7-1 profit planning master budget chapter 7 adapted by cynthia fortin, cpa, cma cost management,...
TRANSCRIPT
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Profit PlanningMaster Budget
Chapter 7
Adapted by Cynthia Fortin, CPA, CMA Cost Management, Eldenburg, Wolcott, Chen and Cook
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Video preparation
http://video.wileyaccountingupdates.com/2011/06/15/standard-costs/
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PlanningPlanning
Develop objectivesDevelop objectives Prepare various budgetsPrepare various budgets To achieve those objectivesTo achieve those objectives
PlanningPlanning
Develop objectivesDevelop objectives Prepare various budgetsPrepare various budgets To achieve those objectivesTo achieve those objectives
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ControlControl
TakeTake steps to meet steps to meet objectivesobjectives
ControlControl
TakeTake steps to meet steps to meet objectivesobjectives
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Budgeting allows a company to
5. Define and communicate objectives
3. Uncover potential bottlenecks
4. Coordinate activities
1. Think about and plan for the future
2. Allocate resources
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Responsibility Accounting
ManagersManagers should be should be held held responsibleresponsible for for onlyonly those items that those items that they they cancan actually actually controlcontrol to a significant to a significant extent.extent.
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Master Budget
A comprehensive plan for the upcoming accounting period
Usually prepared for a one-year period Based on a series of budget assumptions
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 11
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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 labor
budgetDirect labor
budget
Cash budgetCash budget
Sales budgetSales budget
Ending inventorybudget
Ending inventorybudget
Budgetedbalance sheet
Budgetedbalance sheet
Budgetedincome
statement
Budgetedincome
statement
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Basis for assumptionsSales Forecasting Project past sales trends using judgment or statistical
methods. Estimate sales based on industry data for similar
businesses. Predict sales based on forecasted economic variables. Gather sales predictions from sales and other personnel. Conduct market research to estimate customer demand.
.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 14
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Basis for assumptions
Cost Forecasting Budget individual costs as
% of revenues or% change from the prior year
Evaluate cost behaviour
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Basis for assumptions
Cash flow forecasting
•Identify the expected sources and uses of cash
•Estimate timing of receipts and disbursements
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Operating Budgets Sales Production
Direct materials Direct labor
○ Manufacturing overhead Ending Finished Goods Inventory Sales and Administration
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 20
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Financial Budgets
Cash
Budgeted financial statementsIncomeBalance Sheet
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 21
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Revenue budget
Budgeted sales in units in April
Budgeted selling price per unit
Budgeted revenues
Revenue budget
Budgeted sales in units in April 6,000
Budgeted selling price per unit $68.00
Budgeted revenues $408,000
Revenue and Production BudgetsSJ, Inc., makes a tool used by auto mechanics that sells for $68/unit. It expects to sell 6,000 units in April and 7,000 units in May. SJ prefers to end each period with a finished goods inventory equal to 10% of the next period’s sales in units and a direct materials inventory equal to 20% of the direct materials required for the next period’s production. The company never has any beginning or ending work-in-process inventories. There were 400 units in finished goods inventory on April 1. Prepare the revenue and production budgets for April.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 22
Production budget
Budgeted sales in units in April 6 000
Desired ending FG inventory 700
Total units required 6 700
Less: beginning FG inventory (400 )
Required production in units 6 300 How much Revenue will SJ earn?
How many units will SJ produce?
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Direct materials budget
Required production in units 6 300
DM required per unit, in kilograms 0,3
Total DM required, in kilograms 1 890
Less: Beginning DM inventory (220 )
Plus: Desired ending DM inventory 390
Required DM purchases in kilograms 2 060
Budgeted DM cost per kilogram $4,00
Budgeted cost of DM $8 240
Direct Materials Purchase BudgetSJ’s product uses 0.3 kg of direct material per unit, at a cost of $4/kg. There were 220 kg of direct material on hand on April 1. Assume that budgeted production for May is 6,500 units. Prepare the direct materials budget for April.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 23
From production budgetGiven
Given6500*0.3*20%
given
How much DM must SJ purchase to produce the budget units?
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Direct Labour Budget
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 24
Direct labour budget
Required production in units 6 300
DL required per unit, in hours 0,2
Total DL hours required 1 260
Budgeted cost per DL hour $12,00
Budgeted cost of DL $15 120
SJ’s product uses 0.2 hours of direct labour at a cost of $12/hr. Prepare the direct labour budget for April.
How many labour hours are needed?How much will DL cost?
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Manufacturing Overhead BudgetSJ’s budgeted fixed manufacturing overhead for April is $167,000, and variable manufacturing overhead is budgeted at $6 per direct labour hour. Prepare the manufacturing overhead budget for April.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 25
Manufacturing overhead budget
Total DL hours required 1 260
Budgeted variable overhead per DL hour $6,00
Total budgeted variable overhead $7 560
Budgeted fixed overhead $167 000
Total budgeted overhead $174 560
From labor budgetGiven
given
How much total overhead will be incurred?
