budgeting and profit planning chapter 9 budgeting basics a formal written statement of...
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Budgeting and Profit Planning
Chapter
9
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BUDGETING BASICS
A formal written statement of management’s plans for a specified future time period, expressed in financial terms
Primary way to communicate agreed-upon objectives to all parts of the company
Promotes efficiency
Control device - important basis for performance evaluation once adopted
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BUDGETING BASICS Benefits of Budgeting
Requires all levels of management to plan ahead and formalize goals on a
recurring basis
Provides definite objectives for evaluating performance at each level of
responsibility
Creates an early warning system for potential problems
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BUDGETING BASICS Benefits of Budgeting
Facilitates coordination of activities within the business
Results in greater management awareness of the entity’s overall operations and the impact of external factors
Motivates personnel throughout organization to meet planned objectives
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BUDGETING BASICS Role of Accounting
Historical accounting data on revenues, costs, and expenses help in formulating future budgets
Accountants are normally responsible for presenting management’s budgeting goals in financial terms
The budget and its administration are, however, entirely management’s responsibility
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The Basic Framework of Budgeting
DetailBudget
DetailBudget
DetailBudget
MasterBudget
Summary ofa company’s
plans.
Sales
Pro
du
ction
Materials
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Advantages of Budgeting
Advantages
Communicatingplans
Think about andplan for the future
Means of allocatingresources
Uncover potentialbottlenecks
Coordinateactivities
Define goaland objectives
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Choosing the Budget Period
Operating BudgetOperating Budget
2008 2009 2010 2011
The annual operating budget may be divided into monthly
or quarterly budgets.
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The Perpetual Budget
2008 2009 2010 2011
Continuous or Continuous or Perpetual BudgetPerpetual Budget
This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.
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Participative Budget System
Flow of Budget DataFlow of Budget Data
S u p ervisor S u p ervisor
M id d leM an ag em en t
S u p ervisor S u p ervisor
M id d leM an ag em en t
Top M an ag em en t
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Responsibility Accounting
Managers should be held responsible for those items — and only those items — that
the manager can actually controlto a significant extent.
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The Budget Committee
A standing committee responsible for overall policy matters relating to the budgetcoordinating the preparation of the budget
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Chapter 9 Quiz: Question 1
Which of the following is NOT true about the Master Budget?
a)It is composed of many interrelated budgets.b)It consists of 2 classes of budgets: Operating Budgets and Financial Budgets.c)Within the master budget the first budget to be prepared is the sales budget.d)It constitutes a plan of action for a specified period of time.e)All of the above are true.
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The Master Budget
Selling andAdministrative
Budget
ProductionBudget
EndingInventoryBudget
DirectMaterialsBudget
DirectLabor
Budget
ManufacturingOverhead
Budget
SalesBudget
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The Master Budget
DirectMaterialsBudget
EndingInventoryBudget
ProductionBudget
Selling andAdministrative
Budget
DirectLabor
Budget
ManufacturingOverhead
Budget
CashBudget
SalesBudget
Budgeted Financial
Statements
Budgeted Financial
Statements
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The Sales Budget
A detailed schedule showing expected sales for the budgeted periods expressed in units and dollars.
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The Sales Budget
First budget prepared
Derived from the sales forecast Management’s best estimate of sales revenue for the
budget period Every other budget depends on the sales budget
Prepared by multiplying
expected unit sales volume for each product times
anticipated unit selling price
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Factors considered in Sales Forecasting: General economic conditions Industry trends Market research studies Anticipated advertising and promotion Previous market share Price changes Technological developments
The Sales Budget
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Royal Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units.
The selling price is $10 per unit.
The Sales Budget - Example
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The Sales Budget
April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unitTotal sales
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The Sales Budget
April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10$ 10$ 10$ 10$ Total sales 200,000$ 500,000$ 300,000$ 1,000,000$
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The Production Budget
Sales Sales BudgetBudget
ProductionProductionBudgetBudget
Complete
d
Production must be adequate to meet budgetedsales and provide for sufficient ending inventory.
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Shows the units that must be produced to meet anticipated sales
Derived from sales budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units)
Required production in units formula:
The Production Budget
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The Production Budget
Royal 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.
Let’s prepare the production budget.Let’s prepare the production budget.
