Management AccountingFundamentals
Module 6Absorption and variablecosting and budgeting
Lectures and handouts by:Shirley Mauger, HB Comm, CGA
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Module 6 - Table of Contents
6.1 Absorption and variable costing6.2 Absorption and variable costing income statements6.3 Advantages and disadvantages of absorptions and variable
costing6.4 Impact of JIT inventory methods6.5 Basic framework of budgeting6.6 Advantages of budgets6.7 Preparing the master budget6.8 Computer illustration 6-1: Sales budget and cash collection
scheduleReview question: Variable and absorption costing income stmt.Review question: Variable and absorption costing calculationsReview question: Cash collection schedule, production budgetReview question: Cost of purchases & cash budgetReview question: Cash budgetReview question: Cash disbursementsReview question: Multiple choice
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Part Content
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Part 1
Absorption and variablecosting
Topic 6.1
MA1 – MODULE 6
Part 1 – Absorption and variable costing (Topic 6.1)Explain how absorption costing differs from variable costing,and compute the unit product cost under each method (Level 1)
4
Direct Materials
Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH
Variable Selling and Admin Exp.
Fixed Selling and Admin Exp.
© McGraw-Hill Ryerson Limited., 2004
Product and period costs
Part 1 – Absorption and variable costing (Topic 6.1)Explain how absorption costing differs from variable costing,and compute the unit product cost under each method (Level 1)
5
Direct Materials
Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH
Variable Selling and Admin Exp.
Fixed Selling and Admin Exp.
AbsorptionCosting
ProductCosts
PeriodCosts
© McGraw-Hill Ryerson Limited., 2004
Product and period costs
Part 1 – Absorption and variable costing (Topic 6.1)Explain how absorption costing differs from variable costing,and compute the unit product cost under each method (Level 1)
6
Direct Materials
Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH
Variable Selling and Admin Exp.
Fixed Selling and Admin Exp.
VariableCosting
AbsorptionCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
© McGraw-Hill Ryerson Limited., 2004
Product and period costs
Part 1 – Absorption and variable costing (Topic 6.1)
7
Direct Materials
Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH
Variable Selling and Admin Exp.
Fixed Selling and Admin Exp.
VariableCosting
AbsorptionCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
© McGraw-Hill Ryerson Limited., 2004
Product and period costs
Turn to page 305, exercise 7-1 in the textbook
Exercise 7-1
Part 1 – Absorption and variable costing (Topic 6.1)
8
Direct Materials
Direct Labour
Variable Mftg. OH
Fixed Mftg. OH
Var. Sell. & Ad. Exp.
Fixed Sell. & Ad. Exp.
VariableCosting
AbsorptionCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
© McGraw-Hill Ryerson Limited., 2004
Maxwell Company
$18$ 7
$ 2
$160,000$ 5
$110,000
20,000 units produced
Exercise 7-1
Part 1 – Absorption and variable costing (Topic 6.1)
9
Direct Materials
Direct Labour
Variable Mftg. OH
Fixed Mftg. OH
Var. Sell. & Ad. Exp.
Fixed Sell. & Ad. Exp.
