copyright © 2012 mcgraw-hill ryerson limited 9-1 powerpoint author: robert g. ducharme, macc, ca...
TRANSCRIPT
Copyright © 2012 McGraw-Hill Ryerson Limited
9-1
PowerPoint Author:
Robert G. Ducharme, MAcc, CAUniversity of Waterloo, School of Accounting and Finance
MANAGERIALACCOUNTINGNinth Canadian Edition GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
MANAGERIALACCOUNTINGNinth Canadian Edition GARRISON, CHESLEY, CARROLL, WEBB, LIBBY
Budgeting
Chapter 9
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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.
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Planning and Control
Planning – involves developing objectives and preparing various budgets to achieve these objectives.
Planning – involves developing objectives and preparing various budgets to achieve these objectives.
Control – involves the steps taken by management that attempt to ensure the objectives are attained.
Control – involves the steps taken by management that attempt to ensure the objectives are attained.
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Advantages of Budgeting
Advantages
Define goalDefine goaland objectivesand objectives
Uncover potentialUncover potentialbottlenecksbottlenecks
CoordinateCoordinateactivitiesactivities
CommunicateCommunicateplansplans
Think about andThink about andplan for the futureplan for the future
Means of allocatingMeans of allocatingresourcesresources
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Responsibility Accounting
Managers should be held responsible for Managers should be held responsible for those items — and those items — and onlyonly those items — those items — that the manager can actually controlthat the manager can actually control
to a significant extent.to a significant extent.
Managers should be held responsible for Managers should be held responsible for those items — and those items — and onlyonly those items — those items — that the manager can actually controlthat the manager can actually control
to a significant extent.to a significant extent.
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Choosing the Budget Period
Operating BudgetOperating Budget
2012 2013 2014 2015
The annual operating budget The annual operating budget may be divided into quarterlymay be divided into quarterly
or monthly budgets.or monthly budgets.
The annual operating budget The annual operating budget may be divided into quarterlymay be divided into quarterly
or monthly budgets.or monthly budgets.
A continuous budget is aA continuous budget is a12-month budget that rolls12-month 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.
A continuous budget is aA continuous budget is a12-month budget that rolls12-month 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)
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Participative (Self-Imposed) Budget
A budget is prepared with the full cooperation andA budget is prepared with the full cooperation andparticipation of managers at all levels. A participativeparticipation of managers at all levels. A participative
budget is also known as a budget is also known as a particpative budgetparticpative budget..
S u p erviso r S u p erviso r
M id d leM an ag em en t
S u p erviso r S u p erviso r
M id d leM an ag em en t
Top M an ag em en t
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Advantages of Participative Budgets
1.1. Individuals at all levels of the organization are viewed Individuals at all levels of the organization are viewed as as members of the teammembers of the team whose judgments are valued whose judgments are valued by top management.by top management.
2.2. Budget estimates prepared by front-line managers are Budget estimates prepared by front-line managers are often often more accuratemore accurate than estimates prepared by top than estimates prepared by top managers.managers.
3.3. Motivation is generally higherMotivation is generally higher when individuals 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.
4.4. A manager who is not able to meet a budget imposed A manager who is not able to meet a budget imposed from above can claim that it was from above can claim that it was unrealisticunrealistic. . Participative budgets eliminate this excuse.Participative budgets eliminate this excuse.
1.1. Individuals at all levels of the organization are viewed Individuals at all levels of the organization are viewed as as members of the teammembers of the team whose judgments are valued whose judgments are valued by top management.by top management.
2.2. Budget estimates prepared by front-line managers are Budget estimates prepared by front-line managers are often often more accuratemore accurate than estimates prepared by top than estimates prepared by top managers.managers.
3.3. Motivation is generally higherMotivation is generally higher when individuals 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.
4.4. A manager who is not able to meet a budget imposed A manager who is not able to meet a budget imposed from above can claim that it was from above can claim that it was unrealisticunrealistic. . Participative budgets eliminate this excuse.Participative budgets eliminate this excuse.
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Participative (Self-Imposed) Budgets
Participative (self-imposed) budgets should be Participative (self-imposed) budgets should be reviewed by higher levels of management to reviewed by higher levels of management to
prevent “budgetary slack.”prevent “budgetary slack.”
