202 Ch 9 S08

202 Ch 9 S08 - ACC 202 Intro to Management Accounting...

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Unformatted text preview: ACC 202 Intro to Management Accounting Chapter 9: Profit Planning obj 1 Learning Objectives Understand why and how organizations budget. Prepare a master budget including operating budgets & schedules, cash budget, budgeted income statement and budgeted balance sheet. The Basics of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified future time period. 1. The act of preparing a budget is called budgeting. 2. The use of budgets to control an organization's activity is known as budgetary control. Planning and Control Planning: developing objectives and preparing various budgets to achieve these objectives. Control: steps taken by management to attempt to ensure the objectives are attained. Advantages of Budgeting Define goal and objectives Communicate plans Think about and plan for the future Advantages Coordinate activities Uncover potential bottlenecks Means of allocating resources Responsibility Accounting A manager is held responsible for only those items -- that the manager can actually control to a significant extent. Choosing the Budget Period Operating Budget 2007 2008 2009 2010 The annual operating budget may be divided into quarterly or monthly budgets. A continuous budget is a 12-month budget that rolls forward one month as the current month is completed. Self-Imposed Budget Top M anagem ent M id d le M anagem ent M id d le M anagem ent S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a self-imposed budget. Advantages of Self-Imposed Budgets 1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Selfimposed budgets eliminate this excuse. Human Factors in Budgeting Success in budgeting depends upon: 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. The Master Budget: An Overview Ending Finished Goods Budget Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Selling and Administrative Budget Manufacturing Overhead Budget Cash Budget Budgeted Financial Statements Budgeting Example Royal Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are: The selling price is $10 per unit. April May June July August 20,000 units 50,000 units 30,000 units 25,000 units 15,000 units. 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 Expected Cash Collections All sales are on account. Royal's collection pattern is: The March 31 accounts receivable balance of 70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible. $30,000 will be collected in full. Expected Cash Collections Expected Cash Collections From the Sales Budget for April. Expected Cash Collections From the Sales Budget for May. Expected Cash Collections The Production Budget Sales Budget ed and t e pl Expected om C Cash Collections Production Budget Production must be adequate to meet budgeted sales and provide for sufficient ending inventory. The Production Budget Management at Royal Company wants ending inventory to be equal to 20% of the following month's budgeted sales in units. On March 31, 4,000 units were on hand. Prepare the production budget. The Production Budget The Production Budget Budgeted May sales 50,000 20% 10,000 March 31 ending inventory Desired ending inventory % Desired ending inventory The Production Budget The Production Budget Ending inventory = July budgeted sales 25K x 20% = 5K The Direct Materials Budget At Royal Company, five pounds of material are required per unit of product. Management wants materials on hand at the end of each month equal to 10% of the following month's production. On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Prepare the direct materials budget. The Direct Materials Budget From production budget The Direct Materials Budget The Direct Materials Budget March 31 inventory 10% of following months production needs. Calculate the materials to by purchased in May. The Direct Materials Budget The Direct Materials Budget Assumed ending inventory Expected Cash Disbursement for Materials Royal pays $0.40 per pound for its materials. Onehalf of a month's purchases is paid for in the month of purchase; the other half is paid in the following month. $12,000. The March 31 accounts payable balance is Calculate expected cash disbursements Expected Cash Disbursement for Materials Expected Cash Disbursement for Materials Compute the expected cash disbursements for materials for the quarter. 140,000 lbs. $.40/lb. = $56,000 Expected Cash Disbursement for Materials The Direct Labor Budget At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor. There is a "no layoff" policy so all employees will be paid for 40 hours of work each week. In exchange for the "no layoff" policy, all workers are paid $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. Prepare the direct labor budget. The Direct Labor Budget From production budget The Direct Labor Budget The Direct Labor Budget Greater of labor hours required or labor hours guaranteed. The Direct Labor Budget Manufacturing Overhead Budget At Royal manufacturing overhead is applied to units of product on the basis of direct labor hours. The variable manufacturing overhead rate is $20 per direct labor hour. Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets). Prepare the manufacturing overhead budget. Manufacturing Overhead Budget Direct Labor Budget Manufacturing Overhead Budget Total mfg. OH for quarter $251,000 = $49.70 per hour* Total labor hours required 5,050 *rounded Manufacturing Overhead Budget Depreciation is a noncash charge. Ending Finished Goods Inventory Budget Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor Manufacturing overhead Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory $ Total 2.00 Direct materials budget and information Ending Finished Goods Inventory Budget Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor 0.05 hrs. $ 10.00 Manufacturing overhead Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory $ Total 2.00 0.50 Direct labor budget Ending Finished Goods Inventory Budget Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor 0.05 hrs. $ 10.00 Manufacturing overhead 0.05 hrs. $ 49.70 Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory Total $ 2.00 0.50 2.49 $ 4.99 $ 4.99 ? Total mfg. OH for quarter $251,000 = $49.70 per hour* Total labor hours required 5,050 Ending Finished Goods Inventory Budget Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor 0.05 hrs. $ 10.00 Manufacturing overhead 0.05 hrs. $ 49.70 Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory Total $ 2.00 0.50 2.49 $ 4.99 5,000 $ 4.99 $ 24,950 Production Budget Selling and Administrative Expense Budget At Royal, the selling and admin expense budget is divided into variable and fixed components. The variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $70,000 per month. The fixed selling and admin expenses include $10,000 in costs primarily depreciation that are not cash outflows of the current month. Prepare the company's selling and administrative expense budget. Selling and Administrative Expense Budget Calculate the selling and administrative cash expenses for the quarter. Selling and Administrative Expense Budget Format of the Cash Budget The cash budget is divided into four sections: 1. Cash receipts listing all cash inflows excluding borrowing 2. Cash disbursements listing all payments excluding repayments of principal and interest 3. Cash excess or deficiency 4. The financing section listing all borrowings, repayments and interest The Cash Budget Royal: qMaintains a 16% open line of credit for $75K qMaintains a minimum cash balance of $30K qBorrows on the first day of the month and repays loans on the last day of the month qPays a cash dividend of $49,000 in April qPurchases $143,700 of equipment in May and $48,300 in June paid in cash qHas an April 1 cash balance of $40,000 The Cash Budget Schedule of Expected Cash Collections The Cash Budget Schedule of Expected Cash Disbursements Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget The Cash Budget Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on it line-of-credit. The Cash Budget Ending cash balance for April is the beginning May balance. The Cash Budget The Cash Budget $50,000 16% 3/12 = $2,000 Borrowings on April 1 and repayment on June 30. The Budgeted Income Statement Cash Budget p m Co d te le Budgeted Income Statement After we complete the cash budget, we can prepare the budgeted income statement for Royal. The Budgeted Income Statement Royal Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) Cost of goods sold (100,000 @ $4.99) Gross margin Selling and administrative expenses Operating income Interest expense Net income $ 1,000,000 499,000 501,000 260,000 241,000 2,000 $ 239,000 Sales Budget Ending Finished Goods Inventory Selling and Administrative Expense Budget Cash Budget The Budgeted Balance Sheet Royal reported the following account balances prior to preparing its budgeted financial statements: Land $50,000 Common stock $200,000 Retained earnings $146,150 Equipment $265,000 Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ 43,000 75,000 4,600 24,950 147,550 25% of June sales of $300,000 11,500 lbs. at $0.40/lb. 5,000 units at $4.99 each 50,000 367,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550 50% of June purchases of $56,800 Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ 43,000 Beginning balance 75,000 Add: net income 4,600 Deduct: dividends 24,950 balance Ending 147,550 $146,150 239,000 (49,000) $336,150 50,000 367,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550 ...
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