VariableCosting
AbsorptionCosting
ProductCosts$27
PeriodCosts
ProductCosts$35
PeriodCosts
© McGraw-Hill Ryerson Limited., 2004
Maxwell Company
$18$ 7
$ 2
$ 8$ 5
$110,000
20,000 units produced
Exercise 7-1
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Part 2
Absorption and variable costingincome statements
Advantages and disadvantages ofabsorption and variable costing
Impact of JIT inventory methodsTopics 6.2-6.4
MA1 – MODULE 6
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
Prepare income statements using both absorption and variablecosting, and reconcile the two net income figures by observingthe effect of deferred manufacturing overhead costs. (Level 1)
11
Absorptioncosting
Sales $XXCost of goods sold
Beginning inventory $XXAdd: COGM (DM, DL andvariable and fixed OH)
XX
Less: ending inventory (XX) XXGross margin $XXVariable sell. & admin. XXFixed sell & admin. XXNet operating income $XX
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
Prepare income statements using both absorption and variablecosting, and reconcile the two net income figures by observingthe effect of deferred manufacturing overhead costs. (Level 1)
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Variable costing
Sales $XXLess variable expenses:
Beginning inventory XXAdd: variable manufacturing costs XXLess: ending inventory (XX)Variable cost of goods sold $XXVariable sell. & admin. expenses XX XX
Contribution margin $XXFixed manufacturing overhead XXFixed selling & admin. expenses XXNet operating income $XX
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costing
Sales 16,000x$50 $800,000Cost of goods sold
Beginning inventory $ 0Add: COGM (DM, DL andvariable and fixed OH)Less: ending inventory
Gross marginVariable sell. & admin.Fixed sell & admin.Net operating income
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
No beginninginventory
Turn to page 305, exercise 7-1 in the textbook
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
14
Absorption costing
Sales 16,000x$50 $800,000Cost of goods sold
Beginning inventory $ 0Add: COGM (DM, DL andvariable and fixed OH) 20,000x$35 700,000Less: ending inventory 4,000x$35 (140,000) 560,000
Gross marginVariable sell. & admin.Fixed sell & admin.Net operating income
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costing
Sales 16,000x$50 $800,000Cost of goods sold
Beginning inventory $ 0Add: COGM (DM, DL andvariable and fixed OH) 20,000x$35 700,000Less: ending inventory 4,000x$35 (140,000) 560,000
Gross margin $240,000Variable sell. & admin. 16,000x$5 80,000Fixed sel.l & admin. 110,000Net operating income $50,000
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 16,000x$50 $800,000Less variable expenses:
Beginning inventory $ 0Add: variable mftg. costsLess: ending inventoryVariable cost of goods soldVariable sell. & admin. exp.
Contribution marginFixed manufacturing overheadFixed selling & admin. expensesNet operating income
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
No beginninginventory
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 16,000x$50 $800,000Less variable expenses:
Beginning inventory $ 0Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 4,000x$27 (108,000)Variable cost of goods sold $432,000Variable sell. & admin. exp.
Contribution marginFixed manufacturing overheadFixed selling & admin. expensesNet operating income
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 16,000x$50 $800,000Less variable expenses:
Beginning inventory $ 0Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 4,000x$27 (108,000)Variable cost of goods sold $432,000Variable sell. & admin. exp. 16,000x$5 80,000 512,000
Contribution margin $288,000Fixed manufacturing overheadFixed selling & admin. expensesNet operating income
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 16,000x$50 $800,000Less variable expenses:
Beginning inventory $ 0Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 4,000x$27 (108,000)Variable cost of goods sold $432,000Variable sell. & admin. exp. 16,000x$5 80,000 512,000
Contribution margin $288,000Fixed manufacturing overhead 160,000Fixed selling & admin. expenses 110,000Net operating income $ 18,000
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 16,000x$50 $800,000Less variable expenses:
Beginning inventory $ 0Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 4,000x$27 (108,000)Variable cost of goods sold $432,000Variable sell. & admin. exp. 16,000x$5 80,000 512,000
Contribution margin $288,000Fixed manufacturing overhead 160,000Fixed selling & admin. expenses 110,000Net operating income $ 18,000
Exercise 7-1 Prepare an income statement for the year using both the absorptionand variable costing methods.
Compare this with $50,000for absorption costing
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costingoperating income
Variable costingoperating income
Fixed mftg. costs inending inventory(FMOH per unit x
#units)
Fixed mftg. costs inbeginning inventory(FMOH per unit x
#units)
- =-
Reconcile the difference
Exercise 7-1
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costingoperating income
$50,000
Variable costingoperating income
$18,000
Fixed mftg. costs inending inventory
$8X4,000=$32,000
Fixed mftg. costs inbeginning inventory
$0
- =-
Reconcile the difference
Exercise 7-1
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costingoperating income
$50,000
Variable costingoperating income
$18,000
Fixed mftg. costs inending inventory
$8X4,000=$32,000
Fixed mftg. costs inbeginning inventory
$0
- =-
Reconcile the difference
$50,000 - $18,000 = $32,000
In absorption costing, a portion of thefixed cost remains in ending inventory
Exercise 7-1
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Beginning inventory 4,000 unitsAdd: units produced 20,000 unitsUnits available 24,000 unitsUnits sold (18,000) unitsEnding inventory 6,000 units
Exercise 7-1 In the second year of operations, 20,000 units were produced and18,000 were sold. If costs and selling price remain the same, whatwas the net operating income?