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Ending inventories budgets
Budgeted cost of DM purchases $8 240
Beginning DM inventory $880
DM available for use $9 120
Budgeted cost of desired ending DM inventory:
[6,500 units x 0.3 lbs/unit] x 20% x $4/ lb $1 560
Budgeted cost of DM to be used $7 560
Direct Materials Used and Ending inventory budget Prepare the April ending inventories budget for direct materials.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 26
From DM budget220 * $4
390 * $4
How much DM will be used to produce the budget units?
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Budgeted cost of DM to be used $7 560
Budgeted cost of DL $15 120
Total budgeted overhead $174 560
Total budgeted manufacturing costs $197 240
Required production in units 6 300
Budgeted manufacturing cost per unit $31,31
Budgeted ending FG inventory in units 700
Budgeted cost of ending FG inventory $21 916
Finished Goods Ending Inventory BudgetPrepare the April ending inventories budget for finished goods.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 27
First compute unit cost of FG then apply it to FG ending inventory units
Total cost
Unit cost
What will the ending inventory of FG be?
Divided by
Multiply by
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Cost of goods sold budget
Beginning FG inventory $12 146
Total budgeted manufacturing costs $197 240
Cost of goods available for sale $209 386
Less: budgeted ending FG inventory $21 916
Budgeted cost of goods sold $187 470
Cost of goods sold BudgetAssume that SJ’s April 1 finished goods inventory had a cost of $12,146. Prepare the cost of goods sold budget for April.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 28
We need cost of goods sold for the Income statement budget
GivenPrevious slide
Previous slide
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Support department budget
Administration $22 000
Distribution: Fixed costs $34 000
Variable costs $4 500 $38 500
Research & development $18 000
Marketing: Fixed costs $13 000
Variable costs $16 320 $29 320
Total budgeted support department costs $107 820
Selling & Administration BudgetSJ’s budget for April includes $22,000 for administrative costs, $34,000 for fixed distribution costs, $18,000 for research and development, and $13,000 for fixed marketing costs. Additionally, the budgeted variable costs for distribution are $0.75/unit sold and the budgeted variable costs for marketing are 4% of sales revenue. Prepare the support department budget for April.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 29
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Sales revenue $408 000
Cost of goods sold $187 470
Gross margin $220 530
Operating costs:
Administration $22 000
Distribution $38 500
Research & development $18 000
Marketing $29 320 $107 820
Net income before taxes $112 710
Income taxes $31 559
Net income $81 151
Income Statement BudgetSuppose that SJ’s income tax rate is 28%. Prepare the budgeted income statement for April.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 30
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How is a cash budget is developed?
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Cash Budgets
Summary of the expected amounts
and timing of cash receipts and disbursements.
Operating cash receipts estimated from budgeted revenues.
Operating cash disbursements estimated from the budgets for DM, DL, O/H and support departments.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 32
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Cash budgets
1. Cash receipts
2. Cash disbursements
3. Short-term borrowings or investments
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 33
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Cash Budget ExampleRace Manufacturing is preparing a cash budget for a new division that will begin operations on January 1, 2015. Race expects sales to be 40% cash and 60% on account, with 45% of credit sales are collected in the month of the sale. In the month after the sale, 50% of credit sales should be collected, with the remainder collected two months after the sale. Budgeted sales for the first three months are $100,000, $150,000 and $200,000. Prepare a cash receipts budget for the first three months of 2015.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 34
January February March
Cash sales $40 000 $60 000 $80 000
A/R collections:
From current month's sales $27 000 $40 500 $54 000
From 1 month ago $0 $30 000 $45 000
From 2 months ago $0 $0 $3 000
Total $67 000 $130 500 $182 000
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January February March
Direct labour costs $30 000 $45 000 $60 000
Payments on A/P:
From current month's purchases $8 000 $14 000 $18 000
From 1 month ago $0 $10 000 $17 500
From 2 months ago $0 $0 $2 000
Total $38 000 $69 000 $97 500
Cash Budget ExampleRace Manufacturing budgets direct labour costs to be 30% of sales revenue and expects to pay this in the month the costs are incurred. Direct materials purchases will be on account, and paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Budgeted direct material purchases for the first 3 months of 2010 are $20,000, $35,000 and $45,000. Compute the budgeted cash disbursements for direct materials and labour for the first 3 months of 2012.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 35
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January February March
Direct labour and materials $38 000 $69 000 $97 500
Other variable costs $4 000 $6 000
Other fixed costs $6 000 $6 000 $6 000
Total $44 000 $79 000 $109 500
Cash Budget ExampleRace Manufacturing budgets other variable costs at 4% of sales revenue and will be paid in the month after the costs are incurred. Other budgeted fixed costs are $6,000 per month and will be paid in the month incurred. Prepare a cash disbursements budget for all costs, including direct materials and labour.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 36
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Cash Budget Example
Using the information from the prior slides, prepare a schedule of budgeted cash flows for Race Manufacturing’s new division for the first three months of 2012.
© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 37
January February MarchBeginning cash balance $0 $23 000 $74 500Cash receipts $67 000 $130 500 $182 000Cash disbursements ($44 000) ($79 000) ($109 500)Ending cash balance $23 000 $74 500 $147 000