7-1 profit planning master budget chapter 7 adapted by cynthia fortin, cpa, cma cost management,...

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Profit PlanningMaster Budget

Chapter 7

Adapted by Cynthia Fortin, CPA, CMA Cost Management, Eldenburg, Wolcott, Chen and Cook

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Video preparation

http://video.wileyaccountingupdates.com/2011/06/15/standard-costs/

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PlanningPlanning

Develop objectivesDevelop objectives Prepare various budgetsPrepare various budgets To achieve those objectivesTo achieve those objectives

PlanningPlanning

Develop objectivesDevelop objectives Prepare various budgetsPrepare various budgets To achieve those objectivesTo achieve those objectives

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ControlControl

TakeTake steps to meet steps to meet objectivesobjectives

ControlControl

TakeTake steps to meet steps to meet objectivesobjectives

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Budgeting allows a company to

5. Define and communicate objectives

3. Uncover potential bottlenecks

4. Coordinate activities

1. Think about and plan for the future

2. Allocate resources

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Responsibility Accounting

ManagersManagers should be should be held held responsibleresponsible for for onlyonly those items that those items that they they cancan actually actually controlcontrol to a significant to a significant extent.extent.

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Master Budget

A comprehensive plan for the upcoming accounting period

Usually prepared for a one-year period Based on a series of budget assumptions

© John Wiley & Sons, 2012 Eldenburg, Cost Management, 2ce, Chapter 10 Slide 11

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The Master Budget: An Overview

Production budgetProduction budgetSelling and

administrativebudget

Selling andadministrative

budget

Direct materialsbudget

Direct materialsbudget

Manufacturingoverhead budgetManufacturing

overhead budgetDirect labor

budgetDirect labor

budget

Cash budgetCash budget

Sales budgetSales budget

Ending inventorybudget

Ending inventorybudget

Budgetedbalance sheet

Budgetedbalance sheet

Budgetedincome

statement

Budgetedincome

statement

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Basis for assumptionsSales Forecasting Project past sales trends using judgment or statistical

methods. Estimate sales based on industry data for similar

businesses. Predict sales based on forecasted economic variables. Gather sales predictions from sales and other personnel. Conduct market research to estimate customer demand.

.


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Basis for assumptions

Cost Forecasting Budget individual costs as

% of revenues or% change from the prior year

Evaluate cost behaviour

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Basis for assumptions

Cash flow forecasting

•Identify the expected sources and uses of cash

•Estimate timing of receipts and disbursements

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Operating Budgets Sales Production

Direct materials Direct labor

○ Manufacturing overhead Ending Finished Goods Inventory Sales and Administration


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Financial Budgets

Cash

Budgeted financial statementsIncomeBalance Sheet


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Revenue budget

Budgeted sales in units in April

Budgeted selling price per unit

Budgeted revenues

Revenue budget

Budgeted sales in units in April 6,000

Budgeted selling price per unit $68.00

Budgeted revenues $408,000

Revenue and Production BudgetsSJ, Inc., makes a tool used by auto mechanics that sells for $68/unit. It expects to sell 6,000 units in April and 7,000 units in May. SJ prefers to end each period with a finished goods inventory equal to 10% of the next period’s sales in units and a direct materials inventory equal to 20% of the direct materials required for the next period’s production. The company never has any beginning or ending work-in-process inventories. There were 400 units in finished goods inventory on April 1. Prepare the revenue and production budgets for April.


Production budget

Budgeted sales in units in April 6 000

Desired ending FG inventory 700

Total units required 6 700

Less: beginning FG inventory (400 )

Required production in units 6 300 How much Revenue will SJ earn?

How many units will SJ produce?

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Direct materials budget

Required production in units 6 300

DM required per unit, in kilograms 0,3

Total DM required, in kilograms 1 890

Less: Beginning DM inventory (220 )

Plus: Desired ending DM inventory 390

Required DM purchases in kilograms 2 060

Budgeted DM cost per kilogram $4,00

Budgeted cost of DM $8 240

Direct Materials Purchase BudgetSJ’s product uses 0.3 kg of direct material per unit, at a cost of $4/kg. There were 220 kg of direct material on hand on April 1. Assume that budgeted production for May is 6,500 units. Prepare the direct materials budget for April.


From production budgetGiven

Given6500*0.3*20%

given

How much DM must SJ purchase to produce the budget units?

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Direct Labour Budget


Direct labour budget


DL required per unit, in hours 0,2

Total DL hours required 1 260

Budgeted cost per DL hour $12,00

Budgeted cost of DL $15 120

SJ’s product uses 0.2 hours of direct labour at a cost of $12/hr. Prepare the direct labour budget for April.

How many labour hours are needed?How much will DL cost?

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Manufacturing Overhead BudgetSJ’s budgeted fixed manufacturing overhead for April is $167,000, and variable manufacturing overhead is budgeted at $6 per direct labour hour. Prepare the manufacturing overhead budget for April.


Manufacturing overhead budget

Total DL hours required 1 260

Budgeted variable overhead per DL hour $6,00

Total budgeted variable overhead $7 560

Budgeted fixed overhead $167 000

Total budgeted overhead $174 560

From labor budgetGiven

given

How much total overhead will be incurred?

