BAB 6 PROFIT PLAN b6 profit plan
Bab
6
Profit Planning
The Basic Framework of Budgeting
Materials
Production
Irwin/McGraw-Hill
Sales
Master
Budget
Summary of
a company’s
plans.
Detail
Budget
Detail
Budget
Detail
Budget
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Planning and Control
Planning --
involves
developing
objectives and
preparing various
budgets to
achieve these
objectives.
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Control --
involves the steps
taken by
management that
attempt to ensure
the objectives are
attained.
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Advantages of Budgeting
Define goal
and objectives
Communicating
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
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Responsibility Accounting
Managers should be held responsible for those items
— and only those items — that
the manager can actually control
to a significant extent.
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Choosing the Budget Period
Operating Budget
1999
2000
2001
2002
The annual operating budget
may be divided into quarterly
or monthly budgets.
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Choosing the Budget Period
Continuous or
Perpetual Budget
1999
2000
2001
2002
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
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Participative Budget System
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
Flow of Budget Data
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The Budget Committee
A standing committee responsible for
overall policy matters relating to the budget
coordinating the preparation of the budget
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The Master Budget
Sales
Budget
Selling and
Administrative
Budget
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The Master Budget
Sales
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Irwin/McGraw-Hill
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The Master Budget
Sales
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cash
Budget
Budgeted Financial Statements
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The Sales Budget
Detailed schedule showing expected
sales for the coming periods
expressed in units and dollars.
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Budgeting Example
Royal Company is preparing budgets for the
quarter ending June 30.
Budgeted sales for the next five months are:
April
May
June
July
August
20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
The selling price is $10 per unit.
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The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
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April
May
June
20,000
50,000
30,000
Quarter
100,000
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The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
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April
May
June
Quarter
20,000
50,000
30,000
100,000
$
10
$200,000
$
10
$500,000
$
10
$300,000
$
10
$1,000,000
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The Production Budget
Sales
Budget
m
o
C
pl
ed
t
e
Production
Budget
Production must be adequate to meet budgeted
sales and provide for sufficient ending inventory.
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The Production Budget
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.
Let’s prepare the production budget.
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The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
10,000
30,000
4,000
26,000
Budgeted
Budgeted sales
sales
Desired
Desired percent
percent
Desired
Desired inventory
inventory
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Quarter
100,000
50,000
50,000
20%
20%
10,000
10,000
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The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
4,000
26,000
March
March 31
31
ending
ending inventory
inventory
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The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
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April
20,000
May
50,000
10,000
30,000
6,000
56,000
June
30,000
Quarter
100,000
4,000
26,000
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
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April
20,000
May
50,000
10,000
30,000
6,000
56,000
4,000
26,000
10,000
46,000
June
30,000
Quarter
100,000
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
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April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
6,000
56,000
5,000
35,000
5,000
105,000
4,000
26,000
10,000
46,000
6,000
29,000
4,000
101,000
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
All
All sales
sales are
are on
on account.
account.
Royal’s
Royal’s collection
collection pattern
pattern is:
is:
70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
5%
5% is
is uncollectible.
uncollectible.
The
The March
March 31
31 accounts
accounts receivable
receivable
balance
balance of
of $30,000
$30,000 will
will be
be collected
collected in
in
full.
full.
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Expected Cash Collections
Irwin/McGraw-Hill
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Expected Cash Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
Irwin/McGraw-Hill
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Expected Cash Collections
Irwin/McGraw-Hill
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The Direct Materials Budget
At
At Royal
Royal Company,
Company, five
five pounds
pounds of
of material
material
are
are required
required per
per unit
unit of
of product.
product.
Management
Management wants
wants materials
materials on
on hand
hand at
at
the
the end
end of
of each
each month
month equal
equal to
to 10%
10% of
of the
the
following
following month’s
month’s production.
production.
On
On March
March 31,
31, 13,000
13,000 pounds
pounds of
of material
material
are
are on
on hand.
hand. Material
Material cost
cost $0.40
$0.40 per
per
pound.
pound.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
May
46,000
June
29,000
Quarter
101,000
From
From production
production
budget
budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
Irwin/McGraw-Hill
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
10%
10% of
of the
the following
following
month’s
month’s production
production
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
13,000
140,000
March
March 31
31
inventory
inventory
Irwin/McGraw-Hill
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The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
Irwin/McGraw-Hill
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
Irwin/McGraw-Hill
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its
materials.
materials.
