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© 2012 McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & Yuen
Profit Planning
Chapter 10
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2
Learning Objective 1
Understand why organizations budget and the processes they use to
create budgets.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 3
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called budgeting.
2. The use of budgets to control an organization’s activities is known as budgetary control.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 4
Planning and Control
Planning – involves developing objectives and preparing various budgets to achieve those objectives.
Planning – involves developing objectives and preparing various budgets to achieve those objectives.
Control – involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal.
Control – involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 5
Advantages of Budgeting
Advantages
Define goalsand objectives
Uncover potentialbottlenecks
Coordinateactivities
Communicateplans
Think about andplan for the future
Means of allocatingresources
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 6
Responsibility Accounting
Managers should be held responsible for those items - and only those items -
that they can actually control to a significant
extent.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 7
Choosing the Budget Period
Operating Budget
2011 2012 2013 2014
Operating budgets ordinarily cover a one-year period
corresponding to a company’s fiscal year. Many companies divide their annual budget
into four quarters.
A continuous budget is a12-month budget that rolls
forward one month (or quarter)as the current month (or quarter)
is completed.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 8
Learning Objective 2
Understand Basic Budgeting Terms and the
Behavioral Aspects of Budgeting.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 9
Bottom-up and Top-down BudgetingBottom-up budgeting
(Self-imposed budget or Participative
budget )
Top-down budgeting
Top Management
Middle Management
Lower-levelManagement
Top Management
Middle Management
Lower-levelManagement
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 10
Advantages of the Bottom-up Budgeting (Self-Imposed Budgets)
1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management.
2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.
3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.
4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.
1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management.
2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.
3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.
4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 11
How to overcome problems of self-imposed budgets
Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack (or budget
padding).”
Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare
budgets that meet those targets.
Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack (or budget
padding).”
Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare
budgets that meet those targets.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 12
Advantages of the Top-down Budgeting
1. Avoid the potential budgetary slack (budget padding).
2. Provide a clearer performance goals and expectations from the top management.
3. May provide better budget due to top management’s access to privileged/confidential market and organization information .
4. Provide an efficient budgetary process.
1. Avoid the potential budgetary slack (budget padding).
2. Provide a clearer performance goals and expectations from the top management.
3. May provide better budget due to top management’s access to privileged/confidential market and organization information .
4. Provide an efficient budgetary process.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 13
Budget Lapsing
• A popular method among government agencies, universities and organizations relying on allocated funds.
• Any unused funding at the end of the financial period cannot be carried forward to the following year.
• As a result, the following year’s budget may be cut because of the under-expenditure in the previous year.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 14
Budget Lapsing: Advantages
• Budget lapsing helps ensure that the appropriate level of resources is utilized in each period. Without budget lapsing, risk-averse managers may unnecessarily accumulate funds and this may adversely affect the performance of the organization.
• It helps provide an opportunity for a clean cut-off of expenditures and to reallocate any unused resources for other more appropriate requirements.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 15
Budget Lapsing: Potential Problem & Solution
• Budget lapsing can cause undesired behavior effects. For example, managers may wastefully spend their entire budget before the end of the period in order to avoid budget cuts.
• A system of reviewing the expenditures near end of the period may uncover unnecessary expenditures and discourage managers to wastefully spend because of budget lapsing.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 16
Incremental versus Zero-based Budgets
• Incremental method of budgeting is most commonly used by companies. Companies start off one year’s budget by referring back to the previous year’s figures. Adjustments are then made to the budget to account for the expected changes such as prices for the next year.
• While incremental method of budgeting is practical and fast, any inefficiency in the previous year’s figures may be carried forward. For example, if all along the organization is over staffed, then the budget will continually to be allowing for the over staffing situation under this method.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 17
Incremental versus Zero-based Budgets
• Zero-Based Budgets are prepared based on the assumption that the company has just started. Therefore, resources required have to be justified from scratch.
• For example, when budgeting for staff cost for a restaurant, managers using the zero-based budgeting approach will ignore the existing staff level and expenses, rather, they will examine factors such as opening hours, number of tables, expected patron numbers to work out the number of staff required at each position and level, hence the associate costs, to produce a budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 18
Incremental versus Zero-based Budgets
• Companies using the zero-based method do not simply ignore previous years’ figures. Figures generated by the zero-based method are usually compared with previous years’ figures. Any large differences are investigated.
• As zero-based budgeting is time consuming and costly, companies tend to use this method for the relatively large items and the incremental method for the rest.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 19
Top Management Attitude:Human Factors in Budgeting
The success of a budget program depends on three important factors:1. Top management must be enthusiastic and
committed to the budget process.2. Top management must not use the budget to
pressure employees or blame them when something goes wrong.
