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TRANSCRIPT
Chapter 15
Budgeting Profit, Sales, Costs & Expenses
Discussion Questions
1) Profit planning encompasses (a) sales estimating and sales planning programs; (b) budgeting programs for control of all costs, both manufacturing and nonmanufacturing; (c) planning and programming additions to or deletions from working capital and plant investment; and, (d) a review of all factors that have an impact on return on investment, both from a short-term viewpoint of one year and longer periods of time. The profit-planning function must not be merely financial in scope. It must disclose the methods and programs by which the financial goals are to be achieved.2) A budget is the expected target that management strives to achieve, whereas a forecast is a level of revenue or cost that an organization predicts will occur.3) The three approaches for setting profit objectives are: (a) A priori. Management specifies a given rate of return to be achieved in the long run and then draws up plans for achieving that rate. (b) A posteriori. Management draws up plans and then sets the rate resulting from the plans. (c) Pragmatic. Management uses a target profit standard that has been tested empirically and sanctioned by experience.4) Long-range planning deals with specific areas of the company’s plans, such as future sales, long-term capital expenditures, research and development activities, financial requirements, and the profit goal. Short range budgeting places the planning and particularly control into periods of three, six, or twelve months.5) A budget is a detailed financial statement of the organization’s strategy. It converts general strategy statements into specific plans of action, measured financially. It is related to control, because it is the fundamental guideline for what the organization should do. Thus, it is the benchmark against which actual performance is compared. This process of comparison is a vital part of the control function in the organization.6) In carrying out management’s functions of planning, organizing, and control for the development of a budgetary control program, it is necessary to: (a) organize the budget committee (b) organize the entire budgetary control program (c) plan sales with the sales manager (d) determine the finished goods inventory requirement in harmony with the sales budget (e) plan production with the production manager based on the sales budget (f) meet with heads of all departments—both producing
and service—relative to direct materials, direct labor, and factory overhead costs required for the production budgeted (g) establish materials purchase requirements based on production planning, a department’s materials requirements, or the production budget (h) establish expense budgets with marketing, administrative, and financial division heads (i) budget capital expenditures and prepare a research and development budget. (j) Develop a cash budget (k) coordinate and summarize companywide budgets into a master budget— summarized in the budgeted income statement and balance sheet.7) The periodic budget represents a formal communication channel within a company for the following reasons: (a) The periodic budget involves a formal commitment on the part of management to take positive actions to make actual events correspond to the formal budget. (b) The periodic budget is usually reviewed and approved by a higher authority and, once approved, is changed only in unusual specified circumstances. (c) The periodic budget contains explicit statements of the implementation of management objectives for a period of time, published to all parties with control responsibility. (d) Comparison of actual results with the periodic budget forms the basis for management control, motivation, and performance evaluation.8) Budgets are required for planning, monitoring, and motivating, and because they include estimates, they always involve uncertainty. The process of budget preparation forces identification of variables and attempts at estimation. Reiteration should improve the process, and the process should cause a positive attitude to attain goals. Of course, a poorly estimated budget can cause dysfunctional behavior. In this situation, the budget should provide incentive for going after bids. The inclusion of budgeted and actual contribution margin data in periodic reports offers an early indication of below par contribution, or the possible need to reduce bid prices, or other corrective action that may be required. CGA-Canada (adapted).9) All employees (including executive management) must accept the importance of budgeting and be willing to participate fully in budget preparation and implementation, or the budget will not work.10) Commercial expenses are grouped into functions by their actions or operating units. These functions are looked upon as departments and should be set along organizational lines in order to identify the expense with an authorized and responsible individual. Grouping by products and by territories may be desirable as well.
11) The budgeted income statement summarizes in one statement the results of the complete plan of action. It expresses in financial terms the end results
of proposed plans. It can also be used to test the adequacy or inadequacy of those plans.
Exercises
E-1
Whatley Brothers
Budget of sales revenue
For the year 19B
product Sale in pounds
Average sale price per pound
C, G, S per pound
G-P per pound
Sales revenue
Gross profit
$ $ $ $ $Barb 20000 37 28 9 740,000 180000Shirt 10500 18.72 18 0.72 196560 7560Bet 7500 23.92 23.1 0.82 179400 6150
1115960 193710
E-2
Swister Co.
