CH.8 ExcelDoing calendar Q2Doing calendar Q2Doing calendar Q2Doing.docx

CH.8 ExcelDoing calendar Q2Doing calendar Q2Doing calendar
Q2Doing calendar Q2Doing calendar Q2Doing calendar
Q2JanFebMarAprMayJunJulAugSepOctNovDecUnits
Sales20,00050,00030,00025,00015,00032,00036,00042,00066,0
00Price each$ 10.00$ 10.00$ 10.00$ 10.00$ 10.00$
10.00Budgeted
Sales200,000500,000300,000250,000150,000320,000Period
ending
cashCASH90,00030%uncollectedCollections75,00025%/30% of
end Q1 A/R will be collected70% of current
priod175,000105,000224,00025%of prior
period62,50037,500SumCash
collected250,000167,500261,500679,000679,000Looking at
Q2Ending inventory units20%MarAprMayJunJulAugUnits
Sales30,00025,00015,00032,00036,00042,000Budget Ending
Inventory 4,0003,0006,4007,2008,400[20% next mo.
Sales]Sales + EndingGiven28,00021,40039,20044,400Less
Beginning = prior month-end(4,000)(3,000)(6,400)(7,200)= Unit
Production24,00018,40032,80037,200Cost/LbCost/UnitQuantity
per unit in Lbs.5.00$ 0.40$ 2.00Ending Inventory % next
month10%Looking at Q2MarAprMayJunJul= Unit Production-
024,00018,40032,80037,200Required for Production/Lbs-
0120,00092,000164,000186,000$s Into FG for Production$
48,000$ 36,800$ 65,600$ 150,400Qtr. TotalBudget Ending
Inventory 13,0009,20016,40018,60010% of following
MonthSales + Ending129,200108,400182,600Less Beginning =
prior month-end(13,000)(9,200)(16,400)Qty. Purchase
[additions] of Raw material116,20099,200166,200Material
budget$s. Purchase of Raw material$ 46,480$ 39,680$
66,480Material budget$ 0.40per lb.AprApr.CASHEnding A/P$
12,000$ 12,000Beg$ 12,000Cr. To A/P = purchases$
46,480$ 39,680$ 66,480$ 46,480Add$ 46,480Pay 50%
current [given company policy]$ 23,240$ 19,840$
33,2401/2 April$ (23,240)Paid$ (35,240)Pay prior$

12,000$ 23,240$ 19,840Cash budget$ 35,240$ 23,240Total
paid$ 35,240$ 43,080$ 53,080Cash budget$
131,400PaidA/PEndingEnding A/P [Beginning + Additions -
payments]$ 23,240$ 19,840$ 33,240Qtr.
TotalGuaranteedHoursRatePayment for quarter1500$
10.00Required Hrs. per unit0.053minutesDL$s. per unit$
0.50700used for ending Q2 inventoryAprMayJunQtr sum= Unit
Production24,00018,40032,80075,200HRs of Prodctn. at
Required per unit of 0.05 hrs. ea.1,2009201,6403,760DL Cost of
production into units at 10 per Hr$ 12,000$ 9,200$
16,40037,600unfavorable variance of$ 8,800Hrs
paid1,5001,5001,6404,640880Hours$s paid$ 15,000$ 15,000$
16,40046,400ADDEDProductivity at budget earned HRs/paid
HRs80%61%100%Spend > Used by$ 8,800into
CoGS*******Variable OH $s per HR$ 20.00Given: rate is per
DL hr.Required Hrs. per unit0.05Hrs. per unit3minutesVariable
OH $s per unit$ 1.00Fxd. MOH per month$50,000Non cash
MOH$20,000Cash Mfg. OH$30,000Actual Overhead rates NOT
predetermined ratesAprMayJunQtr. SumRequired Hrs. per
unit0.05= Unit Production24,00018,40032,80075,200Fxd. OH
spending$50,000$50,000$50,000# Hrs.1,2009201,640HRs of
Prodctn. at Required per unit of 0.05 hrs.
ea.1,2009201,6403,760per Hr.41.6754.3530.49VOH Cost of
production at $20 per DL Hr$24,000$18,400$32,800per
unit2.082.721.52Fixed manufacturing OH per
period$50,000$50,000$50,000$ 150,000ADDEDFxd. + Var.
Mfg. OHTotal MOH per Month$74,000$68,400$82,800$
225,200$$$$QTY$ 225,200Fxd. Mfg. OH rate/hr.$ 41.67$
54.35$ 30.4939.89$ 150,0003,7603,760Fxd. Mfg. OH unit$
2.08$ 2.72$ 1.52$ 1.990.05hrs. per unit59.89Fxd. Mfg. OH
rate/hr.Quarter
averageòAprMayJunper Hr.Budgeted MOH rate per period
Fxd.+ Var.61.6774.3550.4959.89Fxd + Var$ 41.67$ 54.35$
30.49Fxd rate$ 20.00$ 20.00$ 20.00V. Rate0Non-cash
expense($20,000)($20,000)($20,000)$ 61.67$ 74.35$
50.49Cash MOH$ 54,000$ 48,400$ 62,800$ 165,200Qtr

