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ccounting by Meigs & Meigs
1.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Operational Budgeting Chapter 22
2.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. Budgeting: The Basis for Planning and Control Budgeting: The Basis for Planning and Control
3.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Benefits Coordination of activities Performance evaluation Enhanced managerial responsibility Assignment of decision making responsibilities Benefits Derived from BudgetingBenefits Derived from Budgeting
4.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Budget Problems Perceived unfair or unrealistic goals. Poor management- employee communications. Solution Reasonable and achievable budgets. Employee participation in budgeting process. Establishing Budgeted Amounts: The “Behavioral” Approach Establishing Budgeted Amounts: The “Behavioral” Approach
5.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Flow of Budget Data S u p e r v is o r S u p e r v is o r M id d le M a n a g e m e n t S u p e r v is o r S u p e r v is o r M id d le M a n a g e m e n t T o p M a n a g e m e n t Participation in Budget ProcessParticipation in Budget Process
6.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin 2001 2002 2003 2004 C a p i t a l B u d g e t s A continuous budget is usually a twelve-month budget that adds one month as the current month is completed. The annual operating budget may be divided into quarterly or monthly budgets. The Budget PeriodThe Budget Period
7.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Sales forecast Production schedule Budgeted financial budgets: cash income balance sheet Capital expenditures budget Operating expense budgets Cost of goods sold and ending inventory budgets The Master BudgetThe Master Budget
8.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin That’s enough talking about budgets, now show me an example! Preparing the Master Budget: An Illustration Preparing the Master Budget: An Illustration
9.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Preparing the Master Budget: An Illustration Preparing the Master Budget: An Illustration
10.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for the next four months are: April 20,000 magnets @ $10 = $200,000 May 50,000 magnets @ $10 = $500,000 June 30,000 magnets @ $10 = $300,000 July 25,000 magnets @ $10 = $250,000 The Sales Budget July is needed for June ending inventory computations. Preparing the Master Budget: An Illustration Preparing the Master Budget: An Illustration
11.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Sales Budget Com pleted Production Budget The Production BudgetThe Production Budget
12.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Ellis wants ending inventory to be 20 percent of the next month’s budgeted sales in units. 4,000 units were on hand March 31. Let’s prepare the production budget. The Production BudgetThe Production Budget
13.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Budgeted product sales in units + Desired product units in ending inventory = Total product units needed – Product units in beginning inventory = Product units to produce The Production BudgetThe Production Budget
14.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Desired ending inventory Total units needed Less beginning inventory Units to produce The Production BudgetThe Production Budget
15.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Desired ending inventory 10,000 6,000 5,000 Total units needed 30,000 56,000 35,000 Less beginning inventory Units to produce Ending inventory = 20% of next month's production needs. June ending inventory = .20 × 25,000 July units = 5,000 units. The Production BudgetThe Production Budget
16.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Desired ending inventory 10,000 6,000 5,000 Total units needed 30,000 56,000 35,000 Less beginning inventory 4,000 10,000 6,000 Units to produce 26,000 46,000 29,000 Ending inventory = 20% of next month's production needs. June ending inventory = .20 × 25,000 July units = 5,000 units. Beginning inventory is last month's ending inventory. The Production BudgetThe Production Budget
17.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Production Budget Material Purchases Production Budget Units Com pleted The Production BudgetThe Production Budget
18.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin The material purchases budget is based on production quantity and desired material inventory levels. The material purchases budget is based on production quantity and desired material inventory levels. Units to produce × Material needed per unit = Material needed for units to produce + Desired units of material in ending inventory = Total units of material needed – Units of material in beginning inventory = Units of material to purchase The Production Budget Material Purchases The Production Budget Material Purchases
19.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. The Production Budget Material Purchases The Production Budget Material Purchases
20.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin The Production Budget Material Purchases The Production Budget Material Purchases April May June Units to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000 Desired ending inventory Total material needs (lbs.) Less beginning inventory Material purchases (lbs.)
21.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin The Production Budget Material Purchases The Production Budget Material Purchases April May June Units to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000 Desired ending inventory 23,000 14,500 11,500 Total material needs (lbs.) 153,000 244,500 156,500 Less beginning inventory Material purchases (lbs.) Ending inventory = 10% of next month's material needs. June ending inventory = .10 × (23,000 units × 5 lbs. per unit). June ending inventory = 11,500 lbs.