One-half
One-half of
of aa month’s
month’s purchases
purchases are
are
paid
paid for
for in
in the
the month
month of
of purchase;
purchase; the
the
other
other half
half is
is paid
paid in
in the
the following
following month.
month.
The
The March
March 31
31 accounts
accounts payable
payable balance
balance
is
is $12,000.
$12,000.
Let’s
Let’s calculate
calculate expected
expected cash
cash
disbursements.
disbursements.
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Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
April
$ 12,000
May
June
Quarter
$ 12,000
May purchases
June purchases
Total cash
disbursements
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© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
April
$ 12,000
May
28,000
$ 28,000
June
Quarter
$ 12,000
28,000
28,000
June purchases
Total cash
disbursements
$ 40,000
140,000 lbs. × $.40/lb. = $56,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
Total cash
disbursements
Irwin/McGraw-Hill
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 44,300
$ 40,000
Quarter
$ 12,000
44,300
44,300
$ 72,300
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash
disbursements
Irwin/McGraw-Hill
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 40,000
$ 72,300
Quarter
$ 12,000
$ 44,300
44,300
44,300
28,400
28,400
$ 72,700
$185,000
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours of
of
direct
direct labor.
labor.
The
The Company
Company has
has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours of
of work
work each
each week.
week.
In
In exchange
exchange for
for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agreed
agreed to
to
aa wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless of
of the
the hours
hours
worked
worked (No
(No overtime
overtime pay).
pay).
For
For the
the next
next three
three months,
months, the
the direct
direct labor
labor workforce
workforce will
will
be
be paid
paid for
for aa minimum
minimum of
of 1,500
1,500 hours
hours per
per month.
month.
Let’s
Let’s prepare
prepare the
the direct
direct labor
labor budget.
budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
From production
budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
Higher
Higher of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
Royal Company uses a variable
manufacturing overhead rate of $1 per unit
produced.
produced
Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of noncash costs
(primarily depreciation of plant assets).
Let’s prepare the manufacturing
overhead budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
Total mfg. OH costs
Less noncash costs
Cash disbursements
for manufacturing OH
Irwin/McGraw-Hill
May
46,000
$
1
$ 46,000
June
29,000
$
1
$ 29,000
Quarter
101,000
$
1
$ 101,000
From production
budget
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
50,000
Total mfg. OH costs
76,000
Less noncash costs
Cash disbursements
for manufacturing OH
Irwin/McGraw-Hill
May
46,000
$
1
$ 46,000
50,000
96,000
June
29,000
$
1
$ 29,000
50,000
79,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
50,000
Total mfg. OH costs
76,000
Less noncash costs
20,000
Cash disbursements
for manufacturing OH $ 56,000
May
46,000
$
1
$ 46,000
50,000
96,000
20,000
June
29,000
$
1
$ 29,000
50,000
79,000
20,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
60,000
$ 76,000
$ 59,000
$ 191,000
Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Ending Finished Goods Inventory Budget
Now, Royal can complete the ending
finished goods inventory budget.
At Royal, manufacturing overhead is
applied to units of product on the basis of
direct labor hours.
Let’s calculate ending finished goods
inventory.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Ending Finished Goods Inventory Budget
Production costs per unit Quantity
Direct materials
5.00 lbs.
Direct labor
Manufacturing overhead
Cost
$ 0.40
$
Total
2.00
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct materials
budget and information
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
$
Total
2.00
0.50
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct labor
budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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 hr.*
Total labor hours required 5,050 hrs.
*rounded
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Selling and Administrative Expense Budget
At
At Royal,
Royal, variable
variable selling
selling and
and administrative
administrative
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.
Fixed
Fixed selling
selling and
and administrative
administrative expenses
expenses are
are
$70,000
$70,000 per
per month.
month.
