chapter 12 planning and budgeting. 12-2 learning objectives 4.develop production and cost budgets....
TRANSCRIPT
Chapter Chapter 1212
Planning and Planning and BudgetingBudgeting
12-2
Learning ObjectivesLearning Objectives
4.Develop production and cost budgets.
2.Understand the importance of people in the budgeting process.
3.Estimate sales.
5.Estimate cash flows.
1.Understand the role of budgets in overall organization plans.
6.Develop budgeted financial statements.
7.Explain budgeting in service, retail, and wholesale organizations.
8.Explain why ethical issues arise in budgeting.
9.Explain how to use sensitivity analysis to budget under uncertainty.
12-3
BudgetsBudgetsL.O. 1 Understand the role of budgets in overall organization plans.
Financial plan of the resources needed to carry out activities and meet financial goals
Budget
Strengths of a company that enable it to outperform competitors
Critical Success Factors
Goals
Plans
Decision making
Performance evaluations
12-4
Financial plan of an organization for the coming year or other planning period
Company’s broad objectives established by management that employees work to achieve
Statement detailing steps to take to achieve a company’s organization goals
Organizational PlanOrganizational Plan
Master Budget
Organization Goals
Strategic Long-Range Plan
12-5
Organization and Individual Organization and Individual InteractionInteractionOrganization Individual
Organization goals
Long-range strategic plans
Individual goals and values
Anticipated conditions for the
budget period
Master budget
Actual reported results for period
Individual beliefs and expectations
Strategic evaluation
Periodic performance evaluation
12-6
Master BudgetMaster Budget
Tactical short range plan that ties the strategic plan to operating plan
Static Budget
Budget Plan
Planning Budget
Income statement portion of the master budget
Profit Plan
12-7Human Element in Human Element in BudgetingBudgetingL.O. 2 Understand the importance of people in the
budgeting process.
Organization goals
Individual goals
Goal congruence
Use of input from lower- and middle-management employees; also called grass roots budgeting
Participative Budgeting
12-8
Sales BudgetSales BudgetL.O. 3 Estimate
sales.
Staff
Delphi Technique
Trend analysis
Econometric models
Sales is the most difficult aspect of budgeting.
12-9
Forecast by StaffForecast by Staff
Number of units Sales price of a unitx
Sales personnel have knowledge about customers.
Market researchers have knowledge about the market.
12-10
Delphi TechniqueDelphi Technique
Forecasting method in which individual forecasts of group members are submitted anonymously and evaluated by the group as a whole.
Reduces bias of individual forecasts
12-11
Trend AnalysisTrend Analysis
Forecast method based on past data
Simple visual extrapolation of points on a graph
Highly sophisticated computerized time series analysis.
to
12-12
Econometric ModelsEconometric Models
Statistical methods of forecasting economic data using regression models
Cost versus benefit
12-13Sales Budget: An Sales Budget: An IllustrationIllustration
Estimated sales
= Number of units x Price per unit
$7,200,000 = 160,000 x $45
12-14
Production BudgetProduction BudgetL.O. 4 Develop production and cost
budgets.