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costing
Sales 18,000x$50 $900,000Cost of goods sold
Beginning inventory 4,000 x $35 $140,000Add: COGM (DM, DL andvariable and fixed OH)Less: ending inventory
Gross marginVariable sell. & admin.Fixed sell & admin.Net operating income
Exercise 7-1 In the second year of operations, 20,000 units were produced and18,000 were sold. If costs and selling price remain the same, whatwas the net operating income?
Last period’sending inventory
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costing
Sales 18,000x$50 $900,000Cost of goods sold
Beginning inventory 4,000 x $35 $140,000Add: COGM (DM, DL andvariable and fixed OH) 20,000x$35 700,000Less: ending inventory 6,000x$35 (210,000) 630,000
Gross margin $270,000Variable sell. & admin. 18,000x$5 90,000Fixed sell & admin. 110,000Net operating income $70,000
Exercise 7-1 In the second year of operations, 20,000 units were produced and18,000 were sold. If costs and selling price remain the same, whatwas the net operating income?
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costing
Sales 18,000x$50 $900,000Cost of goods sold
Beginning inventory 4,000 x $35 $140,000Add: COGM (DM, DL andvariable and fixed OH) 20,000x$35 700,000Less: ending inventory 6,000x$35 (210,000) 630,000
Gross margin $270,000Variable sell. & admin. 18,000x$5 90,000Fixed sell & admin. 110,000Net operating income $70,000
Exercise 7-1 In the second year of operations, 20,000 units were produced and18,000 were sold. If costs and selling price remain the same, whatwas the net operating income?
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 18,000x$50 $900,000Less variable expenses:
Beginning inventory 4,000x$27 $108,000Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 6,000x$27 (162,000)Variable cost of goods sold $486,000Variable sell. & admin. exp. 18,000x$5 90,000 576,000
Contribution margin $324,000Fixed manufacturing overhead 160,000Fixed selling & admin. expenses 110,000Net operating income $ 54,000
Exercise 7-1 Prepare an income statement for the second year of operations if20,000 units were produced, and 18,000 were sold
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Variable costing
Sales 18,000x$50 $900,000Less variable expenses:
Beginning inventory 4,000x$27 $108,000Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 6,000x$27 (162,000)Variable cost of goods sold $486,000Variable sell. & admin. exp. 18,000x$5 90,000 576,000
Contribution margin $324,000Fixed manufacturing overhead 160,000Fixed selling & admin. expenses 110,000Net operating income $ 54,000
Exercise 7-1 Prepare an income statement for the second year of operations if20,000 units were produced, and 18,000 were sold
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costingoperating income
$70,000
Variable costingoperating income
$54,000
Fixed mftg. costs inending inventory
$8X6,000=$48,000
Fixed mftg. costs inbeginning inventory
$8 X 4000 = $32,000
- =-
Reconcile the difference
$70,000 - $54,000 = $48,000 – 32,000
In absorption costing, a portion of thefixed cost remains in ending inventory
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Ope
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Production of 20,000 units
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Exercise 7-1 In the third year of operations, 20,000 units were produced and26,000 were sold. If costs and selling price remain the same, whatwas the net operating income?
Beginning inventory 6,000 unitsAdd: units produced 20,000 unitsUnits available 26,000 unitsUnits sold (26,000) unitsEnding inventory 0 units
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Absorption costing
Sales 26,000x$50 $1,300,000Cost of goods sold
Beginning inventory 6,000 x $35 $210,000Add: COGM (DM, DL andvariable and fixed OH) 20,000x$35 700,000Less: ending inventory 0x$35 (0) 910,000
Gross margin $390,000Variable sell. & admin. 26,000x$5 130,000Fixed sell & admin. 110,000Net operating income $150,000
Exercise 7-1 In the third year of operations, 20,000 units were produced and26,000 were sold. If costs and selling price remain the same, whatwas the net operating income?
