Jordan Managment Accounting 51

8/8/2019 Jordan Managment Accounting 51

1/47

Profit Planning


2/47

Learning Objective 1

Understand whyUnderstand whyorganizations budget andorganizations budget andthe processes they use tothe processes they use to

create budgets.create budgets.


3/47

T he Basic Framework of

Budgeting A bud get is a detailed quantitative plan for acquiring and using financial and other resources

over a specified forthcoming time period.

1. T he act of preparing a budget is calledbud geting .

2. T he use of budgets to control anorganizations activity is known asbud getary control .


4/47

P lanning and Control

Planning Planning

involvesinvolvesdevelopingdevelopingobjectives andobjectives andpreparing variouspreparing various

budgets to achievebudgets to achievethese objectives.these objectives.

Control Control

involves the stepsinvolves the stepstaken bytaken bymanagement thatmanagement thatattempt to ensureattempt to ensure

the objectives arethe objectives areattained.attained.


5/47

Advantages of Budgeting

Adv antages

Define goalDefine goaland objectivesand objectives

Uncover potentialUncover potentialbottlenecksbottlenecks

CoordinateCoordinateactivitiesactivities

CommunicateCommunicate

plansplans

T hink about andT hink about and

plan for the futureplan for the future

Means of allocatingMeans of allocatingresourcesresources


6/47

R esponsibility Accounting

Managers should be held responsible for Managers should be held responsible for those itemsthose items andand only only those itemsthose items

thatthatthe manager can actually controlthe manager can actually controlto a significant extent.to a significant extent.


7/47

Choosing the Budget P eriod

Op erating B ud getOp erating B ud get

2005 2006 2007 2008

T he annual operating budgetT he annual operating budgetmay be divided into quarterlymay be divided into quarterlyor monthly budgets.or monthly budgets.

A continuous budget is a A continuous budget is a1212--month budget that rollsmonth budget that rollsforward one month (or quarter)forward one month (or quarter)

as the current month (or quarter)as the current month (or quarter)is completed.is completed.


8/47

S elf-Imposed Budget

A budget is prepared with the full cooperation and A budget is prepared with the full cooperation andparticipation of managers at all levels. A participativeparticipation of managers at all levels. A participative

budget is also known as abudget is also known as a self self--imposed budgetimposed budget ..

S upervisor S upervisor

iddleanagement

S upervisor S upervisor

iddleanagement

Top anagement


9/47

Advantages of S elf-ImposedBudgets

1.1. Individuals at all levels of the organization are viewedIndividuals at all levels of the organization are viewedas members of the team whose judgments are valuedas members of the team whose judgments are valuedby top management.by top management.

2.2. Budget estimates prepared by frontBudget estimates prepared by front- -line managers areline managers areoften more accurate than estimates prepared by topoften more accurate than estimates prepared by topmanagers.managers.

3.3. Motivation is generally higher when individualsMotivation is generally higher when individualsparticipate in setting their own goals than when theparticipate in setting their own goals than when thegoals are imposed from above.goals are imposed from above.

4.4. A manager who is not able to meet a budget imposed A manager who is not able to meet a budget imposedfrom above can claim that it was unrealistic. S elf from above can claim that it was unrealistic. S elf--imposed budgets eliminate this excuse.imposed budgets eliminate this excuse.


10/47

S elf-Imposed Budgets Most companies do not rely exclusively uponMost companies do not rely exclusively upon

self self--imposed budgets in the sense that topimposed budgets in the sense that topmanagers usually initiate the budget processmanagers usually initiate the budget process

by issuing broad guidelines in terms of overallby issuing broad guidelines in terms of overallprofits or sales.profits or sales.


11/47

H uman Factors in Budgeting

T he success of budgeting depends uponT he success of budgeting depends uponthree important factors:three important factors:

1.1. T op management must be enthusiasticT op management must be enthusiasticand committed to the budget process.and committed to the budget process.

2.2. T op management must not use the budgetT op management must not use the budgetto pressure employees or blame themto pressure employees or blame them

when something goes wrong.when something goes wrong.3.3. H ighly achievable budget targets areH ighly achievable budget targets areusually preferred when managers areusually preferred when managers arerewarded based on meeting budgetrewarded based on meeting budgettargets.targets.


12/47

T he Budget Committee

A standing committee responsible A standing committee responsible

for for overall policy matters relating to theoverall policy matters relating to thebudgetbudget

coordinating the preparation of thecoordinating the preparation of thebudgetbudget


13/47

T he Master Budget: An Overview

Pro du ctionBud get

Pro du ctionBud get

Selling an d

Adm

inistrativ

eBud get

Selling an d

Adm

inistrativ

eBud get

DirectMaterialsBud get

DirectMaterialsBud get

Man u fact u ringOv erhea d

Bud get

Man u fact u ringO v erhea d

Bud get

DirectLa b or

Bud get

DirectLa b or

Bud get

CashBud get

CashBud get

SalesBud getSales

Bud get

Bud

geted

Financial Statem

entsBud

geted

Financial Statem

ents

En d ingFinishe d Goo d s

Bud get

En d ingFinishe d Goo d s

Bud get


14/47


P repare a sales budget,P repare a sales budget,including a schedule of including a schedule of

expected cash collections.expected cash collections.


15/47

Budgeting Example R oyal Company is preparing budgets for R oyal Company is preparing budgets for

the quarter ending Junethe quarter ending June 30 30..Budgeted sales for the next five monthsBudgeted sales for the next five months

are:are:Ap rilAp ril 2020,,000000 u nitsu nitsMayMay 5050,,000000 u nitsu nitsJ u neJ u ne 3030,,000000 u nitsu nitsJ u lyJ u ly 2525,,000000 u nitsu nitsAu g u stAu g u st 1515,,000000 u nits.u nits.