Most companies do not rely exclusively upon Most companies do not rely exclusively upon participative budgets in the sense that top participative budgets in the sense that top
managers usually initiate the budget process managers usually initiate the budget process by issuing broad guidelines in terms of overall by issuing broad guidelines in terms of overall
profits or sales.profits or sales.
Participative (self-imposed) budgets should be Participative (self-imposed) budgets should be reviewed by higher levels of management to reviewed by higher levels of management to
prevent “budgetary slack.”prevent “budgetary slack.”
Most companies do not rely exclusively upon Most companies do not rely exclusively upon participative budgets in the sense that top participative budgets in the sense that top
managers usually initiate the budget process managers usually initiate the budget process by issuing broad guidelines in terms of overall by issuing broad guidelines in terms of overall
profits or sales.profits or sales.
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The Budget Committee
A standing committee responsible for A 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
A standing committee responsible for A 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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Behavioural Factors in Budgeting
The success of budgeting depends upon three The success of budgeting depends upon three important factors:important factors:
1.1. Top management must be enthusiastic and Top management must be enthusiastic and committed to the budget process.committed to the budget process.
2.2. Top management must not use the budget to Top management must not use the budget to pressure employees or blame them when pressure employees or blame them when something goes wrong.something goes wrong.
3.3. Highly achievable budget targets are usually Highly achievable budget targets are usually preferred when managers are rewarded based preferred when managers are rewarded based on meeting budget targets.on meeting budget targets.
The success of budgeting depends upon three The success of budgeting depends upon three important factors:important factors:
1.1. Top management must be enthusiastic and Top management must be enthusiastic and committed to the budget process.committed to the budget process.
2.2. Top management must not use the budget to Top management must not use the budget to pressure employees or blame them when pressure employees or blame them when something goes wrong.something goes wrong.
3.3. Highly achievable budget targets are usually Highly achievable budget targets are usually preferred when managers are rewarded based preferred when managers are rewarded based on meeting budget targets.on meeting budget targets.
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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 zero-based budgeting is too zero-based budgeting is too time consuming and costly to time consuming and costly to
justify on an annual basis.justify on an annual basis.
Most managers argue that Most managers argue that zero-based budgeting is too zero-based budgeting is too time consuming and costly to time consuming and costly to
justify on an annual basis.justify on an annual basis.
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The Budget Committee
A standing committee responsible for A 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
A standing committee responsible for A 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
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The Master Budget: An Overview
Production budgetProduction budgetSelling and
administrativebudget
Selling andadministrative
budget
Direct materialsbudget
Direct materialsbudget
Manufacturingoverhead budgetManufacturing
overhead budgetDirect labour
budgetDirect labour
budget
Cash BudgetCash Budget
Sales budgetSales budget
Ending inventorybudget
Ending inventorybudget
Budgetedbalance sheet
Budgetedbalance sheet
Budgetedincome
statement
Budgetedincome
statement
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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 April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.
The selling price is $10 per unit.The selling price is $10 per unit.
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 April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.
The selling price is $10 per unit.The selling price is $10 per unit.
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The Sales Budget
The individual months of April, May, and June are summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th.
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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, 25% collected in the month following sale,25% collected in the month following sale, 5% uncollectible.5% uncollectible.
The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.
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, 25% collected in the month following sale,25% collected in the month following sale, 5% uncollectible.5% uncollectible.
The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.
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Expected Cash Collections
From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.
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Expected Cash Collections
From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.
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Quick Check
What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000
What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000
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What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000
What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000
Quick Check
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The Production Budget
ProductionProductionBudgetBudget
Sales Sales BudgetBudget
andandExpectedExpected
CashCashCollectionsCollections
Complete
d
Production must be adequate to meet budgetedProduction must be adequate to meet budgetedsales and provide for sufficient ending inventory.sales and provide for sufficient ending inventory.
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The Production Budget
The management at Royal Company wants The management at Royal Company wants ending inventory to be equal to ending inventory to be equal to 20%20% of the of 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.
The management at Royal Company wants The management at Royal Company wants ending inventory to be equal to ending inventory to be equal to 20%20% of the of 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.
