chap009 student
TRANSCRIPT
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2010 The McGraw-Hill Companies, Inc.
Profit Planning
Chapter 9
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McGraw-Hill/Irwin Slide 2
The Basic Framework of Budgeting
A budget is a detailed quantitative plan foracquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is calledbudgeting.
2. The use of budgets to control an
organizations activities is knownas budgetary control.
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McGraw-Hill/Irwin Slide 3
Planning and Control
PlanningPlanning
involves developinginvolves developingobjectives andobjectives and
preparing variouspreparing variousbudgets to achievebudgets to achievethose objectives.those objectives.
ControlControl
involves the steps taken byinvolves the steps taken bymanagement to increasemanagement to increase
the likelihood that thethe likelihood that theobjectives set down whileobjectives set down whileplanning are attained andplanning are attained andthat all parts of thethat all parts of the
organization are workingorganization are workingtogether toward that goal.together toward that goal.
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McGraw-Hill/Irwin Slide 4
Advantages of Budgeting
Advantages
Define goalsDefine goalsand objectivesand objectives
Uncover potentialUncover potentialbottlenecksbottlenecks
CoordinateCoordinateactivitiesactivities
CommunicateCommunicate
plansplans
Think about andThink about and
plan for the futureplan for the future
Means of allocatingMeans of allocatingresourcesresources
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McGraw-Hill/Irwin Slide 5
Responsibility Accounting
Managers should beManagers should beheld responsible forheld responsible for
those itemsthose items -- andand onlyonlythose itemsthose items -- that theythat they
can actually controlcan actually controlto a significant extent.to a significant extent.
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McGraw-Hill/Irwin Slide 6
Choosing the Budget Period
Operating BudgetOperating Budget
2008 2009 2010 2011
Operating budgets ordinarilyOperating budgets ordinarilycover a onecover a one--year periodyear period
corresponding to a companyscorresponding to a companysfiscal year. Many companiesfiscal year. Many companiesdivide their annual budgetdivide their annual budget
into four quarters.into four quarters.
A continuous budget is aA continuous budget is a1212--month budget that rollsmonth budget that rolls
forward one month (or quarter)forward one month (or quarter)as the current month (or quarter)as the current month (or quarter)
is completed.is completed.
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McGraw-Hill/Irwin Slide 7
Self-Imposed Budget
A self-imposed budget or participative budget is a budget that isprepared with the full cooperation and participation of managers
at all levels.
Supervisor Supervisor
iddle
anagement
Supervisor Supervisor
iddle
anagement
Top anagement
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McGraw-Hill/Irwin Slide 8
Advantages ofSelf-Imposed Budgets
1. Individuals at all levels of the organization are viewed asmembers of the team whose judgments are valued by topmanagement.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by topmanagers.
3. Motivation is generally higherwhen individuals participatein setting their own goals than when the goals are
imposed from above.
4. A manager who is not able to meet a budget imposedfrom above can claim that it was unrealistic. Self-imposedbudgets eliminate this excuse.
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McGraw-Hill/Irwin Slide 9
Self-Imposed Budgets
SelfSelf--imposed budgets should be reviewedimposed budgets should be reviewedby higher levels of management toby higher levels of management to
prevent budgetary slack.prevent budgetary slack.
Most companies issue broad guidelines inMost companies issue broad guidelines interms of overall profits or sales. Lowerterms of overall profits or sales. Lowerlevel managers are directed to preparelevel managers are directed to prepare
budgets that meet those targets.budgets that meet those targets.
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McGraw-Hill/Irwin Slide 10
Human Factors in Budgeting
The success of a budget program depends on threeimportant factors:
1.Top management must be enthusiastic andcommitted to the budget process.
2.Top management must not use the budget topressure employees or blame them whensomething goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based onmeeting budget targets.
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McGraw-Hill/Irwin Slide 11
The Budget Committee
A standing committee responsible forA standing committee responsible for
overall policy matters relating to the budgetoverall policy matters relating to the budget
coordinating the preparation of the budgetcoordinating the preparation of the budget
resolving disputes related to the budgetresolving disputes related to the budget
approving the final budgetapproving the final budget
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McGraw-Hill/Irwin Slide 12
The Master Budget: An Overview
Production budget
Selling andadministrative
budget
Direct materialsbudget
Manufacturingoverhead budget
Direct laborbudget
Cash Budget
Sales budget
Ending inventorybudget
Budgeted
balance sheet
Budgetedincome
statement
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McGraw-Hill/Irwin Slide 13
Budgeting Example
Royal Company is preparing budgets for thequarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units.
The selling price is $10 per unit.
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McGraw-Hill/Irwin Slide 14
The Sales Budget
The individual months of April, May, and June aresummed to obtain the total budgeted sales in units
and dollars for the quarter ended June 30th
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McGraw-Hill/Irwin Slide 15
Expected Cash Collections
All sales are on account.