Sales and Production
For year 5,
Peers Model Number
Sales in units
AddEndingInventory
LessBeginningInventory
Production In units
Units Units222 140 4 2 142333 400 5 5 400444 50 5 4 51
590 593
E-3
Schwankenfelder Co.
For the quarter end Jun 30
Ceno Nepo Teno
Closing inventory 6200 10500 12200
Add: Sales Forecast 21000 37500 54300
27200 48000 66500
Less: Beginning inventory 5800 11000 14500
Required Production 21400 37000 52000
E-4
Magic Enterprises
Production Budget
For the quarter end Mar 31
Budget sales unit
Add: Finished goods ending
Total units
Less: Finished goods Beg.
Units to be transferred to finished goods
Add: W-I-P ending
Less: W-I-P Beginning
Units to be produced
Moon
Glow
Enchanting Day
Dream
250,000
15000
175,000
10000
300,000
20000
265,000
16000
185,000
12000
320,000
25000
249,000
4200
173000
2000
295000
6000
253200
2000
175,000
1800
301000
6400
251200 173200 294600
E-5 (1)
Manford Industries
Production Budget
For six months period
Estimated sales units
Add: Estimated ending inventory
Less: Estimated beginning inventory
Req. production units
1001 1002 1003 2001 2002 2003
200
40
150
25
425
60
175
20
325
35
215
20
240
50
175
25
485
75
195
15
360
35
235
20
190 150 410 180 325 215
(2) Row Material Production On
Requirement:
Model No. Req. production
Raw Material Requirement per unit
Total Raw Material Requirement
1001
1002
1003
2001
2002
2003
190
150
410
180
325
215
X Y X Y
5
7
10
4
6
8
2
2
3
1.5
2
2.5
950
1050
4100
720
1950
1720
10490
380
300
1230
270
650
537.5
3367.5
E-6
(1)
Production Budget
Tribolite Polycel Poeder x
Expected sales 80,000 40000 100,000
Add: Ending inventory 6000 2000 8000
86000 42000 108000
Less: Beginning inventory 5000 4000 10000
Budgeted production 81000 38000 98000
(2)
Purchases Budget
Mat-A Mat-B
Expected Quantity (w) 157,000kg 260,000kg
Add: Ending inventory 12000 15000
169000kg 275,000kg
Less: Beginning inventory 10,000 12,000
Units to purchase 159,000kg 263,000kg
Total Cost of Purchases
Mat A = 159,000×0.20 = $31,800
Mat B = 263,000×0.10 = $26,300
E-6 (2) Working
Expected Quantity
Mat-A
Tribolite 81000×1 = 81000kg
Polycal 38000×2 = 76000kg
Powder x _
__________
157,000kg
Mat-B
Tribolite 81000×2 = 162,000kg
Polycal _
Powder x 9000×1 = 98,000
260,000kg
E-6 (3)
Tribolite Polycal Powder X TotalMaterials:A:81,000 × 1 × $.20 $16,200 $ 16,20038,000 × 2 × $.20 $15,200 15,200B:81,000 × 2 × $.10 16,200 16,20098,000 × 1 × $.10 _______ _______ $ 9,800 9,800
$32,400 $15,200 $ 9,800 $ 57,400
Direct Labor.81 × 50 × $8 $32,400 $32,40038 × 125 × $8 $38,000 38,00098 × 12.5 × $8 _______ _______ $ 9,800 9,800
$32,400 $38,000 $ 9,800 $ 80,200
Factory overhead—variable:81 × 50 × $6 $24,300 $ 24,30038 × 125 × $6 $28,500 28,50098 × 12.5 × $6 _______ ______ $ 7,350 7,350
$24,300 $28,500 $ 7,350 $ 60,150
Total variable Manufacturing cost $89,100 $81,700 $26,950 $197,750
Fixed manufacturing cost (not allocated to products) 40,000Total manufacturing cost $237,750
E-7 Sanderson Inc.