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Ending inventories budgets

Budgeted cost of DM purchases $8 240

Beginning DM inventory $880

DM available for use $9 120

Budgeted cost of desired ending DM inventory:

[6,500 units x 0.3 lbs/unit] x 20% x $4/ lb $1 560

Budgeted cost of DM to be used $7 560

Direct Materials Used and Ending inventory budget Prepare the April ending inventories budget for direct materials.


From DM budget220 * $4

390 * $4

How much DM will be used to produce the budget units?

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Budgeted cost of DM to be used $7 560

Budgeted cost of DL $15 120

Total budgeted overhead $174 560

Total budgeted manufacturing costs $197 240


Budgeted manufacturing cost per unit $31,31

Budgeted ending FG inventory in units 700

Budgeted cost of ending FG inventory $21 916

Finished Goods Ending Inventory BudgetPrepare the April ending inventories budget for finished goods.


First compute unit cost of FG then apply it to FG ending inventory units

Total cost

Unit cost

What will the ending inventory of FG be?

Divided by

Multiply by

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Cost of goods sold budget

Beginning FG inventory $12 146

Total budgeted manufacturing costs $197 240

Cost of goods available for sale $209 386

Less: budgeted ending FG inventory $21 916

Budgeted cost of goods sold $187 470

Cost of goods sold BudgetAssume that SJ’s April 1 finished goods inventory had a cost of $12,146. Prepare the cost of goods sold budget for April.


We need cost of goods sold for the Income statement budget

GivenPrevious slide

Previous slide

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Support department budget

Administration $22 000

Distribution: Fixed costs $34 000

Variable costs $4 500 $38 500

Research & development $18 000

Marketing: Fixed costs $13 000

Variable costs $16 320 $29 320

Total budgeted support department costs $107 820

Selling & Administration BudgetSJ’s budget for April includes $22,000 for administrative costs, $34,000 for fixed distribution costs, $18,000 for research and development, and $13,000 for fixed marketing costs. Additionally, the budgeted variable costs for distribution are $0.75/unit sold and the budgeted variable costs for marketing are 4% of sales revenue. Prepare the support department budget for April.


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Sales revenue $408 000

Cost of goods sold $187 470

Gross margin $220 530

Operating costs:

Administration $22 000

Distribution $38 500

Research & development $18 000

Marketing $29 320 $107 820

Net income before taxes $112 710

Income taxes $31 559

Net income $81 151

Income Statement BudgetSuppose that SJ’s income tax rate is 28%. Prepare the budgeted income statement for April.


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How is a cash budget is developed?

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Cash Budgets

Summary of the expected amounts

and timing of cash receipts and disbursements.

Operating cash receipts estimated from budgeted revenues.

Operating cash disbursements estimated from the budgets for DM, DL, O/H and support departments.


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Cash budgets

1. Cash receipts

2. Cash disbursements

3. Short-term borrowings or investments


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Cash Budget ExampleRace Manufacturing is preparing a cash budget for a new division that will begin operations on January 1, 2015. Race expects sales to be 40% cash and 60% on account, with 45% of credit sales are collected in the month of the sale. In the month after the sale, 50% of credit sales should be collected, with the remainder collected two months after the sale. Budgeted sales for the first three months are $100,000, $150,000 and $200,000. Prepare a cash receipts budget for the first three months of 2015.


January February March

Cash sales $40 000 $60 000 $80 000

A/R collections:

From current month's sales $27 000 $40 500 $54 000

From 1 month ago $0 $30 000 $45 000

From 2 months ago $0 $0 $3 000

Total $67 000 $130 500 $182 000

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Direct labour costs $30 000 $45 000 $60 000

Payments on A/P:

From current month's purchases $8 000 $14 000 $18 000

From 1 month ago $0 $10 000 $17 500

From 2 months ago $0 $0 $2 000

Total $38 000 $69 000 $97 500

Cash Budget ExampleRace Manufacturing budgets direct labour costs to be 30% of sales revenue and expects to pay this in the month the costs are incurred. Direct materials purchases will be on account, and paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Budgeted direct material purchases for the first 3 months of 2010 are $20,000, $35,000 and $45,000. Compute the budgeted cash disbursements for direct materials and labour for the first 3 months of 2012.


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Direct labour and materials $38 000 $69 000 $97 500

Other variable costs $4 000 $6 000

Other fixed costs $6 000 $6 000 $6 000

Total $44 000 $79 000 $109 500

Cash Budget ExampleRace Manufacturing budgets other variable costs at 4% of sales revenue and will be paid in the month after the costs are incurred. Other budgeted fixed costs are $6,000 per month and will be paid in the month incurred. Prepare a cash disbursements budget for all costs, including direct materials and labour.


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Cash Budget Example

Using the information from the prior slides, prepare a schedule of budgeted cash flows for Race Manufacturing’s new division for the first three months of 2012.


January February MarchBeginning cash balance $0 $23 000 $74 500Cash receipts $67 000 $130 500 $182 000Cash disbursements ($44 000) ($79 000) ($109 500)Ending cash balance $23 000 $74 500 $147 000

7-1 profit planning master budget chapter 7 adapted by cynthia fortin, cpa, cma cost management,...

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