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The Production Budget
March 31March 31ending inventoryending inventory
March 31March 31ending inventoryending inventory
Budgeted May sales 50,000
Desired ending inventory % 20%Desired ending inventory 10,000
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Quick Check
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
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What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
Quick Check
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The Production Budget
Assumed ending inventory.Assumed ending inventory.Assumed ending inventory.Assumed ending inventory.
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The Direct Materials Budget
DirectDirectMaterialsMaterialsBudgetBudget
Production Production BudgetBudget
Complete
d
The direct materials budget details the raw materials The direct materials budget details the raw materials that must be purchased to fulfill the production that must be purchased to fulfill the production budget and to provide for adequate inventories.budget and to provide for adequate inventories.
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The Direct Materials Budget
At Royal Company, At Royal Company, five poundsfive pounds of material of material are required per unit of product.are required per unit of product.
Management wants materials on hand at Management wants materials on hand at the end of each month equal to the end of each month equal to 10%10% of the of the following month’s production.following month’s production.
On March 31, 13,000 pounds of material On March 31, 13,000 pounds of material are on hand. Material cost is are on hand. Material cost is $0.40$0.40 per per pound.pound. Let’s prepare the direct materials budget. Let’s prepare the direct materials budget.
At Royal Company, At Royal Company, five poundsfive pounds of material of material are required per unit of product.are required per unit of product.
Management wants materials on hand at Management wants materials on hand at the end of each month equal to the end of each month equal to 10%10% of the of the following month’s production.following month’s production.
On March 31, 13,000 pounds of material On March 31, 13,000 pounds of material are on hand. Material cost is are on hand. Material cost is $0.40$0.40 per per pound.pound. Let’s prepare the direct materials budget. Let’s prepare the direct materials budget.
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The Direct Materials Budget
From production budgetFrom production budgetFrom production budgetFrom production budget
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The Direct Materials Budget
Calculate the materials toCalculate the materials tobe purchased in May.be purchased in May.
March 31 inventoryMarch 31 inventoryMarch 31 inventoryMarch 31 inventory
10% of following month’s production needs.
10% of following month’s production needs.
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Quick Check
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
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How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
Quick Check
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The Direct Materials Budget
Assumed ending inventoryAssumed ending inventoryAssumed ending inventoryAssumed ending inventory
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Expected Cash Disbursement for Materials
Royal pays Royal pays $0.40 per pound$0.40 per pound for its materials. for its materials.
One-half One-half of a month’s purchases is paid for in of a month’s purchases is paid for in the month of purchase; the other half is paid the month of purchase; the other half is paid in the following month.in the following month.
The March 31 accounts payable balance is The March 31 accounts payable balance is $12,000.$12,000.
Let’s calculate expected cash disbursements.Let’s calculate expected cash disbursements.
Royal pays Royal pays $0.40 per pound$0.40 per pound for its materials. for its materials.
One-half One-half of a month’s purchases is paid for in of a month’s purchases is paid for in the month of purchase; the other half is paid the month of purchase; the other half is paid in the following month.in the following month.
The March 31 accounts payable balance is The March 31 accounts payable balance is $12,000.$12,000.
Let’s calculate expected cash disbursements.Let’s calculate expected cash disbursements.
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Expected Cash Disbursement for Materials
140,000 lbs. × $.40/lb. = $56,000140,000 lbs. × $.40/lb. = $56,000140,000 lbs. × $.40/lb. = $56,000140,000 lbs. × $.40/lb. = $56,000
Compute the expected cashCompute the expected cashdisbursements for materialsdisbursements for materials
for the quarter.for the quarter.
Compute the expected cashCompute the expected cashdisbursements for materialsdisbursements for materials
for the quarter.for the quarter.
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Quick Check
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
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What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
Quick Check
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The Direct Labour Budget
DirectDirectLabourLabourBudgetBudget
DirectDirectMaterials Materials
BudgetBudget
Complete
d
The direct labour budget is a detailed plan The direct labour budget is a detailed plan showing labour requirements over some specific showing labour requirements over some specific
time period.time period.LO 2
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The Direct Labour Budget
At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labour.
