Module+7000+III+Explanation+and+Examples

III. Module 7000 Explanation and Examples jcb

The budgeting process begins when the budget committee is created and information gathering begins. The budget committee will take the lead role in ensuring that the budget matches the future plan of the organization’s upcoming fiscal year by laying the budgetary ground rules and targets, resolving any disputes, and monitoring the budget performance throughout the year. Collecting budgeting information is historical in nature but accurate sales and cost forecasting are instrumental in preparation.
 * • ****The Budgeting Process **

•**Master Budget** The master budget has two components, the operating budget and the financial budget. The operating budget focuses on the budgets that produce income, translating into a budgeted income statement as its outcome. Financial budgets focus on the flow of cash into and out of an organization and produce a cash budget and balance sheet. The diagram below illustrates the relationships between the operating and financial budgets and the products they produce in the end (Martin, James R. “Chapter 9 The Master Budget or Financial Plan”. __Maaw.info__. July 2, 2011 < http://maaw.info/Chapter9.htm>).

•**Operating Budget** The operating budget consists of the following 11 budgets in sequence that covers all income and revenue from organizational operations: 1.Sales Budget 2.Production Budget 3.Direct Materials Purchases Budget 4.Direct Labor Budget 5.Overhead Budget 6.Ending Finished Goods Inventory Budget 7.Cost of Goods Sold Budget 8. Marketing Expense Budget <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">9.Research and Development Budget <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">10.Administrative Expense Budget <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">11.Budgeted Income Statement

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">The operating budget’s purpose is to predict an accurate picture of the organization’s expenses so that operations are financed throughout the budget cycle. It is critical to define an accurate sales picture and align it with the appropriate workflow to produce efficient, overall profitable operations. <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">•**Sales Budget** <span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%;">The sales budget is the most important component of the operating budget. It has to be produced first since other budgets depend on the output. If the sales budget is not as accurate as possible, it will lead to larger discrepancies in the remainder of the operating budgets. Below is an example of a sales budget (“Sales Budget”. __Accountingtools.com__. July2, 2011 < [] >). Quick reference information is also located on the Module 7000 Formulas page.


 * Example of the Sales Budget**

ABC Company plans to produce an array of plastic pails during the upcoming budget year, all of which fall into a single product category. Its sales forecast is outlined as follows:

ABC CompanySales BudgetFor the Year Ended December 31, 20XX


 * ||> Quarter 1 ||> Quarter 2 ||> Quarter 3 ||> Quarter 4 ||
 * Forecasted unit sales ||> 5,500 ||> 6,000 ||> 7,000 ||> 8,000 ||
 * x Price per unit ||> $10 ||> $10 ||> $11 ||> $11 ||
 * Total gross sales ||> $55,000 ||> $60,000 ||> $77,000 ||> $88,000 ||
 * - Sales discounts & allowances ||> $1,100 ||> $1,200 ||> $1,540 ||> $1,760 ||
 * = Total net sales ||> $53,900 ||> $58,800 ||> $75,460 ||> $86,240 ||

ABC's sales manager expects that increased demand in the second half of the year will allow it to increase its unit price from $10 to $11. Also, the sales manager expects that the company's historical sales discounts and allowances percentage of two percent of gross sales will continue through the budget period.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">•**Production Budget** <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">The production budget takes the output from the sales budget, unit sales, and adds desired ending inventory and then subtracts beginning inventory to obtain the number of units to be produced for each period. Special attention should be paid to planning desired ending inventory, whether a particular number of units are given or decided, or if an inventory rule is to be followed. Lost sales or work stoppages in production can occur if there is not enough ending inventory and excess ending inventory utilizes finances that may be needed elsewhere in the organization. Below is an example of a production budget (“Production Budget”. __accountingformanagement.com__. July 2, 2011 < [] >). Quick reference information is also located on the Module 7000 Formulas page.

