chapter # 19: sales mix considerations margin of safety operating leverage cost-volume-profit...

• Chapter # 19: Sales Mix Considerations• Margin of Safety• Operating Leverage• Cost-Volume-Profit Analysis• Business Applications of CVP• Additional Considerations in CVP• CVP Analysis When a Company Sells Many

Products1

• The overall contribution margin ratio• Break-even in sales dollars• The High-Low Method• Assumptions Underlying

CVP Analysis

2

Operational BudgetingChapter

22

3

Budgeting: The Basis forPlanning and Control

Control Steps taken by

management to ensure that objectives are

attained.

Planning Developing objectives for

acquisitionand use of resources.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

4

BenefitsCoordinationof activities

Performanceevaluation

Enhanced managerialresponsibility

Assignment of decisionmaking responsibilities

Benefits Derived from Budgeting

5

Establishing Budgeted Amounts: The “Behavioral” Approach

Budget Problems

• Perceived unfair or unrealistic goals.

• Poor management-employee communications.

Solution

• Reasonable and achievable budgets.

• Employee participation in budgeting process.

6

Flow of Budget Data

S u p ervisor S u p ervisor

M id d leM an ag em en t

S u p ervisor S u p ervisor

M id d leM an ag em en t

Top M an ag em en t

Participation in Budget Process

7

2001 2002 2003 2004

C a p i t a l B u d g e t s

A continuous budget is usually a twelve-month budget that adds one month as the current month is completed.

The annual operating budget may be divided into quarterly or monthly budgets.

The Budget Period

8

Salesforecast

Productionschedule

Budgeted financial budgets: cash income balance sheet

Capitalexpenditures

budget

Operatingexpensebudgets

Cost of goodssold and ending

inventorybudgets

The Master Budget

9

That’s enough talkingabout budgets, now

show me an example!

Preparing the Master Budget:An Illustration

10

SalesBudget

EstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions

+Forecasts of customer needs from marketing personnel

Preparing the Master Budget:An Illustration

11

Preparing the Master Budget:An Illustration

Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for

the next four months are:

April 20,000 magnets @ $10 = $200,000May 50,000 magnets @ $10 = $500,000June 30,000 magnets @ $10 = $300,000July 25,000 magnets @ $10 = $250,000

The Sales Budget

July is needed for June ending inventory computations.12

Sales Budget

Complete

d

ProductionBudget

The Production Budget

13

The Production Budget

Ellis wants ending inventoryto be 20 percent of the next month’s budgeted

sales in units.

4,000 units were on hand March 31.

Let’s prepare the production budget.

14

The Production Budget

Production must be adequate to meet budgeted sales and to provide sufficient ending

inventory.

Production must be adequate to meet budgeted sales and to provide sufficient ending

inventory.

Budgeted product sales in units

+ Desired product units in ending inventory

= Total product units needed

– Product units in beginning inventory

= Product units to produce

15

April May JuneBudgeted unit sales 20,000 50,000 30,000Desired ending inventoryTotal units neededLess beginning inventoryUnits to produce

The Production Budget

16

April May JuneBudgeted unit sales 20,000 50,000 30,000Desired ending inventory 10,000 6,000 5,000 Total units needed 30,000 56,000 35,000Less beginning inventoryUnits to produce

Ending inventory = 20% of next month's production needs.June ending inventory = .20 × 25,000 July units = 5,000 units.

The Production Budget

17

April May JuneBudgeted unit sales 20,000 50,000 30,000Desired ending inventory 10,000 6,000 5,000 Total units needed 30,000 56,000 35,000Less beginning inventory 4,000 10,000 6,000 Units to produce 26,000 46,000 29,000

Ending inventory = 20% of next month's production needs.June ending inventory = .20 × 25,000 July units = 5,000 units.Beginning inventory is last month's ending inventory.

The Production Budget

18

ProductionBudgetMaterial

Purchases

Production BudgetUnits

Complete

d

The Production Budget

19

The material purchases budget is based on production quantity and desired material

inventory levels.

The material purchases budget is based on production quantity and desired material

inventory levels.

Units to produce × Material needed per unit = Material needed for units to produce+ Desired units of material in ending

inventory= Total units of material needed– Units of material in beginning inventory= Units of material to purchase

The Production BudgetMaterial Purchases

20

The Production BudgetMaterial Purchases

Five pounds of material are needed for each unit produced.

Ellis wants to have materials on hand at the end of each month equal to 10 percent of the

following month’s production needs.

The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000

units.

Five pounds of material are needed for each unit produced.

Ellis wants to have materials on hand at the end of each month equal to 10 percent of the

following month’s production needs.

The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000

units.

21

The Production BudgetMaterial Purchases

April May JuneUnits to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000Desired ending inventoryTotal material needs (lbs.)Less beginning inventoryMaterial purchases (lbs.)

22

The Production BudgetMaterial Purchases

April May JuneUnits to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000Desired ending inventory 23,000 14,500 11,500 Total material needs (lbs.) 153,000 244,500 156,500Less beginning inventoryMaterial purchases (lbs.)

Ending inventory = 10% of next month's material needs.June ending inventory = .10 × (23,000 units × 5 lbs. per unit).June ending inventory = 11,500 lbs.

23

The Production BudgetMaterial Purchases

April May JuneUnits to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000Desired ending inventory 23,000 14,500 11,500 Total material needs (lbs.) 153,000 244,500 156,500Less beginning inventory 13,000 23,000 14,500 Material purchases (lbs.) 140,000 221,500 142,000

Ending inventory = 10% of next month's material needs.June ending inventory = .10 × (23,000 units × 5 lbs. per unit).June ending inventory = 11,500 lbs.Beginning inventory is last month's ending inventory.

