Managerial Accounting

Profit Planning

Highlights
 

 

Defn Budgeting and its benefits Prepare Various Budgets  Sales Budget  Production  Direct Materials  Mfg Overhead  Selling and Admin  Cash Budgeted Income Statement & Balance Sheet Non-Profit Budgeting

Budgeting and Business Plans

  

Business Plans are required by banks and other lending institutions One of the business plans main focus is the budget Budget = detailed plan outlining acquisition and use of financial resources over a specified period of time Often for financial institutions and other regulating bodies budgets covering 5 year or more are required

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.

Advantages of Budgeting
Define goal and objectives Communicating plans Think about and plan for the future

Advantages
Coordinate activities Uncover potential bottlenecks Means of allocating resources

Budgeting


Responsibility accounting = each manager is held accountable for the results within their control For example individual in charge of purchasing should have a budget for the year with limits

Budgeting - Time Periods



Depends on the purpose of the budget:  land and equipment normally in years  operating budgets often 1 yr. divided into qtrs.  continuous/perpetual budget always 12 month period once a month is complete another added on to the end

Budgeting


 

Involve lower level managers to prepare budgets for their departments instead of all high level budgets Increases commitment levels of all staff, each has some influence on what they are going to be held accountable for budgets then combined and reviewed by high level managers incentive plans can affect the budgeting process - one area might over budgets and another under budget hero syndrome

Budgeting


Budget Committee is often used in large companies Committee responsible for overseeing the budgeting process including: setting deadline, combining all divisions to prepare company budget and resolution of budget disputes

Master Budget


Collection of many sub-budgets to form budgets income statement, balance sheet and cash flow statement many sub-budgets are inter-related (ie sale budget and production)

TYPES OF BUDGETS
The master budget is a formal summary of the companys plans. y It sets specific targets for sales, production, material purchases, and financing activities. y It culminates in projected statements of net income, financial position, and cash flows.

The Master Budget

Sales Budget

Ending Inventory Budget Direct Materials Budget

Production Budget Direct Labour Budget

Selling and Administrative Budget Manufacturing Overhead Budget

Cash Budget

Budgeted Financial Statements

Sales Budget
Starting point for most master budgets often all other budgets are affected in some way by this plan  Detailed schedule of expected sales both in unit and dollars  also attached is cash receipts expectations based on historical A/R payments


Sales Budget
 

Sales forecast normally a starting point Estimates sales based on a combination of the following:
      

past sales pricing levels market research general economic predictions and indicators industry trends and competition advertising plans market share

SCH 1 Prepare Sales Budget

Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are:
QUEEN

April May June July August

20,000 units 50,000 units 30,000 units 25,000 units 15,000 units.

The selling price is $10 per unit.

SCH 1 Sales Budget

April Budgeted sales (units) 20,000 Selling price per unit $ 10 Total sales $ 200,000 May 50,000 $ 10 $ 500,000 June 30,000 $ 10 $ 300,000 Quarter 100,000 $ 10 $ 1,000,000

SCH 2 Expected Sales Collection




All sales are on account. QUEEN s collection pattern is:

70% collected in the month of sale, 25% collected in the month following sale, 5% is uncollectible.

The March 31 accounts receivable balance of $30,000 will be collected in full.

SCH 2 Expected Cash Collections

Accounts rec. - 3/31 April sales 70% x $200,000 140,000 25% x $200,000 May sales 70% x $500,000 25% x $500,000 June sales 70% x $300,000 Total cash collections $ 170,000 April $ 30,000 May June Quarter $ 30,000 140,000 50,000 350,000 125,000 210,000 $ 905,000

$ 50,000 350,000 $ 125,000 210,000 $ 335,000

$ 400,000

Production Budget
Determined by combining beg inventory, budgeted sales and desired ending inventory  Production budget calculated after sales  expressed in units only  desired inventory levels must be carefully planned, excess inventory = tie up funds and storage space/costs, insufficient inventory = lost sales and customers


SCH 3 Production Budget



QUEEN Company

wants ending inventory to be equal to 20% of the following month s budgeted sales in units. On March 31, 4,000 units were on hand.

SCH 3 Production Budget

Budgeted sales Add desired ending inventory Total needed Less beginning inventory Required production April 20,000 10,000 30,000 4,000 26,000 May 50,000 6,000 56,000 10,000 46,000 June 30,000 5,000 35,000 6,000 29,000 Quarter 100,000 5,000 105,000 4,000 101,000

Direct Materials Budget

    

Prepared after production budget Calculates total material requirements remember to include beg inventory materials in calculations need to ensure have desired material to cover production and inventory required once complete cash disbursements section is calculated based on supplier cost and payment terms

Direct Materials Budget

 

  

MRP (Material Requirement Planning) computer assisted tool/model takes order schedule and bill of materials list, and inventory records to produce reports and schedules including stock orders In some cases can prepare Direct Materials Budget Used when a company has complex products or a large variety Focus on how much needs to be ordered, the cost of DM, and payment timing

SCH 4 Direct Materials Budget



At QUEEN Company, five kilograms of material are required per unit of product. Management wants materials on hand at the end of each month equal to 10% of the following month s production. On March 31, 13,000 kilograms of material are on hand. Material cost is $0.40 per kilogram. Let s prepare the direct materials budget.