The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.
In exchange for the “no layoff” policy, workers agree to a wage rate of $10 per hour regardless of the hours worked (no overtime pay).
For the next three months, the direct labour workforce 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.
At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labour.
The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.
In exchange for the “no layoff” policy, workers agree to a wage rate of $10 per hour regardless of the hours worked (no overtime pay).
For the next three months, the direct labour workforce 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.
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The Direct Labour Budget
From production budget.From production budget.From production budget.From production budget.
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The Direct Labour Budget
Greater of labour hours requiredGreater of labour hours requiredor labour hours guaranteed.or labour hours guaranteed.
Greater of labour hours requiredGreater of labour hours requiredor labour hours guaranteed.or labour hours guaranteed.
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Quick Check
What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500b. $64,500c. $61,000d. $57,000
What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500b. $64,500c. $61,000d. $57,000
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What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500b. $64,500c. $61,000d. $57,000
What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500b. $64,500c. $61,000d. $57,000
Quick Check
April May June QuarterLabor hours required 1,300 2,300 1,450 Regular hours paid 1,500 1,500 1,500 4,500
Overtime hours paid - 800 - 800
Total regular hours 4,500 $10 45,000$ Total overtime hours 800 $15 12,000$
Total pay 57,000$
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The Manufacturing Overhead Budget
ManufacturingManufacturingOverheadOverhead
BudgetBudget
DirectDirectLabour Labour BudgetBudget
Complete
d
The manufacturing overhead budget provides a The manufacturing overhead budget provides a schedule of all costs of production otherschedule of all costs of production otherthan direct materials and direct labour.than direct materials and direct labour.
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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.
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.
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Manufacturing Overhead Budget
Direct Labour Budget.Direct Labour Budget.Direct Labour Budget.Direct Labour Budget.LO 2
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Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000Total labour hours required 5,050
= $49.70 per hour *
* * roundedrounded
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Manufacturing Overhead Budget
Depreciation is a noncash charge.Depreciation is a noncash charge.Depreciation is a noncash charge.Depreciation is a noncash charge.
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The Ending Finished Goods Inventory Budget
EndingEndingFinishedFinishedGoodsGoods
InventoryInventoryBudgetBudget
ManufacturingManufacturingOverhead Overhead
BudgetBudget
Complete
d
After computing unit product costs, the carrying After computing unit product costs, the carrying cost of the unsold units is computed on the cost of the unsold units is computed on the
ending finished goods inventory budget.ending finished goods inventory budget.LO 2
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labour Manufacturing overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct materialsDirect materialsbudget and information.budget and information.
Direct materialsDirect materialsbudget and information.budget and information.
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labour 0.05 hrs. 10.00$ 0.50 Manufacturing overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct labour budget.Direct labour budget.Direct labour budget.Direct labour budget.
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labour 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units Unit product cost 4.99$ Ending finished goods inventory ?
Ending Finished Goods Inventory Budget
Total mfg. OH for quarter $251,000Total labour hours required 5,050
= $49.70 per hour *
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labour 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 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.Production Budget.Production Budget.
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The Selling and Administrative Expense Budget
SellingSellingandand
AdministrativeAdministrativeExpenseExpenseBudgetBudget
EndingEndingFinishedFinishedGoodsGoods
Inventory Inventory BudgetBudgetCom
pleted
The selling and administrative expense budget The selling and administrative expense budget lists the budgeted expenses for areas other lists the budgeted expenses for areas other
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Selling and Administrative Expense Budget
At Royal, the selling and administrative expenses At Royal, the selling and administrative expenses budget is divided into variable and fixed components.budget is divided into variable and fixed components.
The variable selling and administrative expenses are The variable selling and administrative expenses are $0.50 per unit sold.$0.50 per unit sold.
Fixed selling and administrative expenses are $70,000 Fixed selling and administrative expenses are $70,000 per month.per month.
The fixed selling and administrative expenses include The fixed selling and administrative expenses include $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.
Let’s prepare the company’s selling and administrative Let’s prepare the company’s selling and administrative expense budget.expense budget.
At Royal, the selling and administrative expenses At Royal, the selling and administrative expenses budget is divided into variable and fixed components.budget is divided into variable and fixed components.