T he selling price is $T he selling price is $1010 per unit.per unit.


16/47

T he S ales BudgetT he individual months of April, May, and June aresummed to obtain the total projected sales in units

and dollars for the quarter ended June 30 th


17/47

Expected Cash Collections

All sales are on account. All sales are on account.R oyals collection pattern is:R oyals collection pattern is:

70% collected in the month of sale,70% collected in the month of sale,25% collected in the month following25% collected in the month followingsale,sale,

5% uncollectible.5% uncollectible.T he March 31 accounts receivableT he March 31 accounts receivablebalance of $30,000 will be collected inbalance of $30,000 will be collected infull.full.


18/47



19/47


From the Sales Budget for April.From the Sales Budget for April.


20/47


From the Sales Budget for May.From the Sales Budget for May.


21/47

Q uick Check

What will be the total cash collections for theWhat will be the total cash collections for thequarter?quarter?a. $a. $700700,,000000b. $b. $220220,,000000c. $c. $190190,,000000

d. $d. $905905,,000000


22/47

What will be the total cash collections for theWhat will be the total cash collections for thequarter?quarter?a. $a. $700700,,000000b. $b. $220220,,000000c. $c. $190190,,000000

d. $d. $905905,,000000

Q uick Check


23/47



24/47


P repare aP repare aproduction budget.production budget.


25/47

T he P roduction Budget

Pro du ctionPro du ctionBud getBud get

SalesSalesBud getBud get

an dan dEx p ecte dEx p ecte dCashCash

CollectionsCollections

P roduction must be adequate to meet budgetedP roduction must be adequate to meet budgetedsales and provide for sufficient ending inventory.sales and provide for sufficient ending inventory.


26/47


T he management at R oyal CompanyT he management at R oyal Companywants ending inventory to be equal towants ending inventory to be equal to 20%20%

of the following months budgeted sales inof the following months budgeted sales inunits.units.

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

Lets prepare the production budget.Lets prepare the production budget.


27/47



28/47


March 31March 31ending inventoryending inventory

B ud gete d ay sales 50,000 esire d en d ing in v entory % 20%esire d en d ing in v entory 10,000


29/47

Q uick Check

What is the required production for May?What is the required production for May?a. 56,000 unitsa. 56,000 unitsb. 46,000 unitsb. 46,000 unitsc. 62,000 unitsc. 62,000 unitsd. 52,000 unitsd. 52,000 units


30/47

What is the required production for May?What is the required production for May?a. 56,000 unitsa. 56,000 unitsb. 46,000 unitsb. 46,000 unitsc. 62,000 unitsc. 62,000 unitsd. 52,000 unitsd. 52,000 units

Q uick Check


31/47



32/47


Assumed ending inventory. Assumed ending inventory.


33/47


P repare a direct materialsP repare a direct materialsbudget, including abudget, including a

schedule of expected cashschedule of expected cashdisbursements for disbursements for

purchases of materials.purchases of materials.


34/47

T he Direct Materials Budget AtR oyal Company, At R oyal Company, f ive poundsf ive pounds of materialof material

are required per unit of product.are required per unit of product.Management wants materials on hand at theManagement wants materials on hand at theend of each month equal toend of each month equal to 10%10% of theof thefollowing months production.following months production.

On March 31, 13,000 pounds of material areOn March 31, 13,000 pounds of material areon hand. Material cost ison hand. Material cost is $0.40 $0.40 per pound.per pound.

Lets prepare the direct materials budget.Lets prepare the direct materials budget.


35/47

T he Direct Materials Budget

From production budgetFrom production budget


36/47



37/47


Calculate the materials toCalculate the materials tobe purchased in May.be purchased in May.

March 31 inventoryMarch 31 inventory

10% of following monthsproduction needs.


38/47

Q uick Check

H ow much materials should be purchased inH ow much materials should be purchased inMay?May?a. 221,500 poundsa. 221,500 poundsb. 240,000 poundsb. 240,000 poundsc. 230,000 poundsc. 230,000 pounds

d. 211,500 poundsd. 211,500 pounds


39/47

H ow much materials should be purchased in May?H ow much materials should be purchased in May?a. 221,500 poundsa. 221,500 pounds

b. 240,000 poundsb. 240,000 poundsc. 230,000 poundsc. 230,000 poundsd. 211,500 poundsd. 211,500 pounds

Q uick Check


40/47



41/47


Assumed ending inventory Assumed ending inventory


42/47

Expected Cash Disbursement for Materials

R oyal paysR oyal pays $ $0 0..40 40 per pound per pound for its materials.for its materials.OneOne--hal f hal f of a months purchases is paid for inof a months purchases is paid for inthe month of purchase; the other half is paidthe month of purchase; the other half is paidin the following month.in the following month.T he MarchT he March 3131 accounts payable balance isaccounts payable balance is$$1212,,000000..

Lets calculate expected cash disbursements.Lets calculate expected cash disbursements.


43/47



44/47


140140,,000000 lbs.lbs. $.$.4040/lb. = $/lb. = $5656,,000000

Compute the expected cashCompute the expected cashdisbursements for materialsdisbursements for materials

for the quarter.for the quarter.


45/47

Q uick Check

What are the total cash disbursements for theWhat are the total cash disbursements for thequarter?quarter?

a. $185,000a. $185,000b. $ 68,000b. $ 68,000c. $ 56,000c. $ 56,000

d. $201,400d. $201,400


46/47

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

Q uick Check


47/47


Documents

Jordan Managment Accounting 51