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April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 Total needed 30,000 Less beginning inventory 4,000 Required production 26,000
The Production Budget
Budgeted sales 50,000Desired percent 20%Desired inventory 10,000
Budgeted sales 50,000Desired percent 20%Desired inventory 10,000
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April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 Total needed 30,000 Less beginning inventory 4,000 Required production 26,000
The Production Budget
March 31ending inventory
March 31ending inventory
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The Production Budget
April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 6,000 Total needed 30,000 56,000 Less beginning inventory 4,000
Required production 26,000
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April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 6,000 Total needed 30,000 56,000 Less beginning inventory 4,000 10,000
Required production 26,000 46,000
The Production Budget
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April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 6,000 5,000 5,000 Total needed 30,000 56,000 35,000 105,000 Less beginning inventory 4,000 10,000 6,000 4,000
Required production 26,000 46,000 29,000 101,000
The Production Budget
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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 month’s production.
On March 31, 13,000 pounds of material are on hand. Material cost $0.40 per pound. Let’s prepare the direct materials budget.Let’s prepare 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 month’s production.
On March 31, 13,000 pounds of material are on hand. Material cost $0.40 per pound. Let’s prepare the direct materials budget.Let’s prepare the direct materials budget.
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April May June QuarterProduction (units) 26,000 46,000 29,000 101,000 Mat'l per unit (lbs)Production needs
Add desired Ending Inv (lbs)Total neededLess beginning inventory (lbs)Materials to be purchased (lbs)
The Direct Materials Budget
From productionbudget
From productionbudget
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The Direct Materials Budget
April May June QuarterProduction (units) 26,000 46,000 29,000 101,000 Mat'l per unit (lbs) 5 5 5 5 Production needs 130,000 230,000 145,000 505,000
Add desired Ending Inv (lbs)Total neededLess beginning inventory (lbs)Materials to be purchased (lbs)
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April May June QuarterProduction (units) 26,000 46,000 29,000 101,000 Mat'l per unit (lbs) 5 5 5 5 Production needs 130,000 230,000 145,000 505,000
Add desired Ending Inv (lbs) 23,000 Total needed 153,000 Less beginning inventory (lbs)Materials to be purchased
The Direct Materials Budget
10% of the following month’s production 10% of the following month’s production
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April May June QuarterProduction (units) 26,000 46,000 29,000 101,000 Mat'l per unit (lbs) 5 5 5 5 Production needs 130,000 230,000 145,000 505,000
Add desired Ending Inv (lbs) 23,000 Total needed 153,000 Less beginning inventory (lbs) 13,000 Materials to be purchased 140,000
The Direct Materials Budget
March 31 inventory March 31 inventory
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The Direct Materials Budget
April May June QuarterProduction (units) 26,000 46,000 29,000 101,000 Mat'l per unit (lbs) 5 5 5 5 Production needs 130,000 230,000 145,000 505,000
Add desired Ending Inv (lbs) 23,000 14,500 11,500 11,500 Total needed 153,000 244,500 156,500 516,500 Less beginning inventory (lbs) 13,000 23,000 14,500 13,000 Materials to be purchased 140,000 221,500 142,000 503,500
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April May June QuarterProduction (units) 26,000 46,000 29,000 101,000 Mat'l per unit (lbs) 5 5 5 5 Production needs 130,000 230,000 145,000 505,000
Add desired Ending Inv (lbs) 23,000 14,500 11,500 11,500 Total needed 153,000 244,500 156,500 516,500 Less beginning inventory (lbs) 13,000 23,000 14,500 13,000 Materials to be purchased 140,000 221,500 142,000 503,500
The Direct Materials Budget
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Chapter 9 Quiz: Question 2
The Willsey Merchandise Company has budgeted $40,000 in sales for the month of December. The company's cost of goods sold is 30% of sales. If the company has budgeted to purchase $18,000 in merchandise during December, then the budgeted change in inventory levels over the month of December is:
A. $ 6,000 increase.B. $10,000 decrease.C. $22,000 decrease.D. $15,000 increase.
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The Master Budget - Components
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Expected Cash Collections
All sales are on account.Royal’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.
All sales are on account.Royal’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.