Example of a Production Budget:
Following is the production budget of <span class="IL_AD">Hampton Freeze Inc. ([of Production Budget of Hampton Freeze Inc.|See explanation of this production budget])


 * ** Hampton Freeze, Inc.Production BudgetFor the Year Ended December 31, 2009 ** ||
 * |||||||| **// Quarter //** ||  ||
 * || 1 || 2 || 3 || 4 || Year  ||
 * Budgeted sales (see sales budget) || 10,000 || 30,000 || 40,000 || 20,000 || 100,000 ||
 * Add desired ending inventory of finished goods * || 6,000 || 8,000 || 4,000 || 3,000 || 3,000 ||
 * Total needs || 16,000 || 38,000 || 44,000 || 23,000 || 103,000 ||
 * Less Beginning inventory of finished goods || 2,000 || 6,000 || 8,000 || 4,000 || 2,000 ||
 * Required production || 14,000 || 32,000 || 36,000 || 19,000 || 101,000 ||
 * * Twenty percent of the next quarters sales. The ending inventory of 3,000 cases is assumed ||
 * The beginning inventory in each quarter is the same as the prior quarter's ending inventory ||
 * * Twenty percent of the next quarters sales. The ending inventory of 3,000 cases is assumed ||
 * The beginning inventory in each quarter is the same as the prior quarter's ending inventory ||
 * * Twenty percent of the next quarters sales. The ending inventory of 3,000 cases is assumed ||
 * The beginning inventory in each quarter is the same as the prior quarter's ending inventory ||

Explanation of Production Budget of Hampton Freeze Inc.
At Hampton Freeze, management believes that an ending inventory equal to 20% of the next quarter's sales strikes the appropriate balance. Example contains the production budget for Hampton Freeze. The first row in the production budget contains the budgeted sales, which have been taken directly from the sales budget (see sales budget page). The total needs for the first quarter are determined by <span class="IL_AD">adding together the budgeted sales of 10,000 <span class="IL_AD">cases for the quarter and the desired ending inventory of 6,000 cases. The ending inventory is intended to provide some cushion in case problems develop in production or sales increase unexpectedly. Since the budgeted sales for the second quarter are 30,000 cases and management would like the ending inventory in each quarter to 20% of the following quarter's sales, the desired ending inventory is 6,000 cases (20% of 30,000 cases). Consequently, the total needs for the first quarter are 16,000 cases. However, since the company already has 2,000 cases in beginning inventory, only 14,000 cases need to be produced in first quarter.

Pay particular attention to the year column to the right of the production budget in the example. In some cases (e.g., budgeted sales, total needs, and required production), the amount listed for the year is the sum of the <span class="IL_AD">quarterly amounts for the item. In other cases (e.g., desired inventory of finished goods and beginning inventory of finished goods), the amount listed for the year is not simply the sum of the quarterly amounts. From the standpoint of the entire year, the beginning inventory of finished goods is the same as the beginning inventory of finished goods for the first quarter--it is not the sum of the beginning inventories of the finished goods for all quarters. Similarly, from the standpoint of the entire year, the ending inventory of finished goods is the same as the ending inventory of finished goods for the fourth quarter--it is not the sum of the ending inventories of finished goods for all four quarters.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">The direct materials purchases budget can be developed once the production budget is complete. The direct materials purchases budget converts the raw materials per unit to a total amount of materials for unit production. Similar to the production budget, desired ending inventory is added to this total amount of materials and beginning inventory is subtracted. This calculation give the total units to be produced for the period and multiplying the cost per unit of material (lbs, gram, ounces, etc) produces the total purchase cost for the period. Below is an example of a direct materials purchases budget (“Material Budgeting/Direct Materials Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/material_budget.htm>). Quick reference information is also located on the Module 7000 Formulas page.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">•Direct Materials Purchases Budget **

Example of Direct Materials Budget:
Following is the direct materials budget for Hampton Freeze Inc. ([of the Direct Materials Budget for Hampton Freeze Inc.|See explanation of this direct materials budget])