TotalProduct Cost using Qtr. Average
Fxd.unitVariableFixed0.40$5.00Materials$ 2.005 lbs
$0.40/lb0.05$10.00DL$ 0.50This example: Std. Hrs./unit$
100.05$20.00V Mfg. OH$ 1.000.050.05$59.89F MFG.
OH1.99This example: Actual rate for Qtr.$ 0.50Sum$ 3.50$
1.99$ 5.49average per unit for QtrProduct cost without labor
varianceCoGS chartQty4,000No WIP in Examplegiven$ 5.49$
21,979Beginning MaterialsExcel CBeginning FG$
22,0004,000Excel BBeginning FGFor Inome Statement + Input
addtionsExcel CMaterials$ 150,400CoGS =Excel DLabor$
46,400with variance+ BeginningExcel EOverhead$
225,20075,200Excel B+ AdditionsTotal$ 422,000 -
EndingEnding Inventory Q2Average per FG unit5.49Excel E=
CoGS$39,562$ 0.40per lb.- Ending7,200(39,562)7,200Excel
BEnd Qty.7,200FG18,600# lbs. = CoGS$ 404,438Each5.49End
$sRM$ 7,440$47,002$47,002total Inv.Variable unit period
cost $ 0.50Fixed period costs$ 70,000Non cash expenses$
10,000Cash Expense$ 60,000Selling and AdministrativePeriod
CostsAprMayJunQtr. SumUnits
Sales25,00015,00032,00072,000Variable Period costs/unit sold$
0.50$ 0.50$ 0.50Variable unit period
expenses12,5007,50016,00036,000Fixed Period Expense$
70,000$ 70,000$
70,000210,000Total82,50077,50086,000246,000to Income
statementNon cash
portion(10,000)(10,000)(10,000)(30,000)Cash Period
Expense72,50067,50076,000216,000CASHExample uses the
Direct Method of Receipts and Disbusrsementfor Cash Budgets;
large companies use the Balance Ssheet Indirect methodWe'll
assume the debt exists for full quarter; borrowing may be drwn
down as neededand result is different resultTarget Minimum
Cash Balance $10,000givenQuarter June 30Beginning Cash
Balance$ 40,000Given + Collections$ 679,000Excel ACash
avaialble$ 719,000Cash disbursements:Materials$
131,400Excel CDirect labor$ 46,400Excel DMfg.
Overhead=Fxd. + Var - Non-cash$ 165,200Excel Erequired

without interest$ 35,000Selling/Admin.$ 216,000Excel
GBorrowing$ 19,000Average borrowing givenEquipment
Purchased$ 125,000Given data# months3Interest$
2856%interest$ 2856%Total$ 684,285Management judged
Cash balance adequate to operate did not pay down debtCash
Balance$ 34,715Could reduce Cash or change borrowingDebt
on BS$ - 0Excel K BelowCan balance BS with CASH or With
BorrowingRoyal CompanyStatement of IncomeQE: 6/30GAAP,
FACSales720,000100.0%Excel ALess: Cost of Goods Sold$
404,43856.2%Excel FGross Margin$ 315,56243.8%Selling &
Admin, Expense246,00034.2%Excel GOperating
Income69,5629.7%Interest Expense$ 2850.0%Income before
taxes$ 69,8479.7%Beg Cash$ 40,000Royal CompanyPeriod
Cash$ 34,715Month ending 6/30$ 74,715Balance
SheetAssetsdebt to BalanceCash$ 74,715Excel HKeep
Cash392,717Assetssold320,000Accounts receivable96,000Excel
A$ (33,240)70% collected(224,000)Inventory47,002Excel F$
(200,000)30% not collected96,000Land50,000Given$
(156,422)Equipment125,000Given3,055Statement of Retained
EarningsTotal assets392,717Beginning$ 86,575less:
Dividends0Liabilities & Stockholders' EquityPlus: Income$
69,847Accounts Payable$ 33,240Excel CEnding Retained
Earnings$ 156,422Long term debt$ 3,055Excel HKeep
CashBack into to BalanceCommon stock$
200,000GivenRetained Earnings$ 156,422ççrightTotal
Liabilities & Stockholders' Equity$ 392,717Minimize cash pay
debt: balance with cashCash$ 71,660Accounts Payable$
33,240debt to BalanceAccounts receivable$ 96,000Common
stock$ 200,000$ 389,662assetsInventory$ 47,002Retained
Earnings$ 156,422$ (33,240)Land$ 50,000$ 389,662$
(200,000)Equipment$ 125,000Debt to balance$ - 0$
(156,422)pay down debt to -0-$ 389,662$ 389,662$ - 0
Excel A
Sales Budget
Excel D
Direct Labor