SCH 4 Direct Materials Budget

Production Materials per unit Production needs Add desired ending inventory Total needed Less beginning inventory Materials to be purchased April 26,000 5 130,000 23,000 153,000 13,000 140,000 May 46,000 5 230,000 14,500 244,500 23,000 221,500 June 29,000 5 145,000 11,500 156,500 14,500 142,000 Quarter 101,000 5 505,000 11,500 516,500 13,000 503,500

SCH 4 Direct Materials Budget

Production Materials per unit Production needs Add desired 23,000 14,500 ending inventory July Total neededProduction and Inventory 153,000 244,500 Sales in units 25,000 Less beginning Add desired ending inventory 3,000 13,000 23,000 inventory Total units be 28,000 Materials toneeded Less beginning inventory 5,000 purchased 140,000 221,500 23,000 Production in units Kilograms per unit 5 Total kilograms, July 115,000 Desired percent 10% Desired ending inventory, June 11,500 April 26,000 5 130,000 May 46,000 5 230,000 June 29,000 5 145,000 11,500 156,500 14,500 142,000 Quarter 101,000 5 505,000 11,500 516,500 13,000 503,500

SCH 5 Direct Materials Budget Cash Disbursements Budget



pays $0.40 per kilogram for its materials.

QUEEN

One-half of a month s purchases are paid for in the month of purchase; the other half is paid in the following month. The March 31 accounts payable balance is $12,000.

SCH 5 Direct Materials Budget Cash Disbursements

Accounts pay. 3/31 April purchases 50% x $56,000 50% x $56,000 May purchases 50% x $88,600 50% x $88,600 June purchases 50% x $56,800 Total cash disbursements April $ 12,000 28,000 $ 28,000 44,300 $ 44,300 28,400 $ 40,000 $ 72,300 $ 72,700 May June Quarter $ 12,000 28,000 28,000 44,300 44,300 28,400 $ 185,000

Direct Labor Budget

    

Dependant on production budgets includes both $$ and hours required can help ID overtime potential and staffing requirements may help prevent layoffs and staff shortages takes hours per unit x no of units

SCH 6 Direct Labor Budget



At QUEEN , each unit of product requires 0.05 hours 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 agreed 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.

SCH 6 Direct Labor Budget

April Production 26,000 Direct labour hours 0.05 Labour hours required 1,300 Guaranteed labour hours 1,500 Labour hours paid 1,500 Wage rate $ 10 Total direct labour cost $ 15,000 May 46,000 0.05 2,300 1,500 2,300 $ 10 $ 23,000 June 29,000 0.05 1,450 1,500 1,500 $ 10 $ 15,000 Quarter 101,000 0.05 5,050 5,300 $ 10 $ 53,000

Mfg Overhead Budget

List all production costs other than DM & DL and a cash flow section  Should be broken down by cost behavior  Note depreciation costs will need to be backed out of cash flow section  often predetermined overhead rates are used for variable mfg OH costs


SCH 7 Mfg Overhead Budget



Company uses a variable manufacturing overhead rate of $1 per unit produced. produced
QUEEN

Fixed manufacturing overhead is $50,000 per month and includes $20,000 of non-cash costs (primarily depreciation of plant assets).

SCH 7 Mfg Overhead Budget

April Production in units 26,000 Variable mfg. OH rate $ 1 Variable mfg. OH costs $ 26,000 Fixed mfg. OH costs 50,000 Total mfg. OH costs 76,000 Less noncash costs 20,000 Cash disbursements for manufacturing OH $ 56,000 May 46,000 $ 1 $ 46,000 50,000 96,000 20,000 June 29,000 $ 1 $ 29,000 50,000 79,000 20,000 Quarter 101,000 $ 1 $ 101,000 150,000 251,000 60,000

$ 76,000

$ 59,000

$ 191,000

Depreciation is a non-cash charge.

Selling & Admin Budget



Contains other expenses incurred in other areas cost should be carefully identified in order to ensure budgeted correctly a cash disbursements section is included in this report

SCH 8 Selling & Admin Budget



At QUEEN , variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $70,000 per month. 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.

