Chapter 9 - Full Student Version

Chapter 9 - Full Student Version - 9- 1 MANAGERIAL...

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Unformatted text preview: 9- 1 MANAGERIAL ACCOUNTING RSM222 Budgeting Chapter 9 9- 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 organization’s activity is known as budgetary control. LO 1 9- 3 Advantages of Budgeting Define goal and objectives Communicate plans Think about and plan for the future Advantages Coordinate activities Means of allocating resources Uncover potential bottlenecks LO 1 9- 4 Choosing the Budget Period Operating Budget 2012 2013 The annual operating budget The may be divided into quarterly may or monthly budgets. 2014 2015 A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. LO 1 9- 5 Participative (Self-Imposed) Budget Top 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 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 A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a particpative budget. budget particpative LO 1 9- 6 Advantages of Participative Budgets 1. IIndividuals at all levels of the organization are viewed 1. Individuals at all levels of the organization are viewed ndividuals Individuals as members of the team whose judgments are valued as members of the team whose judgments are valued members members by top management. by top management. by by 2. Budget estimates prepared by front-line managers are 2. Budget estimates prepared by front-line managers are Budget Budget often more accurate tthan estimates prepared by top often more accurate han estimates prepared by top more more managers. managers. managers. managers. 3. Motivation is generally higher when individuals 3. Motivation is generally higher when individuals participate in setting their own goals than when the participate in setting their own goals than when the goals are imposed from above. goals are imposed from above. goals goals 4. A manager who is not able to meet a budget imposed 4. A manager who is not able to meet a budget imposed manager manager ffrom above can claim that it was unrealistic.. rom above can claim that it was unrealistic unrealistic unrealistic Participative budgets eliminate this excuse. Participative budgets eliminate this excuse. Participative Participative LO 1 9- 7 Zero-Based Budgeting A zero-based budget requires managers to justify all budgeted expenditures, not just changes in the budget from the prior year. Most managers argue that Most managers argue that Most Most zero-based budgeting is too zero-based budgeting is too ttime consuming and costly to ime consuming and costly to justify on an annual basis. jjustify on an annual basis. justify ustify LO 1 9- 8 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 labour Direct labour 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 LO 2 9- 9 Budgeting Example Royal Company is preparing budgets for the Royal Company is preparing budgets for the quarter ending June 30. quarter ending June 30. Budgeted sales for the next five months are: Budgeted sales for the next five months are: April 20,000 units 20,000 units April May 50,000 units 50,000 units May June 30,000 units 30,000 units June July 25,000 units 25,000 units July August 15,000 units. 15,000 units. August The selling price is $10 per unit. The selling price is $10 per unit. LO 2 9-10 Budgeting Example - The Sales Budget Royal Company is preparing budgets for the quarter ending Royal June 30. June 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. LO 2 9-11 Expected Cash Collections All sales are on account. All sales are on account. Royal’s collection pattern is: Royal’s collection pattern is: 70% collected in the month of sale, 70% collected in the month of sale, 70% 70% 25% collected in the month following sale, 25% collected in the month following sale, 25% 25% 5% uncollectible. 5% uncollectible. 5% 5% The March 31 accounts receivable balance of The March 31 accounts receivable balance of The The $30,000 will be collected in full. $30,000 will be collected in full. $30,000 $30,000 LO 2 9-12 Expected Cash Collections LO 2 9-13 The Production Budget The management at Royal Company wants The management at Royal Company wants ending inventory to be equal to 20% off the ending inventory to be equal to 20% o the following month’s budgeted sales in units. following month’s budgeted sales in units. On March 31, 4,000 units were on hand. On March 31, 4,000 units were on hand. Let’s prepare the production budget. Let’s prepare the production budget. LO 2 9-14 The Production Budget LO 2 9-15 The Production Budget March 31 ending inventory Budgeted May sales Desired ending inventory % Desired ending inventory 50,000 20% 10,000 LO 2 9-16 The Production Budget Assumed ending inventory. LO 2 9-17 The Direct Materials Budget Att Royal Company, five pounds off material At Royal Company, ffive pounds o material A five At ive are required per unit of product. are required per unit of product. are are Management wants materials on hand at Management wants materials on hand at Management Management tthe end of each month equal to 10% off the he end of each month equal to 10% o the 10% 10% following month’s production. ffollowing month’s production. following ollowing On March 31, 13,000 pounds of material On March 31, 13,000 pounds of material On On are on hand. Material cost is $0.40 per are on hand. Material cost is $0.40 per $0.40 $0.40 pound. pound. pound. pound. Let’s