Download - Ch 10 Budgeting
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Budgeting
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Purposes of Budgeting Systems
Budget
a detailed plan,
expressed infinancial terms, thatspecifies how
resources will be
acquired and usedduring a specifiedperiod of time.
Planning
Controlling Profit andOperations
Evaluating Performance
and Providing Incentives
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Types of Budgets
DetailBudget
DetailBudget
DetailBudget
MasterBudget
Covering allphases of
a companysoperations.
Production
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Budgeted Financial Statements
Materialspurchase
budget
CashBudget
Sales of Services or Goods
EndingInventory
BudgetRaw Materials,
Work in Processand Finished
Goods
ProductionBudget
Selling andAdministrative
Budget
DirectLabor
Budget
OverheadBudget
Exh.
9-1
Capitalbudget
Financingbudget
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Sales Budget
Breakers, Inc. is preparing budgets for thequarter ending June 30, 2012.
Budgeted sales for the next five months are:
April 20,000 unitsMay 50,000 units
June 30,000 units
July 25,000 unitsAugust 15,000 units.
The selling price is $10 per unit.
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Sales Budget
April May June Quarter
Budgeted
sales (units) 20,000 50,000 30,000 100,000Selling price
per unit 10$ 10$ 10$ 10$Total
Revenue 200,000$ 500,000$ 300,000$ 1,000,000$
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Production Budget
SalesBudget
ProductionBudget
Production must be adequate to meet budgetedsales and provide for sufficient ending inventory.
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Production Budget
The management of Breakers, Inc. wants endingfinished goods inventory to be equal to 20% ofthe following months budgeted sales in units.
On March 31, 4,000 units were on hand.
Lets prepare the production budget.
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April May June Quarter Sales in units 20,000
Add: desired
end. inventory
Total neededLess: beg.
inventoryUnits to be
produced
Production Budget
From salesbudget
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April May June Quarter Sales in units 20,000
Add: desired
end. inventory 10,000
Total needed 30,000Less: beg.
inventoryUnits to be
started
Production Budget
May sales 50,000 units
Desired percent 20%
Desired inventory 10,000 units
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April May June Quarter Sales in units 20,000
Add: desired
end. inventory 10,000
Total needed 30,000Less: beg.
inventory 4,000Units to be
started 26,000
Production Budget
March 31ending inventory
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April May June Quarter Sales in units 20,000 50,000
Add: desired
end. inventory 10,000 6,000
Total needed 30,000 56,000Less: beg.
inventory 4,000 10,000Units to be
started 26,000 46,000
Production Budget
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April May June Quarter Sales in units 20,000 50,000 30,000 100,000
Add: desired
end. inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000Less: beg.
inventory 4,000 10,000 6,000 4,000Units to be
started 26,000 46,000 29,000 101,000
Production Budget
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Direct-Material Budget
At Breakers, five pounds of material arerequired per unit of product.
Management wants raw materials on hand at
the end of each month equal to 10% of thefollowing months production.
On March 31, 13,000 pounds of material are on
hand. Material cost $.40 per pound.
Lets prepare the direct materials budget.
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April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Materials per unit
Production needs
Add: desired
ending inventory
Total needed
Less: beginning
inventoryMaterials to be
purchased
Direct-Material Budget
From ourproduction
budget
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April May June Quarter
Production in units 26,000 46,000
Materials per unit 5 5
Production needs 130,000 230,000
Add: desired
ending inventory 23,000
Total needed 153,000
Less: beginning
inventoryMaterials to be
purchased
10% of the followingmonths production
Direct-Material Budget
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April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: desired
ending inventory 23,000
Total needed 153,000
Less: beginning
inventory 13,000Materials to be
purchased 140,000
March 31inventory
Direct-Material Budget
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April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: desired
ending inventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less: beginning
inventory 13,000 23,000 14,500 13,000Materials to be
purchased 140,000 221,500 142,000 503,500
Direct-Material Budget
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April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: desired
ending inventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less: beginning
inventory 13,000 23,000 14,500 13,000Materials to be
purchased 140,000 221,500 142,000 503,500
June Ending Inventory
July production in units 23,000
Materials per unit 5Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500
Direct-Material Budget
July ProductionSales in units 25,000
Add: desired ending inventory 3,000
Total units needed 28,000
Less: beginning inventory 5,000
Production in units 23,000
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Direct-Labor Budget
At Breakers, each unit of product requires 0.1 hoursof direct labor.