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
34
Variable costing
Sales 26,000x$50 $1,300,000Less variable expenses:
Beginning inventory 6,000x$27 $162,000Add: variable mftg. costs 20,000x$27 540,000Less: ending inventory 0x$27 (0)Variable cost of goods sold $702,000Variable sell. & admin. exp. 26,000x$5 130,000 832,000
Contribution margin $468,000Fixed manufacturing overhead 160,000Fixed selling & admin. expenses 110,000Net operating income $ 198,000
Exercise 7-1 Prepare an income statement for the second year of operations if20,000 units were produced, and 18,000 were sold
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Ope
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com
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Production of 20,000 units
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Ope
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Production of 20,000 units
When sales < productionabsorption costing
reports higher income.WHY?
Ending inventory storesfixed costs
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
37
Ope
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Production of 20,000 units
When sales > productionabsorption costing
reports lower income.WHY?
Fixed costs stored inending inventory arereleased to COGS
Part 2 – Absorption and variable costing incomestatements (Topic 6.2)
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Ope
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Production of 20,000 units
Part 2 – Advantages and disadvantages of absorptionand variable costing (Topic 6.3)
Explain the advantages and limitations of both the absorptionand variable costing methods. (Level 1)
39
•Accepted standard forexternal reporting
•Focus on full costing
Absorptioncosting
Variablecosting
•Useful for CVP analysis•Fixed costs do notappear to be variable
•Profit is not affected byinventory levels
•Operating income iscloser to cash flows andsales
Part 2 – Impact of JIT inventory methods (Topic 6.4)Explain how the use of JIT inventory methods decrease oreliminates the difference in net income reported under theabsorption and variable costing methods. (Level 1)
40
•The main issue with absorption costing is theeffect of fixed costs stored in ending inventory
•Just in time (JIT) inventory attempts to minimizeinventory on hand
•In a JIT environment absorption and variablecosting methods will show approximately thesame operating income
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Part 3
Basic framework ofbudgeting
Prepare the masterbudget
Topics 6.5-6.7
MA1 – MODULE 6
Part 3 – Basic framework of budgeting (Topic 6.5)Define budgeting and explain the difference between planningand control (Level 2)
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DecisionMaking
Formulating long-and short-term
plans (Planning)
Measuringperformance(Controlling)
Implementing plans (Directingand Motivating)
Comparing actualto plannedperformance(Controlling)
Garrison, Noreen, Chesley, Carroll, Managerial Accounting, 6th Canadian edition, 2004 p. 6
Part 3 – Basic framework of budgeting (Topic 6.5)Define budgeting and explain the difference between planningand control (Level 2)
43
Formulating long-and short-term
plans (Planning)
Comparing actualto plannedperformance(Controlling)
Garrison, Noreen, Chesley, Carroll, Managerial Accounting, 6th Canadian edition, 2004 p. 6 & 383
Budgetcreated
The budget isthe plannedperformance
“A detailed plan for theacquisition and use of financialand other resources over aspecified time period.”
Usually set by a budgetcommittee
Part 3 – Advantages of budgets (Topic 6.6)List the principal advantages of budgeting (Level 2)
44
Advantages of budgeting•Force managers to plan for the future•Communicates management’s plan•Assists with allocating resources•Can foresee problems•Translates goals and objectives into benchmarks
Part 3 – Advantages of budgets (Topic 6.6)List the principal advantages of budgeting (Level 2)
45
Budget periods…•Operating budget – usually 1 year•Often divided into quarters and months•Continuous or perpetual budgets roll forwardone month at a time.
Participative (self imposed) budgets….•Person directly responsible estimates the budget•Must be reviewed by superiors
46
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
Sell & admin.expensebudget
Mftg.overheadbudget
Endinginventorybudget
Directmaterialsbudget
Budgetedincome
statement
Direct labourbudget
Productionbudget
Cash budget
Budgetedbalancesheet
Sales budget
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forecasted units sold X selling price = total sales
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
Sales budget…First Quarter
Jan. Feb. Mar. Qtr.Budgeted sales in units XX XX XX XXX
Selling price per unit $XX $XX $XX $XXTotal sales $X,XXX $X,XXX $X,XXX $X,XXX
Turn to page 1 in ma1_mod6_handout1.pdf andpages 394-402 in the textbook
48
Sales budget…First Quarter
Jan. Feb. Mar. Qtr.Budgeted sales in units XX XX XX XXX
Selling price per unit $XX $XX $XX $XXTotal sales $X,XXX $X,XXX $X,XXX $X,XXX
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
forecasted units sold X selling price = total sales
Used to calculate cashreceipts from customers for
the cash budget
Used for the production budget(purchases budget in retail)
and to calculate variable expenses
First QuarterJan. Feb. Mar. Qtr.
