTIVE
Describe and illustrate the use of staffing budgets for nonmanufacturing businesses.
SYNOPSIS
The budgeting process for manufacturing and nonmanufacturing businesses is similar. However, many
nonmanufacturing businesses do not have direct materials purchases budgets, direct labor cost budgets, or
factory overhead cost budgets. Thus, the budgeted income statement is simplified in many
nonmanufacturing settings. The primary budget in nonmanufacturing businesses is the labor, or staffing
budget and is highly flexible to service demands.
Relevant Check Up Corner and Exhibits
Make a Decision – Nonmanufacturing Staffing Levels
Handout 21(7)-1
Cost of Goods Sold Budget
Direct Materials Purchases Budget
Material A Material B
Units required for production 20,000 14,000
Plus desired ending inventory 8,000 2,500
Total 28,000 16,500
Less estimated beginning inventory 7,400 3,000
Units to be purchased 20,600 13,500
Unit price $0.50 $1.20
Total direct materials purchases $10,300 $16,200
Hours required for production 5,000 Supervisor salaries $18,000
Hourly rate $10 Utilities 3,500
Total direct labor cost $50,000 Depreciation 7,400
Indirect materials 2,100
Total factory overhead cost $31,000
Beginning Inventory Ending Inventory
Work in Process $35,000 $30,000
Finished Goods 87,000 90,000
Type Item Description Video Excel CLGL LO(s) Difficulty Time Est BUSPROG AICPA
ACBSP – Primary Bloom’s ADM Service Real World
Writing
Ethics
MC 1 1 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Remembering
MC 2 2 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
MC 3 2 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
MC 4 4 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
MC 5 5 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
LREX 1 Flexible budgeting x 2 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
LREX 2 Production budget x 4 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
LREX 3 Direct materials purchases budget x 4 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
LREX 4 Direct labor cost budget x 4 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
LREX 5 Cost of goods sold budget x 4 Easy 10 min. Analytic FN – Measurement Budgeting and Responsibility Applying
DQ 5 n/a Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Remembering
DQ 6 n/a Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Remembering
DQ 7 n/a Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Remembering
DQ 8 n/a Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Remembering
BE 5 Cost of goods sold budget x 4 Easy 10 min. Analytic FN – Measurement Budgeting and Responsibility Applying
BE 6 Cash budget x 5 Easy 5 min. Analytic FN – Measurement Budgeting and Responsibility Applying
EX 1 Personal budget x x 2,5 Easy 15 min. Analytic FN – Measurement Budgeting and Responsibility Applying x
EX 2
Flexible budget for selling and administrative expenses for a service
x x 2,4 Easy 20 min. Analytic FN – Measurement Budgeting and Responsibility Applying
EX 9 Direct materials purchases budget x x 4 Moderate 20 min. Analytic FN – Measurement Budgeting and Responsibility Applying
EX 10 Direct materials purchases budget 4 Moderate 20 min. Analytic FN – Measurement Budgeting and Responsibility Applying x
EX 11 Direct materials purchases budget x 4 Moderate 20 min. Analytic FN – Measurement Budgeting and Responsibility Applying
EX 17 Schedule of cash collections of accounts receivable x x 5 Easy 15 min. Analytic FN – Measurement Budgeting and Responsibility Applying
EX 18 Schedule of cash collections of accounts receivable 5 Easy 15 min. Analytic FN – Measurement Budgeting and Responsibility Applying
EX 19 Schedule of cash payments for a service company 5 Easy 15 min. Analytic FN – Measurement Budgeting and Responsibility Applying x
EX 20 Schedule of cash payments for a service company x 5 Moderate 20 min. Analytic FN – Measurement Budgeting and Responsibility Applying x
PR 1B Forecast sales volume and sales budget x 4 Moderate 1.5 hours Analytic FN – Measurement Budgeting and Responsibility Applying
PR 2B
Sales, production, direct materials purchases, and direct labor cost budge
x 4 Moderate 2 hours Analytic FN – Measurement Budgeting and Responsibility Applying
PR 3B Budgeted income statement and supporting budgets x 4 Challenging 2.5 hours Analytic FN – Measurement Budgeting and Responsibility Applying
PR 4B Cash budget x x 5 Challenging 2 hours Analytic FN – Measurement Budgeting and Responsibility Applying x
ADM 2 Parking lot staff budget ADM Moderate 20 min. Analytic FN – Measurement Budgeting and Responsibility Analyzing x
ADM 3 Housekeeping staff budget ADM Easy 10 min. Analytic FN – Measurement Budgeting and Responsibility Applying x
TIF 1 Ethics in action n/a Moderate 20 min. Ethics FN – Reporting Budgeting and Responsibility Analyzing x x
TIF 3 Communication n/a Moderate 1 hour Analytic FN – Measurement Budgeting and Responsibility Applying x
Focus
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