24

Cash Payments forMaterial Purchases

Materials used in production cost $.40per pound. One-half of a month’s purchases

are paid for in the month of purchase; the other half is paid for in the following month.

No discount terms are available.

The accounts payable balance onMarch 31 is $12,000.

Materials used in production cost $.40per pound. One-half of a month’s purchases

are paid for in the month of purchase; the other half is paid for in the following month.

No discount terms are available.

The accounts payable balance onMarch 31 is $12,000.

25

April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$

Payables from March 12,000$April purchasesMay purchasesJune purchasesTotal payments in month

Cash Payments forMaterial Purchases

26

April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$

Payables from March 12,000$April purchases 28,000 28,000$May purchasesJune purchasesTotal payments in month

½ × $56,000 = $28,000

Cash Payments forMaterial Purchases

27

April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$

Payables from March 12,000$April purchases 28,000 28,000$May purchases 44,300 44,300$June purchasesTotal payments in month

½ × $56,000 = $28,000½ × $88,600 = $44,300

Cash Payments forMaterial Purchases

28

April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$

Payables from March 12,000$April purchases 28,000 28,000$May purchases 44,300 44,300$June purchases 28,400 Total payments in month 40,000$ 72,300$ 72,700$

½ × $56,000 = $28,000½ × $88,600 = $44,300½ × $56,800 = $28,400

Cash Payments forMaterial Purchases

29

ProductionBudgetLabor

Production BudgetUnits

Material

Complete

d

The Production Budget

30

The Production BudgetDirect Labor

Each unit produced requires 3 minutes (.05 hours) of direct labor. Ellis employs 30 persons

for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour.

31

April May JuneUnits to produce 26,000 46,000 29,000 Hours per unit 0.05 0.05 0.05 Total hours required 1,300 2,300 1,450 Wage rate per hourDirect labor cost

Cash Payments forDirect Labor

32

April May JuneUnits to produce 26,000 46,000 29,000 Hours per unit 0.05 0.05 0.05 Total hours required 1,300 2,300 1,450 Wage rate per hour 10$ 10$ 10$ Direct labor cost 13,000$ 23,000$ 14,500$

Cash Payments forDirect Labor

33

Production Budget

UnitsMaterialLabor

Complete

d

ProductionBudget

ManufacturingOverhead

The Production Budget

34

The Production BudgetManufacturing Overhead

Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is

$50,000 per month.

Fixed manufacturing overhead includes $20,000 in depreciation which does not require a cash

outflow.

35

April May JuneUnits to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$Fixed overheadTotal mfg. overhead costDeduct depreciationManufacturing overhead - cash

Cash Payments forManufacturing Overhead

36

April May JuneUnits to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 76,000$ 96,000$ 79,000$Deduct depreciationManufacturing overhead - cash

Cash Payments forManufacturing Overhead

37

April May JuneUnits to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 76,000$ 96,000$ 79,000$Deduct depreciation 20,000 20,000 20,000 Manufacturing overhead - cash 56,000$ 76,000$ 59,000$

Cash Payments forManufacturing Overhead

38

Production Budget

Complete

d

Sellingand

AdministrativeExpenseBudget

Selling and Administrative(S&A) Expense Budget

39

Selling and Administrative(S&A) Expense Budget

• Selling expense budgets contain both variable and fixed items.– Variable items: shipping costs and sales

commissions.

– Fixed items: advertising and sales salaries.

• Administrative expense budgets contain mostly fixed items.– Executive salaries and depreciation on company

offices.40

Cash Payments for(S&A) Expenses

Variable selling and administrative expenses are $.50 per unit sold and fixed selling and

administrative expenses are $70,000 per month.

Fixed selling and administrative expenses include $10,000 in depreciation which does not

require a cash outflow.

41

April May JuneBudgeted unit sales 20,000 50,000 30,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 10,000$ 25,000$ 15,000$Fixed S&A expense 70,000 70,000 70,000 Total S&A expense 80,000$ 95,000$ 85,000$Deduct depreciationS&A expense - cash

Cash Payments for(S&A) Expenses

42

April May JuneBudgeted unit sales 20,000 50,000 30,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 10,000$ 25,000$ 15,000$Fixed S&A expense 70,000 70,000 70,000 Total S&A expense 80,000$ 95,000$ 85,000$Deduct depreciation 10,000 10,000 10,000 S&A expense - cash 70,000$ 85,000$ 75,000$

Cash Payments for(S&A) Expenses

43

I have seen a lot of cashpayments but no cash

receipts. Show me somecash receipts!

Cash Receipts Budget

44

Cash Receipts Budget

All sales are on account.

Ellis’s collection pattern is:

70 percent collected in month of sale

25 percent collected in month after sale

5 percent will be uncollectible

Accounts receivable on March 31 is $30,000, all of which is collectible.

All sales are on account.

Ellis’s collection pattern is:

70 percent collected in month of sale

25 percent collected in month after sale

5 percent will be uncollectible

Accounts receivable on March 31 is $30,000, all of which is collectible.

45

April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$

Receipts from March sales 30,000$ Receipts from April salesReceipts from May salesReceipts from June salesTotal cash receipts

Cash Receipts Budget

46

April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$

Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May salesReceipts from June salesTotal cash receipts 170,000$

April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000

Cash Receipts Budget

47

April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$

Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales 350,000 125,000$Receipts from June salesTotal cash receipts 170,000$ 400,000$

April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000

Cash Receipts Budget

48

April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$

Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales 350,000 125,000$Receipts from June sales 210,000 Total cash receipts 170,000$ 400,000$ 335,000$

April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000 June: .70 × $300,000 = $210,000

Cash Receipts Budget

49

50