Beruflich Dokumente
Kultur Dokumente
Chapter Nine
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Learning Objective 1
Understand why organizations budget and the processes they use to create budgets.
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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 organizations activity is known as budgetary control.
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Planning involves developing objectives and preparing various budgets to achieve these objectives.
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Advantages of Budgeting
Define goal and objectives Communicate plans Think about and plan for the future
Advantages
Coordinate activities Uncover potential bottlenecks Means of allocating resources
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Responsibility Accounting
Managers should be held responsible for those items and only those items that the manager can actually control to a significant extent.
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Operating Budget
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The annual operating budget may be divided into quarterly or monthly budgets.
A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.
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Self-Imposed Budget
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A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a self-imposed budget.
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1. Individuals at all levels of the organization are viewed 1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued as members of the team whose judgments are valued by top management. by top management. 2. Budget estimates prepared by front-line managers are 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top often more accurate than estimates prepared by top managers. managers. 3. Motivation is generally higher when individuals 3. Motivation is generally higher when individuals participate in setting their own goals than when the participate in setting their own goals than when the goals are imposed from above. goals are imposed from above. 4. A manager who is not able to meet a budget imposed 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Selffrom above can claim that it was unrealistic. Selfimposed budgets eliminate this excuse. imposed budgets eliminate this excuse.
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Self-Imposed Budgets
Most companies do not rely exclusively upon self-imposed budgets in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales.
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The success of budgeting depends upon 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. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.
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Cash Budget
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Learning Objective 2
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Budgeting Example
Royal Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are:
April May June July August 20,000 units 50,000 units 30,000 units 25,000 units 15,000 units.
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The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30th
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The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full. $30,000 will be collected in full.
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Quick Check
What will be the total cash collections for the quarter?
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Quick Check
What will be the total cash collections for the quarter?
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Learning Objective 3
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Production Budget
Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
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Quick Check
What is the required production for May?
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Quick Check
What is the required production for May?
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Learning Objective 4
Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.
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At Royal Company, five pounds of material At Royal Company, five pounds of material are required per unit of product. are required per unit of product. Management wants materials on hand at Management wants materials on hand at the end of each month equal to 10% of the the end of each month equal to 10% of the following months production. following months production. On March 31, 13,000 pounds of material On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per are on hand. Material cost is $0.40 per pound. pound.
Lets prepare the direct materials budget. Lets prepare the direct materials budget.
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March 31 inventory
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Quick Check
How much materials should be purchased in May? How much materials should be purchased in May?
a. 221,500 pounds a. 221,500 pounds b. 240,000 pounds b. 240,000 pounds c. 230,000 pounds c. 230,000 pounds d. 211,500 pounds d. 211,500 pounds
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Quick Check
How much materials should be purchased in May? How much materials should be purchased in May? a. 221,500 pounds a. 221,500 pounds b. 240,000 pounds b. 240,000 pounds c. 230,000 pounds c. 230,000 pounds d. 211,500 pounds d. 211,500 pounds
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Royal pays $0.40 per pound for its materials. Royal pays $0.40 per pound for its materials. One-half of a months purchases is paid for in One-half of a months purchases is paid for in the month of purchase; the other half is paid the month of purchase; the other half is paid in the following month. in the following month. The March 31 accounts payable balance is The March 31 accounts payable balance is $12,000. $12,000. Lets calculate expected cash disbursements. Lets calculate expected cash disbursements.
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Compute the expected cash disbursements for materials for the quarter. 140,000 lbs. $.40/lb. = $56,000
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Quick Check
What are the total cash disbursements for the quarter?
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Quick Check
What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400
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Learning Objective 5
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At Royal, each unit of product requires 0.05 hours (3 At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor. minutes) of direct labor. The Company has a no layoff policy so all employees The Company has a no layoff policy so all employees will be paid for 40 hours of work each week. will be paid for 40 hours of work each week. In exchange for the no layoff policy, workers agree to In exchange for the no layoff policy, workers agree to a wage rate of $10 per hour regardless of the hours a wage rate of $10 per hour regardless of the hours worked (no overtime pay). worked (no overtime pay). For the next three months, the direct labor workforce will For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month. be paid for a minimum of 1,500 hours per month. Lets prepare the direct labor budget. Lets prepare the direct labor budget.
