Profit Planning

SCHEDULE OF CASH COLLECTIONS FROM SALE

A cash collection schedule shows the actual amount of cash received by a firm followed by a predetermined structure. In this problem 9.1, budgeted sales are given at April, May and June, and provided with a cash collection structure, which is:

20% of a month's sale are collected in the month of sale, 70% are collected in the month following sale, and the remaining 10% are collected in the second month following sale.

for instance, in the problem, in the month of may the budgeted sales is $300,000. According to the collection structure given in the problem, the schedule should be as follows:

April May June

(20% of sales collected in the month of sales, so 20% of $300,000)

(70% of sales are collected in the month following sale, so 70% of $300,000)

(remaining 10% are collected in the second month following sale, so 10% of 300,000)

= $60,000 =$210,000 =$30,000

remembering the things above, lets solve 9.1

Notice that though the table starts from April, in the problem there are sales that occurred even before April, Sales of $230,000 in February and in March sales of $260,000.

The schedule starts from May, but let's look what happens for the sales of February and March. As 20% of sales is collected in the month of the sale and 70% in the following month and 10% collected in the second month following,

20% of sales in February is already collected in February

70% of sales in February is already collected in March

10% of sales in February is to be collected in April

as the table starts from April, there is a remaining collection of 10% of February sales in The month of April. Similarly, 20% of sales of March is already collected on march, the remaining 70% has to be collected in the month of April and the last 10% on the month of May.

The solved problem is as follows:

9.1

April may June total

sales in February 23000 23000

sales in march 182000 26000 208000

sales in April 60000 210000 30000 300000

sales in may 100000 350000 450000

sales in June 40000 40000

265000 336000 420000 1021000

The budgeted sales of April are totally covered in the following months, but however, 10% of sales in may (which is to be collected in the month of July) is still remained uncollected plus a total of 80% of sales in June is left uncollected (70% to be collected in July and 10% to be collected in August). THESE UNCOLLECTED CASH PAYMENTS ARE TO BE INCLUDED AS ACCOUNTS RECIEVABLE, which is as follows:

On June 30, accounts receivables:

10% of sales in May (10% of $500,000) 50000

80% of sales in June (80% of $200,000) 160000

Total accounts receivables: $210000

things to remember... Before starting to compute problems that involve cash collection schedules, we should determine whether there are cash to be collected from previous months/quarters/years or any timeline. The cash to be received later which are not added in the schedule, should be treated as accounts receivables.

PRODUCTION BUDGET

A production budget follows the following format:

Budgeted sales

add: Desired Ending Inventory

Total needs

Less: beginning inventory of finished goods

required production

problem 9.2

The problem requires a production budget for the second quarter, which implies that we only prepare a production budget for a quarter, so we only take from April to June to determine the quarter's budget.

April May June 1st quarter

Budgeted sales 50000 75000 90000 215000

At the end of 3 months, in the first quarter, we add up the previous sales, from April to June

Then, according to the format, we plot the desired according inventory, which, according to the given problem is "10% of the following months sales".

so here in this problem, the desired ending inventory of April will be 10% of the following months sales, which is May, so 10% of $75000 IS $7500. similarly for May, the desired ending inventory would be 10% of the sales happened in June, which is 10% of $90000=$9000. For June, 10% of July's sales which would be 10% of $80000=$8000. lets look at the table:


Budgeted sales 50000 75000 90000 215000

add: Desired ending inventory of finished goods

7500 9000 8000 8000

If we look closely, we'll see that the desired ending inventory on the first quarter is not a sum up of the previous desired inventories. because, the DESIRED ENDING INVENTORY OF A QUARTER IS THE LAST MONTH'S ENDING INVENTORY, so, June's desired ending inventory is as well as the quarter's desired inventory, we'll see in a moment.

