Chapter 8 Lecture Notes Profit Planning BUDGET - detailed plan for acquiring and using resources over a specific

time period - represents a plan for the future expressed in formal quantitative terms Differences between Planning and Controlling Planning involves developing objectives and preparing budgets to achieve them. Control involves the steps taken by management to achieve the objectives. Advantages of Budgeting 1. Communicates company objectives throughout the firm. 2. Focus on planning for the future. 3. Effectively allocates resources. 4. Reveals bottlenecks. 5. Coordinates department objectives with the firm. 6. Provides benchmarks for performance evaluation. Responsibility Accounting -hold managers responsible for those items they control -the responsible manager should understand and be able to explain discrepancies -feedback is used to correct discrepancies -goal is to make sure nothing falls through the cracks in the organization -shouldnt use responsibility accounting to penalize the individual for missing targets Choosing a Budget Period -Annual -Continuous or perpetual Self-Imposed Budget Exhibit 8-1 page 338 (aka participative budget) -managers across the whole organization are involved in preparing the budget -typically budget estimates are more accurate and reliable -motivation and commitment are higher due to personal goal setting -mangers cannot complain that the budget was unrealistic (since they were the one responsible for setting it) -Upper-management reviews the budget to make sure there isnt budgetary slack built into the budget.

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The Budget Committee - policy matters - coordinating budget preparation - top management THE MASTER BUDGET Exhibit 8-2 page 341

1. Sales budget (including a schedule of cash collections); 2. Production budget for manufacturing firms or Inventory purchase budget for merchandising firms; 3. Direct materials budget (including a schedule of expected cash disbursements for raw material); 4. Direct labor budget; 5. Manufacturing overhead budget; 6. Ending finished goods budget; 7. Selling and Administrative expense budget; 8. Cash budget; 9. Budgeted income statement; and 10. Budgeted balance sheet.

Sales Budget -Sales Forecast -units -dollars -cash collection Schedule 1, page 344 PracticeSales Budget and Expected Cash Collections Zan Industries sells an XLT for $10 per unit. All of Zan sales are on credit. Zan collects credit sales 40% in the month of sale, 50% in the month following sale and the last 10% is collected two months after the sale. Beginning A/R is $265,000 (made up of $40,000 remaining from Mays sales and $225,000 remaining from Junes sales(Junes credit sales were $375,000). The marketing/selling department of Zan has submitted the following sales forecast for the third Quarter.

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July August Septemb er

Budgeted sales of XLT in units 35,000 units 40,000 units 50,000 units

Prepare a sales budget for the third Quarter and a schedule of expected cash collections for the third Quarter for Zan. Septemb July August er Quarter Budgeted sales (units) 35,000 40,000 50,000 125,000 Sales per unit $10 $10 $10 $10 Budgeted sales $350,000 400,000 500,000 1,250,000 Percent of sales collected in the month of sale 40% Percent of sales collected in the following month 50% sale Percent of sales collected in the second month 10% following sale Schedule of Expected Cash Collections A/R, beginning balance Septemb ($265,000) July August er May credit sales ($400,000) June credit sales ($375,000) July credit sales ($350,000) 160,00 200,000 August credit sales ($400,000) 0 200,000 September credit sales ($500,000) Total cash collections $372,5 $435,000 00 How much cash is expected to be collected in the month of July? $

QUARTE R $40,000 225,000 350,000 360,000 200,000 $1,175,00 0

How much of Julys credit sales are expected to be collected in September?

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At the end of the quarter (September 30th) what is the expected $ ending Accounts Receivable?

The Production Budget (Manufacturing Firm) Inventory Purchases (Merchandising Firm) Budgeted COGS in Units or $$ (from Schedule 2, page 345 PracticeProduction Budget Based on the sales forecast of Zan Industries, the production department can prepare its production budget for the next quarter. The sales budget is presented below for convenience. - Ending finished goods inventory requirement is 20% of next months sales.
July August September October November Budgeted sales of XL in units 35,000 units 40,000 units 50,000 units 30,000 units 20,000 units Sales budget) Plus: desired ending inventory Total needs: Less: beginning inventory Required purchases in Units or $$dollars

Prepare the production budget for the XLT for the months July, August, September and October and for the 3rd Quarter. Augu Septemb Quarte Octob Novemb July er er st r er Budgeted sales (units) 40,00 50,00 125,0 35,000 0 0 00 30,000 20,000 Add desired ending 4,000 inventory 34,000 Total needs 7,000 6,000 Less beginning inventory 28,000 Required production What is the budgeted production for August? What is the beginning inventory requirement for July?