The
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses
include
include $10,000
$10,000 in
in costs
costs –– primarily
primarily depreciation
depreciation ––
that
that are
are not
not cash
cash outflows
outflows of
of the
the current
current month.
month.
Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and
administrative
administrative expense
expense budget.
budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Selling and Administrative Expense Budget
Budgeted sales
Variable selling
and admin. rate
Variable expense
Fixed selling and
admin. expense
Total expense
Less noncash
expenses
Cash disbursements for
selling & admin.
Irwin/McGraw-Hill
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
© The McGraw-Hill Companies, Inc., 2000
Selling and Administrative Expense Budget
Budgeted sales
Variable selling
and admin. rate
Variable expense
Fixed selling and
admin. expense
Total expense
Less noncash
expenses
Cash disbursements for
selling & admin.
Irwin/McGraw-Hill
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
10,000
10,000
10,000
30,000
$70,000
$85,000
$75,000
$230,000
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Royal:
Maintains
Maintains aa 16%
16% open
open line
line of
of credit
credit for
for $75,000.
$75,000.
Maintains
Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000.
$30,000.
Borrows
Borrows on
on the
the first
first day
day of
of the
the month
month and
and repays
repays
loans
loans on
on the
the last
last day
day of
of the
the month.
month.
Pays
Pays aa cash
cash dividend
dividend of
of $49,000
$49,000 in
in April.
April.
Purchases
Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
$48,300
$48,300 in
in June
June paid
paid in
in cash.
cash.
Has
Has an
an April
April 11 cash
cash balance
balance of
of $40,000.
$40,000.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
April
$ 40,000
170,000
210,000
May
June
Quarter
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
40,000
Direct labor
Mfg. overhead
Selling and admin.
Schedule
Equipment purchase
Schedule of
of Expected
Expected
Dividends
Cash
Cash Disbursements
Disbursements
Total disbursements
Excess (deficiency) of
Schedule of
of Expected
Expected
cash available over Schedule
Cash
disbursements
Cash Collections
Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
May
June
Quarter
Direct Labor
Budget
Manufacturing
Overhead Budget
Selling and Administrative
Expense Budget
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
49,000
230,000
May
June
Quarter
Because Royal maintains
a cash balance of $30,000,
the company must
borrow on its
line-of-credit
$ (20,000)
© The McGraw-Hill Companies, Inc., 2000
Financing and Repayment
April
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
May
June
Quarter
$ (20,000)
50,000
50,000
$ 30,000
$ 30,000
$
-
$
-
Ending cash balance for April
is the beginning May balance.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
$ (20,000)
$ 30,000
June
Quarter
© The McGraw-Hill Companies, Inc., 2000
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
April
May
$ (20,000)
$ 30,000
50,000
50,000
$ 30,000
$ 30,000
June
Quarter
Because the ending cash balance is
exactly $30,000, Royal will not repay
the loan this month.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Quarter
$ 40,000
905,000
945,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
72,700
15,000
59,000
75,000
48,300
270,000
185,000
53,000
191,000
230,000
192,000
49,000
900,000
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Quarter
$ 40,000
905,000
945,000
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
40,000
72,300
72,700
185,000
Direct labor
15,000
23,000
15,000
53,000
Mfg. overhead
56,000
76,000
59,000
191,000
Selling and admin.
70,000
85,000
75,000
230,000
At
the
end
of
June,
Royal
has
enough
cash
At
the
end
of
June,
Royal
has
enough
cash
Equipment purchase
143,700
48,300
192,000
$50,000
at
16%.
to repay
repay the
the49,000
$50,000 loan
loan
plus interest
interest
at49,000
16%.