prepare the direct materials budget. Let’s prepare the direct materials budget. LO 2 9-18 The Direct Materials Budget March 31 inventory 10% of following month’s production needs. Calculate the materials to be purchased in May. LO 2 9-19 The Direct Materials Budget Assumed ending inventory LO 2 9-20 Expected Cash Disbursement for Materials Royal pays $0.40 per pound for its materials. Royal pays $0.40 per pound for its materials. Royal $0.40 Royal $0.40 One-half of a month’s purchases is paid for in One-half of a month’s purchases is paid for in One-half One-half tthe month of purchase; the other half is paid he month of purchase; the other half is paid in the following month. iin the following month. in n The March 31 accounts payable balance is The March 31 accounts payable balance is The The $12,000. $12,000. $12,000. $12,000. Let’s calculate expected cash disbursements. Let’s calculate expected cash disbursements. Let’s Let’s LO 2 9-21 Expected Cash Disbursement for Materials Compute the expected cash disbursements for materials for the quarter. 140,000 lbs. × $.40/lb. = $56,000 LO 2 9-22 Expected Cash Disbursement for Materials LO 2 9-23 The Direct Labour Budget At Royal, each unit of product requires 0.05 hours (3 At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labour. minutes) of direct labour. The Company has a “no layoff” policy so all employees The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. will be paid for 40 hours of work each week. In exchange for the “no layoff” policy, workers agree to a In exchange for the “no layoff” policy, workers agree to a wage rate of $10 per hour regardless of the hours wage rate of $10 per hour regardless of the hours worked (no overtime pay). worked (no overtime pay). For the next three months, the direct labour workforce For the next three months, the direct labour workforce will be paid for a minimum of 1,500 hours per month. will be paid for a minimum of 1,500 hours per month. Let’s prepare the direct labour budget. Let’s prepare the direct labour budget. Let’s Let’s LO 2 9-24 The Direct Labour Budget From production budget. LO 2 9-25 The Direct Labour Budget LO 2 9-26 Manufacturing Overhead Budget At Royal, manufacturing overhead is applied to At Royal, manufacturing overhead is applied to units of product on the basis of direct labour units of product on the basis of direct labour hours. hours. The variable manufacturing overhead rate is $20 The variable manufacturing overhead rate is $20 per direct labour hour. per direct labour hour. Fixed manufacturing overhead is $50,000 per Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs month and includes $20,000 of noncash costs (primarily depreciation of plant assets). (primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget. Let’s prepare the manufacturing overhead budget. LO 2 9-27 Manufacturing Overhead Budget Direct Labour Budget. LO 2 9-28 Manufacturing Overhead Budget Total mfg. OH for quarter $251,000 = $49.70 per hour * Total labour hours required 5,050 * rounded rounded LO 2 9-29 Manufacturing Overhead Budget Depreciation is a noncash charge. Depreciation is a noncash charge. LO 2 9-30 Ending Finished Goods Inventory Budget Production costs per unit Quantity Cost Direct materials 5.00 l bs. $ 0.40 Direct labour 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. LO 2 9-31 Selling and Administrative Expense Budget At Royal, the selling and administrative expenses At Royal, the selling and administrative expenses At At budget is divided into variable and fixed components. budget is divided into variable and fixed components. budget budget The variable selling and administrative expenses are The variable selling and administrative expenses are The The $0.50 per unit sold. $0.50 per unit sold. $0.50 $0.50 Fixed selling and administrative expenses are $70,000 Fixed selling and administrative expenses are $70,000 Fixed Fixed per month. per month. per per The fixed selling and administrative expenses include The fixed selling and administrative expenses include The The $10,000 in costs – primarily depreciation – that are not $10,000 in costs – primarily depreciation – that are not cash outflows of the current month. cash outflows of the current month. cash cash Let’s prepare the company’s selling and administrative Let’s prepare the company’s selling and administrative Let’s Let’s expense budget. expense budget. expense expense LO 2 9-32 Selling and Administrative Expense Budget LO 2 9-33 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 LO 2 9-34 The Cash Budget Royal: Royal: q Maintains a 16% open line of credit for $75,000 q Maintains a 16% open line of credit for $75,000 q Maintains a minimum cash balance of $30,000 q Maintains a minimum cash balance of $30,000 q Borrows on the first day of the month and repays q Borrows on the first day of the month and repays Borrows Borrows loans on the last day of the month lloans on the last day of the month loans oans q Pays a cash dividend of $49,000 in April q Pays a cash dividend of $49,000 in April q Purchases $143,700 of equipment in May and q Purchases $143,700 of equipment in May and Purchases Purchases $48,300 in June (both purchases paid in cash) $48,300 in June (both purchases paid in cash) $48,300 $48,300 q Has an April 1 cash balance of $40,000 q Has an April 1 cash balance of $40,000 LO 2 9-35 The Cash Budget LO 2 9-36 The Budgeted Financial Statements Cash Budget