 * |||||||||||| ** Hampton Freeze, Inc.Direct Materials BudgetFor the Year Ended December 31, 2009 ** ||
 * ||  |||||||| **// Quarter //** ||   ||
 * ||  || 1 || 2 || 3 || 4 ||  Year  ||
 * || Required production in cases (see production budget page) || 14,000 || 32,000 || 36,000 || 19,000 || 101,000 ||
 * || Raw materials needed per case (pounds) || 15 || 15 || 15 || 15 || 15 ||
 * || Production needs (pounds) || 210,000 || 480,000 || 540,000 || 285,000 || 1,515,000 ||
 * 1 || Add desired ending inventory of raw material || 48,000 || 54,000 || 28,500 || 22,500 || 22,500 ||
 * || Total needs || 258,000 || 534,000 || 568,500 || 307,500 || 1,537,500 ||
 * || Less beginning inventory of raw materials || 21,000 || 48,000 || 54,000 || 28,500 || 21,000 ||
 * || Raw materials to be purchased || 237,000 || 486,000 || 514,000 || 279,000 || 1,516,500 ||
 * || Cost of raw materials per pound || $0.20 || $0.20 || $0.20 || $0.20 || $0.20 ||
 * || Cost of raw materials to be purchased || $47,400 || $97,200 || $102,900 || 55,800 || $303,300 ||
 * || Percentage of purchases paid for in the period of the purchase ||  ||   || 50% ||   ||   ||
 * || Percentage of purchase paid for in the period after purchase ||  ||   || 50% ||   ||   ||
 * ||  || 50% || 50% ||   ||   ||   ||
 * |||||||||||| ** Schedule of Expected Cash Disbursement for Materials ** ||
 * 2 || <span class="IL_AD">Accounts payable, beginning balance || $25,800 ||  ||   ||   || $25,800 ||
 * 3 || First-quarter purchase || 23,700 || $23,700 ||  ||   || 47,400 ||
 * 4 || Second-quarter purchases ||  || 48,600 || $48,600 ||   || 97,200 ||
 * 5 || Third-quarter purchase ||  ||   || 51,450 || $51,450 || 102,900 ||
 * 6 || Fourth-quarter purchase ||  ||   ||   || 27,900 || 27,900 ||
 * || Total cash disbursement || $49,500 || $72,300 || $100,050 || $79,350 || $301,200 ||
 * 1 |||||||||||| Ten <span class="IL_AD">percent of the next quarter's needs. For example, the second-quarter production needs are 480,000 pounds. Therefore, the desired ending inventory for <span class="IL_AD">the first quarter would be 10% 480,000 pounds = 48,000 pounds. The ending inventory of 22,500 pounds for the quarter is assumed ||
 * 2 |||||||||||| Cash payments for the last year's fourth-quarter materials purchases. ||
 * 3 |||||||||||| $47,500 × 50%; $47,500 × 50%. ||
 * 4 |||||||||||| $97,200 × 50%; $97,200 × 50%. ||
 * 5 |||||||||||| $102,900 × 50%; $102,900 × 50%. ||
 * 6 |||||||||||| $55,800 × 50%. Unpaid fourth quarter's purchases appear as accounts payable on the company's end of year balance sheet ||
 * || Total cash disbursement || $49,500 || $72,300 || $100,050 || $79,350 || $301,200 ||
 * 1 |||||||||||| Ten <span class="IL_AD">percent of the next quarter's needs. For example, the second-quarter production needs are 480,000 pounds. Therefore, the desired ending inventory for <span class="IL_AD">the first quarter would be 10% 480,000 pounds = 48,000 pounds. The ending inventory of 22,500 pounds for the quarter is assumed ||
 * 2 |||||||||||| Cash payments for the last year's fourth-quarter materials purchases. ||
 * 3 |||||||||||| $47,500 × 50%; $47,500 × 50%. ||
 * 4 |||||||||||| $97,200 × 50%; $97,200 × 50%. ||
 * 5 |||||||||||| $102,900 × 50%; $102,900 × 50%. ||
 * 6 |||||||||||| $55,800 × 50%. Unpaid fourth quarter's purchases appear as accounts payable on the company's end of year balance sheet ||
 * 6 |||||||||||| $55,800 × 50%. Unpaid fourth quarter's purchases appear as accounts payable on the company's end of year balance sheet ||