The Company has a no layoff policy so allemployees will be paid for a minimum of 40 hours of
work each week.
In exchange for the no layoff policy, workers agreedto a wage rate of $8 per hour regardless of the hoursworked (No overtime pay).
For the next three months, the direct labor workforcewill be paid for a minimum of 3,000 hours per month.
Lets prepare the direct labor budget.
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April May June Quarter Production in units 26,000 46,000 29,000 101,000
Direct labor hours
Labor hours required
Guaranteed labor
hoursLabor hours paid
Wage rate
Total direct labot cost
From ourproduction
budget
Direct-Labor Budget
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Direct-Labor Budget
April May June Quarter Production in units 26,000 46,000 29,000 101,000
Direct labor hours 0.10 0.10 0.10 0.10
Labor hours required 2,600 4,600 2,900 10,100
Guaranteed labor
hoursLabor hours paid
Wage rate
Total direct labot cost
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April May June Quarter Production in units 26,000 46,000 29,000 101,000
Direct labor hours 0.10 0.10 0.10 0.10
Labor hours required 2,600 4,600 2,900 10,100
Guaranteed labor
hours 3,000 3,000 3,000Labor hours paid 3,000 4,600 3,000 10,600
Wage rate
Total direct labot cost
This is the greater oflabor hours required orlabor hours guaranteed.
Direct-Labor Budget
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April May June Quarter Production in units 26,000 46,000 29,000 101,000
Direct labor hours 0.10 0.10 0.10 0.10
Labor hours required 2,600 4,600 2,900 10,100
Guaranteed labor
hours 3,000 3,000 3,000Labor hours paid 3,000 4,600 3,000 10,600
Wage rate 8$ 8$ 8$ 8$
Total direct labot cost 24,000$ 36,800$ 24,000$ 84,800$
Direct-Labor Budget
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Overhead Budget
Here is Breakers Overhead Budget for the quarter.
April May June Quarter
Indirect labor 17,500$ 26,500$ 17,900$ 61,900$
Indirect material 7,000 12,600 8,600 28,200Utilities 4,200 8,400 5,200 17,800
Rent 13,300 13,300 13,300 39,900
Insurance 5,800 5,800 5,800 17,400
Maintenance 8,200 9,400 8,200 25,800
56,000$ 76,000$ 59,000$ 191,000$
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Selling and Administrative
Expense Budget
At Breakers, variable selling andadministrative expenses are $0.50 per unitsold.
Fixed selling and administrative expensesare $70,000 per month.
The $70,000 fixed expenses include$10,000 in depreciation expense that doesnot require a cash outflow for the month.
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April May June Quarter
Sales in units 20,000 50,000 30,000 100,000
Variable S&A rate
Variable expense
Fixed S&Aexpense
Total expense
Less: noncash
expenses
Cashdisbursements
Selling and Administrative
Expense Budget
From our
Sales budget
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Selling and Administrative
Expense BudgetApril May June Quarter
Sales in units 20,000 50,000 30,000 100,000
Variable S&A rate 0.50$ 0.50$ 0.50$ 0.50$
Variable expense 10,000$ 25,000$ 15,000$ 50,000$
Fixed S&Aexpense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less: noncash
expenses
Cashdisbursements
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Selling and Administrative
Expense BudgetApril May June Quarter
Sales in units 20,000 50,000 30,000 100,000
Variable S&A rate 0.50$ 0.50$ 0.50$ 0.50$
Variable expense 10,000$ 25,000$ 15,000$ 50,000$
Fixed S&Aexpense 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
Cashdisbursements 70,000$ 85,000$ 75,000$ 230,000$
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At Breakers, all sales are on account.
The companys collection pattern is:
70% collected in the month of sale,25% collected in the month following sale,
5% is uncollected.
The March 31 accounts receivablebalance of $30,000 will be collected in full.
Cash Receipts Budget
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Cash Receipts Budget
April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$
April sales
70% x $200,000 140,000 140,000
25% x $200,000 50,000$ 50,000
Total cash collections 170,000$
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April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$
April sales
70% x $200,000 140,000 140,000
25% x $200,000 50,000$ 50,000
May sales
70% x $500,000 350,000 350,000
25% x $500,000 125,000$ 125,000
June sales
70% x $300,000 210,000 210,000
Total cash collections 170,000$ 400,000$ 335,000$ 905,000$
Cash Receipts Budget
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Cash Disbursement Budget
Breakers pays $0.40 per pound for itsmaterials.