Budgeted Cost of Goods Manufactured and Sold StatementFor the year 20—
Materials:Beginning inventory $500,000Purchases 2,600,0005Materials available for use $3,100,000Ending inventory 600,000Cost of materials used $2,500,000Labor 4,340,000Factory overhead 1,840,0004Total manufacturing cost $8,680,0003Add beginning work in process inventory 100,000
$8,780,000Deduct ending work in process inventory 300,000Cost of goods manufactured $8,480,0002Add beginning finished goods inventory 800,000Cost of goods available for sale $9,280,000Deduct ending finished goods inventory 1,000,000Cost of goods sold $8,280,0001
1Earnings (6% of $20,000,000 = $1,200,000) 10% of salesMarketing, administrative, and financial expenses 21
31% of salesCost of goods sold ($8,280,000) 69
100% of sales
2Cost of goods ending finished Beginning finished Cost of goodsSold + goods inventory – goods inventory = manufactured
$8,280,000 $1,000,000 $800,000 $8,480,000
Total manufacturing cost
3Cost of goods Ending work in Beginning work in (materials, labor, and manufactured + process inventory – process inventory = factory overhead)$8,480,000 $300,000 $100,000 $8,680,000
4Total manufac- Labor (50% of Cost of materialsturing cost – manufacturing cost) – used = Factory overhead$8,680,000 $4,340,000 $2,500,000 $1,840,000
5Cost of Ending Beginningmaterials + materials – materials = Materialsused inventory inventory purchases$2,500,000 $600,000 $500,000 $2,600,000
E-8
Starness Company
Budgeted Income Statement
Second Quarter 19B
$ $
Sales (360,000×2) 720,000
Less: cost of goods sold ? 504,000
Gross Profit (720,000×30/100) 216,000
Less:
Operating expenses
Marketing expenses
Variable (720,000×10/100) 72,000
Fixed 48,000 120,000
Uncollectibles (720,000×2/100) 14400
Admin expenses
Variable (720,000×3/100) 21,600
Fixed 34,200 55800
Depreciation (800,000/20×1/4) 10000
Net Income 15800
E-9 ?
PROBLEMS
P-1
(1) Sales BudgetUnit Price Total
Thingone 60,000 $ 70 $4,200,000Thingtwo 40,000 100 4,000,000
Projected sales $8,200,000
(2)
Production BudgetThingone Thingtwo
Projected sales 60,000 40,000Desired inventories, December 31, 20B 25,000 9,000
85,000 49,000Less expected inventories, January 1, 20B 20,000 8,000Production required (units) 65,000
41,000
(3)
Raw Materials Purchases BudgetRaw Materials
A B C TotalThingone (65,000 unitsprojected to be produced) 260,000 130,000 —Thingtwo (41,000 unitsprojected to be produced) 205,000 123,000 41,000 Production requirement 465,000 253,000 41,000Add desired inventories,December 31, 20B 36,000 32,000 7,000 Total requirements. 501,000 285,000 48,000 Less expected inventories,January 1, 20B 32,000 29,000 6,000 Purchase requirements 469,000 256,000 42,000
Cost per pound or unit. $8 $5 $3____ Total cost of purchases $3,752,000 $1,280,000 $126,000 $5,158,000
(4)
Direct Labor BudgetProjected HoursProduction per(Units) Unit Total Rate Total
Thingone 65,000 2 130,000 $8 $1,040,000Thingtwo 41,000 3 123,000 9 1,107,000
$2,147,000
(5)
Finished Goods Inventory Budget, December 31, 20B
Thingone:Raw materials:
A—4 pounds @ $8 $32B—2 pounds @ $5 10 $42
Direct labor—2 hours @ $8 16Factory overhead—2 hours @ $2 per direct labor hour 4
$62$62 × 25,000 units
$1,550,000
Thingtwo:Raw materials:
A—5 pounds @ $8 $40B—3 pounds @ $5 15C—1 unit @ $3 3 $58
Direct labor—3 hours @ $9 27Factory overhead—3 hours @ $2 per direct labor hour 6
$91$91 × 9,000 units 819,000
Budgeted finished goods inventory,December 31, 20B $2,369,000
P-2 (1)
ROLETTER COMPANYBudget for Production and Direct LaborFor the Quarter Ending March 31, 20B
MonthJanuary February March Quarter
Sales (units) 10,000 12,000 8,000 30,000
Add ending inventory* 16,000 12,500 13,500 13,500 Total units required 26,000 24,500 21,500 43,500Less beginning inventory 16,000 16,000 12,500 16,000 Units to be produced 10,000 8,500 9,000 27,500
Direct labor hours per unit × 2 × 2 × 1.5
Total hours of direct labor timeNeeded 20,000 17,000 13,500 50,500
Direct labor costs:Wages ($8.00 per DLH) $160,000 $136,000 $108,000
$404,000Pension contributions($.25 per DLH) 5,000 4,250 3,375 12,625Workers’ compensationinsurance ($.10 per DLH) 2,000 1,700 1,350 5,050Employee medical insurance($.40 per DLH) 8,000 6,800 5,400 20,200Employer’s social security andunemployment taxes($8.00 × .10 = $.80 per DLH) 16,000 13,600 10,800 40,400
Total direct labor cost $191,000 $162,350 $128,925 $482,275
*100% of the first following month’s sales plus 50% of the second following month’s sales.