Dividends to
- plus
Total disbursements
230,000
400,000
270,000
900,000
Excess (deficiency) of
cash available over
disbursements
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
April
May
June
Quarter
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
50,000
50,000
$ 30,000
$ 30,000
(50,000)
(2,000)
(52,000)
$ 43,000
50,000
(50,000)
(2,000)
(2,000)
$ 43,000
$50,000 × 16% × 3/12 = $2,000
Borrowings on April 1 and
repayment of June 30.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Budgeted Income Statement
Cash
Budget
m
o
C
pl
ed
t
e
Budgeted
Income
Statement
After we complete the cash budget,
we can prepare the budgeted income
statement for Royal.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
Irwin/McGraw-Hill
$ 1,000,000
499,000
501,000
260,000
241,000
2,000
$ 239,000
© The McGraw-Hill Companies, Inc., 2000
The Budgeted Balance Sheet
Royal
Royal reported
reported the
the following
following account
account
balances
balances on
on June
June 30
30 prior
prior to
to preparing
preparing
its
its budgeted
budgeted financial
financial statements:
statements:
Land
Land -- $50,000
$50,000
Building
Building (net)
(net) -- $175,000
$175,000
Common
Common stock
stock -- $200,000
$200,000
Retained
Retained earnings
earnings -- $146,150
$146,150
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
Irwin/McGraw-Hill
$
43,000
75,000
4,600
24,950
147,550
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
25%of
25%of June
June
sales
sales of
of
$300,000
$300,000
11,500
11,500 lbs.
lbs.
at
at $0.40/lb.
$0.40/lb.
5,000
5,000 units
units
at
at $4.99
$4.99 each
each
50%
50% of
of June
June
purchases
purchases
of
of $56,800
$56,800
© The McGraw-Hill Companies, Inc., 2000
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
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
Irwin/McGraw-Hill
$
43,000
75,000
Beginning balance
4,600
Add:
net income
24,950
Deduct: dividends
Ending balance
147,550
$146,150
239,000
(49,000)
$336,150
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
© The McGraw-Hill Companies, Inc., 2000
Zero-Base Budgeting
Managers are required to justify all budgeted
expenditures, not just changes in the budget
from the previous year. The baseline is zero
rather than last year’s budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
International Aspects of Budgeting
Multinational companies face special
problems when preparing a budget.
Fluctuations in foreign currency exchange rates.
High inflation rates in some foreign countries.
Differences in local economic conditions.
Local governmental policies.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
End of Chapter 9
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
6
Profit Planning
The Basic Framework of Budgeting
Materials
Production
Irwin/McGraw-Hill
Sales
Master
Budget
Summary of
a company’s
plans.
Detail
Budget
Detail
Budget
Detail
Budget
© The McGraw-Hill Companies, Inc., 2000
Planning and Control
Planning --
involves
developing
objectives and
preparing various
budgets to
achieve these
objectives.
Irwin/McGraw-Hill
Control --
involves the steps
taken by
management that
attempt to ensure
the objectives are
attained.
© The McGraw-Hill Companies, Inc., 2000
Advantages of Budgeting
Define goal
and objectives
Communicating
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Responsibility Accounting
Managers should be held responsible for those items
— and only those items — that
the manager can actually control
to a significant extent.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Choosing the Budget Period
Operating Budget
1999
2000
2001
2002
The annual operating budget
may be divided into quarterly
or monthly budgets.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Choosing the Budget Period
Continuous or
Perpetual Budget
1999
2000
2001
2002
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Participative Budget System
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
Flow of Budget Data
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Budget Committee
A standing committee responsible for
overall policy matters relating to the budget
coordinating the preparation of the budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Master Budget
Sales
Budget
Selling and
Administrative
Budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Master Budget
Sales
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Master Budget
Sales
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cash
Budget
Budgeted Financial Statements
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Sales Budget
Detailed schedule showing expected
sales for the coming periods
expressed in units and dollars.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Budgeting Example
Royal Company is preparing budgets for the
quarter ending June 30.
Budgeted sales for the next five months are:
April
May
June
July
August
20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
The selling price is $10 per unit.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
Irwin/McGraw-Hill
April
May
June
20,000
50,000
30,000
Quarter
100,000
© The McGraw-Hill Companies, Inc., 2000
The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
Irwin/McGraw-Hill
April
May
June
Quarter
20,000
50,000
30,000
100,000
$
10
$200,000
$
10
$500,000
$
10
$300,000
$
10
$1,000,000
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Sales
Budget
m
o
C
pl
ed
t
e
Production
Budget
Production must be adequate to meet budgeted
sales and provide for sufficient ending inventory.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
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.
