11th Edition Chapter 9

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Profit Planning

Chapter Nine

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The Basic Framework of Budgeting

A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of preparing a budget is called budgeting. 2. The use of budgets to control an organizations activity is known as budgetary control.

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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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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.

A continuous budget is a 12month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.
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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.
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The Budget Committee

A standing committee responsible for
overall policy matters relating to the budget coordinating the preparation of the budget

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The Master Budget: An Overview

Sales Budget Ending Finished Goods Budget Production Budget Direct Materials Budget Direct Labor Budget

Selling and Administrative Budget Manufacturing Overhead Budget

Cash Budget

Budgeted Financial Statements

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

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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

All sales are on account. Royals collection pattern is:
70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible.

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.

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Expected Cash Collections

From the Sales Budget for May.

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Quick Check

What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000

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Quick Check

What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000

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Expected Cash Collections

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The Production Budget

Sales Budget and Expected Cash Collections

Production Budget

Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
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The Production Budget

The management at Royal Company wants
ending inventory to be equal to 20% of the following months budgeted sales in units.

On March 31, 4,000 units were on hand.

Lets prepare the production budget.

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The Production Budget

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The Production Budget

March 31 ending inventory

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Budgeted May sales Desired ending inventory % Desired ending inventory

50,000 20% 10,000

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Quick Check
What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units

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Quick Check
What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units

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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

At Royal Company, five pounds 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 months production. On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound.
Lets 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

March 31 inventory

10% of following months production needs.

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Calculate the materials to by purchased in May.

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Quick Check

How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds

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Quick Check

How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds

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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

Royal pays $0.40 per pound for its materials. One-half of a months purchases is 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.

Lets calculate expected cash disbursements.

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Expected Cash Disbursement for Materials

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Expected Cash Disbursement for Materials

Compute the expected cash disbursements for materials for the quarter. 140,000 lbs. $.40/lb. = $56,000
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Quick Check

What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400

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Quick Check

What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400

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Expected Cash Disbursement for Materials

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The Direct Labor Budget

At Royal, each unit of product requires 0.05 of direct labor.

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 agree to a wage rate of $10 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month. Lets 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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Quick Check
What would be the total direct labor cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000

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Quick Check
What would be the total direct labor cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour April May June worked in excess of 1,500 hours in a month? Quarter Labor hours required 1,300 2,300 1,450 a. $79,500 Regular hours paid 1,500 1,500 1,500 4,500 800 800 b. $64,500 Overtime hours paid c. $61,000 Total regular hours 4,500 $10 $ 45,000 d. $57,000 Total overtime hours 800 $15 $ 12,000
Total pay $ 57,000

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Manufacturing Overhead Budget

At Royal manufacturing overhead is applied to units of product on the basis of direct labor hours.

The variable manufacturing overhead rate is $20 per direct labor hour.
Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets). Lets prepare the manufacturing overhead budget.

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Manufacturing Overhead Budget

Direct Labor Budget

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Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000 = $49.70 per hour* Total labor hours required 5,050

*rounded
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Manufacturing Overhead Budget

Depreciation is a noncash charge.

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End of Chapter 9

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