SCH 8 Selling & Admin Budget

Budgeted sales Variable selling and admin. rate $ 0.50 Variable expense $ 10,000 Fixed selling and 70,000 admin. expense Total expense 80,000 Less noncash 10,000 expenses Cash disbursements for selling & admin. $ 70,000 April 20,000 May 50,000 $ 0.50 $ 25,000 70,000 95,000 10,000 June 30,000 $ 0.50 $ 15,000 70,000 85,000 10,000 Quarter 100,000 $ 0.50 $ 50,000 210,000 260,000 30,000

$ 85,000

$ 75,000

$ 230,000

Cash Budget


Broken up into shortest possible time periods helps ID cash flow problems and shortages

Cash Budget


 

4 major sections:  receipts  disbursements  cash receipts + beginning cash - disbursements = cash excess or deficit  financing section - outline borrowings, repayments and interest costs Cash Excess - can identify if short term investments should be made Cash Deficit - identifies when financing arrangement need to be made and for how long they are required

SCH 9 Cash Budget

QUEEN :
  

Maintains a 16% open line-of-credit for $75,000. Maintains a minimum cash balance of $30,000. Borrows on the first day of the month and repays loans on the last day of the month. Pays a cash dividend of $49,000 in April. Purchases $143,700 of equipment in May and $48,300 in June paid in cash. Has an April 1 cash balance of $40,000.

 

SCH 9 Cash Budget

Beginning cash balance Add cash collections Total cash available Less disbursements Materials Direct labour Mfg. overhead Selling and admin. Equipment purchase Dividends Total disbursements Excess (deficiency) of cash available over disbursements April $ 40,000 170,000 210,000 40,000 15,000 56,000 70,000 49,000 230,000 May $ 30,000 400,000 430,000 72,300 23,000 76,000 85,000 143,700 400,000 June $ 30,000 335,000 365,000 72,700 15,000 59,000 75,000 48,300 270,000 Quarter $ 40,000 905,000 945,000 185,000 53,000 191,000 230,000 192,000 49,000 900,000

$ (20,000)

$ 30,000

$ 95,000

$ 45,000

SCH 9 Cash Budget

April Excess (deficiency) of Cash available over disbursements Financing: Borrowing Repayments Interest Total financing Ending cash balance May June Quarter

$ (20,000) 50,000 50,000 $ 30,000

$ 30,000 $ 30,000

$ 95,000 (50,000) (2,000) (52,000) $ 43,000

$ 45,000 50,000 (50,000) (2,000) (2,000) $ 43,000

$50,000 16% 3/12 = $2,000 Borrowings on April 1 and repayment of June 30.

Ending Finished Goods Budget



Details the amount & value of ending inventory and cost of goods sold need to decide if using variable cost or absorption costing Use DM, DL and Mfg OH budgets in the calculations

SCH 10 Production Cost per Unit

Production costs per unit Quantity Cost Direct materials 5.00 kgs $ 0.40 Direct labour 0.05 hrs. $ 10.00 Manufacturing overhead 0.05 hrs. $ 49.70 Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory Total 2.00 0.50 2.49 4.99

4.99

Total mfg. OH for quarter Total labor hours required

$251,000 = $49.70 per hr.* 5,050 hrs. *rounded

SCH 11 Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Direct materials 5.00 kgs. $ 0.40 Direct labour 0.05 hrs. $ 10.00 Manufacturing overhead 0.05 hrs. $ 49.70 Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory Total $ 2.00 0.50 2.49 $ 4.99 5,000 $ 4.99 $ 24,950

Production Budget

Budget Income Statement and Balance Sheet



Can be prepared using information from previous discussed budgets Prior years financial statements are also required

SCH 12

Budgeted Income Statement

QUEEN Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) Cost of goods sold (100,000 @ $4.99) Gross margin Selling and administrative expenses Operating income Interest expense Net income $ 1,000,000 499,000 501,000 260,000 241,000 2,000 $ 239,000

SCH 13
QUEEN

Budgeted Balance Sheet

reported the following account balances on June 30 prior to preparing its budgeted financial statements:

Land - $50,000  Building (net) - $175,000  Common stock - $200,000  Retained earnings - $146,150


QUEEN Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Building Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ 43,000 75,000 4,600 24,950 147,550

25%of June sales of $300,000 11,500 kg at $0.40/kg 5,000 units at $4.99 each

50,000 175,000 192,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550

50% of June purchases of $56,800

QUEEN Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Building Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ 43,000 75,000 Beginning balance 4,600 Add: net income 24,950 Deduct: dividends Ending balance 147,550

$146,150 239,000 (49,000) $336,150

50,000 175,000 192,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550

Budgeting Challenges


Foreign currency can provide significant differences budget numbers to actual numbers Changes in economic conditions and trade disputes

Budgeting For Non-Profits



 

Critical for non-profits to obtain grants and often required for large donations government organizations budgets are required to obtain spending authority accountability is important budgets can be done by program or by expenditures (ie. List all cost regardless of program) Helps ID where funds are needed or how much funds need to be raised