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THE BUDGET COMMITTEE

THE BUDGET COMMITTEE

  •  A standing budget committee is usually responsible for overall policy relating to the budget program and for coordinating the preparation of the budget itself. This committee may consist of the president; vice presidents in charge of various functions such as sales, production, and purchasing; and the controller. Difficulties and disputes relating to the budget are resolved by the budget committee. In addition, the budget committee approves the final budget. 
  •  Disputes can (and do) erupt over budget matters. Because budgets allocate resources, the budgeting process determines to a large extent which departments get more resources and which get less. Also, the budget sets the benchmarks used to evaluate managers and their departments. Therefore, it should not be surprising that managers take the budgeting process very seriously and invest considerable energy and emotion in ensuring that their interests, and those of their departments, are protected. Because of this, the budgeting process can easily degenerate into interoffice arguments.                                                                                                                                  The Master Budget 

  • The master budget consists of a number of separate but interdependent budgets that for￾mally lay out the company’s sales, production, and financial goals. The master budget culmi￾nates in a cash budget, a budgeted income statement, and a budgeted balance sheet.
  •  The first step in the budgeting process is the preparation of the sales budget , which is a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process. As illustrated in Exhibit 8–2 , all other parts of the master budget depend on the sales budget. If the sales budget is inaccurate,the rest of the budget will be inaccurate. The sales budget is based on the company’s sales forecast, which may require the use of sophisticated mathematical models and statistical tools. We will not go into the details of how sales forecasts are made.                                                                                                                                                                                                                    
  •  The Sales Budget                                                     The sales budget is the starting point in preparing the master budget. As shown earlier in all other items in the master budget, including production, purchases, inven￾tories, and expenses, depend on it.The sales budget is constructed by multiplying budgeted unit sales by the selling price. Schedule 1 contains the quarterly sales budget for Hampton Freeze for the year 2012. Notice from the schedule that the company plans to sell 100,000 cases of popsicles during the year, with sales peaking in the third quarter.                             A schedule of expected cash collections, such as the one that appears in the bottom portion of Schedule 1 , is prepared after the sales budget. This schedule will be needed later to prepare the cash budget.                                                                                                          The Direct Labor Budget                                 
The direct labor budget shows the direct labor-hours required to satisfy the production budget. By knowing in advance how much labor time will be needed throughout the budget year, the company can develop plans to adjust the labor force as the situation requires. Companies that neglect to budget run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity, low morale, and inefficiency.The direct labor budget for Hampton Freeze is shown in Schedule 4 . The first line in the direct labor budget consists of the required production for each quarter.                                                                                                                                                     The Manufacturing Overhead Budget           
  • The manufacturing overhead budget lists all costs of production other than direct mate￾rials and direct labor. Schedule 5 shows the manufacturing overhead budget for Hampton Freeze. At Hampton Freeze, manufacturing overhead is separated into variable and fixed components. The variable component is $4 per direct labor-hour and the fixed component is $60,600 per quarter. Because the variable component of manufacturing overhead depends on direct labor, the first line in the manufacturing overhead budget.                       
  • The budgeted direct labor-hours from the direct labor budget ( Schedule 4 ). The budgeted direct labor-hours in each quarter are multiplied by the variable rate to determine the variable component of manufacturing overhead. For example, the variable manufacturing overhead for the first quarter is $22,400 (5,600 direct labor-hours ×  $4.00 per direct labor-hour). This is added to the fixed manufacturing overhead for the quarter to determine the total manufacturing overhead for the quarter of $83,000 ($22,400  +  $60,600). A few words about fixed costs and the budgeting process are in order.                                                                                                                                               The Ending Finished Goods Inventory Budget                                                                         
  • After completing Schedules 1–5, Larry Giano had all of the data he needed to compute unit product costs. This computation was needed for two reasons: first, to determine cost of goods sold on the budgeted income statement; and second, to value ending inventories.                                                                  
  • The cost of unsold units is computed on the ending finished goods inventory budget Larry Giano considered using variable costing to prepare Hampton Freeze’s budget statements, but he decided to use absorption costing instead because the bank would very likely require absorption costing. He also knew that it would be easy to convert the absorption costing financial statements to a variable costing basis later. At this point, the primary concern was to determine what financing, if any, would be required in 2012 and then to arrange for that financing from the bank. 

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