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Expected Cash Collections
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Expected Cash Collections
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Expected Cash Collections
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Expected Cash Collections
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Expected Cash Collections
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Chapter 9 Quiz: Question 3
Avril Company collects it’s A/R as follows: 30% in the month of sale 60% in the month following sale 8% in the 2nd month following sale
The following sales are expected: Jan....$100,000 Feb....$120,000 Mar....$110,000
Cash collections in March should be budgeted at:
A. $110,000. C. $105,000. B. $110,800. D. $113,000.
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Expected Cash Disbursement for Materials
Royal pays $0.40 per pound for its materials.
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.
Let’s calculate expected cash Let’s calculate expected cash disbursements.disbursements.
Royal pays $0.40 per pound for its materials.
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 $12,000.
Let’s calculate expected cash Let’s calculate expected cash disbursements.disbursements.
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Expected Cash Disbursement for Materials
April May June QuarterAccounts pay. 3/31 12,000$ 12,000$ April purchases
May purchases
June purchases
Total cash disbursements
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April May June QuarterAccounts pay. 3/31 12,000$ 12,000$ April purchases 50% x $56,000 28,000 28,000 50% x $56,000 28,000$ 28,000 May purchases
June purchases
Total cash disbursements 40,000$
Expected Cash Disbursement for Materials
140,000 lbs. × $.40/lb. = $56,000
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Expected Cash Disbursement for Materials
April May June QuarterAccounts pay. 3/31 12,000$ 12,000$ April purchases 50% x $56,000 28,000 28,000 50% x $56,000 28,000$ 28,000 May purchases 50% x $88,600 44,300 44,300 50% x $88,600 44,300$ 44,300 June purchases
Total cash disbursements 40,000$ 72,300$
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Expected Cash Disbursement for Materials
April May June QuarterAccounts pay. 3/31 12,000$ 12,000$ April purchases 50% x $56,000 28,000 28,000 50% x $56,000 28,000$ 28,000 May purchases 50% x $88,600 44,300 44,300 50% x $88,600 44,300$ 44,300 June purchases 50% x $56,800 28,400 28,400 Total cash disbursements 40,000$ 72,300$ 72,700$ 185,000$
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The Direct Labor Budget
At Royal, each unit of product requires 0.05 hours 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 agreed to a wage rate of $10 per hour regardless of the hours worked (Overtime paid as straight time).
For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.Let’s prepare the direct labor budget.
At Royal, each unit of product requires 0.05 hours 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 agreed to a wage rate of $10 per hour regardless of the hours worked (Overtime paid as straight time).
For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.Let’s prepare the direct labor budget.
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The Direct Labor Budget
From productionbudget
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The Direct Labor Budget
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The Direct Labor Budget
Higher of labor hours requiredor labor hours guaranteed.
Higher of labor hours requiredor labor hours guaranteed.
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The Direct Labor Budget
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Manufacturing Overhead Budget
Royal Company uses a variable manufacturing overhead rate of $1 per unit producedproduced.
Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets).
Let’s prepare the manufacturing Let’s prepare the manufacturing overhead budget.overhead budget.
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April May June QuarterProduction in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costsTotal mfg. OH costsLess noncash costsCash disbursements for manufacturing OH
Manufacturing Overhead Budget
From productionbudget
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Manufacturing Overhead Budget
April May June QuarterProduction in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000 Less noncash costsCash disbursements for manufacturing OH
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Manufacturing Overhead Budget
April May June QuarterProduction in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$ Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$ Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000 Less noncash costs 20,000 20,000 20,000 60,000 Cash disbursements for manufacturing OH 56,000$ 76,000$ 59,000$ 191,000$
Depreciation is a noncash charge.Depreciation is a noncash charge.
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Ending Finished Goods Inventory Budget
Now, Royal can complete the ending finished goods inventory budget.
At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.
Let’s calculate ending finished goods Let’s calculate ending finished goods inventory.inventory.
Now, Royal can complete the ending finished goods inventory budget.
At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.
Let’s calculate ending finished goods Let’s calculate ending finished goods inventory.inventory.
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor Manufacturing overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct materialsbudget and information
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct laborbudget
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units Unit product cost 4.99$ Ending finished goods inventory
Ending Finished Goods Inventory Budget
Total mfg. OH for quarter $251,000 Total labor hours required 5,050 hrs.