The variable selling and administrative expenses are The variable selling and administrative expenses are $0.50 per unit sold.$0.50 per unit sold.
Fixed selling and administrative expenses are $70,000 Fixed selling and administrative expenses are $70,000 per month.per month.
The fixed selling and administrative expenses include The fixed selling and administrative expenses include $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.
Let’s prepare the company’s selling and administrative Let’s prepare the company’s selling and administrative expense budget.expense budget.
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Selling and Administrative Expense Budget
Calculate the selling and administrativeCalculate the selling and administrativecash expenses for the quarter.cash expenses for the quarter.
Calculate the selling and administrativeCalculate the selling and administrativecash expenses for the quarter.cash expenses for the quarter.
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Quick Check
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
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What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
Quick Check
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The Cash Budget
CashCashBudgetBudget
SellingSellingandand
AdministrativeAdministrativeExpense Expense BudgetBudgetCom
pleted
The cash budget pulls together much of the data The cash budget pulls together much of the data developed in the preceding steps and displays it in developed in the preceding steps and displays it in four major sections: receipts, disbursements, cash four major sections: receipts, disbursements, cash
excess or deficiency, and financing.excess or deficiency, and financing.LO 2
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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 listing all cash inflows excluding Cash receipts listing all cash inflows excluding borrowing;borrowing;
2.2. Cash disbursements listing all payments Cash disbursements listing all payments excluding repayments of principal and interest;excluding repayments of principal and interest;
3.3. Cash excess or deficiency; andCash excess or deficiency; and
4.4. The financing section listing all borrowings, The financing section listing all borrowings, repayments and interest.repayments and interest.
The cash budget is divided into four sections:The cash budget is divided into four sections:
1.1. Cash receipts listing all cash inflows excluding Cash receipts listing all cash inflows excluding borrowing;borrowing;
2.2. Cash disbursements listing all payments Cash disbursements listing all payments excluding repayments of principal and interest;excluding repayments of principal and interest;
3.3. Cash excess or deficiency; andCash excess or deficiency; and
4.4. The financing section listing all borrowings, The financing section listing all borrowings, repayments and interest.repayments and interest.
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The Cash Budget
Royal:Royal: 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 repays Borrows on the first day of the month and repays
loans 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 and Purchases $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
Royal:Royal: 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 repays Borrows on the first day of the month and repays
loans 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 and Purchases $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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The Cash Budget
Schedule of ExpectedSchedule of ExpectedCash Collections.Cash Collections.
Schedule of ExpectedSchedule of ExpectedCash Collections.Cash Collections.
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The Cash Budget
Direct LabourDirect LabourBudget.Budget.
Direct LabourDirect LabourBudget.Budget.
ManufacturingManufacturingOverhead Budget.Overhead Budget.
ManufacturingManufacturingOverhead Budget.Overhead Budget.
Selling and AdministrativeSelling and AdministrativeExpense Budget.Expense Budget.
Selling and AdministrativeSelling and AdministrativeExpense Budget.Expense Budget.
Schedule of ExpectedSchedule of ExpectedCash Disbursements.Cash Disbursements.Schedule of ExpectedSchedule of ExpectedCash Disbursements.Cash Disbursements.
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The Cash Budget
Because Royal maintainsBecause Royal maintainsa cash balance of $30,000,a cash balance of $30,000,the company must borrow the company must borrow
$50,000 on its line-of-credit.$50,000 on its line-of-credit.
Because Royal maintainsBecause Royal maintainsa cash balance of $30,000,a cash balance of $30,000,the company must borrow the company must borrow
$50,000 on its line-of-credit.$50,000 on its line-of-credit.
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The Cash Budget
Ending cash balance for AprilEnding cash balance for Aprilis the beginning May balance.is the beginning May balance.Ending cash balance for AprilEnding cash balance for Aprilis the beginning May balance.is the beginning May balance.