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What are the expected total needs for September? What is the September? budgeted production for

Direct Materials Budget -purchase amount

Schedule 3 page 347

Units to be produced (from production budget) Raw materials needed per unit (pounds, etc.) Production needs (Raw Material)* Plus: desired ending inventory for Raw Material Total Raw Material Needs Less: beginning inventory Required Raw material purchases *Materials needed to meet the production schedule

-also includes a cash disbursement section PracticeDirect Materials Budget -Use units to be produced from production budget -Beginning raw materials is based on Junes budgeted ending inventory. -All material is purchased on credit. -Beginning accounts payable is budgeted at $93,200 -Each unit requires 5 grams of raw material at a cost of $0.90 per gram. -Ending raw material inventory requirement is 25% of the following months production needs. -Management plans to pay for raw material purchases 60% in month of purchase and 40% in month following purchase. Prepare the DM budget and schedule of for the third Quarter Augus July t Required production (units) Raw materials per unit (grams) 5 5 Production needs (grams) Add desired EI (grams) Total needs (grams) Less BI (grams) RM to be purchased
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expected cash disbursements Septem ber 46,000 5 230,000 35,000 265,000 57,500 207,500 5 5 140,00 0 October 28,000

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(grams) Cost @ $0.90/gram

$186,75 0

$549,0 00 60% 40%

Percent of purchases paid for in the month of purchase Percentage of purchases paid for in the month following purchase Schedule of Cash Disbursements for Material July $93,20 0 Augus t Septem ber

A/P, beginning balance July purchases August purchases September purchases Total cash disbursements

$77,400

$189,45 0 What are the budgeted material production needs for August? What are the budgeted total needs for material for August? What are the budgeted grams of material to be purchased in August? What is the budgeted cost of material purchases for August? What are the budgeted cash disbursements for August? $

Quarter $93,20 0 168,75 0 193,50 0 112,05 0 $567,5 00

What are the ending accounts payable budgeted for the quarter (September 30)? Direct Labor Budget Schedule 4 page 349
Units to be produced (from Production budget) Direct labor time per unit (in hours) Chapter 8

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Total hours of direct labor time needed* Direct labor cost per hour Total direct labor costs *assumes workforce is adjusted automatically

-guaranteed minimum payment PracticeDirect Labor Budget The production department of Zan has submitted the following forecast of units to be produced by month for the next few months. -Each unit requires 0.2 direct labor-hours and direct laborers are paid $9 per hour. Prepare the DL budget, assume the workforce is adjusted each quarter to match the number of hours required to produce the forecasted number of units produced. Septem Quarter July August ber Required production (units) 36,000 42,000 46,000 124,00 0 Direct labor-hours per unit 0.20 0.20 0.20 Total direct labor-hours needed 8,400 9,200 24,800 $9 $9 Direct labor cost per hour $9 $223,20 Total direct labor cost $75,600 $82,800 0 What are the budgeted DLH for July? What are the budgeted costs for labor in July? $ DLH

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Manufacturing Overhead Budget Schedule 5 on page 350 -VMOH -FMOH -Depreciation expense (non-cash) PracticeManufacturing Overhead Budget -VMOH rate is $2.50 per DLH -FMOH is $31,000 per month, (including $8,000 depreciation) Prepare the companys MOH budget Septemb July August er Budgeted direct labor-hours 8,400 9,200 Variable overhead rate $2.50 $2.50 $2.50 VMOH $21,00 0 $23,000 31,000 FMOH 31,000 Total manufacturing overhead 52,000 54,000 Less depreciation 8,000 8,000 Cash disbursements for MOH $44,00 0 $46,000 Budgeted Total Quarter manufacturing overhead Budgeted direct labor hours Predetermined Overhead Rate for Quarter

Quarter 24,800 $2.50 $62,000 93,000 155,000 24,000 $131,000 $155,000 24,800 $6.25 per hour $

What are the budgeted total manufacturing overhead costs for July? What are the budgeted cash disbursements for manufacturing overhead in July?