Explanation of the Direct Materials Budget for Hampton Freeze Inc.
The only raw materials include in this budget is high fructose sugar, which is the major ingredient in popsicles (finished goods of Hampton Freeze Inc.) other than water. The remaining raw materials are relatively insignificant and are included in variable manufacturing overhead. As with finished goods, management would like to maintain some minimum inventories of raw materials as cushion. In this case, management would like to maintain ending inventories of sugar equal to 10% of the following quarter's production needs.

The first line in the direct materials budget contains the required production for each quarter, which is taken directly from the production budget (see production budget page). Looking at the first quarter, since the schedule of production budget calls for the production of 14,000 cases of popsicles (finished goods of Hampton Freeze Inc.) and each case requires 15 pounds of sugar, the total production needs are for 210,000 pounds of sugar (14,000 cases × 15 pounds per case). In addition, management wants to have ending inventories of 48,000 pounds of sugar, which is 10% of the following quarter's needs of 480,000 pounds. Consequently the total needs are for 258,000 pounds (210,000 pounds for the current quarter's production plus 48,000 pounds for the desired ending inventory). However, since the company already has 21,000 pounds in beginning inventory, only 237,000 pounds of sugar (258,000 pounds – 21,000 pounds) will need to be purchased. Finally, the cost of the materials purchases is determined by multiplying the amount of raw materials to be purchased by the cost per unit of the raw materials. In this case, since 237,000 pounds of sugar will have to be purchased during the first quarter and sugar costs $0.20 per pound, the <span class="IL_AD">total cost will be $47,400 (237,000 pounds × $0.20 per pound).

As with the production budget, the amounts listed under the year column are not always just the sum of the quarterly amounts. The desired ending inventory of raw materials for the year is the same as the desired ending inventory of raw materials for the fourth quarter. Likewise the beginning inventory of the raw materials for the year is the same as the beginning inventory of raw materials for the first quarter.


 * // D //** //**irect materials budget**// is usually accompanied by a **schedule of expected cash disbursements** for raw materials. This schedule is needed to prepare the overall cash budget. **Disbursement of raw materials** consist of payments for purchases on account in prior periods plus any payments for purchases in the current budget period. Direct materials budget in our example includes such a schedule of expected cash disbursements. Ordinarily, companies do not immediately pay their suppliers. At Hampton Freeze Inc. the policy is to pay for 50% of purchases in the quarter in which the purchase is made and 50% in the following quarter, so while the company intends to purchase $47,400 worth of sugar in the first quarter, the company will only pay for half, $23,700, in the first quarter and the other half will be paid in the second quarter. The company will also pay $25,800 for sugar acquired in the previous quarter, but not yet paid for. This is the beginning balance in the accounts payable. Therefore, the total cash disbursements for sugar in the first quarter are $49,500--the $25,800 <span class="IL_AD">payment for sugar acquired in the previous quarter plus the $23,700 payment for sugar acquired during the first quarter.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">The direct budget is similar to the direct materials budget as it depends on production output. Multiplying the direct labor cost per unit times the units produced each period produces the direct labor hours needed. Multiplying the total times the direct labor cost per hour provides the total direct labor cost for the period. Below is an example of a direct labor budget (“Direct Labor Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/labor_budget.htm>). Quick reference information is also located on the Module 7000 Formulas page.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">•Direct Labor Budget **

Example of Direct Labor Budget:
Following is the direct labor budget for Hampton Freeze Inc. ([of the direct labor budget for Hampton Freeze Inc.|see explanation of this budget])