Budgeted sales in units 400 500 700 1,600Add: desired ending inventory 200 260 155 155
Total needs 600 760 855 1,755Less: beginning inventory (170) (200) (260) (170)
Required production 430 560 595 1,585
Production budget…
Budgeted sales + desired ending inventory –beginning inventory= required production
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
49
From thesales budget
First QuarterJan. Feb. Mar. Qtr.
Budgeted sales in units 400 500 700 1,600Add: desired ending inventory 200 260 155 155
Total needs 600 760 855 1,755Less: beginning inventory (170) (200) (260) (170)
Required production 430 560 595 1,585
Production budget…
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
50
Desired endinginventory at the end
of the quarter
Budgeted sales + desired ending inventory –beginning inventory= required production
Beginning inventory isdesired ending inventory
of the previous period
First QuarterJan. Feb. Mar. Qtr.
Budgeted sales in units 400 500 700 1,600Add: desired ending inventory 200 260 155 155
Total needs 600 760 855 1,755Less: beginning inventory (170) (200) (260) (170)
Required production 430 560 595 1,585
Production budget…
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
51
Budgeted sales + desired ending inventory –beginning inventory= required production
Production budget…
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
?
Finished goods
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First QuarterJan. Feb. Mar. Qtr.
Budgeted sales in units 400 500 700 1,600Add: desired ending inventory 200 260 155 155
Total needs 600 760 855 1,755Less: beginning inventory (170) (200) (260) (170)
Required production 430 560 595 1,585
Production budget…
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
Merchandising firm issimilar – except costof inventory is usedinstead of units andthe result is required
‘purchases’.
Beg. Bal. 170
200Desired ending
balance
400 from sales bud.)430
Finished goods
53
First QuarterJan. Feb. Mar. Qtr.
Budgeted sales in units 400 500 700 1,600Add: desired ending inventory 200 260 155 155
Total needs 600 760 855 1,755Less: beginning inventory (170) (200) (260) (170)
Required production 430 560 595 1,585
Production budget…
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
54
Used for the directmaterials and direct
labour budgets
First QuarterJan. Feb. Mar. Qtr.
Budgeted sales in units 400 500 700 1,600Add: desired ending inventory 200 260 155 155
Total needs 600 760 855 1,755Less: beginning inventory (170) (200) (260) (170)
Required production 430 560 595 1,585
Direct materials budget…First Quarter
Jan. Feb. Mar. Qtr.Units to be produced XX XX XX XXX
Raw materials per unit X X X XProduction needs XX XX XX XXX
Add: desired ending inventory XX XX XX XXTotal needs XXX XXX XXX XXX
Less: beginning inventory (XX) (XX) (XX) (XX)Raw materials to purchase XX XX XX XX
Cost per unit of raw materials $X $X $X $XTotal cost for units purchased $XXX $XXX $XXX $XXX
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
55
From the productionbudget
(Units to produce x raw materials per unit) +desired ending inventory – beginninginventory = raw materials to purchase
Direct materials budget…First Quarter
Jan. Feb. Mar. Qtr.Units to be produced XX XX XX XXX
Raw materials per unit X X X XProduction needs XX XX XX XXX
Add: desired ending inventory XX XX XX XXTotal needs XXX XXX XXX XXX
Less: beginning inventory (XX) (XX) (XX) (XX)Raw materials to purchase XX XX XX XX
Cost per unit of raw materials $X $X $X $X Total cost for units purchased $XXX $XXX $XXX $XXX
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
56
Used for the cashbudget
Direct labour budget…First Quarter
Jan. Feb. Mar. Qtr.Units to be produced XX XX XX XXX
Direct labour time per unit X X X XTotal hours of direct labour
requiredXX XX XX XXX
Direct labour cost per hour $XX $XX $XX $XXTotal direct labour cost $XXX $XXX $XXX $XXX
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
57
From the productionbudget
Units to produce x DL time per unit x DL cost perhour = total DL cost
Units to produce x DL time per unit x DL cost perhour = total DL cost
Direct labour budget…First Quarter
Jan. Feb. Mar. Qtr.Units to be produced XX XX XX XXX
Direct labour time per unit X X X XTotal hours of direct labour
requiredXX XX XX XXX
Direct labour cost per hour $XX $XX $XX $XXTotal direct labour cost $XXX $XXX $XXX $XXX