Ending Finished Goods Inventory Budget Schedule 6 on page 351 -unit cost of goods sold -unit cost of ending inventory Finished Goods Inventory Budget
Absorption Costing Product Costs Item (Production cost per unit) Quantity Cost Direct material 5 grams $0.90 per gram Direct Labor 0.2 hours 9.00 per hour Manufacturing Overhead 0.2 hours $6.25 per hour Chapter 8 Total $4.50 1.80 1.25 Page 8-8

Per Unit Product Cost Budgeted ending inventory 6,000 units $7.55 per unit

$7.55 $45,300

Selling and Administrative Expense Budget Schedule 7 on page 352 -Variable S&A -Fixed S&A -Depreciation expense PracticeSelling and Administrative Budget -VS&A is $0.80 per unit -FS&A is $15,000 per month, (including $9,000 depreciation) Prepare the companys Selling and Administrative budget Septem July August ber Budgeted sales (units) 40,000 50,000 Variable selling & administrative per unit VS&A FS&A Total S&A (operating expense) Less depreciation Cash disbursements for S&A

$0.80

$0.80 $32,00 0 15,000 47,000 9,000 $38,00 0 $

$0.80 $40,00 0 15,000 55,000 9,000 $46,00 0

Quarter 125,00 0 $0.8 0 $100,0 00 45,000 145,00 0 27,000 $118,0 00

What are the budgeted total operating expenses for July?

What are the budgeted cash disbursements for operating expenses in July?

The Cash Budget Schedule 8 on page 354 1. cash receipts 2. cash disbursements 3. cash excess or deficiency
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4. The financing section a. Borrowing b. Repayment c. Interest

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PracticeCash Budget You have been asked to prepare the third Quarter cash budget for Zan Industries:
Zan Industries Balance Sheet June 30, 2012 Assets Cash A/R Raw Material Inventory Finished Goods Inventory PPE, net Total Assets $9,000 265,000 40,500 52,850 207,000 $574,350 Liabilities & Stockholders Equity A/P $93,200 N/P 14,500

CC RE Total L & SE

320,500 146,150 $574,350

-N/P of $14,500 will be paid (plus $100 interest that had accrued over the quarter). -New refrigerating equipment will be purchased for cash for $65,000. -Zan requires a cash balance of at least $5,000 each quarter. Zan Industries Cash Budget For the 3rd Quarter Cash balance, beginning (June 30 balance sheet)... $ 9,000 Add receipts from customers (sales budget)........... ________ Total cash available................................................. 1,184,000 Less disbursements: Payment to suppliers for raw material inventory (DM budget)........................................................ ________ Payment to laborers (DL budget).......................... 223,200 Payment for manufacturing overhead (MOH budget).............................................................. _________ Operating expenses (S&A budget)........................ 118,000 Purchases of equipment....................................... _________ ___1,104,7 Total cash disbursements........................................ 00 Excess (deficiency) of receipts over disbursements 79,300 Financing: Borrowingnote................................................... 0 Repaymentsnote................................................ (14,500) Interest................................................................. (100) Total financing......................................................... (14,600) Cash balance, ending.............................................. $64,700
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The Budgeted Income Statement Schedule 9 on page 356 The Budgeted Balance Sheet Schedule 10 on page 358 PracticeBudgeted financial statements Prepare a budgeted income statement for the 3rd Quarter. Zan Industries Budgeted Income Statement For the Quarter ending September 30, 2012 $_______ Sales (sales budget)......................................... Cost of goods sold (125,000 units x $7.55)...... Gross profit....................................................... Operating expenses (S&A budget)................... Net operating income....................................... Interest expense (cash budget)........................ Net income (Loss)............................................. Prepare a budgeted Balance Sheet for the 3rd Quarter. Zan Industries Budgeted Balance Sheet September 30, 2012 Assets Cash (from cash budget)........................................................... Accounts receivable (August $400,000 x 10%) + (September $500,000 x 60%) Raw material inventory (35,000 grams x $0.90 per gram)....... Finished goods inventory (6,000 units x $7.55 per unit)......... Buildings and equipment, net ($207,000 + 65,000 24,000 27,000)................................................................................. Total assets.............................................................................. Liabilities and Equity Accounts payable (Septembers purchases ($186,750 x 40%) Note payable........................................................................... Capital stock............................................................................ Retained earnings ($146,150 + $161,150).............................
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_ 943,750 306,250 ________ 161,250 100 $161,150

$_________ __________ __________ 45,300 221,000 $702,500

$_________ 0 320,500 __________

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Total liabilities and equity........................................................

$702,500

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