22.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin The Production Budget Material Purchases The Production Budget Material Purchases April May June Units to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000 Desired ending inventory 23,000 14,500 11,500 Total material needs (lbs.) 153,000 244,500 156,500 Less beginning inventory 13,000 23,000 14,500 Material purchases (lbs.) 140,000 221,500 142,000 Ending inventory = 10% of next month's material needs. June ending inventory = .10 × (23,000 units × 5 lbs. per unit). June ending inventory = 11,500 lbs. Beginning inventory is last month's ending inventory.
23.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Materials used in production cost $.40 per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance on March 31 is $12,000. Materials used in production cost $.40 per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance on March 31 is $12,000. Cash Payments for Material Purchases Cash Payments for Material Purchases
24.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Material purchases (lbs.) 140,000 221,500 142,000 Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$ Payables from March 12,000$ April purchases May purchases June purchases Total payments in month Cash Payments for Material Purchases Cash Payments for Material Purchases
25.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Material purchases (lbs.) 140,000 221,500 142,000 Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$ Payables from March 12,000$ April purchases 28,000 28,000$ May purchases June purchases Total payments in month ½ × $56,000 = $28,000 Cash Payments for Material Purchases Cash Payments for Material Purchases
26.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Material purchases (lbs.) 140,000 221,500 142,000 Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$ Payables from March 12,000$ April purchases 28,000 28,000$ May purchases 44,300 44,300$ June purchases Total payments in month ½ × $56,000 = $28,000 ½ × $88,600 = $44,300 Cash Payments for Material Purchases Cash Payments for Material Purchases
27.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Material purchases (lbs.) 140,000 221,500 142,000 Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$ Payables from March 12,000$ April purchases 28,000 28,000$ May purchases 44,300 44,300$ June purchases 28,400 Total payments in month 40,000$ 72,300$ 72,700$ ½ × $56,000 = $28,000 ½ × $88,600 = $44,300 ½ × $56,800 = $28,400 Cash Payments for Material Purchases Cash Payments for Material Purchases
28.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Production Budget Labor Production Budget Units Material Com pleted The Production BudgetThe Production Budget
29.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Each unit produced requires 3 minutes (.05 hours) of direct labor. Ellis employs 30 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour. The Production Budget Direct Labor The Production Budget Direct Labor
30.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Units to produce 26,000 46,000 29,000 Hours per unit 0.05 0.05 0.05 Total hours required 1,300 2,300 1,450 Wage rate per hour Direct labor cost Cash Payments for Direct Labor Cash Payments for Direct Labor
31.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Units to produce 26,000 46,000 29,000 Hours per unit 0.05 0.05 0.05 Total hours required 1,300 2,300 1,450 Wage rate per hour 10$ 10$ 10$ Direct labor cost 13,000$ 23,000$ 14,500$ Cash Payments for Direct Labor Cash Payments for Direct Labor
32.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Production Budget Units Material Labor Com pleted Production Budget Manufacturing Overhead The Production BudgetThe Production Budget
33.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is $50,000 per month. Fixed manufacturing overhead includes $20,000 in depreciation which does not require a cash outflow. The Production Budget Manufacturing Overhead The Production Budget Manufacturing Overhead
34.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Units to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$ Fixed overhead Total mfg. overhead cost Deduct depreciation Manufacturing overhead - cash Cash Payments for Manufacturing Overhead Cash Payments for Manufacturing Overhead
35.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Units to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$ Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 76,000$ 96,000$ 79,000$ Deduct depreciation Manufacturing overhead - cash Cash Payments for Manufacturing Overhead Cash Payments for Manufacturing Overhead
36.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin April May June Units to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$ Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 76,000$ 96,000$ 79,000$ Deduct depreciation 20,000 20,000 20,000 Manufacturing overhead - cash 56,000$ 76,000$ 59,000$ Cash Payments for Manufacturing Overhead Cash Payments for Manufacturing Overhead
37.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Production Budget Com pleted Selling and Administrative Expense Budget Selling and Administrative (S&A) Expense Budget Selling and Administrative (S&A) Expense Budget
38.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries. Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices. Selling and Administrative (S&A) Expense Budget Selling and Administrative (S&A) Expense Budget