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Quick Check
What is the excess (deficiency) of cash What is the excess (deficiency) of cash available over disbursements for June? available over disbursements for June?
a. $ 85,000a. $ 85,000
b. $(10,000)b. $(10,000)
c. $ 75,000c. $ 75,000
d. $ 95,000d. $ 95,000
What is the excess (deficiency) of cash What is the excess (deficiency) of cash available over disbursements for June? available over disbursements for June?
a. $ 85,000a. $ 85,000
b. $(10,000)b. $(10,000)
c. $ 75,000c. $ 75,000
d. $ 95,000d. $ 95,000
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What is the excess (deficiency) of cash What is the excess (deficiency) of cash available over disbursements for June? available over disbursements for June?
a. $ 85,000a. $ 85,000
b. $(10,000)b. $(10,000)
c. $ 75,000c. $ 75,000
d. $ 95,000d. $ 95,000
What is the excess (deficiency) of cash What is the excess (deficiency) of cash available over disbursements for June? available over disbursements for June?
a. $ 85,000a. $ 85,000
b. $(10,000)b. $(10,000)
c. $ 75,000c. $ 75,000
d. $ 95,000d. $ 95,000
Quick Check
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The Cash Budget
$50,000 × 16% × 3/12 = $2,000$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 andBorrowings on April 1 and
repayment on June 30.repayment on June 30.
$50,000 × 16% × 3/12 = $2,000$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 andBorrowings on April 1 and
repayment on June 30.repayment on June 30.
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The Budgeted Financial Statements
Cash Budget
BudgetedFinancial
Statements
Complete
d
After we complete the cash budget, we can After we complete the cash budget, we can prepare the budgeted income statement prepare the budgeted income statement and budgeted balance sheet for Royal.and budgeted balance sheet for Royal.
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The Budgeted Income Statement
Royal CompanyBudgeted 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.Sales Budget.Sales Budget.
Ending FinishedEnding FinishedGoods Inventory.Goods Inventory.Ending FinishedEnding FinishedGoods Inventory.Goods Inventory.
Selling and Selling and AdministrativeAdministrative
Expense Budget.Expense Budget.
Selling and Selling and AdministrativeAdministrative
Expense Budget.Expense Budget.
Cash Budget.Cash Budget.Cash Budget.Cash Budget.
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The Budgeted Balance Sheet
Royal reported the following account Royal reported the following account balances prior to preparing its budgeted balances prior to preparing its budgeted
financial statements:financial statements:
• Land – $50,000Land – $50,000• Common shares – $200,000Common shares – $200,000• Retained earnings – $146,150Retained earnings – $146,150• Equipment – $175,000Equipment – $175,000
Royal reported the following account Royal reported the following account balances prior to preparing its budgeted balances prior to preparing its budgeted
financial statements:financial statements:
• Land – $50,000Land – $50,000• Common shares – $200,000Common shares – $200,000• Retained earnings – $146,150Retained earnings – $146,150• Equipment – $175,000Equipment – $175,000
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Royal CompanyBudgeted Balance Sheet
June 30
Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Equipment 367,000 Total property and equipment 417,000 Total assets 564,550$
Accounts payable 28,400$ Common shares 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$
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 Junepurchases purchases of $56,800.of $56,800.
50% of June50% of Junepurchases purchases of $56,800.of $56,800.
25% of June25% of Junesales of sales of
$300,000.$300,000.
25% of June25% of Junesales of sales of
$300,000.$300,000.
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Royal CompanyBudgeted Balance Sheet
June 30
Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Equipment 367,000 Total property and equipment 417,000 Total assets 564,550$
Accounts payable 28,400$ Common shares 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$
Beginning balance 146,150$ Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$
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Static budgetsare prepared fora single, plannedlevel of activity.
Performance evaluation is
difficult when actual activity differs from the planned level of
activity.
Hmm! Comparingstatic budgets withactual costs is likecomparing apples
and oranges.
Static Budgets and Performance Reports
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Flexible Budgets
Improve performance evaluation.
May be prepared for any activity level in the relevant range.
Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons.
Reveal variances related tocost control.
Let’s look at CheeseCo.LO 3
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CheeseCo
Static Budgets and Performance Reports
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CheeseCo
Static Budgets and Performance Reports
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U = Unfavourable variance CheeseCo was unable to achieve
the budgeted level of activity.