3. Budget targets should be challenging but achievable in order to have good motivational effects.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 20
The Budget Committee
A standing committee responsible for overall policy matters relating to the
budget coordinating the preparation of the
budget resolving disputes related to the
budget approving the final budget
A standing committee responsible for overall policy matters relating to the
budget coordinating the preparation of the
budget resolving disputes related to the
budget approving the final budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 21
Learning Objective 3
Understand the Key Components of Master
Budget in Manufacturing, Merchandising and Service Industries
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 22
Understand the key components of master budget in Manufacturing, Merchandising, and Service Industries
The first step of budgeting for every business is to budget for the revenue, whether it is a sales budget for providing goods or services or a funding budget. Although operational budgets are adapted according to the industries, they are very similar and typically comprise of budgets for • Income statement• Cash• Balance sheet.
The major differences of different industries include:• Manufacturing: production budget is involved• Merchandising: no production budget, only purchase budget of
merchandise is required.• Service Industries: budget for revenue and cost of providing
services• Not-for-profit: expected funding available and plan usage of funding.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 23
Learning Objective 4
Prepare a Master Budget for a Manufacturing
Company.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 24
The Master Budget: An Overview
Production budget
Selling andadministrative
budget
Direct materialsbudget
Manufacturingoverhead budget
Direct laborbudget
Cash Budget
Sales budget
Ending inventorybudget
Budgetedbalance sheet
Budgetedincome
statement
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 25
Learning Objective 4 (a)
Prepare a sales budget, including a schedule of
expected cash collections.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 26
Budgeting Example
Royal Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units.
The selling price is $10 per unit.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 27
The Sales Budget
The individual months of April, May, and June are summed to obtain the total budgeted sales in units
and dollars for the quarter ended June 30th
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 28
Expected Cash Collections
All sales are on account.Royal’s collection pattern is:
70% collected in the month of sale, 25% collected in the month following
sale, 5% uncollectible.
The March 31 accounts receivable balance of $30,000 will be collected in full.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 29
Expected Cash Collections
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 30
Expected Cash Collections
From the Sales Budget for April.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 31
Expected Cash Collections
From the Sales Budget for May.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 32
Quick Check
What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 33
What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 34
Expected Cash Collections
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 35
Learning Objective 4 (b)
Prepare a production budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 36
The Production Budget
ProductionBudget
Sales Budget
andExpected
CashCollections
Complete
d
The production budget must be adequate to meet budgeted sales and to provide for
the desired ending inventory.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 37
The Production Budget
The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.
On March 31, 4,000 units were on hand.
Let’s prepare the production budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 38
The Production Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 39
The Production Budget
March 31ending inventory
March 31ending inventory
Budgeted May sales 50,000
Desired ending inventory % 20%Desired ending inventory 10,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 40
Quick Check
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 41
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 42
The Production Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 43
The Production Budget
Assumed ending inventory.Assumed ending inventory.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 44
Learning Objective 4 (c)
Prepare a direct materials budget, including a
schedule of expected cash disbursements for
purchases of materials.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 45
The Direct Materials Budget
At Royal Company, five pounds of material are required per unit of product.
Management wants materials on hand at the end of each month equal to 10% of the following month’s production.
On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound.
Let’s prepare the direct materials budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 46
The Direct Materials Budget
From production budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 47
The Direct Materials Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 48
The Direct Materials Budget
Calculate the materials tobe purchased in May.
March 31 inventoryMarch 31 inventory
10% of following month’s production needs.
10% of following month’s production needs.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 49
Quick Check
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 50
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 51
The Direct Materials Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 52
The Direct Materials Budget
Assumed ending inventoryAssumed ending inventory
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 53
Expected Cash Disbursement for Materials
Royal pays $0.40 per pound for its materials. One-half of a month’s purchases is paid for in the
month of purchase; the other half is paid in the following month.
The March 31 accounts payable balance is $12,000.
Let’s calculate expected cash disbursements.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 54
Expected Cash Disbursement for Materials
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 55
Expected Cash Disbursement for Materials
140,000 lbs. × $0.40/lb. = $56,000140,000 lbs. × $0.40/lb. = $56,000
Compute the expected cashdisbursements for materials
for the quarter.
Compute the expected cashdisbursements for materials
for the quarter.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 56
Quick Check
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 57
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 58
Expected Cash Disbursement for Materials
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 59
Learning Objective 4 (d)
Prepare a direct labor budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 60
The Direct Labor Budget
At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor.
The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.
For purposes of our illustration assume that Royal has a “no layoff” policy, workers are pay at the rate of $10 per hour regardless of the hours worked.
For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 61
The Direct Labor Budget
From production budget.From production budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 62
The Direct Labor Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 63
The Direct Labor Budget
Greater of labor hours requiredor labor hours guaranteed.