Let’s prepare the production budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
10,000
30,000
4,000
26,000
Budgeted
Budgeted sales
sales
Desired
Desired percent
percent
Desired
Desired inventory
inventory
Irwin/McGraw-Hill
Quarter
100,000
50,000
50,000
20%
20%
10,000
10,000
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
4,000
26,000
March
March 31
31
ending
ending inventory
inventory
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
Irwin/McGraw-Hill
April
20,000
May
50,000
10,000
30,000
6,000
56,000
June
30,000
Quarter
100,000
4,000
26,000
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
Irwin/McGraw-Hill
April
20,000
May
50,000
10,000
30,000
6,000
56,000
4,000
26,000
10,000
46,000
June
30,000
Quarter
100,000
© The McGraw-Hill Companies, Inc., 2000
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
Irwin/McGraw-Hill
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
6,000
56,000
5,000
35,000
5,000
105,000
4,000
26,000
10,000
46,000
6,000
29,000
4,000
101,000
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
All
All sales
sales are
are on
on account.
account.
Royal’s
Royal’s collection
collection pattern
pattern is:
is:
70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
5%
5% is
is uncollectible.
uncollectible.
The
The March
March 31
31 accounts
accounts receivable
receivable
balance
balance of
of $30,000
$30,000 will
will be
be collected
collected in
in
full.
full.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
At
At Royal
Royal Company,
Company, five
five pounds
pounds of
of material
material
are
are required
required per
per unit
unit of
of product.
product.
Management
Management wants
wants materials
materials on
on hand
hand at
at
the
the end
end of
of each
each month
month equal
equal to
to 10%
10% of
of the
the
following
following month’s
month’s production.
production.
On
On March
March 31,
31, 13,000
13,000 pounds
pounds of
of material
material
are
are on
on hand.
hand. Material
Material cost
cost $0.40
$0.40 per
per
pound.
pound.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
May
46,000
June
29,000
Quarter
101,000
From
From production
production
budget
budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
Irwin/McGraw-Hill
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
10%
10% of
of the
the following
following
month’s
month’s production
production
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
13,000
140,000
March
March 31
31
inventory
inventory
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
Irwin/McGraw-Hill
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
© The McGraw-Hill Companies, Inc., 2000
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
Irwin/McGraw-Hill
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its
materials.
materials.
One-half
One-half of
of aa month’s
month’s purchases
purchases are
are
paid
paid for
for in
in the
the month
month of
of purchase;
purchase; the
the
other
other half
half is
is paid
paid in
in the
the following
following month.
month.
The
The March
March 31
31 accounts
accounts payable
payable balance
balance
is
is $12,000.
$12,000.
Let’s
Let’s calculate
calculate expected
expected cash
cash
disbursements.
disbursements.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
April
$ 12,000
May
June
Quarter
$ 12,000
May purchases
June purchases
Total cash
disbursements
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
April
$ 12,000
May
28,000
$ 28,000
June
Quarter
$ 12,000
28,000
28,000
June purchases
Total cash
disbursements
$ 40,000
140,000 lbs. × $.40/lb. = $56,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
Total cash
disbursements
Irwin/McGraw-Hill
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 44,300
$ 40,000
Quarter
$ 12,000
44,300
44,300
$ 72,300
© The McGraw-Hill Companies, Inc., 2000
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash
disbursements
Irwin/McGraw-Hill
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 40,000
$ 72,300
Quarter
$ 12,000
$ 44,300
44,300
44,300
28,400
28,400
$ 72,700
$185,000
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours of
of
direct
direct labor.
labor.
The
The Company
Company has
has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours of
of work
work each
each week.
week.
In
In exchange
exchange for
for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agreed
agreed to
to
aa wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless of
of the
the hours
hours
worked
worked (No
(No overtime
overtime pay).
pay).
For
For the
the next
next three
three months,
months, the
the direct
direct labor
labor workforce
workforce will
will
be
be paid
paid for
for aa minimum
minimum of
of 1,500
1,500 hours
hours per
per month.
month.