Production plan of resources needed to meet current sales demand and ensure that inventory levels are sufficient for future sales
Units in beginning inventory
Required production
(units)
Budgeted sales (units)
Units in ending
inventory
=+ -
Inventories
BB TI TO EB
12-15Production Budget Production Budget ContinuedContinued
Units in beginning inventory
Required production
(units)
Budgeted sales (units)
Units in ending
inventory
-= +
5,000 units (beginning Inventory)
Required production
(units)
160,000 units (sales)
15,000 units (ending
inventory)-= +
BBTI TO EB
BB TI TO EB
Required production
(units)
170,000 units
=
12-16
Production BudgetProduction Budget
Expected sales 160,000 Add desired ending inventory of finished goods 15,000
Total needs 175,000
Less beginning inventory of finished goods 5,000
Units to be produced 170,000
Santiago PantsProduction Budget (in
units)For the Budget Year Ended December 31
12-17
Production CostsProduction Costs
Labor
Direct Materials
Overheadsantiago
12-18Direct Materials: An Direct Materials: An ExampleExample
Cotton Fine CottonMaterial per unit of output 3.0 yards 0.2 yardsBeginning materials inventory 10,000 yards 1,000 yardsEnding inventory 15,000 yards 1,000 yards
Cost per yard 3$ 5$
Santiago PantsMaterial Data
Estimated Production
12-19
Direct Materials: An Example Direct Materials: An Example ContinuedContinued
Yards needed
Fine cotton = 170,000 x 0.2
+ 1,000 - 1,000
= 34,000 yards
= 515,000 yards
Cotton = 170,000 x 3.0
+ 15,000
- 10,000
Santiago PantsMaterial Data
Estimated Production
12-20
Direct Material ContinuedDirect Material Continued
Cotton Fine CottonDirect materials needed per unit 3.0 yards 0.2 yardsTotal production needsa 510,000 a 34,000 b
Add desired ending inventory 15,000 1,000
Total direct materials needs 525,000 35,000 Less beginning inventory of materials 10,000 1,000
Total yards to be purchased 515,000 34,000 Cost of materials, per yard $3 $5Cost of direct materials to be purchased $1,545,000 $170,000
Total cost of direct materials 1,715,000$
a 3.0 yards x 170,000 unitsb 0.2 yards x 170,000 units
Santiago PantsDirect Materials
BudgetFor the Budget Year Ended December 31
12-21
Direct LaborDirect Labor
Units to be produced 170,000 Direct labor time per unit (in hours) 0.50
Total direct labor-hours needed 85,000 Direct labor cost per hour 22$
Total direct labor cost 1,870,000$
Santiago PantsDirect Labor Budget
For the Budget Year Ended December 31
12-22
OverheadOverhead
Variable overhead needed to produce 170,000 units
Indirect materials and supplies 36,000 Materials handing 70,000 Other indirect labor 30,000 136,000$
Fixed manufacturing overhead
Supervisory labor 102,000 Maintenance and repairs 50,000 Plant administration 85,000 Utilities 55,000 Depreciation 140,000 Insurance 30,000 Property taxes 60,000 Other indirect labor 22,000 544,000
Total manufacturing overhead 680,000$
Santiago PantsOverhead Budget
For the Budget Year Ended December 31
santiago
12-23
Cost of Goods SoldCost of Goods Sold
Beginning work in process inventoryManufacturing costsDirect materials
Beginning inventory (10,000 cotton @ $3 + 1,000 f ine cotton @ $5) 35,000 Purchases 1,715,000
Materials available for manufacturing 1,750,000$ Less ending inventory (15,000 cotton @ $3 + 1,000 fine cotton @ $5) (50,000)
Total direct material costs 1,700,000$ Direct labor 1,870,000 Manufacturing overhead 680,000
Total manufacturing costs 4,250,000$ Less ending work in process inventory -
Cost of goods manufactured 4,250,000$
Add beginning finished goods inventory (5,000 units)a 120,000 Less ending finished goods inventory (@ 15,000 units)b (375,000)
Cost of goods sold 3,995,000$
a Management estimateb Finished goods are valued at $15 per unit ($4,250,000/170,000 units produced) assuming FIFO. Hence, ending finished goods inventory is estimated to be $375,000 (15,000 units x $25).
Santiago PantsBudgeted Statement of Cost of Goods
SoldFor the Budget Year Ended December 31
12-24Marketing and Administrative Marketing and Administrative BudgetBudget
Variable marketing costsSales commissions 240,000$ Other marketing 120,000
Total variable marketing costs 360,000$ Fixed marketing costsSales salaries 130,000$ Advertising 153,000 Other marketing 67,000
Total fixed marketing costs 350,000
Total marketing costs 710,000$ Administrative costs (all fixed)Administrative salaries 241,000$ Legal and accounting staff 136,000 Data processing services 127,000 Outside professional services 32,000 Depreciation: building, furniture, and equipment 84,000 Other, including interest 36,000 Taxes-other than income 140,000
Total administrative costs 796,000
Total budgeted marketing and administrative costs 1,506,000$
Santiago PantsSchedule of Budgeted Marketing and Administrative Costs For the Budget Year Ended December 31
12-25
Income StatementIncome Statement
Budgeted revenuesSales (160,000 units at $45) 7,200,000$ CostsCost of goods sold 3,995,000$ Marketing and administrative costs 1,506,000
Total budgeted costs 5,501,000 Operating profit 1,699,000 Federal and other income taxesa
550,000
Operating profit after taxes 1,149,000$
a Computed by the compay's tax staff
Santiago PantsBudgeted Income Statement
For the Budget Year Ended December 31
12-26
Cash BudgetCash BudgetL.O. 5 Estimate cash flows.
Statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period.
Collections of accounts receivable
Cash sales
Sales of assets
Borrowing
Issuing stock
Other
12-27
Acquire new assets
Cash Budget ContinuedCash Budget Continued
Materials purchases
Manufacturing costs
Operating activities
Debt repayment
Income taxes
Dividends
Other
12-28
Cash Budget ContinuedCash Budget Continued
Cash balance beginning of perioda 830,000$ Receipts
Collections on accountsa 6,840,000 Collection on employee loansa
100,000
Total receipts 6,940,000
Less disbursements
Payments for accounts payablea 1,694,000 Direct labor 1,870,000 Manufacturing overhead requiring cash 540,000 Marketing and administrative costs requiring cash 1,422,000
Payments for federal income taxesb 350,000
Dividendsa 30,000
Reduction in long-term debtsa 23,000 Acquisition of new assetsc
1,470,000
Total disbursements 7,399,000
Budgeted ending cash balance 371,000$
a Estimated by the treasurer's officeb Per discussion with the tax staffc Estimated by the treasurer's office per the capital budget
Santiago PantsCash Budget
For the Budget Year Ended December 31
12-29Cash Collections From Credit Cash Collections From Credit SalesSales
Santiago PantsCollection of Credit
Sales
January sales 500,000$ February sales 450,000$ March sales 600,000$
Cash collected from current month's sales 20 % Cash collected from last month's sales 75Cash discounts taken (percentage of gross sales) 2Written off as a bad debt 3
Total disposition of credit sales in current month 100 %
12-30
Cash Collections ContinuedCash Collections ContinuedSantiago PantsSchedule of Cash Collections
For the Quarter Ended March 31
January February March Total for Quarter
Beginning accounts receivable January 1 500,000$ 500,000$ January sales, $500,000a
100,000 375,000$ 475,000
February sales, $450,000b90,000 337,500$ 427,500
March sales, $600,000c120,000 120,000
Total cash collections 600,000$ 465,000$ 457,500$ 1,522,500$
a 20 percent collected in January, 75 percent collected in February, and 5 percent not collected b 20 percent collected in February, 75 percent collected in March, and 5 percent not collectedc 20 percent collected in March, 75 percent collected in April, and 5 percent not collected
12-31
Santiago PantsCash Disbursements for
Purchases
Cash DisbursementsCash Disbursements
January 120,000$ February 200,000$ March 250,000$
Cash disbursement for current month's purchases 50 %Cash disbursement for prior month's purchases 48Cash discounts taken 2
Total cash disbursement for purchases 100 %
12-32Cash Disbursements Cash Disbursements ContinuedContinued
Santiago PantsSchedule of Cash
DisbursementsFor the Quarter Ended March 31
January February MarchTotal for Quarter
Beginning accounts payable, January 1 256,000$ 256,000$ January purchases, $120,000a 60,000 57,600$ 117,600 February purchases, $200,000b 100,000 96,000$ 196,000 March purchases, $250,000c 125,000 125,000 Additional cash payments 250,000 250,000 250,000 750,000
Total cash disbursements 566,000$ 407,600$ 471,000$ 1,444,600$
a 50 percent paid in January, 48 percent paid in February, and 2 percent discounts taken b 50 percent paid in February, 48 percent paid in March, and 2 percent discounts takenc 50 percent paid in March, 48 percent paid in April, and 2 percent discounts taken
12-33
Budget Balance SheetBudget Balance SheetL.O. 6 Develop budgeted financial statements.