Greater of labor hours requiredor labor hours guaranteed.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 64
The Direct Labor Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 65
Quick Check
What would be the total direct labor cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500b. $64,500c. $61,000d. $57,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 66
What would be the total direct labor cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500b. $64,500c. $61,000d. $57,000
Quick Check
April May June QuarterLabor hours required 1,300 2,300 1,450 Regular hours paid 1,500 1,500 1,500 4,500
Overtime hours paid - 800 - 800
Total regular hours 4,500 $10 45,000$ Total overtime hours 800 $15 12,000$
Total pay 57,000$
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 67
Learning Objective 4 (e)
Prepare a manufacturing
overhead budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 68
Manufacturing Overhead Budget
At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.
The variable manufacturing overhead rate is $20 per direct labor hour.
Fixed manufacturing overhead is $50,000 per month, which includes $20,000 of noncash costs (primarily depreciation of plant assets).
Let’s prepare the manufacturing overhead budget.
At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.
The variable manufacturing overhead rate is $20 per direct labor hour.
Fixed manufacturing overhead is $50,000 per month, which includes $20,000 of noncash costs (primarily depreciation of plant assets).
Let’s prepare the manufacturing overhead budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 69
Manufacturing Overhead Budget
Direct Labor Budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 70
Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000Total labor hours required 5,050
= $49.70 per hour *
* rounded
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 71
Manufacturing Overhead Budget
Depreciation is a noncash charge.Depreciation is a noncash charge.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 72
Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
Direct materialsbudget and information.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 73
Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
Direct labor budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 74
Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory ?
Ending Finished Goods Inventory Budget
Total mfg. OH for quarter $251,000Total labor hours required 5,050
= $49.70 per hour *
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 75
Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
Production Budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 76
Learning Objective 4 (f)
Prepare a selling and administrative
expense budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 77
Selling and Administrative Expense Budget At Royal, the selling and administrative expense budget is
divided into variable and fixed components. The variable selling and administrative expenses are $0.50
per unit sold. Fixed selling and administrative expenses are $70,000 per
month. The fixed selling and administrative expenses include
$10,000 in costs – primarily depreciation – that are not cash outflows of the current month.
Let’s prepare the company’s selling and administrative expense budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 78
Selling and Administrative Expense Budget
Calculate the selling and administrativecash expenses for the quarter.
Calculate the selling and administrativecash expenses for the quarter.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 79
Quick Check
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 80
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 81
Selling Administrative Expense Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 82
Learning Objective 4 (g)
Prepare a cash budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 83
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash received from financing;
2. Cash disbursements section consists of all cash payments excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and
4. Financing section details the borrowings and repayments projected to take place during the budget period.
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash received from financing;
2. Cash disbursements section consists of all cash payments excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and
4. Financing section details the borrowings and repayments projected to take place during the budget period.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 84
The Cash Budget
Assume the following information for Royal: Maintains a 16% open line of credit for
$75,000 Maintains a minimum cash balance of
$30,000 Borrows on the first day of the month and
repays loans on the last day of the month Pays a cash dividend of $49,000 in April Purchases $143,700 of equipment in May
and $48,300 in June (both purchases paid in cash)
Has an April 1 cash balance of $40,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 85
The Cash Budget
Schedule of ExpectedCash Collections.
Schedule of ExpectedCash Collections.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 86
The Cash Budget
Direct LaborBudget.
Direct LaborBudget.
ManufacturingOverhead Budget.
ManufacturingOverhead Budget.
Selling and AdministrativeExpense Budget.
Selling and AdministrativeExpense Budget.
Schedule of ExpectedCash Disbursements.Schedule of ExpectedCash Disbursements.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 87
The Cash Budget
Because Royal maintainsa cash balance of $30,000,the company must borrow
$50,000 on its line-of-credit.
Because Royal maintainsa cash balance of $30,000,the company must borrow
$50,000 on its line-of-credit.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 88
The Cash Budget
Ending cash balance for Aprilis the beginning May balance.Ending cash balance for Aprilis the beginning May balance.
Because Royal maintainsa cash balance of $30,000,the company must borrow
$50,000 on its line-of-credit.
Because Royal maintainsa cash balance of $30,000,the company must borrow
$50,000 on its line-of-credit.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 89
The Cash Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 90
Quick Check
What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000b. $(10,000)c. $ 75,000d. $ 95,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 91
What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000b. $(10,000)c. $ 75,000d. $ 95,000
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 92
The Cash Budget
$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 and
repayment on June 30.
$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 and
repayment on June 30.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 93
The Budgeted Income Statement
Cash Budget
BudgetedIncome
Statement
Complete
d
With interest expense from the cash budget, Royal can prepare the budgeted
income statement.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 94
Learning Objective 4(h)
Prepare a budgeted income statement.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 95
The Budgeted Income Statement
Royal CompanyBudgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10) 1,000,000$ Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000 Interest expense 2,000 Net income 239,000$
Sales Budget.Sales Budget.