`Royals collection pattern is:
70% collected in the month of sale,25% collected in the month following sale,
5% uncollectible.
`The March 31 accounts receivablebalance of $30,000 will be collected in full.
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McGraw-Hill/Irwin Slide 16
Expected Cash Collections
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McGraw-Hill/Irwin Slide 17
Expected Cash Collections
From the Sales Budget for April.From the Sales Budget for April.
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McGraw-Hill/Irwin Slide 18
Expected Cash Collections
From the Sales Budget for May.From the Sales Budget for May.
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McGraw-Hill/Irwin Slide 19
Expected Cash Collections
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McGraw-Hill/Irwin Slide 20
The Production Budget
ProductionProductionBudgetBudget
SalesSales
BudgetBudget
andandExpectedExpected
CashCash
CollectionsCollections
The production budget must be adequate toThe production budget must be adequate tomeet budgeted sales and to provide formeet budgeted sales and to provide for
the desired ending inventory.the desired ending inventory.
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McGraw-Hill/Irwin Slide 21
The Production Budget
`The management at Royal Company wantsThe management at Royal Company wantsending inventory to be equal toending inventory to be equal to 20%20% of theof thefollowing months budgeted sales in units.following months budgeted sales in units.
`On March 31, 4,000 units were on hand.On March 31, 4,000 units were on hand.
Lets prepare the production budget.Lets prepare the production budget.
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McGraw-Hill/Irwin Slide 22
The Production Budget
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McGraw-Hill/Irwin Slide 23
The Production Budget
March 31March 31ending inventoryending inventory
Budgeted ay sales 50,000
Desired ending inventory % 20%
Desired ending inventory 10,000
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McGraw-Hill/Irwin Slide 24
The Production Budget
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McGraw-Hill/Irwin Slide 25
The Production Budget
Assumed ending inventory.Assumed ending inventory.
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McGraw-Hill/Irwin Slide 26
The Direct Materials Budget
`At Royal Company,At Royal Company, five poundsfive pounds of material areof material arerequired per unit of product.required per unit of product.
` Management wants materials on hand at theManagement wants materials on hand at the
end of each month equal toend of each month equal to 10%10% of theof thefollowing months production.following months production.
` On March 31, 13,000 pounds of material areOn March 31, 13,000 pounds of material are
on hand. Material cost ison hand. Material cost is $0.40$0.40per pound.per pound.
Lets prepare the direct materials budget.Lets prepare the direct materials budget.
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McGraw-Hill/Irwin Slide 27
The Direct Materials Budget
From production budgetFrom production budget
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McGraw-Hill/Irwin Slide 28
The Direct Materials Budget
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McGraw-Hill/Irwin Slide 29
The Direct Materials Budget
Calculate the materials toCalculate the materials tobe purchased in May.be purchased in May.
March 31 inventoryMarch 31 inventory
10% of following monthsproduction needs.
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McGraw-Hill/Irwin Slide 30
The Direct Materials Budget
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McGraw-Hill/Irwin Slide 31
The Direct Materials Budget
Assumed ending inventoryAssumed ending inventory
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McGraw-Hill/Irwin Slide 32
Expected Cash Disbursement for Materials
` Royal paysRoyal pays $0.40$0.40per poundper poundfor its materials.for its materials.
` OneOne--halfhalfof a months purchases is paid for in theof a months purchases is paid for in themonth of purchase; the other half is paid in themonth of purchase; the other half is paid in the
following month.following month.` The March 31 accounts payable balance isThe March 31 accounts payable balance is
$12,000.$12,000.
Lets calculate expected cash disbursements.Lets calculate expected cash disbursements.
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McGraw-Hill/Irwin Slide 33
Expected Cash Disbursement for Materials
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McGraw-Hill/Irwin Slide 34
Expected Cash Disbursement for Materials
140,000 lbs.140,000 lbs. $0.40/lb. = $56,000$0.40/lb. = $56,000
Compute the expected cashCompute the expected cash
disbursements for materialsdisbursements for materialsfor the quarter.for the quarter.
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McGraw-Hill/Irwin Slide 35
Expected Cash Disbursement for Materials
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McGraw-Hill/Irwin Slide 36
The Direct Labor Budget
` At Royal, each unit of product requires 0.05hours (3minutes) of direct labor.
` The Company has a no layoff policy so all employeeswill be paid for 40 hours of work each week.
` For purposes of our illustration assume that Royal has ano layoff policy, workers are pay at the rate of $10 perhour regardless of the hours worked.
` For the next three months, the direct labor workforce willbe paid for a minimum of 1,500 hours per month.
Lets prepare the direct labor budget.Lets prepare the direct labor budget.