= $49.70 per hr. (rounded)
Predetermined Overhead Rate:
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Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
ProductionBudget
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Selling and Administrative Expense Budget
At Royal, 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.
At Royal, 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 $10,000 in costs – primarily depreciation – that are not cash outflows of the current month.
Let’s prepare the company’s selling and administrative expense budget.
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Selling and Administrative Expense Budget
April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000 Variable selling and admin. rate 0.50$ 0.50$ 0.50$ 0.50$ Variable expense 10,000$ 25,000$ 15,000$ 50,000$ Fixed selling and admin. expense 70,000 70,000 70,000 210,000 Total expense 80,000 95,000 85,000 260,000 Less noncash expensesCash disburse- ments for selling & admin.
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Selling and Administrative Expense Budget
April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000 Variable selling and admin. rate 0.50$ 0.50$ 0.50$ 0.50$ Variable expense 10,000$ 25,000$ 15,000$ 50,000$ Fixed selling and admin. expense 70,000 70,000 70,000 210,000 Total expense 80,000 95,000 85,000 260,000 Less noncash expenses 10,000 10,000 10,000 30,000 Cash disburse- ments for selling & admin. 70,000$ 85,000$ 75,000$ 230,000$
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Shows anticipated cash flows
Often considered to be the most important output in preparing financial budgets
Contains three sections:
Cash receipts
Cash disbursements
Financing
Shows beginning and ending cash balances
The Cash Budget
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The Cash Budget
Royal: 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.
Royal: 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 $40,000.
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April May June QuarterBeginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor Mfg. overhead Selling and admin. Equipment purchase DividendsTotal disbursementsExcess (deficiency) of cash available over disbursements
The Cash Budget
Schedule of ExpectedCash Collections
Schedule of ExpectedCash Collections
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April May June QuarterBeginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor Mfg. overhead Selling and admin. Equipment purchase DividendsTotal disbursementsExcess (deficiency) of cash available over disbursements
The Cash Budget
Schedule of ExpectedCash Collections
Schedule of ExpectedCash Collections
Schedule of ExpectedCash Disbursements
Schedule of ExpectedCash Disbursements
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April May June QuarterBeginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase DividendsTotal disbursementsExcess (deficiency) of cash available over disbursements
The Cash Budget
Direct LaborBudget
ManufacturingOverhead Budget
Selling and AdministrativeExpense Budget
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April May June QuarterBeginning cash balance 40,000$ Add cash collections 170,000 Total cash available 210,000 Less disbursements Materials 40,000 Direct labor 15,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000 Total disbursements 230,000 Excess (deficiency) of cash available over disbursements (20,000)$
The Cash Budget
Because Royal maintainsa cash balance of $30,000,
the company mustborrow on itsline-of-credit
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April May June QuarterExcess (deficiency) of Cash available over disbursements (20,000)$ Financing: Borrowing 50,000 Repayments - Interest - Total financing 50,000 Ending cash balance 30,000$ 30,000$ -$ -$
Financing and Repayment
Ending cash balance for Aprilis the beginning May balance.
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CASH BUDGET
Contributes to more effective cash management
Shows managers need for additional financing before actual need arises
Indicates when excess cash will be available
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The Cash BudgetApril May June Quarter
Beginning cash balance 40,000$ 30,000$ Add cash collections 170,000 400,000 Total cash available 210,000 430,000 Less disbursements Materials 40,000 72,300 Direct labor 15,000 23,000 Mfg. overhead 56,000 76,000 Selling and admin. 70,000 85,000 Equipment purchase - 143,700 Dividends 49,000 - Total disbursements 230,000 400,000 Excess (deficiency) of cash available over disbursements (20,000)$ 30,000$
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Financing and Repayment
Because the ending cash balance isexactly $30,000, Royal will not repay
the loan this month.