Ending FinishedGoods Inventory.Ending FinishedGoods Inventory.
Selling and Administrative
Expense Budget.
Selling and Administrative
Expense Budget.
Cash Budget.Cash Budget.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 96
Learning Objective 4 (i)
Prepare a budgeted balance
sheet.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 97
The Budgeted Balance Sheet
Royal reported the following account balances prior to preparing its budgeted
financial statements:
• Land - $50,000• Common stock - $200,000• Retained earnings - $146,150 (April 1)• Equipment - $175,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 98
Royal CompanyBudgeted Balance Sheet
June 30
Assets: Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Land 50,000 Equipment 367,000 Total assets 564,550
Liabilities and Stockholders' EquityAccounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and stockholders' equity 564,550$
11,500 lbs.at $0.40/lb.
5,000 unitsat $4.99 each.
50% of Junepurchases of $56,800.
25% of Junesales of
$300,000.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 99
Royal CompanyBudgeted Balance Sheet
June 30
Assets: Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Land 50,000 Equipment 367,000 Total assets 564,550
Liabilities and Stockholders' EquityAccounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and stockholders' equity 564,550$
Beginning balance 146,150$ Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 100
Learning Objective 5
Prepare Budget on the Key
Components for the Service Industry
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 101
Key Budget Components for the Service Industry
Wonder World, a hypothetical theme park, has the following data:
Main Sources of Revenue
Major Expenses
Departments
• Ticketing• Food &
Beverages• Souvenir Shop
• Salaries• Rent • Cost of Sales• Advertising• Maintenance• Depreciation• Utilities
• Finance & Administration• Operations• Marketing• Souvenir Shop• Food and Beverages• Maintenance
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 102
Learning Objective 5 (a)
Prepare a Visitorship Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 103
Visitorship Budget
Number of Visitors
Adults 750,000
Children 250,000
Total Visitors 1,000,000
Based on historical records, economic outlook, tourist arrival expectations, the following visitorship budget for the coming year is prepared:
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 104
Learning Objective 5 (b)
Prepare a Revenue Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 105
Revenue Budget
Revenue per visitorGate Collections : Adults $13 Gate Collections : Children $9 Souvenir Shop $4 Food and Beverages $6
Based on the average price charged by Wonder World and other historical data, the following revenues per visitor are budgeted and approved by the top management:
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 106
Revenue Budget
RevenueGate Collections : Adults1 $9,750,000 Gate Collections : Children2 $2,250,000 Souvenir Shop3 $4,000,000 Food and Beverages4 $6,000,000 Total Revenue $22,000,000
With the budgeted number of visitors and revenues per visitor from each category, the budgeted revenues are computed:
Note1 750,000 X $132 250,000 X $93 1,000,000 X $44 1,000,000 X $6
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 107
Learning Objective 5 (c)
Prepare a Cost of Sales Budget and Expense Budget
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 108
Cost of Sales Budget
Cost of SalesSouvenir Shop $2,000,000 Food and Beverage $3,000,000 Total $5,000,000
For cost of sales on souvenirs and food and beverages, the company normally makes use of the historical cost of sales % and takes into account of any expected price changes from the suppliers. For the coming year, the expected cost of sales % is 50% on sales for both the souvenir shop and food and beverages.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 109
Expenses BudgetHow the items are budgeted will depend on the nature of the items.
Nature of expense Amount Budget approach
Rental $1,100,000 5% of revenue as agreed with the landlord.
Salaries $3,500,000 Zero based approach by reviewing the actual requirement of each position and its suitable rate of pay.
Advertising $1,200,000 Proposed by marketing manager.
Maintenance $980,000 Proposed by maintenance manager.
Depreciation $890,000 Computed by the finance manager by taking into account of existing assets and proposed new assets.
Utilities $580,000 Computed by maintenance manager based on the rates and usage expectations.
Other operating expenses $490,000 Based on judgment and any specific requirements such as legal expenses.
Total $8,740,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 110
Learning Objective 5 (d)
Prepare a Budgeted Income
Statement
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 111
Budgeted Income Statement
Budgeted Income Statement
Revenue $22,000,000
Cost of goods sold $5,000,000
Expenses $8,740,000
Net income $8,260,000
Budgeted Income Statement can be prepared by putting all previous budgeted information together.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 112
Learning Objective 6
Explain the Costs and Benefits of
Budgeting
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 113
Costs and Benefits of Budgeting
• Budgeting is time-consuming and costly.
• Budgetary slack or padding is an inherent problem of budgeting.
• Despite the drawbacks of budgeting, most companies are still using budgets to plan, communicate, set objectives and allocate resources etc.
• Since budgets are still commonly used, benefits of budgeting are high and drawbacks of budgeting can be minimized by having a good budgeting system.
• For a good budgeting system, it is critical to have effective communication and mutual trust between the top management and its staff.