8
PROFIT Chapter PLANNING
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
McGraw-Hill/Irwin
Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
8- 2
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organizations activity is known as
budgetary control.
8- 3
Planning and Control
Planning
Planning
iinvolves developing
nvolves developing
objectives and
objectives and
preparing various
preparing various
budgets to achieve
budgets to achieve
these objectives.
these objectives.
Control
Control
iinvolves the steps
nvolves the steps
ttaken by
aken by
management to
management to
iincrease the
ncrease the
llikelihood that the
ikelihood that the
objectives set down
objectives set down
while planning are
while planning are
attained.
attained.
8- 4
Advantages of Budgeting
Define goal
and objectives
Communicate
plans
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
8- 5
Responsibility Accounting
Managers should be held responsible for
those items and only those items that
only
the manager can actually control
to a significant extent.
8- 6
Human Factors in Budgeting
The success of budgeting depends upon three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when something
goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based on
meeting budget targets.
8- 7
The Master Budget: An Overview
Sales budget
Sales budget
Ending inventory
Ending inventory
budget
budget
Direct materials
Direct materials
budget
budget
Production budget
Production budget
Direct labor
Direct labor
budget
budget
Selling and
Selling and
administrative
administrative
budget
budget
Manufacturing
Manufacturing
overhead budget
overhead budget
Cash Budget
Cash Budget
Budgeted
Budgeted
income
income
statement
statement
Budgeted
Budgeted
balance sheet
balance sheet
8- 8
Budgeting Example
Royal Company is preparing budgets for the
quarter ending June 30.
Budgeted sales for the next five months are:
April
20,000 units
May
50,000 units
June
30,000 units
July
25,000 units
August
15,000 units.
The selling price is $10 per unit.
8- 9
The Sales Budget
The individual months of April, May, and June are
summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th
8-10
Expected Cash Collections
All sales are on account.
Royals collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% uncollectible.
The March 31 accounts receivable
balance of $30,000 will be collected in full.
8-11
Expected Cash Collections
8-12
The Production Budget
The management at Royal Company wants
The
ending inventory to be equal to 20% of the
20%
following months budgeted sales in units.
following
On March 31, 4,000 units were on hand.
Lets prepare the production budget.
Lets
8-13
The Production Budget
March 31
ending inventory
Budgeted May sales
Desired ending inventory %
Desired ending inventory
50,000
20%
10,000
8-14
The Production Budget
Assumed ending inventory.
8-15
The Direct Materials Budget
At Royal Company, five pounds of material
At
five
are required per unit of product.
are
Management wants materials on hand at the
Management
end of each month equal to 10% of the
10%
following months production.
following
On March 31, 13,000 pounds of material are
On
on hand. Material cost is $0.40 per pound.
$0.40 per
Lets prepare the direct materials budget.
Lets
8-16
The Direct Materials Budget
8-17
The Direct Materials Budget
March 31 inventory
10% of following months
production needs.
Calculate the materials to
be purchased May.
8-18
The in Direct Materials Budget
Assumed ending inventory
8-19
Expected Cash Disbursement for
Expected
Materials
Materials
Royal pays $0.40 per pound for its materials.
Royal
per
One-half of a months purchases is paid for in
One-half
the month of purchase; the other half is paid in
the following month.
the
The March 31 accounts payable balance is
The
$12,000.
$12,000.
Lets calculate expected cash disbursements.
Lets
8-20
Expected Cash Disbursement for
Expected
Materials
Materials
8-21
The Direct Labor Budget
At
Royal, each unit of product requires 0.05 hours (3
minutes) of direct labor.
The
Company has a no layoff policy so all employees will
be paid for 40 hours of work each week.
In
exchange for the no layoff policy, workers agree to a
wage rate of $10 per hour regardless of the hours worked
(no overtime pay).
For
the next three months, the direct labor workforce will be
paid for a minimum of 1,500 hours per month.
Lets prepare the direct labor budget.
8-22
The Direct Labor Budget
8-23
Manufacturing Overhead Budget
At Royal, manufacturing overhead is applied to units
At Royal, manufacturing overhead is applied to units
of product on the basis of direct labor hours.
of product on the basis of direct labor hours.
The variable manufacturing overhead rate is $20 per
The variable manufacturing overhead rate is $20 per
direct labor hour.
direct labor hour.
Fixed manufacturing overhead is $50,000 per month
Fixed manufacturing overhead is $50,000 per month
and includes $20,000 of noncash costs (primarily
and includes $20,000 of noncash costs (primarily
depreciation of plant assets).
depreciation of plant assets).
Lets prepare the manufacturing overhead budget.
Lets prepare the manufacturing overhead budget.
8-24
Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000
= $49.70 per hour *
Total labor hours required 5,050
* rounded
8-25
Manufacturing Overhead Budget
Depreciation is a noncash charge.
Depreciation is a noncash charge.
8-26
Selling and Administrative Expense
Selling
Budget
Budget
At Royal, the selling and administrative expenses budget is
At
divided into variable and fixed components.
divided
The variable selling and administrative expenses are $0.50
The
per unit sold.
per
Fixed selling and administrative expenses are $70,000 per
Fixed
month.
month.
The fixed selling and administrative expenses include
The
selling
$10,000 in costs primarily depreciation that are not cash
outflows of the current month.
outflows
Lets prepare the companys selling and
Lets
administrative expense budget.
administrative
8-27
Selling Administrative Expense Budget
8-28
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts listing all cash inflows excluding
Cash
borrowing;
borrowing;
2. Cash disbursements listing all payments
Cash
excluding repayments of principal and interest;
excluding
3. Cash excess or deficiency; and
4. The financing section listing all borrowings,
The
repayments and interest.
repayments
8-29
The Cash Budget
Assume the following information for Royal:
q Maintains
a 16% open line of credit for $75,000
q Maintains
a minimum cash balance of $30,000
q Borrows
Borrows
on the first day of the month and repays
loans on the last day of the month
loans
q Pays
a cash dividend of $49,000 in April
q Purchases
Purchases
$143,700 of equipment in May and
$48,300 in June (both purchases paid in cash)
$48,300
q Has
an April 1 cash balance of $40,000
8-30
The Cash Budget
Schedule of Expected
Schedule of Expected
Cash Disbursements.
Cash Disbursements.
Direct Labor
Budget.
Manufacturing
Overhead Budget.
Selling and Administrative
Expense Budget.
8-31
The Cash Budget
Because Royal maintains
a cash balance of $30,000,
the company must borrow
the
$50,000 on its line-of-credit.
$50,000
Ending cash balance for April
is the beginning May balance.
8-32
The Cash Budget
8-33
The Cash Budget
$50,000 16% 3/12 = $2,000
Borrowings on April 1 and
repayment on June 30.