 * ** Hampton Freeze, Inc.Direct Labor BudgetFor the Year Ended December 31, 2003 ** ||
 * |||||||| **// Quarter //** ||  ||
 * || ** 1 ** || ** 2 ** || ** 3 ** || ** 4 ** || ** Year ** ||
 * Required production <span class="IL_AD">in cases (see production budget page) || 14,000 || 32,000 || 36,000 || 19,000 || 101,000 ||
 * Direct labor hours per case || 0.40 || 0.40 || 0.40 || 0.40 || 0.40 ||
 * Total direct labor hours needed || 5,600 || 12,800 || 14,400 || 7,600 || 40,400 ||
 * Direct labor cost per hour || $15.00 || $15.00 || $15.00 || $15.00 || $15.00 ||
 * Total direct labor cost * || $84,000 || $192,000 || $216,000 || $114,000 || $606,000 ||
 * * This schedule assumes that the direct labor work force will be fully adjusted to the total direct labor hours needed each quarter. ||
 * Total direct labor cost * || $84,000 || $192,000 || $216,000 || $114,000 || $606,000 ||
 * * This schedule assumes that the direct labor work force will be fully adjusted to the total direct labor hours needed each quarter. ||
 * * This schedule assumes that the direct labor work force will be fully adjusted to the total direct labor hours needed each quarter. ||
 * * This schedule assumes that the direct labor work force will be fully adjusted to the total direct labor hours needed each quarter. ||

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">The overhead budget provides the cost of all non-labor and non-material items used during the production process for each defined period. Total overhead cost is calculated by adding variable and fixed overhead costs. Variable overhead is calculated by multiplying the variable overhead rate times the direct labor hours. Below is an example of an overhead budget using Hampton Freeze, Inc. (“Manufacturing Overhead Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/overhead_budget.htm>). Quick reference information is also located on the Module 7000 Formulas page.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">•Overhead Budget **

Example of a Manufacturing Overhead Budget:
Following is the manufacturing overhead budget of Hampton Freeze Inc. ([of the Manufacturing Overhead Budget for Hampton Freeze Inc|See explanation of this manufacturing overhead budget for Hampton Freeze Inc].)

|| ||  ||  ||  || ||  ||  ||  ||  ||
 * ** Hampton Freeze Inc.Manufacturing Overhead BudgetFor the Year Ended December 31, 2003 ** ||
 * |||||||| **// Quarters //** ||  ||
 * || 1 || 2 || 3 || 4 || Year  ||
 * <span class="IL_AD">Budgeted direct labor hours ([|see direct labor budget]) || 5,600 || 12,800 || 14,400 || 7,600 || 40,400 ||
 * Variable overhead rate || $4.00 || $4.00 || $4.00 || $4.00 || $4.00 ||
 * Variable manufacturing overhead || $22,400 || $51,200 || $57,600 || $30,400 || $161,600 ||
 * Fixed manufacturing overhead || 60,600 || 60,600 || 60,600 || 60,600 || 242,400 ||
 * Fixed manufacturing overhead || 60,600 || 60,600 || 60,600 || 60,600 || 242,400 ||
 * Total manufacturing overhead || 83,000 || 111,800 || 118,200 || 91,000 || 404,000 ||
 * Less depreciation || 15,000 || 15,000 || 15,000 || 15,000 || 60,000 ||
 * Cash disbursement for manufacturing overhead || $68,000 || $96,800 || $103,200 || $76,000 || $344,000 ||
 * Total manufacturing overhead (a) ||  ||   ||   ||   || $404,000 ||
 * Budgeted direct labor-hours (b) ||  ||   ||   ||   || 40,400 ||
 * Predetermined overhead rate for the year (a) / (b) ||  ||   ||   ||   || $10.00 ||
 * Budgeted direct labor-hours (b) ||  ||   ||   ||   || 40,400 ||
 * Predetermined overhead rate for the year (a) / (b) ||  ||   ||   ||   || $10.00 ||
 * Predetermined overhead rate for the year (a) / (b) ||  ||   ||   ||   || $10.00 ||