(2)
(a) Components of the periodic budget, other than the production budget and the direct labor budget, that would also use the sales data include:
(1) the sales budget(2) the cost of goods manufactured and sold budget(3) the marketing and administrative expenses budget(4) the budgeted income statement
(b) Components of the periodic budget, other than the production budget and the direct labor budget, that would also use the production data include:
(1) the direct materials budget(2) the factory overhead budget(3) the cost of goods manufactured and sold budget(c) Components of the periodic budget, other than the production
budget and the direct labor budget, that would also use the direct labor hour data include:
(1) the factory overhead budget (for determining the overhead application rate if based on direct labor hours)(d) Components of the periodic budget, other than the production budget and the direct labor budget, that would also use the direct labor cost data include:
(1) the factory overhead budget (for determining the overhead application rate if based on direct labor dollars and for determining the cost of employee benefits attributable to wages earned by direct labor)
(2) the cost of goods manufactured and sold budget(3) the cash budget(4) the budgeted income statement
P-3
(1) Estimated sales for third quarter (July—September) 18,000Add ending inventory (7,000 × 80%) 5,600
23,600Less beginning inventory 5,600Production 18,000
(2)
Material101 211 242
Units to be produced 18,000 18,000 18,000Materials rate × 6 × 4 × 2
Units of materials required 108,000 72,000 36,000
Add ending inventory:5,600 × 6 33,6005,600 × 4 22,4005,600 × 2 ______ ______ 11,200
141,600 94,400 47,200
Less beginning inventory 35,000 30,000 14,000
Purchases 106,600 64,400 33,200Cost per unit × $2.40 × $3.60 × $1.20Total cost of purchases $255,840 $231,840 $39,840
(3)
Hours Total Totalper Total Labor Labor
Process Production Unit Hours Rate Cost
Forming 18,000 .80 14,400 $8 $115,200
(4)
Expected annual production 60,000 unitsActual production through June 30 27,000Expected production during last six months of 20A 33,000 unitsVariable factory overhead per unit ($162,000 ÷ 27,000) × $6Budgeted variable factory overhead $198,000Budgeted fixed factory overhead 93,000Total budgeted factory overhead $291,000
P-4
(1) Revised Sales Budget in Units Based on the IndexTerritories
6-MonthI II III Other Total
1-lb. package 9,0001 13,500 10,800 551,700 585,0002-lb. package 10,800 2 16,200 10,800 704,700 742,500 Total 19,800 29,700 21,600 1,256,400 1,327,500
110,000 × .9 = 9,000212,000 × .9 = 10,800
(2) Sales Budget in DollarsTerritories
6-MonthI II III Other Total
1-lb. package $2,2501 $ 3,375 $2,700 $137,925 $146,2502-lb. package 5,400 2 8,100 5,400 352,350 371,250Total $7,650 $11,475 $8,100 $490,275 $517,500
19,900 revised estimate × $.25 (per package) = $2,250210,800 revised estimate × $.50 (per package) = $5,400
(3) Materials PurchasesGrain R Grain S Total
Bu. Cost Bu. Cost Bu. CostJanuary 5,000 $ 6,500 2,000 $ 2,400 7,000 $ 8,900February 2,000 2,800 1,000 1,200 3,000 4,000
March — — 3,000 3,750 3,000 3,750April 8,000 12,000 3,000 3,000 11,000 15,000May 3,000 4,500 — — 3,000
4,500June 4,000 6,400 4,000 4,000 8,000 10,400
22,000 $32,200 13,000 $14,350 35,000 $46,550
(4) Materials Requirements for Production
Production of 585,000 1-lb. packages 585,000 lbs.Production of 742,500 2-lb. packages 1,485,000Total materials requirements for six months 2,070,000 lbs.