One-half of a months purchases are paid for in
the month of purchase; the other half is paid inthe following month.
No discounts are available.
The March 31 accounts payable balance is$12,000.
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April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000$ 28,000
Total cash payments
for materials 40,000$
140,000 lbs. $.40/lb. = $56,000
Cash Disbursement Budget
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April May June Quarter
Accounts pay. 3/31 12,000$ 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 $56,800 28,400 28,400Total cash payments
for materials 40,000$ 72,300$ 72,700$ 185,000$
Cash Disbursement Budget
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Cash Budget
Breakers: Maintains a 12% open line of credit for $75,000.
Maintains a minimum cash balance of $30,000.
Borrows and repays loans on the last day of themonth.
Pays a cash dividend of $25,000 in April.
Purchases $143,700 of equipment in May and$48,300 in June paid in cash.
Has an April 1 cash balance of $40,000.
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April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
MaterialsDirect labor
Mfg. overhead
Selling and admin.
Equipment purchase
DividendsTotal disbursements
Excess (deficiency) of
Cash available over
disbursements
From our CashReceipts Budget
Cash BudgetContinued
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April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
DividendsTotal disbursements
Excess (deficiency) of
Cash available over
disbursements
From our CashDisbursements
Budget
Cash BudgetContinued
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April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000Direct labor 24,000
Mfg. overhead
Selling and admin.
Equipment purchase
DividendsTotal disbursements
Excess (deficiency) of
Cash available over
disbursements
From our DirectLabor Budget
Cash BudgetContinued
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April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000Direct labor 24,000
Mfg. overhead 56,000
Selling and admin.
Equipment purchase
DividendsTotal disbursements
Excess (deficiency) of
Cash available over
disbursements
From ourOverhead Budget
Cash BudgetContinued
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April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000Direct labor 24,000
Mfg. overhead 56,000
Selling and admin. 70,000
Equipment purchase
DividendsTotal disbursements
Excess (deficiency) of
Cash available over
disbursements
From ourSelling and Administrative
Expense Budget
Cash BudgetContinued
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April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000Direct labor 24,000
Mfg. overhead 56,000
Selling and admin. 70,000
Equipment purchase -
Dividends 25,000Total disbursements 215,000
Excess (deficiency) of
Cash available over
disbursements (5,000)$
To maintain a cashbalance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
Cash BudgetContinued
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April May June Quarter
Excess (deficiency) of
Cash available over
disbursements (5,000)$
Financing:Borrowing 35,000
Repayments -
Interest -
Total financing 35,000
Ending cash balance 30,000$
Ending cash balance for Aprilis the beginning May balance.
Cash BudgetFinancing and Repayment
April May June Quarter
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April May June Quarter
Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000
Direct labor 24,000
Mfg. overhead 56,000
Selling and admin. 70,000
Equipment purchase -
Dividends 25,000
Total disbursements 215,000
Excess (deficiency) ofCash available over
disbursements (5,000)$Excess (deficiency) of
Cash available over
disbursements (5,000)$
Financing:
Borrowing 35,000
Repayments -Interest -
Total financing 35,000
Ending cash balance 30,000$
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April 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 72,300Direct labor 24,000 36,800
Mfg. overhead 56,000 76,000
Selling and admin. 70,000 85,000
Equipment purchase - 143,700
Dividends 25,000 -Total disbursements 215,000 413,800
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$
Cash BudgetContinued
Breakers mustborrow an
addition $13,800to maintain a
cash balanceof $30,000.
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Cash BudgetFinancing and Repayment
April May June Quarter
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$
Financing:Borrowing 35,000 13,800
Repayments - -
Interest - -
Total financing 35,000 13,800
Ending cash balance 30,000$ 30,000$
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April May June Quarter Beginning cash balance 40,000$ 30,000$ 30,000$
Add: cash collections 170,000 400,000 335,000
Total cash available 210,000 430,000 365,000
Less: disbursements
Materials 40,000 72,300 72,700Direct labor 24,000 36,800 24,000
Mfg. overhead 56,000 76,000 59,000
Selling and admin. 70,000 85,000 75,000
Equipment purchase - 143,700 48,300
Dividends 25,000 - -Total disbursements 215,000 413,800 279,000
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$ 86,000$
At the end of June, Breakershas enough cash to repay
the $48,800 loan plus interest
at 12%.