Explanation of the Manufacturing Overhead Budget for Hampton Freeze Inc:
At Hampton Freeze the manufacturing overhead is spread 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 the manufacturing overhead depends on direct labor, the first line in the manufacturing overhead budget consists of the budgeted direct labor hours from the[|direct labor budget] ([|see direct labor budget]). The budgeted direct labor hours in each quarter are multiplied by the variable rate to determine the variable component of the manufacturing overhead. For example, the the variable manufacturing overhead for the first quarter is $22,400 (5,600 direct labor hours × $4.00 per direct labor-hour). This is <span class="IL_AD">added to the fixed manufacturing overhead for the quarter to determine the total manufacturing overhead for the quarter. The total manufacturing overhead for the first quarter is $83,000 ($22,400 + $60,600).

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Calculating ending finished goods inventory is needed for input for the cost of goods sold budget. Total ending inventory cost is calculated by multiplying the unit cost (direct materials cost per unit, direct labor cost per unit, overhead cost per unit) x the number of units in ending inventory. Below is an example of an ending finished goods budget using Hampton Freeze, Inc. (“Ending Finished Goods Inventory Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/inventory_budget.htm>). Quick reference information is also located on the Module 7000 Formulas page.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">• Ending Finished Goods Inventory Budget **

Example:
<span class="IL_AD">The unit product cost calculations for Hampton Freeze Inc. are shown below: ([of Ending Finished Goods Inventory Budget for Hampton Freeze Inc|see explanation])


 * ** Hampton Freeze Inc.Ending Finished Goods Inventory BudgetAbsorption Costing BasesFor the Year Ended December 31, 2009 ** ||
 * **// Item //** || **// Quantity //** || **// Cost //** || **// Total //** ||
 * // Production Cost Per Case: // ||  ||   ||   ||
 * Direct materials || 15 Pounds || $0.20 per <span class="IL_AD">pound || $3.00 ||
 * Direct labor || 0.40 hours || 15.00 per hour || 6.00 ||
 * Manufacturing overhead || 0.40 hours || 10.00 per hour || 4.00 ||
 * Unit product cost ||  ||   || $13.00 ||
 * // <span class="IL_AD">Budgeted finished goods inventory: // ||  ||   ||   ||
 * Ending finished goods inventory ([|see production budget]) ||  ||   || 3,000 ||
 * Unit production cost (see above) ||  ||   || $13.00 ||
 * Ending finished goods inventory in dollars ||  ||   || $39.00 ||
 * Unit production cost (see above) ||  ||   || $13.00 ||
 * Ending finished goods inventory in dollars ||  ||   || $39.00 ||
 * Ending finished goods inventory in dollars ||  ||   || $39.00 ||

Explanation of Ending Finished Goods Inventory Budget for Hampton Freeze Inc.
For Hampton Freeze Inc. the absorption costing unit product cost is $13 per case of // <span class="IL_AD">popsicles //(finished goods of Hampton Freeze Inc.)--costing of $3 of direct materials, $6 of direct labor, and $4 of manufacturing overhead. The manufacturing overhead is applied to units of product on the basis of direct labor-hours at the rate of $10 per direct labor-hour. The budgeted carrying cost of the expected inventory is $39,000.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">The marketing expense budget is used to define all costs associated with sales/distribution of an organization’s products. Expenditures can be fixed or variable. Variable marketing expense is calculated by multiplying the unit variable marketing expense times the unit sales. An example of marketing expenses to think about is taken from: [].
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">• Marketing Expense Budget **

Typical general marketing expenses:

 * [|Advertising agency commissions]
 * Salaries for marketing managers
 * Salaries for marketing support e.g. marketing assistants.
 * Office space
 * Fixtures and fittings
 * Travel costs
 * Other direct and indirect marketing costs, including marketing communications costs (see below).