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McGraw-Hill/Irwin Slide 37
The Direct Labor Budget
From production budget.From production budget.
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McGraw-Hill/Irwin Slide 38
The Direct Labor Budget
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McGraw-Hill/Irwin Slide 39
The Direct Labor Budget
Greater of labor hours requiredGreater of labor hours requiredor labor hours guaranteed.or labor hours guaranteed.
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McGraw-Hill/Irwin Slide 40
The Direct Labor Budget
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McGraw-Hill/Irwin Slide 41
Manufacturing Overhead Budget
`At Royal, manufacturing overhead is applied to unitsAt Royal, manufacturing overhead is applied to unitsof product on the basis of direct labor hours.of product on the basis of direct labor hours.
` The variable manufacturing overhead rate is $20 perThe variable manufacturing overhead rate is $20 per
direct labor hour.direct labor hour.` Fixed manufacturing overhead is $50,000 per month,Fixed manufacturing overhead is $50,000 per month,
which includes $20,000 of noncash costs (primarilywhich includes $20,000 of noncash costs (primarilydepreciation of plant assets).depreciation of plant assets).
Lets prepare the manufacturing overhead budget.Lets prepare the manufacturing overhead budget.
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McGraw-Hill/Irwin Slide 42
Manufacturing Overhead Budget
Direct Labor Budget.Direct Labor Budget.
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McGraw-Hill/Irwin Slide 43
Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000Total labor hours required 5,050
= $49.70 per hour *
** roundedrounded
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McGraw-Hill/Irwin Slide 44
Manufacturing Overhead Budget
Depreciation is a noncash charge.Depreciation is a noncash charge.
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McGraw-Hill/Irwin Slide 45
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$
Direct labor 0.05 hrs. 10.00$ 0.50
Manufacturing overhea 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost 4.99$
Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
Direct materialsDirect materialsbudget and information.budget and information.
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McGraw-Hill/Irwin Slide 46
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$
Direct labor 0.05 hrs. 10.00$ 0.50
Manufacturing overhea 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost 4.99$
Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
Direct labor budget.Direct labor budget.
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McGraw-Hill/Irwin Slide 47
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$
Direct labor 0.05 hrs. 10.00$ 0.50
Manufacturing overhea 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost 4.99$
Ending finished goods inventory ?
Ending Finished Goods Inventory Budget
Total mfg. OH for quarter $251,000Total labor hours required 5,050
= $49.70 per hour *
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McGraw-Hill/Irwin Slide 48
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$
Direct labor 0.05 hrs. 10.00$ 0.50
Manufacturing overhea 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost 4.99$
Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
Production Budget.Production Budget.
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McGraw-Hill/Irwin Slide 49
Selling and Administrative Expense Budget
` At Royal, the selling and administrative expense budget isAt Royal, the selling and administrative expense budget isdivided into variable and fixed components.divided into variable and fixed components.
` The variable selling and administrative expenses are $0.50The variable selling and administrative expenses are $0.50per unit sold.per unit sold.
` Fixed selling and administrative expenses are $70,000 perFixed selling and administrative expenses are $70,000 permonth.month.
` The fixed selling and administrative expenses includeThe fixed selling and administrative expenses include$10,000 in costs$10,000 in costs primarily depreciationprimarily depreciation that are not cashthat are not cashoutflows of the current month.outflows of the current month.
Lets prepare the companys selling and administrativeLets prepare the companys selling and administrativeexpense budget.expense budget.
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McGraw-Hill/Irwin Slide 50
Selling and Administrative Expense Budget
Calculate the selling and administrativeCalculate the selling and administrativecash expenses for the quarter.cash expenses for the quarter.
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McGraw-Hill/Irwin Slide 51
Selling Administrative Expense Budget
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McGraw-Hill/Irwin Slide 52
Format of the Cash Budget
The cash budget is divided into four sections:The cash budget is divided into four sections:
1.1. Cash receipts section lists all cash inflows excluding cashCash receipts section lists all cash inflows excluding cashreceived from financing;received from financing;
2.2. Cash disbursements section consists of all cash paymentsCash disbursements section consists of all cash paymentsexcluding repayments of principal and interest;excluding repayments of principal and interest;
3.3. Cash excess or deficiency section determines if theCash excess or deficiency section determines if thecompany will need to borrow money or if it will be able tocompany will need to borrow money or if it will be able to
repay funds previously borrowed; andrepay funds previously borrowed; and4.4. Financing section details the borrowings and repaymentsFinancing section details the borrowings and repayments
projected to take place during the budget period.projected to take place during the budget period.