Cash BudgetContinued
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Cash BudgetFinancing and Repayment
April May June Quarter
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$ 86,000$
Financing:Borrowing 35,000 13,800
Repayments - - (48,800)
Interest - - (838)
Total financing 35,000 13,800 (49,638)
Ending cash balance 30,000$ 30,000$ 36,362$
Borrowing RateAnnualInterest
MonthsOutstanding
InterestExpense
35,000$ 12% = 4,200$ 2 mths = 700$
13,800 12% = 1,656 1 mth. = 138
838$
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April May June Quarter
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$ 86,000$ 37,200$
Financing:
Borrowing 35,000 13,800 48,800
Repayments - - (48,800) (48,800)
Interest - - (838) (838)
Total financing 35,000 13,800 (49,638) (838)
Ending cash balance 30,000$ 30,000$ 36,362$ 36,362$
April May June Quarter
Beginning 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: disbursementsMaterials 40,000 72,300 72,700 185,000
Direct labor 24,000 36,800 24,000 84,800
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 25,000 - - 25,000Total disbursements 215,000 413,800 279,000 907,800
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$ 86,000$ 37,200$
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Budgeted Income Statement
CashBudget
BudgetedIncome
Statement
After we complete the cash budget, we can preparethe budgeted income statement for Breakers.
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Budgeted Ending Inventory
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$
Direct labor 0.10 hrs. 8.00$ 0.80
Manufacturing overhead 0.10 hrs. 18.02$ 1.80
4.60$
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost 4.60$
Ending finished goods inventory 23,000$
Total overhead $191,000Total labor hours 10,600 hrs.
= $18.02 per hr.*
*rounded
Manufacturing overhead is applied on the basis of direct labor hours.
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Budgeted Income Statement
Revenue (100,000 $10) 1,000,000$
Cost of goods sold (100,000 $4.60) 460,000
Gross margin 540,000Operating expenses:
Selling and admin. Expenses 260,000$
Interest expense 838
Total operating expenses 260,838
Net income 279,162$
Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
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Budgeted Balance Sheet
Breakers reports the following accountbalances on June 30 prior to preparing its
budgeted financial statements:
Land - $50,000 Building (net) - $148,000
Common stock - $200,000
Retained earnings (beginning of year) -$46,400
Breakers, Inc.
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Budgeted Balance Sheet
June 30
Current assets
Cash 36,362$Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 23,000
Total current assets 138,962
Property and equipment
Land 50,000
Building 148,000
Equipment 192,000
Total property and equipment 390,000
Total assets 528,962$
Accounts payable 28,400$
Common stock 200,000
Retained earnings 300,562
Total liabilities and equities 528,962$
25%of June
sales of$300,000
11,500 lbs. at
$.40 per lb.
5,000 units at$4.60 per unit.
Breakers, Inc.
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Budgeted Balance Sheet
June 30
Current assets
Cash 36,362$Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 23,000
Total current assets 138,962
Property and equipment
Land 50,000
Building 148,000
Equipment 192,000
Total property and equipment 390,000
Total assets 528,962$
Accounts payable 28,400$
Common stock 200,000
Retained earnings 300,562
Total liabilities and equities 528,962$
50% of June
purchasesof $56,800
Beginning balance 46,400$
Add: net income 279,162
Deduct: dividends (25,000)
Ending balance 300,562$
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Flexible Budgets
Hmm! Comparingstatic budgetswith actual costsis like comparing
apples and oranges.
Static budgets areprepared for a single,
planned level ofactivity.
Performanceevaluation is difficult
when actual activitydiffers from theplanned level of
activity.
Static Budgets and
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Static Actual
Budget Results Variance
Machine hours 10,000 8,000 2,000 U
Variable costsIndirect labor 40,000$
Indirect materials 30,000
Power 5,000
Fixed costsDepreciation 12,000
Insurance 2,000
Total overhead costs 89,000$
Static Budgets and
Performance Reports
U = Unfavorable varianceCheese Company wasunable to achieve the
budgeted level of activity.
Static Budgets and
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Static Actual
Budget Results Variance
Machine hours 10,000 8,000 2,000 U
Variable costsIndirect labor 40,000$ 34,000$ $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costsDepreciation 12,000 12,000 0
Insurance 2,000 2,000 0
Total overhead costs 89,000$ 77,300$ $11,700 F
Static Budgets and
Performance Reports
Static Budgets and
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Static Actual
Budget Results Variance
Machine hours 10,000 8,000 2,000 U
Variable costsIndirect labor 40,000$ 34,000$ $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costsDepreciation 12,000 12,000 0
Insurance 2,000 2,000 0
Total overhead costs 89,000$ 77,300$ $11,700 F
Since cost variances are favorable, have
we done a good job controlling costs?