Balance Balance
(January 1) Additions Subtractions (December 31)
AssetsCurrent assets
Casha 830$ 6,940$ 7,399$ 371$
Accounts receivable 540 b 7,200 c 6,840 a 900 b
Inventories 155 d 4,265 e 3,995 f 425 g
Other current assets 161 b - b 100 h 61 b
Total current assets 1,686$ 18,405$ 18,334$ 1,757$
Long-term assets
Property, plant and equipment 1,866 b 1,470 a - b 3,336 b
Less accumulated depreciation (1,246) b (224) i - b (1,470) b
Total assets 2,306$ 19,651$ 18,334$ 3,623$ a From cash budgetb Estimated by personnel in the company's accounting departmentc From budgeted income statement. Assumes that all sales are on accountd From budgeted statement of cost of goods sold, sum of beginning direct materials, work in process, and finished goods inventories ($35 + 0 + $120 = $155)e From budgeted statement of costs of goods sold, sum of materials purchases, direct labor and manufacturing overhead ($1,715 + $1,870 + $680 = $4,265) f From budgeted statement of cost of goods soldg From budgeted statement of cost of goods sold, sum of ending direct materials, work in process, finished goods inventories ($50 + 0 + $375 = $425)h From employee loansi Depreciation of $140 from schedule of budgeted manufacturing overhead plus $84 from the schedule of budgeted marketing and administrative costs
Santiago PantsBudgeted Balance Sheet ($000)
Year Ended December 31
12-34Budget Balance Sheet Budget Balance Sheet ContinuedContinued
Liabilities and shareholders equity
Current liabilities
Accounts payable 256$ b 1,715$ j 1,694$ a 277$ b
Taxes payable 187 b 550 b 350 a 387 b
Current portion of long-term debt 23 b 23 b 23 a 23 b
Total current liabilities 466 2,288 2,067 687
Long-term liabilities 258 b - b 23 b 235 b
Total liabilities 724 2,288 2,090 922
Shareholders equity
Common stock 437 b - b - b 437 b
Retained earnings 1,145 b 1,149 k 30 a 2,264 b
Total shareholders equity 1,582 1,149 30 2,701
Total liabilities and shareholders equity 2,306$ 3,437$ 2,120$ 3,623$
a From cash budgetb Estimated by personnel in the company's accounting departmentj From budgeted statement of cost of goods sold. Accounts payable increases are assumed to be for materials purchases onlyk From budgeted income statement, operating profit after taxes.
12-35
Master Budget for a Master Budget for a Manufacturing FirmManufacturing Firm
Sales Forecast
Production budget
Marketing and administrative
cost budget
Required direct material, direct labor,
and manufacturing overhead budgets
Budgeted cost of goods sold
Budgeted income
statement
Cash budget
Budgeted balance sheet
12-36Budgeting in Service Budgeting in Service OrganizationsOrganizationsL.O. 7 Explain budgeting in service, retail, and wholesale organizations.
Sales Forecast
Labor budget
Marketing and administrative
cost budget
Budgeted cost of services
Budgeted income statement
Cash budget
Budgeted balance sheet
12-37
Budgeting Retail and Wholesale Budgeting Retail and Wholesale OrganizationsOrganizations
Sales Forecast
PurchasesMarketing and administrative
cost budget
Budgeted income statement
Cash budget
Budgeted balance sheet
12-38
Ethical Issues in BudgetingEthical Issues in BudgetingL.O. 8 Explains why ethical issues arise in budgeting.
Budgets can create serious ethical issues for many people. The company must recognize the trade-off between encouraging unbiased reporting by managers and the use of budget information in performance evaluation and rewards.
12-39Budgeting Under Budgeting Under UncertaintyUncertaintyL.O. 9 Explain how to use sensitivity analysis to budget under uncertainty.
Sales Sales Cost of Gross Marketing Operating Price Quantity Revenue Goods Sold Margin & Admin Profit
40$ 150,000 6,000,000$ 3,600,000$ 2,400,000$ 1,483,500$ 916,500$ 45$ 150,000 6,750,000$ 3,600,000$ 3,150,000$ 1,483,500$ 1,666,500$ 50$ 150,000 7,500,000$ 3,600,000$ 3,900,000$ 1,483,500$ 2,416,500$
40$ 160,000 6,400,000$ 3,840,000$ 2,560,000$ 1,506,000$ 1,054,000$ 45$ 160,000 7,200,000$ 3,840,000$ 3,360,000$ 1,506,000$ 1,854,000$ 50$ 160,000 8,000,000$ 3,840,000$ 4,160,000$ 1,506,000$ 2,654,000$
40$ 170,000 6,800,000$ 4,080,000$ 2,720,000$ 1,528,500$ 1,191,500$ 45$ 170,000 7,650,000$ 4,080,000$ 3,570,000$ 1,528,500$ 2,041,500$ 50$ 170,000 8,500,000$ 4,080,000$ 4,420,000$ 1,528,500$ 2,891,500$
Santiago PantsAlternative Budgeting
Scenarios
12-40
Chapter 12Chapter 12