Now lets add up budgeted sales :


Budgeted sales 50000 75000 90000 215000


7500 9000 8000 8000

Total needs 57500 84000 98000 223000

as the format, we have to deduct the beginning inventory. in the last point, it says that the beginning inventory of a month is the ending inventory of the previous month, so, the beginning inventory of April would be the ending inventory of March, the beginning inventory of May would be the ending inventory of April, and Similarly the beginning inventory of June would be the ending inventory of May,


Budgeted sales 50000 75000 90000 215000


7500 9000 8000 8000

Total needs 57500 84000 98000 223000

less: beginning inventory of finished goods 5000 7500 9000 ????

what would be the Beginning inventory of the quarter? obviously, the beginning inventory of the first quarter would be the beginning inventory of the first month, which is April($5000 is the beginning inventory of April, making it the beginning inventory of the quarter, as the computation for the quarter starts from April.


Budgeted sales 50000 75000 90000 215000


7500 9000 8000 8000

Total needs 57500 84000 98000 223000

less: beginning inventory of finished goods 5000 7500 9000 5000

required production 52500 76500 89000 218000

Direct materials budget

The direct materials budget is usually accompanied by a schedule of cash disbursements (a lot similar to the schedule of cash collection which represents inflows while schedule of cash disbursements represent outflows) for raw materials or merchandise purchases.

The direct materials budget follows the following format:

Required production in (cases/bottles/packets etc)

(X) Raw materials needed per (case/bottle/packet etc) Production needs (in pounds/kg etc)

Add: desired ending inventory of materials Total needs Less: beginning inventory of raw materials Raw materials to be purchased cost of raw materials per (pound/kg etc)

Cost of raw materials to be purchased

ex 9.3

The budgeted production at different timeline are given, which is the required production in bottles in this case.

year 2 year 3

first quarter

second quarter

third quarter

fourth quarter

first

Required production in bottles

60000 90000 150000 100000 70000

then we multiply the required production in bottles and raw materials needed per bottle, and we find the production needs in grams. In the problem, raw materials needed per bottle is 3 Roubles.

year 2 year 3

first quarter

second quarter

third quarter

fourth quarter

first

Required production in bottles

60000 90000 150000 100000 70000

(*) raw materials needed per bottle

3 3 3 3 3

production needs in grams

180000 270000 450000 300000 210000

Now if we go back to the problem we'll see that it demands a direct materials budget by quarter and in total for year 2. so, we'll start computing for the 4 quarters or the year 2 only.

year 2

first quarter

second quarter

third quarter

fourth quarter

Year (4 quarters*3)

production needs in grams 180000 270000 450000 300000 1200000

by adding desired ending inventory we can find total needs. the problem says that the inventory at the end of a quarter must be equal to 20% of the following quarter's production quarter's production needs. so, the desired ending inventory of the first quarter would be 20% of next quarter, similarly for all other quarters. the desired ending inventory for year would be the ending inventory of the last quarter, which is the fourth quarter.

year 2

first quarter

second quarter

third quarter

fourth quarter

Year (4 quarters*3)


(+) desired ending inventory of materials

54000 90000 60000 42000 42000

total needs 234000 360000 510000 342000 1242000

lets deduct beginning inventory from total needs to find out raw materials to be purchased.

according to the problem, some 36000 grams of musk oil will be on hand to start the first quarter of year 2. so the beginning inventory of first quarter would be 36000. we know that the beginning inventory of a quarter is the ending inventory of the previous quarter. so beginning inventory of second quarter would be the ending inventory of first quarter.

and the beginning inventory of year 2? the beginning inventory of the first quarter of the year is the beginning inventory of the year.

year 2

first quarter

second quarter

third quarter

fourth quarter

Year (4 quarters*3)


(+) deired ending inventory of materials

54000 90000 60000 42000 42000

total needs 234000 360000 510000 342000 1242000

(-) beginning inventory 36000 54000 90000 60000 36000

raw materials to be purchased

198000 306000 420000 282000 1206000

according to the problem, per Kilogram of musk oil is 150 roubles, which means that 0.15 roubles per gram. so multiplying raw materials to be purchased in grams and cost of raw materials per gram we get the cost of materials to be purchased.