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McGraw-Hill/Irwin Slide 53
The Cash Budget
Assume the following information forRoyal:Assume the following information forRoyal:
Maintains a 16% open line of credit for $75,000Maintains a 16% open line of credit for $75,000
Maintains a minimum cash balance of $30,000Maintains a minimum cash balance of $30,000
Borrows on the first day of the month and repaysBorrows on the first day of the month and repaysloans on the last day of the monthloans on the last day of the month
Pays a cash dividend of $49,000 in AprilPays a cash dividend of $49,000 in April
Purchases $143,700 of equipment in May andPurchases $143,700 of equipment in May and$48,300 in June (both purchases paid in cash)$48,300 in June (both purchases paid in cash)
Has an April 1 cash balance of $40,000Has an April 1 cash balance of $40,000
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McGraw-Hill/Irwin Slide 54
The Cash Budget
Schedule of ExpectedSchedule of Expected
Cash Collections.Cash Collections.
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McGraw-Hill/Irwin Slide 55
The Cash Budget
Direct LaborDirect LaborBudget.Budget.
ManufacturingManufacturing
Overhead Budget.Overhead Budget.
Selling and AdministrativeSelling and AdministrativeExpense Budget.Expense Budget.
Schedule of ExpectedSchedule of ExpectedCash Disbursements.Cash Disbursements.
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McGraw-Hill/Irwin Slide 56
The Cash Budget
Because Royal maintainsBecause Royal maintains
a cash balance of $30,000,a cash balance of $30,000,the company must borrowthe company must borrow$50,000 on its line$50,000 on its line--ofof--credit.credit.
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McGraw-Hill/Irwin Slide 57
The Cash Budget
Ending cash balance for AprilEnding cash balance for Aprilis the beginning May balance.is the beginning May balance.
Because Royal maintainsBecause Royal maintainsa cash balance of $30,000,a cash balance of $30,000,
the company must borrowthe company must borrow$50,000 on its line$50,000 on its line--ofof--credit.credit.
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McGraw-Hill/Irwin Slide 58
The Cash Budget
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McGraw-Hill/Irwin Slide 59
The Cash Budget
$50,000$50,000 16%16% 3/12 = $2,0003/12 = $2,000Borrowings on April 1 andBorrowings on April 1 and
repayment on June 30.repayment on June 30.
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McGraw-Hill/Irwin Slide 60
The Budgeted Income Statement
Cash
BudgetBudgeted
Income
Statement
With interest expense from the cash
budget, Royal can prepare the budgeted
income statement.
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McGraw-Hill/Irwin Slide 61
The Budgeted Income Statement
Royal Company
udgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10) 1,000,000$Cost of goods sold (100,000 @ $4.99) 499,000
Gross margin 501,000
Selling and administrative expenses 260,000
Operating income 241,000
Interest expense 2,000
Net income 239,000$
Sales Budget.Sales Budget.
Ending FinishedEnding Finished
Goods Inventory.Goods Inventory.
Selling andSelling andAdministrativeAdministrative
Expense Budget.Expense Budget.
Cash Budget.Cash Budget.
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McGraw-Hill/Irwin Slide 62
The Budgeted Balance Sheet
Royal reported the following accountRoyal reported the following accountbalances prior to preparing its budgetedbalances prior to preparing its budgeted
financial statements:financial statements:
LandLand -- $50,000$50,000 Common stockCommon stock -- $200,000$200,000 Retained earningsRetained earnings -- $56,150 (April 1)$56,150 (April 1)
EquipmentEquipment -- $175,000$175,000
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McGraw-Hill/Irwin Slide 63
Royal Company
Budgeted Balance Sheet
June 30
Assets:Cash 43,000$
Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 24,950
Land 50,000
Equipment 277,000
Total assets 474,550
Liabilities and Stockholders' Equity
Accounts payable 28,400$
Common stock 200,000
Retained earnings 246,150
Total liabilities and stockholders' equity 474,550$
11,500 lbs.11,500 lbs.at $0.40/lb.at $0.40/lb.
11,500 lbs.11,500 lbs.at $0.40/lb.at $0.40/lb.
5,000 units5,000 unitsat $4.99 each.at $4.99 each.5,000 units5,000 unitsat $4.99 each.at $4.99 each.
50% of June50% of June
purchasespurchasesof $56,800.of $56,800.
50% of June50% of June
purchasespurchasesof $56,800.of $56,800.
25% of June25% of Junesales ofsales of
$300,000.$300,000.
25% of June25% of Junesales ofsales of
$300,000.$300,000.
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Royal Company
Budgeted Balance Sheet
June 30
Assets:Cash 43,000$
Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 24,950
Land 50,000
Equipment 277,000
Total assets 474,550
Liabilities and Stockholders' Equity
Accounts payable 28,400$
Common stock 200,000
Retained earnings 246,150
Total liabilities and stockholders' equity 474,550$
RE, beg 56,150
+Net Inc. 239,000
-Div (49,000)
=RE, end 246,150