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
58
Used for the cashbudget
Used for themanufacturing
overhead budget
Manufacturing overhead budgetFirst Quarter
Jan. Feb. Mar. Qtr.Budgeted direct labour hours XX XX XX XXX
Variable overhead rate $X $X $X $XVariable mftg. overhead $XXX $XXX $XXX $XXX
Fixed mftg. overhead $XXX $XXX $XXX $XXXTotal mftg. overhead $XXX $XXX $XXX $XXX
Less depreciation $(XXX) $(XXX) $(XXX) $(XXX)Cash disbursements for
overhead $XXX $XXX $XXX $XXX
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
59
From the directlabour budget
(DL hours x variable overhead rate) + FMOH –depreciation = cash disbursements for overhead
Used for the cash budget
Ending finished goods inventory budget
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
60
(Direct materials per unit + Direct labour per unit +manufacturing overhead) x ending finished
goods inventory in units
Ending finished goods inventory (units) XXXUnit product cost $XEnding finished goods inventory in dollars $X,XXX
To the balance sheetand income statement
Selling and administrative expense budget
Part 3 – Preparing the master budget (Topic 6.7)Prepare the master budget (Level 1)
61
(Unit sales x variable sell.& admin. expense perunit) + fixed selling and admin. expenses
First QuarterJan. Feb. Mar. Qtr.
Unit sales XX XX XX XXXVariable selling & administrative
expense per unitX X X X
Variable expense XX XX XX XXXFixed selling and administrative
expenses$XX $XX $XX $XX
Total budgeted selling &administrative expenses
$XXX $XXX $XXX $XXX
To the income statementand the cash budget
From the sales budget
62
Part 4
Prepare the masterbudget
(the cash budget)
Topic 6.7(continued)
MA1 – MODULE 6
63
Cash budget…
• Receipts section• Disbursements section• Cash excess or deficiency section• Financing section
Part 4 – Preparing the master budget (Topic 6.7 continued)Prepare the master budget (Level 1)
Cash budget: April May June Qtr.Cash balance, beginning $2,600 $2,700 $2,020 $2,600Add receipts: Customer collect.
Cash availableLess disbursements
Direct materials purchasesPayrollManufacturing overheadSelling and administrative
Total disbursementsCash avail. over disbursementsFinancing
Borrowings (at beginning)Repayments (at ending)Interest Total financing
Cash balance, ending 64
Part 4 – Preparing the master budget (Topic 6.7 continued)
Cash budget: April May June Qtr.Cash balance, beginning $2,600 $2,700 $2,020 $2,600Add receipts: Customer collect. 18,100 21,720 28,300 68,120
Cash available 20,700 24,420 30,320 70,720Less disbursements
Direct materials purchasesPayrollManufacturing overheadSelling and administrative
Total disbursementsCash avail. over disbursementsFinancing
Borrowings (at beginning)Repayments (at ending)Interest Total financing
Cash balance, ending
Customer collections arecalculated from a schedule of
expected cash collections(see p.394 schedule 1)
65
Part 4 – Preparing the master budget (Topic 6.7 continued)
Cash budget: April May June Qtr.Cash balance, beginning $2,600 $2,700 $2,020 $2,600Add receipts: Customer collect. 18,100 21,720 28,300 68,120
Cash available 20,700 24,420 30,320 70,720Less disbursements
Direct materials purchases 10,800 12,000 18,000 40,800Payroll 2,400 2,400 800 5,600Manufacturing overhead 7,000 7,000 7,000 21,000Selling and administrative 800 1,000 500 2,300
Total disbursements 21,000 22,400 26,300 69,700Cash avail. over disbursementsFinancing
Borrowings (at beginning)Repayments (at ending)Interest Total financing
Cash balance, ending 66
Part 4 – Preparing the master budget (Topic 6.7 continued)
Disbursement figuresare taken from
separate budgets
Cash budget: April May June Qtr.Cash balance, beginning $2,600 $2,700 $2,020 $2,600Add receipts: Customer collect. 18,100 21,720 28,300 68,120
Cash available 20,700 24,420 30,320 70,720Less disbursements
Direct materials purchases 10,800 12,000 18,000 40,800Payroll 2,400 2,400 800 5,600Manufacturing overhead 7,000 7,000 7,000 21,000Selling and administrative 800 1,000 500 2,300
Total disbursements 21,000 22,400 26,300 69,700Cash avail. over disbursements (300) 2,020 4,020 1,020Financing
Borrowings (at beginning)Repayments (at ending)Interest Total financing
Cash balance, ending 67
Part 4 – Preparing the master budget (Topic 6.7 continued)
-=
Cash available minusdisbursements. A negativeresult means $$ may have
to be borrowed.