April May June QuarterExcess (deficiency) of Cash available over disbursements (20,000)$ 30,000$ Financing: Borrowing 50,000 - Repayments - - Interest - - Total financing 50,000 - Ending cash balance 30,000$ 30,000$
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April May June QuarterBeginning cash balance 40,000$ 30,000$ 30,000$ 40,000$ Add cash collections 170,000 400,000 335,000 905,000 Total cash available 210,000 430,000 365,000 945,000 Less disbursements Materials 40,000 72,300 72,700 185,000 Direct labor 15,000 23,000 15,000 53,000 Mfg. overhead 56,000 76,000 59,000 191,000 Selling and admin. 70,000 85,000 75,000 230,000 Equipment purchase - 143,700 48,300 192,000 Dividends 49,000 - - 49,000 Total disbursements 230,000 400,000 270,000 900,000 Excess (deficiency) of cash available over disbursements (20,000)$ 30,000$ 95,000$ 45,000$
The Cash Budget
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April May June QuarterBeginning cash balance 40,000$ 30,000$ 30,000$ 40,000$ Add cash collections 170,000 400,000 335,000 905,000 Total cash available 210,000 430,000 365,000 945,000 Less disbursements Materials 40,000 72,300 72,700 185,000 Direct labor 15,000 23,000 15,000 53,000 Mfg. overhead 56,000 76,000 59,000 191,000 Selling and admin. 70,000 85,000 75,000 230,000 Equipment purchase - 143,700 48,300 192,000 Dividends 49,000 - - 49,000 Total disbursements 230,000 400,000 270,000 900,000 Excess (deficiency) of cash available over disbursements (20,000)$ 30,000$ 95,000$ 45,000$
The Cash Budget
At the end of June, Royal has enough cashto repay the $50,000 loan plus interest at 16%.At the end of June, Royal has enough cash
to repay the $50,000 loan plus interest at 16%.
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April May June QuarterExcess (deficiency) of Cash available over disbursements (20,000)$ 30,000$ 95,000$ 45,000$ Financing: Borrowing 50,000 - - 50,000 Repayments - - (50,000) (50,000) Interest - - (2,000) (2,000) Total financing 50,000 - (52,000) (2,000) Ending cash balance 30,000$ 30,000$ 43,000$ 43,000$
Financing and Repayment
$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 and
repayment of June 30.
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The Budgeted Income Statement
Cash Budget
BudgetedIncome
Statement
Complete
d
After we complete the cash budget, After we complete the cash budget, we can prepare the budgeted income we can prepare the budgeted income
statement for Royal.statement for Royal.
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The Budgeted Income Statement
Royal CompanyBudgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10) 1,000,000$ Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000 Interest expense 2,000 Net income 239,000$
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The Stacy Company makes and sells a single product, Product R. Budgeted sales for April are $300,000. Gross Margin is budgeted at 30% of sales dollars. If the net income for April is budgeted at $40,000, the budgeted selling and administrative expenses are:
A. $133,333.B. $50,000.C. $102,000.D. $78,000.
Chapter 9 Quiz: Question 4
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The Budgeted Income Statement
Stacy CompanyBudgeted Income StatementFor the Month Ended April 30
Sales (Product R) 300,000$ Cost of goods sold (@ 70%) 210,000 Gross margin (@ 30%) 90,000 Selling and administrative expensesNet income 40,000$
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The Budgeted Balance Sheet
Royal reported the following account balances on March 31 prior to preparing
its budgeted financial statements:Land - $50,000Building (net) - $175,000Common stock - $200,000Retained earnings - $146,150
Royal reported the following account balances on March 31 prior to preparing
its budgeted financial statements:Land - $50,000Building (net) - $175,000Common stock - $200,000Retained earnings - $146,150
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Royal CompanyBudgeted Balance Sheet
June 30
Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Building 175,000 Equipment 192,000 Total property and equipment 417,000 Total assets 564,550$
Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$
25%of Junesales of $300,000
25%of Junesales of $300,000
5,000 unitsat $4.99 each5,000 units
at $4.99 each
11,500 lbs.at $0.40/lb.11,500 lbs.at $0.40/lb.
50% of Junepurchases of $56,800
50% of Junepurchases of $56,800
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Royal CompanyBudgeted Balance Sheet
June 30
Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550 Property and equipment Land 50,000 Building 175,000 Equipment 192,000 Total property and equipment 417,000 Total assets 564,550$
Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$
Beginning balance 146,150$ Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$
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Zero-Base Budgeting
Managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The baseline is zero
rather than last year’s budget.
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International Aspects of Budgeting
Multinational companies face special problems when preparing a budget.
Fluctuations in foreign currency exchange rates.High inflation rates in some foreign countries.Differences in local economic conditions.Local governmental policies.
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End of Chapter 9End of Chapter 9