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Greater of labor hours required Greater of labor hours required or labor hours guaranteed. or labor hours guaranteed.
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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?
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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 April May June worked in excess of 1,500 hours in a month? Quarter
Labor hours required 1,300 Regular hours paid 1,500 Overtime hours paid Total regular hours Total overtime hours Total pay -
1,450 1,500 -
4,500 800
4,500 800
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Learning Objective 6
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Total mfg. OH for quarter $251,000 = $49.70 per hour * Total labor hours required 5,050
* rounded
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Production costs per unit Direct materials Direct labor Manufacturing overhead
Cost $ 0.40
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory materials Direct budget and information.
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Production costs per unit Direct materials Direct labor Manufacturing overhead
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventorylabor budget. Direct
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Production costs per unit Direct materials Direct labor Manufacturing overhead
$ Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory
4.99 ?
Total mfg. OH for quarter $251,000 = $49.70 per hour * Total labor hours required 5,050
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Production costs per unit Direct materials Direct labor Manufacturing overhead
Quantity Cost 5.00 lbs. $ 0.40 0.05 hrs. $10.00 0.05 hrs. $49.70
Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory Production Budget.
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Learning Objective 7
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Lets prepare the companys selling and administrative Lets prepare the companys selling and administrative expense budget. expense budget.
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Calculate the selling and administrative cash expenses for the quarter.
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Quick Check
What are the total cash disbursements for selling and administrative expenses for the quarter?
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Quick Check
What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000
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Learning Objective 8
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Royal: Royal:
q Maintains a 16% open line of credit for $75,000 q Maintains a 16% open line of credit for $75,000 q Maintains a minimum cash balance of $30,000 q Maintains a minimum cash balance of $30,000 q Borrows on the first day of the month and repays q Borrows on the first day of the month and repays
loans on the last day of the month loans on the last day of the month q Pays a cash dividend of $49,000 in April q Pays a cash dividend of $49,000 in April
q Purchases $143,700 of equipment in May and q Purchases $143,700 of equipment in May and
$48,300 in June (both purchases paid in cash) $48,300 in June (both purchases paid in cash) q Has an April 1 cash balance of $40,000 q Has an April 1 cash balance of $40,000
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Schedule of Expected Schedule of Expected Cash Disbursements. Cash Disbursements. Direct Labor Budget. Manufacturing Overhead Budget. Selling and Administrative Expense Budget.
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Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit.
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Quick Check
What is the excess (deficiency) of cash available over disbursements for June?
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Quick Check
What is the excess (deficiency) of cash available over disbursements for June?
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$50,000 16% 3/12 = $2,000 Borrowings on April 1 and repayment on June 30.
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Cash Budget
om C pl d te e
After we complete the cash budget, we can prepare the budgeted income statement for Royal.
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Learning Objective 9
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Royal Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) Cost of goods sold (100,000 @ $4.99) Gross margin Selling and administrative expenses Operating income Interest expense Net income $ 1,000,000 499,000 501,000 260,000 241,000 2,000 $ 239,000
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Learning Objective 10
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Land -- $50,000 Land $50,000 Common stock -- $200,000 Common stock $200,000 Retained earnings -- $146,150 Retained earnings $146,150 Equipment -- $175,000 Equipment $175,000
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Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ 43,000 75,000 4,600 24,950 147,550
25% of June 25% of June sales of sales of $300,000. $300,000. 11,500 lbs. 11,500 lbs. at $0.40/lb. at $0.40/lb. 5,000 units 5,000 units at $4.99 each. at $4.99 each.
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Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ 43,000 75,000 4,600 24,950 147,550
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End of Chapter 9
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