39.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Variable selling and administrative expenses are $.50 per unit sold and fixed selling and administrative expenses are $70,000 per month. Fixed selling and administrative expenses include $10,000 in depreciation which does not require a cash outflow. Cash Payments for (S&A) Expenses Cash Payments for (S&A) Expenses
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Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 10,000$ 25,000$ 15,000$ Fixed S&A expense 70,000 70,000 70,000 Total S&A expense 80,000$ 95,000$ 85,000$ Deduct depreciation S&A expense - cash Cash Payments for (S&A) Expenses Cash Payments for (S&A) Expenses
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Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 10,000$ 25,000$ 15,000$ Fixed S&A expense 70,000 70,000 70,000 Total S&A expense 80,000$ 95,000$ 85,000$ Deduct depreciation 10,000 10,000 10,000 S&A expense - cash 70,000$ 85,000$ 75,000$ Cash Payments for (S&A) Expenses Cash Payments for (S&A) Expenses
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Companies, Inc., 2002McGraw-Hill/Irwin I have seen a lot of cash payments but no cash receipts. Show me some cash receipts! Cash Receipts BudgetCash Receipts Budget
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Companies, Inc., 2002McGraw-Hill/Irwin All sales are on account. Ellis’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. All sales are on account. Ellis’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. Cash Receipts BudgetCash Receipts Budget
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Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$ Receipts from March sales 30,000$ Receipts from April sales Receipts from May sales Receipts from June sales Total cash receipts Cash Receipts BudgetCash Receipts Budget
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Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$ Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales Receipts from June sales Total cash receipts 170,000$ April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 Cash Receipts BudgetCash Receipts Budget
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Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$ Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales 350,000 125,000$ Receipts from June sales Total cash receipts 170,000$ 400,000$ April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000 Cash Receipts BudgetCash Receipts Budget
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Companies, Inc., 2002McGraw-Hill/Irwin April May June Budgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$ Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales 350,000 125,000$ Receipts from June sales 210,000 Total cash receipts 170,000$ 400,000$ 335,000$ April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000 June: .70 × $300,000 = $210,000 Cash Receipts BudgetCash Receipts Budget
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Companies, Inc., 2002McGraw-Hill/Irwin With just a little more information we will be able to prepare a comprehensive cash budget. Comprehensive Cash BudgetComprehensive Cash Budget
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company: Has a $100,000 line of credit at its bank, with a zero balance on April 1. Maintains a $30,000 minimum cash balance. Borrows at the beginning of a month and repays at the end of a month. Pays interest at 16 percent when a principal payment is made. Pays a $51,000 cash dividend in April. Purchases equipment costing $143,700 in May and $48,800 in June. Has a $40,000 cash balance on April 1. Comprehensive Cash Budget Additional Information Comprehensive Cash Budget Additional Information
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Companies, Inc., 2002McGraw-Hill/Irwin Comprehensive Cash Budget April May June Beginning cash balance 40,000$ Cash receipts Cash available Cash payments: Materials budget Labor budget Manufacturing OH budget S&A expense budget Equipment purchases Dividends Total cash payments Balance before financing Borrowing Principal repayment Interest Ending cash balance
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Companies, Inc., 2002McGraw-Hill/Irwin Comprehensive Cash Budget April May June Beginning cash balance 40,000$ Cash receipts 170,000 400,000 335,000 Cash available 210,000$ Cash payments: Materials budget Labor budget Manufacturing OH budget S&A expense budget Equipment purchases Dividends Total cash payments Balance before financing Borrowing Principal repayment Interest Ending cash balance
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Companies, Inc., 2002McGraw-Hill/Irwin Comprehensive Cash Budget April May June Beginning cash balance 40,000$ Cash receipts 170,000 400,000 335,000 Cash available 210,000$ Cash payments: Materials budget 40,000$ 72,300$ 72,700$ Labor budget 13,000 23,000 14,500 Manufacturing OH budget 56,000 76,000 59,000 S&A expense budget 70,000 85,000 75,000 Equipment purchases 0 143,700 48,800 Dividends 51,000 0 0 Total cash payments 230,000$ 400,000$ 270,000$ Balance before financing (20,000)$ Borrowing Principal repayment Interest Ending cash balance
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Companies, Inc., 2002McGraw-Hill/Irwin Comprehensive Cash Budget April May June Beginning cash balance 40,000$ 30,000$ Cash receipts 170,000 400,000 335,000 Cash available 210,000$ 430,000$ Cash payments: Materials budget 40,000$ 72,300$ 72,700$ Labor budget 13,000 23,000 14,500 Manufacturing OH budget 56,000 76,000 59,000 S&A expense budget 70,000 85,000 75,000 Equipment purchases 0 143,700 48,800 Dividends 51,000 0 0 Total cash payments 230,000$ 400,000$ 270,000$ Balance before financing (20,000)$ 30,000$ Borrowing 50,000 Principal repayment 0 Interest 0 Ending cash balance 30,000$