om C d te e pl Budgeted Financial Statements After we complete the cash budget, we can After prepare the budgeted income statement and budgeted balance sheet for Royal. and LO 2 9-37 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. Sales Budget. Sales Ending Finished Ending Finished Goods Inventory. Goods Inventory. Selling and Selling and Selling Selling Administrative Administrative Administrative Administrative Expense Budget. Expense Budget. Cash Budget. Cash Budget. LO 2 9-38 The Budgeted Balance Sheet Royal reported the following account Royal reported the following account Royal Royal balances prior to preparing its budgeted balances prior to preparing its budgeted financial statements: ffinancial statements: financial inancial • Land – $50,000 • Land – $50,000 • Common shares – $200,000 • Common shares – $200,000 • Retained earnings – $146,150 • Retained earnings – $146,150 • Equipment – $175,000 • Equipment – $175,000 LO 2 9-39 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 shares Retained earnings Total liabilities and equities $ 43,000 75,000 4,600 24,950 147,550 50,000 367,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550 25% of June 25% of June sales of sales of sales sales $300,000. $300,000. $300,000. $300,000. 11,500 lbs. 11,500 lbs. 11,500 at $0.40/lb. at $0.40/lb. 5,000 units 5,000 units at $4.99 each. at $4.99 each. 50% of June 50% of June purchases purchases purchases purchases off$56,800. of $56,800. of o LO 2 9-40 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 shares 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 LO 2 9-41 Static Budgets and Performance Reports Static budgets are prepared for a single, planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. Performance evaluation is difficult when actual activity differs from the planned level of activity. LO 3 9-42 Flexible Budgets May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Reveal variances related to cost control. Improve performance evaluation. Let’s look at CheeseCo. LO 3 9-43 Static Budgets and Performance Reports U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity. CheeseCo Static Budget Machine hours Variable costs Indirect labour Indirect materials Power Fixed costs Depreciation Insurance Total overhead costs Actual Results Variances 10,000 8,000 2,000 U $ 40,000 30,000 5,000 $ 34,000 25,500 3,800 $6,000 F 4,500 F 1,200 F 12,000 2,000 12,000 2,050 0 50 U $ 89,000 $ 77,350 $11,650 F LO 3 9-44 Static Budgets and Performance Reports CheeseCo Static Budget Machine hours Variable costs I ndirect labour I ndirect materials Power Actual Results Variances 10,000 8,000 2,000 U $ 40,000 30,000 5,000 $ 34,000 25,500 3,800 $6,000 F 4,500 F 1,200 F Since cost Fixed costs variances are favourable, have we done a good job controlling costs? Depreciation 12,000 12,000 I nsurance 2,000 2,050 Total overhead costs $ 89,000 $ 77,350 0 50 U $11,650 F LO 3 9-45 Static Budgets and Performance Reports The relevant question is .. .. .. The relevant question is “How much of the favourable cost variance “How much of the favourable cost variance iis due to lower activity, and how much is due s due to lower activity, and how much is due tto good cost control?” o good cost control?” To answer the question, To answer the question, we must we must the budget to the the budget to the actual level of activity. actual level of activity. LO 3 9-46 Preparing a Flexible Budget Cost Formula per Hour Total Fixed Cost Machine hours Variable costs Indirect labour Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ $ $ 12,000 2,000 12,000 $ 32,000 24,000 4,000 $ 60,000 4.00 3.00 0.50 7.50 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 48,000 36,000 6,000 $ 90,000 $ 12,000 2,000 $ 14,000 $ 74,000 $ 12,000 2,000 $ 14,000 $ 89,000 $ 12,000 2,000 $ 14,000 $ 104,000 LO 3 9-47 Flexible Budget Performance Report CheeseCo Cost Formula per Hour Total Fixed Cost Variable costs Indirect labour Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ $ $ 12,000 2,000 8,000 $ 32,000 24,000 4,000 $ 60,000 4.00 3.00 0.50 7.50 Actual Results 8,000 Machine hours Flexible Budget $ 34,000 25,500 3,800 $ 63,300 $ 2,000 U 1,500 U 200 F $ 3,300 U $ 12,000 2,000 $ 14,000 $ 74,000 $ 12,000 2,050 $ 14,050 $ 77,350 $ Variances 0 0 50 U 50 U $ 3,350 U LO 4 9-48 Static Budgets and Performance How much of the $11,650 favourable variance is due to lower activity and how much is due to cost control? Static Budget Machine hours Variable costs I ndirect labour I ndirect materials Power Fixed costs Depreciation I nsurance Total overhead costs Actual Results Variances 10,000 8,000 2,000 U $ 40,000 30,000 5,000 $ 34,000 25,500 3,800 $6,000 F 4,500 F 1,200 F 12,000 2,000 12,000 2,050 0 50 U $ 89,000 $ 77,350 $11,650 F LO 4 9-49 Flexible Budget Performance Report Overhead Variance Analysis Static Overhead Budget at 10,000 Hours $ 89,000 Let’s place the flexible budget for 8,000 hours here. Actual Overhead at 8,000 Hours $ 77,350 Difference between original static budget and actual overhead = $11,650 F. LO 4 9-50 Flexible Budget Performance Report Overhead Variance Analysis Static Overhead Budget at 10,000 Hours $ 89,000 Flexible Overhead Budget at 8,000 Hours $ Activity This $15,000F variance is due to lower activity. 74,000 Actual Overhead at 8,000 Hours $ 77,350 Cost control This $3,350U variance is due to poor cost control. LO 4 ...
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