Cash budget: April May June Qtr.Cash balance, beginning $2,600 $2,700 $2,020 $2,600Add receipts: Customer collect. 18,100 21,720 28,300 68,120
Cash available 20,700 24,420 30,320 70,720Less disbursements
Direct materials purchases 10,800 12,000 18,000 40,800Payroll 2,400 2,400 800 5,600Manufacturing overhead 7,000 7,000 7,000 21,000Selling and administrative 800 1,000 500 2,300
Total disbursements 21,000 22,400 26,300 69,700Cash avail. over disbursements (300) 2,020 4,020 1,020Financing
Borrowings (at beginning) 3,000 -- 3,000Repayments (at ending) -- -- (3,000) (3,000)Interest -- -- (120) (120) Total financing 3,000 -- (3,120) (120)
Cash balance, ending $2,700 $2,020 $900 $900 68
Part 4 – Preparing the master budget (Topic 6.7 continued)
+=
Cash budget: April May June Qtr.Cash balance, beginning $2,600 $2,700 $2,020 $2,600Add receipts: Customer collect. 18,100 21,720 28,300 68,120
Cash available 20,700 24,420 30,320 70,720Less disbursements
Direct materials purchases 10,800 12,000 18,000 40,800Payroll 2,400 2,400 800 5,600Manufacturing overhead 7,000 7,000 7,000 21,000Selling and administrative 800 1,000 500 2,300
Total disbursements 21,000 22,400 26,300 69,700Cash avail. over disbursements (300) 2,020 4,020 1,020Financing
Borrowings (at beginning) 3,000 -- 3,000Repayments (at ending) -- -- (3,000) (3,000)Interest -- -- (120) (120) Total financing 3,000 -- (3,120) (120)
Cash balance, ending $2,700 $2,020 $900 $900 69
Part 4 – Preparing the master budget (Topic 6.7 continued)
70
Budgeted income statement andbalance sheet
•Same format as actual statements•Income statement is based on the operatingbudgets
•Balance sheet is based on the current balancesheet data and then adjusted with the data fromthe other operating budgets.
Part 4 – Preparing the master budget (Topic 6.7 continued)
71
Part 5
Review question:Variable and absorption costing
income statements
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
72
Question 4 March, 2005Handout pages 2 thru 3
a) Prepare in good form a variable costing incomestatement
b) Prepare in good form an absorption costing formatincome statement
c) Prepare a schedule reconciling the net incomes
Part 5 – Review question: Variable and absorptioncosting income statements
Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.
73
Question 4 March, 2005Handout pages 2 thru 3
a) Prepare in good form a variable costing incomestatement
b) Prepare in good form an absorption costing formatincome statement
c) Prepare a schedule reconciling the net incomes
Part 5 – Review question: Variable and absorptioncosting income statements
74
Question 4 March, 2005Handout pages 2 thru 3
a) Prepare in good form a variable costing incomestatement
b) Prepare in good form an absorption costing formatincome statement
c) Prepare a schedule reconciling the net incomes
Part 5 – Review question: Variable and absorptioncosting income statements
75
Part 6
Review question:Variable and absorption costing
calculations
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
76
Question 2 June, 2003Handout pages 4 thru 5
a) Calculate the units sold in fiscal 2002b) Calculate the total contribution margin under
variable costingc) Calculate the gross margin under absorption
costingd) Calculate the cost per unit sold under variable
costinge) Calculate the cost per unit sold under absorption
costing
Part 6 – Review question: Variable and absorptioncosting calculations
Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.
