 In this presentation, we will discuss budget options first We're gonna go through the components of the master budget We took a look at this in a prior course in prior presentations in detail in terms of going through each component of the master budget first a word from our sponsor Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they Don't want to be seen with us, but but that's okay Whatever because our merchandise is is better than their stupid stuff anyways like our CPA six-pack shirts I must have for any pool or beach time Mixing money with muscle always sure to attract attention Yeah, even if you're not a CPA you need this shirt so you can like pull in that iconic CPA six-pack stomach muscle vibe, man You know that CPA six-pack everyone envisions in their mind when they think CPA Yeah, as a CPA I actually and unusually don't have tremendous abs However, I was blessed with a whole lot of belly hair Yeah, I allowing me to sculpt the hair into a nice CPA six-pack like shape Which is highly attractive. 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It's an improvement If you would like a commercial free experience consider subscribing to our website at accounting instruction comm or Accounting instruction dot think of it comm want to take a look and review those components of the master Budget we did so last time in terms of a static type of budget We're going to be focusing here on other options including a flexible budget So we have the sales budget That's the first component that will start out when we're creating basically the master budget type process Remember the end line the end level the bottom line that we're going to be getting to will be the buzzed budgeted Financial statements the balance sheet the income statement also important to have the budgeted cash Statement so all the cash flow budget the budgeted income statement the budgeted balance sheet the income statement and the cash flow We're kind of the activity the performance type things we're considering Usually the things we consider most when when looking at a budget. What are we going to do? What's the action plan that we're going to do the balance sheet? Of course telling us where we will end up at the end of that process now Remember the budget needs to be done in some specific order Because we have to know some information before we can move forward to other components of the budget the first thing We start off with is typically going to be the sales budget We got to know how many units we're going to sell what the sales amount will be before we can do other components of the budget Then we can go to the production budget Then we've got the direct materials budget the direct labor budget and the overhead budget Then we can move to the capital expenditures budget the selling and administrative budget and Finally, then we go to the cash budget. So the cash budget given us that cash flow type budget What's going to be that the actual inflows and outflows of cash? Then we've got our financial statements being the balance sheet and the budgeted income statement So the budgeted balance sheet the budgeted income statement the budgeted statement of cash flows So remember when we think about the whole budgeting process from master budget type process We would start with the sales budget. We need to know that first We're ending up in essence with the budgeted financial statements the budgeted balance sheet the budgeted income statement statement of cash flows budget options We typically have the fixed budget That's what we concentrated on last time and went through each of these components with those items on the fixed budget And then we have the flexible budget. That's what we're going to concentrate on more here a flexible type of budget Before we do so, however, let's take a look at the problems with a fixed budget So what are going to be the issues with a fixed budget? Why might we need some other option? Why might we use some other options such as a flexible budget if we consider the fixed budget? This will be the structure of the fixed budget. We will typically have we're gonna have the sales We're gonna have the cost of goods sold this of course concentrating on the income statement So we're concentrating on the final result on the income statement the timing type of account for a Fixed type of budget. So we're concentrating on the bottom line financial statements specifically income statement So we got the sales cost of goods sold then we've got the overhead items that we've got the selling expenses We've got the general administrative expenses that gives us the total expenses and finally the income from Operations now we can imagine what would happen if we see the time process go by now So the budgeting time period has passed. What are we going to do then? We're going to compare the budgeted numbers to the actual numbers So then if we run the actual numbers for the actual income statement the performance Statement the income statement the timing accounts how did we do over a time period and then we're going to take the difference Otherwise known as the variances between the budget and actual numbers and we'll consider what those differences will be Now we can look at this difference and we can say okay the actual is greater on the sales than then it is Budgeted so that's going to be a favorable difference for the sales and we can go and say that's good And then we could say okay the cost of goods sold direct materials direct labor. These are expenses Here's the actual number. Here's the budgeted number. The actual number is higher So we would say that's bad or unfavorable and that's bad or unfavorable because again the budget or the actual Is higher than the budget and these are expenses and then we can say okay overhead the actual is higher again So that's unfavorable or bad Unfavorable or bad these depreciation was lower. So these two are good So I'm going to say favorable on those the selling expenses again higher In actual than we expected so that's unfavorable unfavorable and then we've got the selling expenses Higher than what we expect unfavorable unfavorable depreciation we're going to say favorable and the Administrative is going to be favorable and the bottom line is that the total expenses are going to be unfavorable Yet the net income is higher than we expected. So that's good So you can see this type of analysis we would have we can go through a line by line on the performance statement Versus the budget versus the actual and say what did we do and and what was the budget planned to do? What are those differences and are those good or bad now? You can see that there may be a problem with this however because it looks like while the sales is higher than we expected That's great, but many of the expenses are Also higher than we had budgeted them to be and that seems bad And of course our net income is higher. So this this seems good So we'd say hey the net income is good. We're good on the bottom line We're good on the sales, but we have all these unfavorable items in a lot of the expenses And so we should go through there based on this static budget This fixed budget we'd have to go through there and say hmm. How can we fix those items? But you might figure well, is there what's the reason why would why would all the? Expenses be unfavorable and the sales be favorable It could be that the budget units that we budgeted on that we sold were 10,000 let's say and the actual units that were sold were 12,000 in That case in other words if we produced and sold more units than we had budgeted to produce and sell We would expect the sales to be favorable And it could quite possibly mean also that many of the expenses will be unfavorable because if we if we Produced more than than we expected you would think that the expenses of us producing that higher level would be more And so you could see that if we have this static budget this fixed budget and we compare it to the actual numbers We're not really comparing apples to apples as they say or the same thing to the same thing Because this budget is based on us Assuming that we're gonna have 10,000 units when we actually sold 12,000 units we produced and sold 12,000 units and therefore we it's we can't really do the comparison as well as we would like We could still say the comparison we could say hey We did better because we sold more units and that we could see exactly what we would expect sales are higher and Expenses are also higher sales are favorably differed and the expenses are unfavorably differed But that doesn't really help us to do anything next time period We can't take this number We can't really go to the direct materials area and say hey You need to do a better job because we have an unfavorable difference here because they're gonna say well It looks like we planned on 10,000 units and we produced 12 we did better than we should have of course it cost more So we can't really use that as a as a measure to go in from a manager standpoint and say you need to improve or not Because it's it's doesn't give us enough information what we need to do then is start by breaking this out into a flexible budget And then we'll see that we'll even need to break it down further than that to really just decide and assign Where any unfavorable problems are or where we where we can improve So a flexible budget then is going to be a first step to doing that the first step for must be able to say Let's compare the a budgeted based on actual units produced To what actually happened and then we can take that number and possibly further break it down even so that we can Make performance analysis that makes sense and therefore improve so the flexible budgets where we'll start with that process We'll take a look at that next time