Let’s
Let’s prepare
prepare the
the direct
direct labor
labor budget.
budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
From production
budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
Higher
Higher of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Direct Labor Budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
Royal Company uses a variable
manufacturing overhead rate of $1 per unit
produced.
produced
Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of noncash costs
(primarily depreciation of plant assets).
Let’s prepare the manufacturing
overhead budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
Total mfg. OH costs
Less noncash costs
Cash disbursements
for manufacturing OH
Irwin/McGraw-Hill
May
46,000
$
1
$ 46,000
June
29,000
$
1
$ 29,000
Quarter
101,000
$
1
$ 101,000
From production
budget
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
50,000
Total mfg. OH costs
76,000
Less noncash costs
Cash disbursements
for manufacturing OH
Irwin/McGraw-Hill
May
46,000
$
1
$ 46,000
50,000
96,000
June
29,000
$
1
$ 29,000
50,000
79,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
50,000
Total mfg. OH costs
76,000
Less noncash costs
20,000
Cash disbursements
for manufacturing OH $ 56,000
May
46,000
$
1
$ 46,000
50,000
96,000
20,000
June
29,000
$
1
$ 29,000
50,000
79,000
20,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
60,000
$ 76,000
$ 59,000
$ 191,000
Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Ending Finished Goods Inventory Budget
Now, Royal can complete the ending
finished goods inventory budget.
At Royal, manufacturing overhead is
applied to units of product on the basis of
direct labor hours.
Let’s calculate ending finished goods
inventory.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Ending Finished Goods Inventory Budget
Production costs per unit Quantity
Direct materials
5.00 lbs.
Direct labor
Manufacturing overhead
Cost
$ 0.40
$
Total
2.00
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct materials
budget and information
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
$
Total
2.00
0.50
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct labor
budget
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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 hr.*
Total labor hours required 5,050 hrs.
*rounded
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Selling and Administrative Expense Budget
At
At Royal,
Royal, variable
variable selling
selling and
and administrative
administrative
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.
Fixed
Fixed selling
selling and
and administrative
administrative expenses
expenses are
are
$70,000
$70,000 per
per month.
month.
The
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses
include
include $10,000
$10,000 in
in costs
costs –– primarily
primarily depreciation
depreciation ––
that
that are
are not
not cash
cash outflows
outflows of
of the
the current
current month.
month.
Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and
administrative
administrative expense
expense budget.
budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Selling and Administrative Expense Budget
Budgeted sales
Variable selling
and admin. rate
Variable expense
Fixed selling and
admin. expense
Total expense
Less noncash
expenses
Cash disbursements for
selling & admin.
Irwin/McGraw-Hill
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
© The McGraw-Hill Companies, Inc., 2000
Selling and Administrative Expense Budget
Budgeted sales
Variable selling
and admin. rate
Variable expense
Fixed selling and
admin. expense
Total expense
Less noncash
expenses
Cash disbursements for
selling & admin.
Irwin/McGraw-Hill
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
10,000
10,000
10,000
30,000
$70,000
$85,000
$75,000
$230,000
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Royal:
Maintains
Maintains aa 16%
16% open
open line
line of
of credit
credit for
for $75,000.
$75,000.
Maintains
Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000.
$30,000.
Borrows
Borrows on
on the
the first
first day
day of
of the
the month
month and
and repays
repays
loans
loans on
on the
the last
last day
day of
of the
the month.
month.
Pays
Pays aa cash
cash dividend
dividend of
of $49,000
$49,000 in
in April.
April.
Purchases
Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
$48,300
$48,300 in
in June
June paid
paid in
in cash.
cash.
Has
Has an
an April
April 11 cash
cash balance
balance of
of $40,000.
$40,000.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
April
$ 40,000
170,000
210,000
May
June
Quarter
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
40,000
Direct labor
Mfg. overhead
Selling and admin.