Three bushels of grain in the proportions of 2R:1S produce 198 lbs. of finished product. R weighs 70 lbs. per bushel and S weighs 80 lbs. per bushel.
Weight perGrain Bushels Bushel Lbs.R 2 70 lbs. 140S 1 80 lbs. 80
220 10% loss 22
Weight of finished product 198
Since each 198 lbs. of product calls for 220 lbs. of grain, the total weight of grain required for 2,070,000 lbs. is:220/198 ×2,070,000 = 2,300,000 lbs., to be apportioned as follows:
Grain R= 140/220 x 230,000 = 1,463,636 lbs. = 20,909 bushels @70 lbs. each.Grain S= 80/220 x 230,000 = 836,364 lbs. = 10,455 bushels @80 lbs. each.
(5)Materials Account (Fifo Basis)
Grain R Grain SBu. Cost Bu. Cost
Inventory, January 1 10,000 $12,000 3,000 $3,000Purchases 22,000 32,200 13,000 14,350
Total 32,000 $44,200 16,000 $17,350Put into production:Beginning inventory 10,000 $12,000 3,000 $3,000January purchases 5,000 6,500 2,000 2,400February purchases 2,000 2,800 1,000 1,200March purchases — — 3,000 3,750April purchases 3,909 5,864 1,455 1,455Total consumption 20,909 $27,164 10,455 $11,805Inventory, June 30 11,091 $17,036 5,545 $ 5,545
P5-5 (revised) (1)
Budgeted Income Statement(000s omitted)
QuarterFirst Second Third Fourth Total
Sales:Commercial $250 $266 $275 $300
$1,091Government 100 120 110 115 445 Total $350 $386 $385 $415
$1,536
Cost of goods sold 161 178 177 191 707 Gross profit $189 $208 $208 $224 $ 829
Other operating expenses:Advertising $ 6 $ 6 $ 6 $ 6 $ 24Selling 35 39 39 42 155Administrative 32 35 35 38 140General office 23 25 25 27 100 Total $ 96 $105 $105 $113 $ 419
Operating Income $ 93 $103 $103 $111 $ 410
Add: Other Income 8 8 8 8 32
Income before Tax $101 $111 $111 $119 $442
Less: Income tax 40 44 44 47 176
Income after tax $61 $67 $67 $72 $267*
*rounding adjustment
Note: all figures have been rounded to nearest thousand, as required in the question.
(2) Budgeted Income Statement
With 5% increase in commercial sales(000s omitted)
QuarterFirst Second Third Fourth Total
Sales:Commercial $263 $279 $289 $315
$1,146Government 100 120 110 115 445 Total $363 $399 $399 $430
$1,591
Cost of goods sold 167 184 184 198 733 Gross profit $196 $215 $215 $232 $ 858
Other operating expenses:Advertising $ 6 $ 6 $ 6 $ 6 $ 24Selling 36 40 40 43 159Administrative 33 36 36 39 144General office 24 26 26 28 104 Total $ 99 $108 $108 $116 $ 431
Operating Income $ 97 $107 $107 $116 $ 427
Add: Other Income 8 8 8 8 32
Income before Tax $105 $115 $115 $124 $459
Less: Income tax 42 46 46 50 183
Income after tax $63 $69 $69 $74 $275*
*rounding adjustment
Note: all figures have been rounded to nearest thousand, as required in the question.