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Companies, Inc., 2002McGraw-Hill/Irwin Comprehensive Cash Budget April May June Beginning cash balance 40,000$ 30,000$ 30,000$ Cash receipts 170,000 400,000 335,000 Cash available 210,000$ 430,000$ 365,000$ Cash payments: Materials budget 40,000$ 72,300$ 72,700$ Labor budget 13,000 23,000 14,500 Manufacturing OH budget 56,000 76,000 59,000 S&A expense budget 70,000 85,000 75,000 Equipment purchases 0 143,700 48,800 Dividends 51,000 0 0 Total cash payments 230,000$ 400,000$ 270,000$ Balance before financing (20,000)$ 30,000$ 95,000$ Borrowing 50,000 0 Principal repayment 0 0 Interest 0 0 Ending cash balance 30,000$ 30,000$
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Companies, Inc., 2002McGraw-Hill/Irwin Comprehensive Cash Budget April May June Beginning cash balance 40,000$ 30,000$ 30,000$ Cash receipts 170,000 400,000 335,000 Cash available 210,000$ 430,000$ 365,000$ Cash payments: Materials budget 40,000$ 72,300$ 72,700$ Labor budget 13,000 23,000 14,500 Manufacturing OH budget 56,000 76,000 59,000 S&A expense budget 70,000 85,000 75,000 Equipment purchases 0 143,700 48,800 Dividends 51,000 0 0 Total cash payments 230,000$ 400,000$ 270,000$ Balance before financing (20,000)$ 30,000$ 95,000$ Borrowing 50,000 0 0 Principal repayment 0 0 (50,000) Interest 0 0 (2,000) Ending cash balance 30,000$ 30,000$ 43,000$ $50,000 × .16 × 3/12 = $2,000
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Companies, Inc., 2002McGraw-Hill/Irwin Budgeted Income Statement Cash Budget Com pleted The Budgeted Income Statement The Budgeted Income Statement
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) 1,000,000$ The Budgeted Income Statement The Budgeted Income Statement
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) 1,000,000$ Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000$ Computation of unit cost follows The Budgeted Income Statement The Budgeted Income Statement
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Companies, Inc., 2002McGraw-Hill/Irwin 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 Total unit cost 4.99$ Total mfg. OH for quarter $251,000 Total labor hours required 5,050 hrs. = $49.70 per hr. From labor and Mfg. OH budgets Labor Hours Mfg. OH April 1,300 76,000$ May 2,300 96,000 June 1,450 79,000 Total 5,050 251,000$ Manufacturing overhead is applied based on direct labor hours. The Budgeted Income Statement The Budgeted Income Statement
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company Budgeted 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$ From S&A Expense Budget April 80,000$ May 95,000 June 85,000 Total 260,000$ The Budgeted Income Statement The Budgeted Income Statement
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company Budgeted 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$ The Budgeted Income Statement The Budgeted Income Statement
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Companies, Inc., 2002McGraw-Hill/Irwin Budgeted Balance Sheet Com pleted Budgeted Income Statement The Budgeted Balance Sheet The Budgeted Balance Sheet
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis reports the following account balances on June 30, prior to preparing its budgeted financial statements: Land - $50,000 Building (net) - $174,500 Common stock - $200,000 Equipment (net) - $192,500 Retained earnings - $148,150 Ellis reports the following account balances on June 30, prior to preparing its budgeted financial statements: Land - $50,000 Building (net) - $174,500 Common stock - $200,000 Equipment (net) - $192,500 Retained earnings - $148,150 The Budgeted Balance Sheet The Budgeted Balance Sheet
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company Budgeted Balance Sheet June 30, 2002 Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550$ Property and equipment Land 50,000$ Building 174,500 Equipment 192,500 Total property and equipment 417,000$ Total assets 564,550$ Liabilities and Equities Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$ 25% of June sales of $300,000 11,500 lbs. @ $.40 per lb. 50% of June purchases of $56,800 5,000 units @ $4.99 each
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Companies, Inc., 2002McGraw-Hill/Irwin Ellis Magnet Company Budgeted Balance Sheet June 30, 2002 Current assets Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Total current assets 147,550$ Property and equipment Land 50,000$ Building 174,500 Equipment 192,500 Total property and equipment 417,000$ Total assets 564,550$ Liabilities and Equities Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$ Beginning balance 148,150$ Add: net income 239,000 Deduct: dividends (51,000) Ending balance 336,150$
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Companies, Inc., 2002McGraw-Hill/Irwin Let’s change topics. Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Performance evaluation is difficult when actual activity differs from the activity originally budgeted. Flexible BudgetingFlexible Budgeting Hmm! Comparing costs at different levels of activity is like comparing apples with oranges. Consider the following condensed example from the Cheese Company . . . Consider the following condensed example from the Cheese Company . . .