Static Budgets and
Performance Reports
Static Budgets and
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I dont think I cananswer this question
using a static budget.
I do know thatactual activity is belowbudgeted activity which
is unfavorable.
But shouldnt variable costsbe lower if actual activity
is below budgeted activity?
Static Budgets and
Performance Reports
Static Budgets and
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The relevant question is . . .
How much of the favorable cost variance is due tolower activity, and how much is due to good cost
control?
To answer the question,we must
the budget to theactual level of activity.
Static Budgets and
Performance Reports
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Preparing a Flexible Budget
To a budget for different activitylevels, we must know how costs behavewith changes in activity levels.
Total variable costs changein direct proportion tochanges in activity.
Total fixed costs remain
unchanged within therelevant range.
Fixed
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Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00Indirect material 3.00
Power 0.50
Total variable cost 7.50$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Preparing a Flexible Budget
Note that the cost
budgets are prepared
using a cost behavior
format, similar to
variable costing.
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Preparing a Flexible Budget
Variable Total Flexible BudgetsCost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costsIndirect labor 4.00 32,000$
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost 7.50$ 60,000$
Fixed costsDepreciation 12,000$ 12,000$
Insurance 2,000 2,000
Total fixed cost 14,000$
Total overhead costs 74,000$
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Preparing a Flexible Budget
Variable Total Flexible BudgetsCost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costsIndirect labor 4.00 32,000$ 40,000$ 48,000$
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost 7.50$ 60,000$ 75,000$ 90,000$
Fixed costsDepreciation 12,000$ 12,000$ 12,000$ 12,000$
Insurance 2,000 2,000 2,000 2,000
Total fixed cost 14,000$ 14,000$ 14,000$
Total overhead costs 74,000$ 89,000$ 104,000$
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Preparing a Flexible Budget
Variable Total Flexible BudgetsCost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costsIndirect labor 4.00 32,000$ 40,000$ 48,000$
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost 7.50$ 60,000$ 75,000$ 90,000$
Fixed costsDepreciation 12,000$ 12,000$ 12,000$ 12,000$
Insurance 2,000 2,000 2,000 2,000
Total fixed cost 14,000$ 14,000$ 14,000$
Total overhead costs 74,000$ 89,000$ 104,000$
Note: There is no flexin the fixed costs.
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Flexible Budget
Performance ReportVariable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 0
Variable costsIndirect labor 4.00$ 34,000$
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs 7.50$ 63,300$
Fixed Expenses
Depreciation 12,000$ 12,000$
Insurance 2,000 2,000
Total fixed costs 14,000$
Total overhead costs 77,300$
Original actual results forCheese Company that we saw
earlier.
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Flexible Budget
Performance ReportVariable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costsIndirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U
Fixed Expenses
Depreciation 12,000$ 12,000$ 12,000$ 0
Insurance 2,000 2,000 2,000 0
Total fixed costs 14,000$ 14,000$ 0
Total overhead costs 74,000$ 77,300$ $ 3,300 U
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Flexible Budget
Performance ReportVariable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costsIndirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U
Fixed Expenses
Depreciation 12,000$ 12,000$ 12,000$ 0
Insurance 2,000 2,000 2,000 0
Total fixed costs 14,000$ 14,000$ 0
Total overhead costs 74,000$ 77,300$ $ 3,300 U
Indirect labor andindirect material haveunfavorable variancesbecause actual costs
are more than theflexible budget costs.
Fle ible B dget
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Flexible Budget
Performance ReportVariable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costsIndirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U
Fixed Expenses
Depreciation 12,000$ 12,000$ 12,000$ 0
Insurance 2,000 2,000 2,000 0
Total fixed costs 14,000$ 14,000$ 0
Total overhead costs 74,000$ 77,300$ $ 3,300 U
Power has a favorablevariance because the
actual cost is less thanthe flexible budget cost.
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Handout 10 (a):Static and Flexible
Budgetingd
Standard Costs, C-P-V, Flexible Budgets and Analysis of Standard
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Cost Variations
This example provides a comprehensive illustration of standard costing, flexible
budgeting, and analysis of differences between budgeted and actual operating results.