Typical [|marketing communications] costs:

 * [|Personal Selling]
 * [|Public Relations]
 * Printing
 * Mailing
 * Website Development & Hosting
 * Brochure Design
 * [|Advertising]
 * Television Advertising
 * Radio Advertising
 * [|Direct Marketing]
 * Newspaper Advertising
 * Proposal Development/bid submittal
 * Networking
 * Event Attendance
 * [|Sales Promotion]
 * Many other marketing communications tools.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Administrative expenses are not production related and are mostly fixed in nature. Examples include: salaries, legal fees, accounting fees, equipment depreciation, building depreciation, office supplies, travel expenses, insurance, rent, etc. Below is an example of an selling and administrative expense budget using Hampton Freeze, Inc. (“Selling and Administrative Expense Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/selling_and_admn_expenses_budget.htm>). Quick reference information is also located on the Module 7000 Formulas page.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">• Administrative Expense Budget **

Example:
Following is the selling and administrative expense budget for Hampton Freeze Inc. ([of Selling and Administrative Expense Budget for Hampton Freeze Inc.|See explanation of this budget])


 * ** Hampton Freeze Inc.Selling and Administrative Expense BudgetFor the Year Ended December 31, 2009 ** ||
 * |||||||| //** Quarter **// ||  ||
 * || 1 || 2 || 3 || 4 || Year ||
 * Budgeted sales in cases ([|see sales budget]) || 10,000 || 30,000 || 40,000 || 20,000 || 100,000 ||
 * Variable selling and administrative expenses per case || $1.80 || $1.80 || $1.80 || 1.80 || $1.80 ||
 * Budgeted variable expense || $ 18,000 || $54,000 || $72,000 || $36,000 || $180,000 ||
 * // Budgeted fixed selling and administrative expenses: // ||  ||   ||   ||   ||   ||
 * <span class="IL_AD">Advertising || 20,000 || 20,000 || 20,000 || 20,000 || 80,000 ||
 * Executive <span class="IL_AD">salaries || 55,000 || 55,000 || 55,000 || 55,000 || 220,000 ||
 * <span class="IL_AD">Insurance ||   || 1,900 || 37,750 ||   || 39,650 ||
 * <span class="IL_AD">Property taxes ||   ||   ||   || 18,150 || 18,150 ||
 * Depreciation || 10,000 || 10,000 || 10,000 || 10,000 || 40,000 ||
 * Total budgeted fixed selling and administrative exp. || 85,000 || 86,900 || 122,750 || 103,150 || 397,800 ||
 * Total budgeted selling and administrative expenses || 103,000 || 140,900 || 194,750 || 139,150 || 577,800 ||
 * Less depreciation || 10,000 || 10,000 || 10,000 || 10,000 || 40,000 ||
 * Cash disbursements for selling and administrative exp. || $93,000 || $130,900 || $184,750 || $129,150 || $537,800 ||
 * Total budgeted selling and administrative expenses || 103,000 || 140,900 || 194,750 || 139,150 || 577,800 ||
 * Less depreciation || 10,000 || 10,000 || 10,000 || 10,000 || 40,000 ||
 * Cash disbursements for selling and administrative exp. || $93,000 || $130,900 || $184,750 || $129,150 || $537,800 ||
 * Cash disbursements for selling and administrative exp. || $93,000 || $130,900 || $184,750 || $129,150 || $537,800 ||
 * Cash disbursements for selling and administrative exp. || $93,000 || $130,900 || $184,750 || $129,150 || $537,800 ||