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Companies, Inc., 2002McGraw-Hill/Irwin Flexible BudgetingFlexible Budgeting Original Actual Budget Results Variances Units of Activity 10,000 8,000 2,000 U Variable costs Indirect labor 40,000$ 34,000$ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,000 0 Total overhead costs 89,000$ 77,300$ $11,700 F
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Companies, Inc., 2002McGraw-Hill/Irwin Original Actual Budget Results Variances Units of Activity 10,000 8,000 2,000 U Variable costs Indirect labor 40,000$ 34,000$ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,000 0 Total overhead costs 89,000$ 77,300$ $11,700 F U = Unfavorable variance – Cheese Company was unable to achieve the budgeted level of activity. Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Original Actual Budget Results Variances Units of Activity 10,000 8,000 2,000 U Variable costs Indirect labor 40,000$ 34,000$ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,000 0 Total overhead costs 89,000$ 77,300$ $11,700 F F = Favorable variance: actual costs are less than budgeted costs. Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Original Actual Budget Results Variances Units of Activity 10,000 8,000 2,000 U Variable costs Indirect labor 40,000$ 34,000$ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,000 0 Total overhead costs 89,000$ 77,300$ $11,700 F Since cost variances are favorable, have we done a good job controlling costs? Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin I don’t think I can answer the question using the original budget. How much of the favorable cost variance is due to lower activity, and how much is due to good cost control? Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Flexible BudgetingFlexible Budgeting I don’t think I can answer the question using the original budget. How much of the favorable cost variance is due to lower activity, and how much is due to good cost control? To answer the question, we must the budget to the actual level of activity.
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Companies, Inc., 2002McGraw-Hill/Irwin Central Concept If you can tell me what your activity was for the period, I will tell you what your costs and revenue should have been. Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Improve performance evaluation. May be prepared for any activity level in the relevant range. Show expenses that should have occurred at the actual level of activity. Reveal variances due to good cost control or lack of cost control. Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin To a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Let’s prepare budgets for the Cheese Company. Flexible BudgetingFlexible Budgeting
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Companies, Inc., 2002McGraw-Hill/Irwin Flexible BudgetingFlexible Budgeting Cost Total Flexible Budgets Formula Fixed 8,000 10,000 12,000 Per Hour Cost Hours Hours Hours Units of Activity 8,000 10,000 12,000 Variable costs Indirect labor 4.00 32,000$ Indirect material 3.00 24,000 Power 0.50 4,000 Total variable cost 7.50$ 60,000$ Fixed costs Depreciation 12,000$ Insurance 2,000 Total fixed cost Total overhead costs Variable costs are expressed as a constant amount per hour. In the original budget, indirect labor was $40,000 for 10,000 hours resulting in a rate of $4.00 per hour.