Per Unit Standards, Product X:Sales price $ 100
Quantity Price TotalDirect materials 1 lb. $ 10 $ 10Direct labor 2 hours $ 12 $ 24Variable overhead 2 hours $ 15 $ 30
Total variable cost $ 64Contribution margin $ 36Fixed overhead* 2 hours $ 7.50 $ 15
Gross margin $ 21
* Budgeted annual fixed costs are $ 1,200,000. Budgeted production is 80,000 units.Budgeted direct labor hours are therefore 160,000 (2 x 80,000).Therefore, the fixed overhead rate per labor hour is $7.50 ($1,200,000 / 160,000
DLH).
Static budget and flexible budget
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The static budget is prepared based on the companys budgeted output of 80,000units, using standard sales prices and production costs. The flexible budget uses thesame per-unit standards, at the companys actual output. In substance, the profit
volume equation is an alternative way of expressing the firms flexible budget.Assume that the company has actual output of 100,000 units. The static and flexible
budgets are as follows:
Item
Static budget
(80,000 units)
Flexible budget
(100,000 units)Revenues $100 x 80,000 u. $ 8,000,000 $100 x 100,000 u. $ 10,000,000Directmaterials
$ 10 x 80,000 u. $ 800,000 $ 10 x 100,000u.
$ 1,000,000
Direct labor $ 24 x 80,000 u. $ 1,920,000 $ 24 x 100,000 u. $ 2,400,000Variableoverhead $ 30 x 80,000 u. $ 2,400,000 $ 30 x 100,000 u. $ 3,000,000Contribution $ 36 x 80,000 u. $ 2,880,000 $ 36 x 100,000 u. $ 3,600,000Fixedoverhead
- $ 1,200,000 - $ 1,200,000
Operatingprofit
- $ 1,680,000 - $ 2,400,000
The next step is a comparison of the firms actual revenues and
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expenses to the amounts allowed in theflexible budget.
Item
Actual results
(100,000 units)
Flexible budget
(100,000 units) VarianceRevenues $100 x 100,000 u. $10,000,000 $100 x 100,000 u. $ 10,000,000 $ 0
Direct mat. $ 11 x 105,000 lbs. $ 1,155,000 $10 x 100,000 lbs. $ 1,000,000 $ 155,000 UDirect labor $ 10 x 210,000 dlh. $ 2,100,000 $12 x 200,000 dlh. $ 2,400,000 $ 300,000 FVariableoverhead - $ 3,400,000 $15 x 200,000 dlh. $ 3,000,000 $ 400,000 UContribution - $ 3,345,000 $36 x 100,000 u. $ 3,600,000 $ 255,000 UFixed overhead - $ 1,400,000 - $ 1,200,000 $ 200,000 UOperatingprofit
-$ 1,945,000
-$ 2,400,000 $ 455,000 U
Note that the firms actual profit exceeds the profit in the firmsoriginal static budget by $ 265,000. The flexible budget, however,indicates that profits should have increased by $ 720,000 because ofthe increase in sales. For this reason, management requires asexplanation for the shortfall of $ 455,000 ($ 720,000 - $ 265,000).The analysis of the source of this variation focuses on the variancecolumn above. In a variable costing framework, the following sevenvariances are usually measured:
A. Prime cost variances:
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1. Materials price variance.
2. Materials efficiency variance.
3. Labor rate variance.
4. Labor efficiency variance.
B. Overhead variances:
5. Variable overhead efficiency variance.
6. Variable overhead spending variance.
7. Fixed overhead spending variance.
In an absorption costing framework, the following additional variance is measured:
8. Fixed overhead volume variance. (The economic interpretation of this variance is
not the same as the interpretation of the other seven variances.)
A. Over-all reconciliation of budgeted and actual amounts:
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Static budget $ 1,680,000 Static budget profit $ 1,680,000
Actual results $ 1,945,000 Sales activity variance(fav)
$ 720,000
Total variance $ 265,000 Flexible budget profit $ 2,400,000Actual profit $ 1,945,000
Flexible budget variance(unfav)
$ 455,000
B. Components of the flexible budget variance:
Item Total Price* Quantity*Direct materials $ 155,000 UNF $ 105,000 UNF $ 50,000 UNF
Direct labor $ 300,000 FAV $ 420,000 FAV $ 120,000 UNF
Variable OH $ 400,000 UNF $ 250,000 UNF $ 150,000 UNFFixed OH $ 200,000 UNF $ 200,000 UNF NA
Total $ 455,000 UNF $ 135,000 UNF $ 320,000 UNF
Fixed overheadvolume variance $ 300,000 FAV
Aggregate $ 155,000 UNF
* For purposes of this table, the terms price, rate and spending variances are used as
synonyms; also, the terms quantity, usage and efficiency are used as synonyms.
