management accounting lecture 11 sales...7-2 mcgraw-hill /irwin copyright © 2008 by the mcgraw-hill...
TRANSCRIPT
7-1
McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Profit Planning
Management Accounting Lecture 11 (Chapter 7)
McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Today’s LEcture
n What is a budget n Why and how organizations budget n Budgeting
n Sales n Production n Sales & Administration n Balance Sheet Budget Items
n Working Capital n Capital Equipment n Financing
n Financial Statements
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Budget
n A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period
n Its purpose is to plan for the future and control behaviour and costs n Planning to prepare for objectives and setting out a framework
to achieve the objectives n Providing incentives to managers to achieve the objectives n Control by holding people to account with respect to their
objectives n Cost control n Revenue generation
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Advantages of Budgeting
n The budgeting process forces managers to think through a plan from their perspective
n It provides a forum for people to interact and determine how to best allocate limited resources
n Defines a set of consistent goals and objectives
n Communicated throughout the organization for common understanding and cooperation
n The budget provides a document against which to measure performance
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Planning and Control
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.
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Advantages of Budgeting
Advantages
Uncover potential bottlenecks
Communicate plans
Coordinate activities
Define goals and objectives
Think about and plan for the future
Means of allocating resources
7-2
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Responsibility Accounting
Managers should be held responsible for those items — and only those items — that the manager can actually control
to a significant extent.
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Choosing the Budget Period
Operating Budget
2003 2004 2005 2006
The annual operating budget may be divided into quarterly
or monthly budgets.
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Self-Imposed Budget
A participative budget is prepared with the full cooperation and participation of managers at all levels. A participative
budget is also known as a self-imposed budget.
Supervisor Supervisor
MiddleManagement
Supervisor Supervisor
MiddleManagement
Top Management
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Advantages of Self-Imposed Budgets
1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management.
2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.
3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.
4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this explanation.
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Self-Imposed Budgets
Most companies do not rely exclusively upon self-imposed budget in the sense that top
managers usually initiate the budget process by issuing broad guidelines in terms of overall
target profits or sales.
Self-imposed budgets should be reviewed by higher
levels of management.
Managers should watch our for
budgetary slack.
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Human Factors in Budgeting
The success of budgeting depends upon three important factors:
1. Top management must be enthusiastic and committed to the budget process.
2. Top management must not use the budget to pressure employees or blame them when something goes wrong.
3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.
7-3
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The Budget Committee
A standing committee responsible for n overall policy matters relating to the budget n coordinating the preparation of the budget
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The Master Budget: An Overview
Sales budget
Budgeted income
statement
Budgeted balance sheet
Selling and administrative
expense budget
Ending inventory
budget Production
budget
Cash budget
Direct labor
budget
Direct materials budget
Manufacturing overhead budget
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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
n All sales are on account. n Royal’s collection pattern is:
70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible.
n The March 31 accounts receivable balance of $30,000 will be collected in full.
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Expected Cash Collections
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Expected Cash Collections
From the Sales Budget for April.
7-4
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Expected Cash Collections
From the Sales Budget for May.
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Expected Cash Collections
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The Production Budget
Production Budget
Sales Budget
and Expected
Cash Collections
Completed
Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
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The Production Budget
n The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.
n On March 31, 4,000 units were on hand.
Let’s prepare the production budget.
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The Production Budget
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The Production Budget
March 31 ending inventory
Budgeted May sales 50,000 Desired ending inventory % 20%Desired ending inventory 10,000
7-5
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The Production Budget
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The Production Budget
Assumed ending inventory.
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The Direct Materials Budget
n At Royal Company, five pounds of material are required per unit of product.
n Management wants materials on hand at the end of each month equal to 10% of the following month’s production.
n On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Let’s prepare the direct materials budget.
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The Direct Materials Budget
From production budget
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The Direct Materials Budget
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The Direct Materials Budget
Calculate the materials to by purchased in May.
March 31 inventory
10% of following month’s production
needs.
7-6
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The Direct Materials Budget
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The Direct Materials Budget
Assumed ending inventory
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Expected Cash Disbursement for Materials
n Royal pays $0.40 per pound for its materials. n One-half of a month’s purchases is paid for in
the month of purchase; the other half is paid in the following month.
n The March 31 accounts payable balance is $12,000.
Let’s calculate expected cash disbursements.
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Expected Cash Disbursement for Materials
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Expected Cash Disbursement for Materials
140,000 lbs. × $.40/lb. = $56,000
Compute the expected cash disbursements for materials
for the quarter.
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Expected Cash Disbursement for Materials
7-7
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The Direct Labor Budget
n At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor.
n The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.
n 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).
n For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.
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The Direct Labor Budget
From production budget
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The Direct Labor Budget
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The Direct Labor Budget
Greater of labor hours required or labor hours guaranteed.
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The Direct Labor Budget
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Manufacturing Overhead Budget
n At Royal manufacturing overhead is applied to units of product on the basis of direct labor hours.
n The variable manufacturing overhead rate is $20 per direct labor hour.
n Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets).
Let’s prepare the manufacturing overhead budget.
7-8
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Manufacturing Overhead Budget
Direct Labor Budget McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour*
*rounded
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Manufacturing Overhead Budget
Depreciation is a noncash charge. McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor Manufacturing overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct materials budget and information
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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 overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct labor budget
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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 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 $251,000 Total labor hours required 5,050 = $49.70 per hour*
7-9
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing 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
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Selling and Administrative Expense Budget
n At Royal, the selling and administrative expenses budget is divided into variable and fixed components.
n The variable selling and administrative expenses are $0.50 per unit sold.
n Fixed selling and administrative expenses are $70,000 per month.
n The fixed selling and administrative expenses include $10,000 in costs – primarily depreciation – that are not cash outflows of the current month.
Let’s prepare the company’s selling and
administrative expense budget.
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Selling and Administrative Expense Budget
Calculate the selling and administrative cash expenses for the quarter.
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Selling and Administrative Expense Budget
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Format of the Cash Budget
The cash budget is divided into four sections: 1. Cash receipts listing all cash inflows excluding
borrowing;
2. Cash disbursements listing all payments excluding repayments of principal and interest;
3. Cash excess or deficiency; and
4. The financing section listing all borrowings, repayments and interest.
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The Cash Budget
Royal: q Maintains a 16% open line of credit for $75,000 q Maintains a minimum cash balance of $30,000 q Borrows on the first day of the month and
repays loans on the last day of the month q Pays a cash dividend of $49,000 in April q Purchases $143,700 of equipment in May and
$48,300 in June paid in cash q Has an April 1 cash balance of $40,000
7-10
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The Cash Budget
Schedule of Expected Cash Collections
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The Cash Budget
Direct Labor Budget
Manufacturing Overhead Budget
Selling and Administrative Expense Budget
Schedule of Expected Cash Disbursements
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The Cash Budget
In the month of April will expect to have a cash deficiency of $20,000.
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The Cash Budget
Ending cash balance for April is the beginning May balance.
Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on it line-of-credit.
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The Cash Budget
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The Cash Budget
$50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 and
repayment on June 30.
7-11
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Review
n What is a budget n Why and how organizations budget n Budgeting
n Sales n Production n Sales & Administration n Balance Sheet Budget Items
n Working Capital n Capital Equipment n Financing
n Financial Statements
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Tutorial
n Review of today’s lecture n Problems
n 7-3 n 7-6