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Companies, Inc., 2002McGraw-Hill/Irwin Flexible BudgetingFlexible Budgeting Cost Total Flexible Budgets Formula Fixed 8,000 10,000 12,000 Per Hour Cost Hours Hours Hours Units of Activity 8,000 10,000 12,000 Variable costs Indirect labor 4.00 32,000$ 40,000$ 48,000$ Indirect material 3.00 24,000 30,000 36,000 Power 0.50 4,000 5,000 6,000 Total variable cost 7.50$ 60,000$ 75,000$ 90,000$ Fixed costs Depreciation 12,000$ 12,000$ 12,000$ 12,000$ Insurance 2,000 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$ 14,000$ Total overhead costs 74,000$ 89,000$ 104,000$
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Companies, Inc., 2002McGraw-Hill/Irwin Flexible BudgetingFlexible Budgeting Cost Total Flexible Budgets Formula Fixed 8,000 10,000 12,000 Per Hour Cost Hours Hours Hours Units of Activity 8,000 10,000 12,000 Variable costs Indirect labor 4.00 32,000$ 40,000$ 48,000$ Indirect material 3.00 24,000 30,000 36,000 Power 0.50 4,000 5,000 6,000 Total variable cost 7.50$ 60,000$ 75,000$ 90,000$ Fixed costs Depreciation 12,000$ 12,000$ 12,000$ 12,000$ Insurance 2,000 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$ 14,000$ Total overhead costs 74,000$ 89,000$ 104,000$Total variable cost = $7.50 per unit × budget level in units
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Companies, Inc., 2002McGraw-Hill/Irwin Flexible BudgetingFlexible Budgeting Cost Total Flexible Budgets Formula Fixed 8,000 10,000 12,000 Per Hour Cost Hours Hours Hours Units of Activity 8,000 10,000 12,000 Variable costs Indirect labor 4.00 32,000$ 40,000$ 48,000$ Indirect material 3.00 24,000 30,000 36,000 Power 0.50 4,000 5,000 6,000 Total variable cost 7.50$ 60,000$ 75,000$ 90,000$ Fixed costs Depreciation 12,000$ 12,000$ 12,000$ 12,000$ Insurance 2,000 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$ 14,000$ Total overhead costs 74,000$ 89,000$ 104,000$ Fixed costs are expressed as a total amount that does not change within the relevant range of activity.
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Companies, Inc., 2002McGraw-Hill/Irwin Now let’s prepare a budget performance report at 8,000 actual machine hours for the Cheese Co. Flexible Budgeting Performance Report Flexible Budgeting Performance Report
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Companies, Inc., 2002McGraw-Hill/Irwin Cost Total Formula Fixed Flexible Actual Per Hour Costs Budget Results Variances Units of Activity 8,000 8,000 0 Variable costs Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 24,000 25,500 1,500 U Power 0.50 4,000 3,800 200 F Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U Fixed Costs Depreciation 12,000$ 12,000$ 12,000$ 0 Insurance 2,000 2,000 2,000 0 Total fixed costs 14,000$ 14,000$ 0 Total overhead costs 74,000$ 77,300$ $ 3,300 U Flexible Budgeting Performance Report Flexible Budgeting Performance Report
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Companies, Inc., 2002McGraw-Hill/Irwin Cost Total Formula Fixed Flexible Actual Per Hour Costs Budget Results Variances Units of Activity 8,000 8,000 0 Variable costs Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 24,000 25,500 1,500 U Power 0.50 4,000 3,800 200 F Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U Fixed Costs Depreciation 12,000$ 12,000$ 12,000$ 0 Insurance 2,000 2,000 2,000 0 Total fixed costs 14,000$ 14,000$ 0 Total overhead costs 74,000$ 77,300$ $ 3,300 U Indirect labor and indirect material have unfavorable variances because actual costs are more than the flexible budget costs. Flexible Budgeting Performance Report Flexible Budgeting Performance Report
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Companies, Inc., 2002McGraw-Hill/Irwin Cost Total Formula Fixed Flexible Actual Per Hour Costs Budget Results Variances Units of Activity 8,000 8,000 0 Variable costs Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 24,000 25,500 1,500 U Power 0.50 4,000 3,800 200 F Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U Fixed Costs Depreciation 12,000$ 12,000$ 12,000$ 0 Insurance 2,000 2,000 2,000 0 Total fixed costs 14,000$ 14,000$ 0 Total overhead costs 74,000$ 77,300$ $ 3,300 U Power has a favorable variance because the actual cost is less than the flexible budget cost. Flexible Budgeting Performance Report Flexible Budgeting Performance Report
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Companies, Inc., 2002McGraw-Hill/Irwin I would be happy to assist you with your cash budget! End of Chapter 22End of Chapter 22
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