CheeseCo
Static Budgets and Performance Reports
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Copyright © 2012 McGraw-Hill Ryerson Limited
CheeseCo
F = Favourable variance that occurs when actual costs are less than budgeted costs.
Static Budgets and Performance Reports
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Since cost variances are favourable, havewe done a good job controlling costs?
CheeseCo
Static Budgets and Performance Reports
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I don’t think Ican answer thequestion usinga static budget.
Actual activity is belowbudgeted activity.
So, shouldn’t variable costsbe lower if actual activity
is lower?
Static Budgets and Performance Reports
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The relevant question is . . .“How much of the favourable cost variance is due to lower activity, and how much is due to good cost control?”
To answer the question,we mustthe budget to theactual level of activity.
The relevant question is . . .“How much of the favourable cost variance is due to lower activity, and how much is due to good cost control?”
To answer the question,we mustthe budget to theactual level of activity.
Static Budgets and Performance Reports
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Preparing a Flexible Budget
To a budget we need to know that: Total variable costs change
in direct proportion to changes in activity.
Total fixed costs remainunchanged within therelevant range. Fixed
Variable
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Preparing a Flexible Budget
Let’s prepare budgets for CheeseCo.
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Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labour 4.00$ Indirect material 3.00 Power 0.50 Total variable cost 7.50$
Fixed costs Depreciation 12,000$ Insurance 2,000 Total fixed costTotal overhead costs
Flexible Budgets
Preparing a Flexible Budget
Fixed costs areexpressed as atotal amount.
Variable costs are expressed as a constant amount per hour.
$40,000 ÷ 10,000 hours is$4.00 per hour.
CheeseCo
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Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labour 4.00$ 32,000$ Indirect material 3.00 24,000 Power 0.50 4,000 Total variable cost 7.50$ 60,000$
Fixed costs Depreciation 12,000$ Insurance 2,000 Total fixed costTotal overhead costs
Flexible Budgets
Preparing a Flexible Budget
$4.00 per hour × 8,000 hours = $32,000
CheeseCo
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Preparing a Flexible Budget
CheeseCoCost Total
Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labour 4.00$ 32,000$ Indirect material 3.00 24,000 Power 0.50 4,000 Total variable cost 7.50$ 60,000$
Fixed costs Depreciation 12,000$ 12,000$ Insurance 2,000 2,000 Total fixed cost 14,000$ Total overhead costs 74,000$
Flexible Budgets
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Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labour 4.00$ 32,000$ 40,000$ Indirect material 3.00 24,000 30,000 Power 0.50 4,000 5,000 Total variable cost 7.50$ 60,000$ 75,000$
Fixed costs Depreciation 12,000$ 12,000$ 12,000$ Insurance 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$ Total overhead costs 74,000$ 89,000$ ?
Flexible Budgets
Preparing a Flexible Budget
Total fixed costsdo not change in
the relevant range.
CheeseCo
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Quick Check
What should be the total overhead costs for the Flexible Budget at 12,000 hours?a. $92,500.b. $89,000.c. $106,800.d. $104,000.
What should be the total overhead costs for the Flexible Budget at 12,000 hours?a. $92,500.b. $89,000.c. $106,800.d. $104,000.
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What should be the total overhead costs for the Flexible Budget at 12,000 hours?a. $92,500.b. $89,000.c. $106,800.d. $104,000.
What should be the total overhead costs for the Flexible Budget at 12,000 hours?a. $92,500.b. $89,000.c. $106,800.d. $104,000.
Quick Check
Total overhead cost
= $14,000 + $7.50 per hour 12,000 hours
= $14,000 + $90,000 = $104,000LO 3
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Preparing a Flexible Budget
Cost Total Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Indirect labour 4.00$ 32,000$ 40,000$ 48,000$ Indirect material 3.00 24,000 30,000 36,000 Power 0.50 4,000 5,000 6,000 Total variable cost 7.50$ 60,000$ 75,000$ 90,000$
Fixed costs Depreciation 12,000$ 12,000$ 12,000$ 12,000$ Insurance 2,000 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$ 14,000$ Total overhead costs 74,000$ 89,000$ 104,000$
Flexible Budgets
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Let’s prepare a budget performance report for CheeseCo.