77
Question 2 June, 2003Handout pages 4 thru 5
a) Calculate the units sold in fiscal 2002b) Calculate the total contribution margin under
variable costingc) Calculate the gross margin under absorption
costingd) Calculate the cost per unit sold under variable
costinge) Calculate the cost per unit sold under absorption
costing
Part 6 – Review question: Variable and absorptioncosting calculations
78
Question 2 June, 2003Handout pages 4 thru 5
a) Calculate the units sold in fiscal 2002b) Calculate the total contribution margin under
variable costingc) Calculate the gross margin under absorption
costingd) Calculate the cost per unit sold under variable
costinge) Calculate the cost per unit sold under absorption
costing
Part 6 – Review question: Variable and absorptioncosting calculations
79
Question 2 June, 2003Handout pages 4 thru 5
a) Calculate the units sold in fiscal 2002b) Calculate the total contribution margin under
variable costingc) Calculate the gross margin under absorption
costingd) Calculate the cost per unit sold under variable
costinge) Calculate the cost per unit sold under absorption
costing
Part 6 – Review question: Variable and absorptioncosting calculations
80
Part 7
Review questions:Cash collection schedule
Production budget
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
81
Exercise 9-1 p. 410Handout page 6
1. Prepare a schedule of expected cash collectionsfrom sales by month and in total for the thirdquarter
2. Assume that the company will prepare a budgetedbalance sheet as of September 30. Compute theaccounts receivable as of that date.
Part 7 – Review question: Cash collection schedule,production budget
Stop the audio, read and attempt thequestion in the textbook then come back tolisten to the solution.
82
Exercise 9-2 p. 410Handout page 6
1. Prepare a production budget for the third quartershowing the number of units to be produced eachmonth and for the quarter in total
Part 7 – Review question: Cash collection schedule,production budget
83
Part 8
Review question:Cost of purchases and cash
budget
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
84
Question 5 March, 2004Handout pages 7 thru 8
a. Prepare a cost of purchases schedule for Octoberand November
b. Prepare the cash budgets for October andNovember including the effects of financing
Part 8 – Review question: Cost of purchases and cashbudget
Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.
85
Question 5 March, 2004Handout pages 7 thru 8
a. Prepare a cost of purchases schedule for Octoberand November
b. Prepare the cash budgets for October andNovember including the effects of financing
Part 8 – Review question: Cost of purchases and cashbudget
86
Question 5 March, 2004Handout pages 7 thru 8
a. Prepare a cost of purchases schedule for Octoberand November
b. Prepare the cash budgets for October andNovember including the effects of financing
Part 8 – Review question: Cost of purchases and cashbudget
87
Part 9
Review question:Cash budget
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
88
Question 4 June, 1991Handout pages 9 thru 10
Prepare a cash budget for the month of April
Part 9 – Review question: Cash budget
Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.
89
Part 10
Review question:Cash disbursements
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
90
Question 3 December, 1992Handout page 11
Compute the April cash disbursements for payment ofaccounts payable regarding direct materialspurchased
Part 10 – Review question: Cash disbursements
Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.
91
Part 11
Review questions:Multiple Choice Questions
(download the additional questions handout: ma1_mod6_handout1.pdf)
MA1 – MODULE 6
92
Multiple choice questionsHandout pages 12 thru 14Now working on page 12Q1
a. Cost of the ending finished goods inventoryunder variable costing
b.Cost of the ending finished goods inventoryunder absorption costing
c. Operating profit for the year under absorptioncosting
d.Operating profit for the year under variable costing
Part 11 – Review questions: Multiple choice
Stop the audio, read and attempt thequestion in the handout then come back tolisten to the solution.
93
Multiple choice questionsHandout pages 12 thru 14Now working on page 13
Q2 May variance from the master budget operatingincome
Q3 Expected production in February
Part 11 – Review questions: Multiple choice
94
Multiple choice questionsHandout pages 12 thru 14Now working on page 14
Q4 Which statement regarding variable vs absorptioncosting is true?
Q5 How does the accounting treatment of selling andadministration costs differ between absorption andvariable costing if more units are produced thansold?
Q6 a. What would be inventoriable costs be if Ventoruses variable costing?
b.What would be the inventoriable cost if Ventoruses absorption costing?
Part 11 – Review questions: Multiple choice