Explanation of Selling and Administrative Expense Budget for Hampton Freeze Inc.
Like the manufacturing overhead budget the selling and administrative expense budget is divided into variable and fixed cost components. In the above example the variable selling and administrative expense is $1.80 per case. Consequently, budgeted sales in <span class="IL_AD">cases for each quarter are entered at the top of the schedule. These data are taken from the[|sales budget] ([|see sales budget]). The budgeted variable selling and administrative expenses are determined by multiplying the budgeted sales in cases by the variable selling and administrative expense per case. For example, the budgeted variable selling and administrative expense for the first quarter is $18,000 (10,000 cases × $1.80 per case). The fixed selling and administrative expenses (all given data) are then <span class="IL_AD">added to the variable selling and administrative expenses to arrive at the total budgeted selling and administrative expenses. Finally, to determine the cash disbursement for selling and administrative items, total budgeted selling and administrative expense is adjusted by <span class="IL_AD">adding back non-cash selling and administrative expenses (in this case, just depreciation).

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Research and development budgets, like administrative budgets, are mostly fixed. R&D budgets usually involve large expenditures and must be diligently planned. The following link shows the companies that spent the most on R&D in 2008 and 2009: []. (Pope, Byron.” Automotive R&D Spending Down Last Year, Study Shows”. __wardsauto.com__. Nov 9, 2010. July 2, 2011 < []>). You can see where the five automakers on the top twenty list ranked, including Toyota, which fell from its number one ranking in 2008 to fourth in 2009. Ford changed the most spots, from eight to number 20, with a 32.9% drop in R&D spending.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">• Research and Development Budget **

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Completing the operating budgets above produces the budgedt income statement. It gives an accurate picture of the profitability of organizational operations and a tool for maximizing operational strengths and reducing deficiencies. Below is an example of a budgeted income statement using Hampton Freeze, Inc. (“Budgeted Income Statement:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/budgeted_income_statement.htm>). Quick reference information is also located on the Module 7000 Formulas page.
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">• Budgeted Income Statement **

Example | Sample of Budgeted Income Statement:
Following <span class="IL_AD">schedule contains the budgeted income statement for Hampton Freeze Inc.


 * ** Hampton Freeze Inc.Budgeted Income StatementFor the Year Ended December 31, 2009 ** ||
 * || Other Budgets References  ||   ||
 * Sales || Sales budget || $2,000,000 ||
 * Less cost of goods sold * || Sales budget__,__ Ending finished goods inventory budget || 1,300,000 ||
 * Gross margin ||  || 700,000 ||
 * Less selling and <span class="IL_AD">administrative expenses || Selling and administrative expense budget || 577,800 ||
 * Net operating income ||  || 122,200 ||
 * Less interest expense || Cash budget || 14,000 ||
 * Net income ||  || $108,200 ||
 * Less interest expense || Cash budget || 14,000 ||
 * Net income ||  || $108,200 ||
 * Net income ||  || $108,200 ||


 * __<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">References __**

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">1.Martin, James R. “Chapter 9 The Master Budget or Financial Plan”. __Maaw.info__. July 2, 2011 < http://maaw.info/Chapter9.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">2. “Sales Budget”. __Accountingtools.com__. July2, 2011 <<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">http://www.accountingtools.com/sales-budget/>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">3. “Production Budget”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/production_budget.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">4. “Material Budgeting/Direct Materials Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/material_budget.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">5. “Direct Labor Budget:”. __accountingformanagement.com.__ July 2, 2011 < http://www.accountingformanagement.com/labor_budget.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">6. “Manufacturing Overhead Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/overhead_budget.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">7. “Ending Finished Goods Inventory Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/inventory_budget.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">8. Thomas, Ron. “Marketing Budget Financial Statements for Marketing”. __marketingteacher.com.__ July 2, 2011< [] >.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">9. “Selling and Administrative Expense Budget:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/selling_and_admn_expenses_budget.htm>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">10. Pope, Byron.” Automotive R&D Spending Down Last Year, Study Shows”. __wardsauto.com__. Nov 9, 2010. July 2, 2011 < http://wardsauto.com/ar/automotive_rd_spending_101109/>.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">11. “Budgeted Income Statement:”. __accountingformanagement.com__. July 2, 2011 < http://www.accountingformanagement.com/budgeted_income_statement.htm>.