year 2

first quarter

second quarter

third quarter

fourth quarter

Year (4 quarters*3)


(+) desired ending inventory of materials

54000 90000 60000 42000 42000

total needs 234000 360000 510000 342000 1242000

(-) beginning inventory 36000 54000 90000 60000 36000

raw materials to be purchased

198000 306000 420000 282000 1206000

[cost of raw materials 0.15/gram]

cost of raw materials to be purchased

29700 45900 63000 42300 180900

the problem doesn't demand a schedule of cash disbursements.

DIRECT LABOR BUDGET

very simple format..

required production in units

(*)direct labor hours

total direct labor hours needed (*)diret labor cost per hour

total direct labor cost

EX 9.4

direct labor budget for the first part (1):

year 2 year

first second third fourth

required production in units 8000 6500 7000 7500 29000

(*)direct labor hours 0.35 0.35 0.35 0.35 0.35

total direct labor hours needed 2800 2275 2450 2625 10150

(*)direct labor cost per hour 12 12 12 12 12

total direct labor cost 33600 27300 29400 31500 121800

for the second part, we acquire new information, such as number of regular hours (2600) for which regular wage was 12 and we also find out that for overtime hours, 1.5 times of the regular wage (1.5*$12=$18) will be paid. performing the required calculation for the direct labor budget,

total direct labor hours needed 2800 2275 2450 2625

regular hours 2600 2600 2600 2600

overtime hours 200 - - 25

regular wage ($12 per hour) 31200 31200 31200 31200 124800

overtime wage (1.5*$12 per hour=$18)

3600 - - 450 4050

total direct labor cost 34800 31200 31200 31650 128850

year 2

first second third Fourth

MANUFACTURING OVERHEAD BUDGET

find variable manufacturing overhead

add variable manufacturing overhead and fixed manufacturing overhead to determine total manufacturing overhead

deduct depreciation to figure out cash disbursements for manufacturng overhead.

finally compute predetermined overhead rate for the year

^^budgeted labor hours X variable manufacturing overhead rate= variable manufacturing overhead

^^overhead rate= total manufacturing overhead/budgeted direct labor hours

EX 9.5

1st 2nd 3rd 4th year

Quarter Quarter Quarter Quarter Year

Budgeted direct labor-hours 8000 8200 8500 7800 32500

(X)Variable man. overhead rate 3.25 3.25 3.25 3.25 3.25

Variable manufacturing overhead

26000 26650 27625 25350 105625

(+)Fixed manufacturing overhead

48000 48000 48000 48000 192000

Total manufacturing overhead 74000 74650 75625 73350 297625

(-) depreciation 16000 16000 16000 16000 64000

Cash disbursements for man overhead

58000 58650 59625 57350 233625

| overhead rate: $297625/32500= 9.158 |

SELLING AND ADMINISTRATIVE EXPENSE BUDGET

EX 9.6

1st 2nd 3rd 4th Year

Quarter Quarter Quarter Quarter

budgeted sales In units 15000 16000 14000 13000 58000

variable s&A expense per unit 2.5 2.5 2.5 2.5 2.5

variable s&A expense 37500 40000 35000 32500 145000

fixed s&A expense:

advertising 8000 8000 8000 8000 32000

executive salaries 35,000 35,000 35,000 35,000 140,000

insurance 5000 5000 10000

property taxes 8000 8000

depreciation 20000 20000 20000 20000 80000

total fixed s&A expense 68000 71000 68000 63000 270000

total s&A expense 105500 111000 103000 95500 415000

(-) depreciation 20000 20000 20000 20000 80000

cash disbrsements for s&A expenses

85500 91000 83000 75500 335000

EX 9.7

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Profit Planning