C. Calculations of the variances shown in the previous table:
Item Price* Quantity*Materials (11-10)*105,000=$ 105,000 U (105,000-100,000)*10=$ 50,000 ULabor (10-12)*210,000=$ 420,000 F (210,000-200,000)*12=$ 120,000 UVOH Plugged U (210,000-200,000)*15=$ 150,000 U
FOH $ 200,000 over budget U
FOH-Vol 20,000u.*2DLH*$ 7.50=$300,000 F
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Handout 10(b)
Industry and market share
variances
Additional Variances
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In addition to the basic variances
examined on the previous slides, manyfirms develop further disaggregations ofsales activity variances. The total
contribution margin variance is oftendisaggregated into three components:(1) contribution margin per unit, (2)industry and (3) market share variances.These variances are defined as follows:
Additional Variances
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Contribution margin per unit variance: Theimpact of the standard cost variances formaterials, labor and variable overhead.
Industry variance: The impact of the change in
inventory sales, holding market share constant.
Market share variance:The impact of the changein market share percentage, given the actual
level of industry sales.
Note: The sum of the industry and market sharevariances is equal to the sales activity variance.
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Handout 10(b): Partition of the sales activity variance into industry and marketshare variances: The sales activity variance measures the change in the flexible
budget total contribution margin that is due to the difference between the budgetedand actual level of sales. The sales activity variance may be partitioned into theportion due to changes in industry sales, and the portion due to changes in marketshare.
Example: Consider the following information:
Expected industry sales 1,000,000 unitsExpected market share 20%Budgeted contribution margin $ 10 per unitActual industry sales 1,100,000 unitsActual market share 15%
Actual contribution margin $ 12 per unit
Expected industry sales 1,000,000 unitsExpected market share 20%Budgeted contribution margin $ 10 per unit
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Budgeted contribution margin $ 10 per unitActual industry sales 1,100,000 unitsActual market share 15%Actual contribution margin $ 12 per unit
Required: Determine the following amounts:
1. Variation between budgeted and actual total contribution margin.
Budgeted contribution margin: ($10) (20% x 1,000,000u) = $2,000,000Actual contribution margin: ($12) (15% x 1,100,000u) = $1,980,000Variance: $ 20,000UNF
Expected industry sales 1,000,000 unitsExpected market share 20%Budgeted contribution margin $ 10 per unit
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Budgeted contribution margin $ 10 per unitActual industry sales 1,100,000 unitsActual market share 15%Actual contribution margin $ 12 per unit
Required: Determine the following amounts:
1. Variation between budgeted and actual total contribution margin.
Budgeted contribution margin: ($10) (20% x 1,000,000u) = $2,000,000Actual contribution margin: ($12) (15% x 1,100,000u) = $1,980,000Variance: $ 20,000UNF
2. Portion of variation due to change in unit contribution margin.
Total contribution margin variance = (ACMSCM) (AQ)= ($12 - $10) (165,000)
= $ 330,000FAV
Expected industry sales 1,000,000 unitsExpected market share 20%Budgeted contribution margin $ 10 per unit
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Budgeted contribution margin $ 10 per unitActual industry sales 1,100,000 unitsActual market share 15%Actual contribution margin $ 12 per unit
Required: Determine the following amounts:
1. Variation between budgeted and actual total contribution margin.
Budgeted contribution margin: ($10) (20% x 1,000,000u) = $2,000,000Actual contribution margin: ($12) (15% x 1,100,000u) = $1,980,000Variance: $ 20,000UNF
2. Portion of variation due to change in unit contribution margin.
Total contribution margin variance = (ACMSCM) (AQ)
= ($12 - $10) (165,000)= $ 330,000FAV
3. Portion of variation due to change in industry sales
Change in industry sales: + 100,000uImpact on contribution margin: ($10) (20% x 100,000u) = $ 200,000FAV
4. Portion of variation due to change in market share
Impact of change in market share = (SMSAMS) ($10 x 1,100,000u)