Flexible Budget Performance Report
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Cost Total Formula Fixed Flexible Actualper Hour Cost Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs Indirect labour 4.00$ 34,000$ Indirect material 3.00 25,500 Power 0.50 3,800 Total variable cost 7.50$ 63,300$
Fixed costs Depreciation 12,000$ 12,000$ Insurance 2,000 2,050 Total fixed cost 14,050$ Total overhead costs 77,350$
CheeseCoFlexible budget is prepared for the
same activity level (8,000 hours) as
actually achieved.
Flexible Budget Performance Report
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Quick Check
What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results?a. $2,000 Ub. $2,000 Fc. $6,000 Ud. $6,000 F
What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results?a. $2,000 Ub. $2,000 Fc. $6,000 Ud. $6,000 F
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What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results?a. $2,000 Ub. $2,000 Fc. $6,000 Ud. $6,000 F
What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results?a. $2,000 Ub. $2,000 Fc. $6,000 Ud. $6,000 F
Quick Check
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Cost Total Formula Fixed Flexible Actualper Hour Cost Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs Indirect labour 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 25,500 Power 0.50 3,800 Total variable cost 7.50$ 63,300$
Fixed costs Depreciation 12,000$ 12,000$ Insurance 2,000 2,050 Total fixed cost 14,050$ Total overhead costs 77,350$
CheeseCo
Flexible Budget Performance Report
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Quick Check
What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results?a. $1,500 Ub. $1,500 Fc. $4,500 Ud. $4,500 F
What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results?a. $1,500 Ub. $1,500 Fc. $4,500 Ud. $4,500 F
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What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results?a. $1,500 Ub. $1,500 Fc. $4,500 Ud. $4,500 F
What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results?a. $1,500 Ub. $1,500 Fc. $4,500 Ud. $4,500 F
Quick Check
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Cost Total Formula Fixed Flexible Actualper Hour Cost Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs Indirect labour 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 24,000 25,500 1,500 U Power 0.50 4,000 3,800 200 FTotal variable cost 7.50$ 60,000$ 63,300$ $ 3,300 U
Fixed costs Depreciation 12,000$ 12,000$ 12,000$ $ 0 Insurance 2,000 2,000 2,050 50 UTotal fixed cost 14,000$ 14,050$ 50 UTotal overhead costs 74,000$ 77,350$ $ 3,350 U
CheeseCo
Flexible Budget Performance Report
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Remember the question: “How much of the total variance is due to lower activity and how much isdue to cost control?”
Flexible Budget Performance Report
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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?
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Difference between original static budgetand actual overhead = $11,650 F.
Overhead Variance Analysis
Static ActualOverhead OverheadBudget at at
10,000 Hours 8,000 Hours
89,000$ 77,350$
Let’s place the flexible budget for
8,000 hours here.
Flexible Budget Performance Report
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Overhead Variance Analysis
This $15,000F variance is due to lower activity.
Activity
This $3,350Uvariance is due
to poor cost control.
Cost control
Static Flexible ActualOverhead Overhead OverheadBudget at Budget at at
10,000 Hours 8,000 Hours 8,000 Hours
89,000$ 74,000$ 77,350$
Flexible Budget Performance Report
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Budgeting for Not-for-Profit Entities
With not-for-profit (NFP) entities, there is often no relationship between revenues expected to be received
and expenditures expected to be incurred.
Examples of NFP entities:Examples of NFP entities:
municipal, provincial and federal municipal, provincial and federal governments, hospitals, universities, governments, hospitals, universities,
voluntary associations, etc.voluntary associations, etc.
Examples of NFP entities:Examples of NFP entities:
municipal, provincial and federal municipal, provincial and federal governments, hospitals, universities, governments, hospitals, universities,
voluntary associations, etc.voluntary associations, etc.
The profit motive is replaced with a service orientation in NFP organizations. Budget information is gathered to assist in decisions regarding what programs and expenditures the
entity will undertake.LO 5
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International Aspects of Budgeting
• When a multinational company enters into the budgeting process there are at least three major problems that must be dealt with . . .
1. Fluctuations in foreign currency exchange rates.
2. High inflation rates.
3. Local economic conditions and governmental policies.
LO 5