Schedule
Equipment purchase
Schedule of
of Expected
Expected
Dividends
Cash
Cash Disbursements
Disbursements
Total disbursements
Excess (deficiency) of
Schedule of
of Expected
Expected
cash available over Schedule
Cash
disbursements
Cash Collections
Collections
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
May
June
Quarter
Direct Labor
Budget
Manufacturing
Overhead Budget
Selling and Administrative
Expense Budget
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
49,000
230,000
May
June
Quarter
Because Royal maintains
a cash balance of $30,000,
the company must
borrow on its
line-of-credit
$ (20,000)
© The McGraw-Hill Companies, Inc., 2000
Financing and Repayment
April
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
May
June
Quarter
$ (20,000)
50,000
50,000
$ 30,000
$ 30,000
$
-
$
-
Ending cash balance for April
is the beginning May balance.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
$ (20,000)
$ 30,000
June
Quarter
© The McGraw-Hill Companies, Inc., 2000
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
April
May
$ (20,000)
$ 30,000
50,000
50,000
$ 30,000
$ 30,000
June
Quarter
Because the ending cash balance is
exactly $30,000, Royal will not repay
the loan this month.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
Irwin/McGraw-Hill
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Quarter
$ 40,000
905,000
945,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
72,700
15,000
59,000
75,000
48,300
270,000
185,000
53,000
191,000
230,000
192,000
49,000
900,000
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
© The McGraw-Hill Companies, Inc., 2000
The Cash Budget
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Quarter
$ 40,000
905,000
945,000
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
Materials
40,000
72,300
72,700
185,000
Direct labor
15,000
23,000
15,000
53,000
Mfg. overhead
56,000
76,000
59,000
191,000
Selling and admin.
70,000
85,000
75,000
230,000
At
the
end
of
June,
Royal
has
enough
cash
At
the
end
of
June,
Royal
has
enough
cash
Equipment purchase
143,700
48,300
192,000
$50,000
at
16%.
to repay
repay the
the49,000
$50,000 loan
loan
plus interest
interest
at49,000
16%.
Dividends to
- plus
Total disbursements
230,000
400,000
270,000
900,000
Excess (deficiency) of
cash available over
disbursements
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
April
May
June
Quarter
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
50,000
50,000
$ 30,000
$ 30,000
(50,000)
(2,000)
(52,000)
$ 43,000
50,000
(50,000)
(2,000)
(2,000)
$ 43,000
$50,000 × 16% × 3/12 = $2,000
Borrowings on April 1 and
repayment of June 30.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
The Budgeted Income Statement
Cash
Budget
m
o
C
pl
ed
t
e
Budgeted
Income
Statement
After we complete the cash budget,
we can prepare the budgeted income
statement for Royal.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
Irwin/McGraw-Hill
$ 1,000,000
499,000
501,000
260,000
241,000
2,000
$ 239,000
© The McGraw-Hill Companies, Inc., 2000
The Budgeted Balance Sheet
Royal
Royal reported
reported the
the following
following account
account
balances
balances on
on June
June 30
30 prior
prior to
to preparing
preparing
its
its budgeted
budgeted financial
financial statements:
statements:
Land
Land -- $50,000
$50,000
Building
Building (net)
(net) -- $175,000
$175,000
Common
Common stock
stock -- $200,000
$200,000
Retained
Retained earnings
earnings -- $146,150
$146,150
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
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
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
Irwin/McGraw-Hill
$
43,000
75,000
4,600
24,950
147,550
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
25%of
25%of June
June
sales
sales of
of
$300,000
$300,000
11,500
11,500 lbs.
lbs.
at
at $0.40/lb.
$0.40/lb.
5,000
5,000 units
units
at
at $4.99
$4.99 each
each
50%
50% of
of June
June
purchases
purchases
of
of $56,800
$56,800
© The McGraw-Hill Companies, Inc., 2000
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
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
Irwin/McGraw-Hill
$
43,000
75,000
Beginning balance
4,600
Add:
net income
24,950
Deduct: dividends
Ending balance
147,550
$146,150
239,000
(49,000)
$336,150
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
© The McGraw-Hill Companies, Inc., 2000
Zero-Base Budgeting
Managers are required to justify all budgeted
expenditures, not just changes in the budget
from the previous year. The baseline is zero
rather than last year’s budget.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
International Aspects of Budgeting
Multinational companies face special
problems when preparing a budget.
Fluctuations in foreign currency exchange rates.
High inflation rates in some foreign countries.
Differences in local economic conditions.
Local governmental policies.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
End of Chapter 9
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000