Excel E
Manufacturing Overhead
Excel F
CoGS
Excel G
S&A Expense
Excel B
FG budget
Excel H
Cash
Excel I
Statement of Income
Excel J // Balance Sheet
2
1
5
3
6
7
4
8
9
10
Excel C
Materials
invested capital
Sheet2
Sheet3
Master Budgeting
Operating
Chapter 8
FAC=GAAP= Financial Reporting
Chapter Focus in Operating Budget NOT Cash Flow/BS –

financing, capital items, equity, investments, etc. not covered
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 by McGraw-Hill Education. All rights
reserved.
8-‹#›
8-‹#›
Learning Objective 1
Why do organizations budget and the processes used to create
budgets.

8-‹#›
Learning objective number 1 is to understand why organizations
budget and the processes they use to create budgets.
8-‹#›
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for acquiring and
allocating financial and other resources over a specified
forthcoming time period for defined purpose.
The act of preparing a budget is called budgeting.
The use of budgets to control an organization’s activities is
known as budgetary control.
8-‹#›
A budget is a detailed quantitative plan for acquiring and using
financial and other resources over a specified forthcoming time
period. The act of preparing a budget is called budgeting. The
use of budgets to control an organization’s activities is known
as budgetary control.

8-‹#›
Planning and Control
Planning –
involves developing objectives and preparing various budgets to
achieve those objectives.
Control –
involves the steps [review, iterate] taken by management to
increase the likelihood that the objectives set down while
planning is attained and that budgets and objectives for each
part of the organization is integrated to achieve objective.
Budget often are the controlling exercise to allocate resources
to company objectives>
Essential for Resource Allocation
8-‹#›
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 at the planning stage are
attained and that all parts of the organization are working
together toward that goal.

To be effective, a good budgeting system must provide for both
planning and control. Good planning without effective control is
time wasted.
8-‹#›
Advantages of Budgeting
Advantages
Define goals
and objectives
Uncover potential
encumbrances
including bottlenecks
Coordinate
activities
Communicate
plans
Think about and
plan for the future
Means of allocating
Resources #1

8-‹#›
Budgets communicate management’s plans throughout the
organization. Budgets force managers to think about and plan
for the future. The budgeting process provides a means of
allocating resources to those parts of the organization where
they can be used most effectively. The budget process can
uncover potential bottlenecks before they occur. Budgets
coordinate the activities of the entire organization by
integrating the plans of its various parts. Budgets define goals
and objectives that can serve as benchmarks for evaluating
subsequent performance.
While our focus in this chapter is on preparing operating
budgets for a one-year time frame, longer term budgets also can
be very helpful to organizations from a planning standpoint.
8-‹#›
Responsibility Accounting [part of MBO]
Managers should be held responsible for those items - and
only those items - that they can actually control [or influence]
to a significant extent. Responsibility accounting enables
organizations to react quickly to deviations from their plans and
to learn from feedback.
Responsibility- Learn & Correct

8-‹#›
The premise of responsibility accounting is that managers
should be held responsible only for those items that they can
control to a significant extent. Responsibility accounting
systems enable organizations to react quickly to deviations from
their plans and to learn from feedback obtained by comparing
budgeted goals to actual results. The point is not to penalize
individuals for missing targets.
8-‹#›
Choosing the
Budget Period
Operating Budget
2xx1
2xx2
2xx3
2xx4
Operating budgets ordinarily
cover a one - fiscal year
corresponding to a company’s fiscal year. Many companies
divide their annual budget
into four quarters or twelve months.
A continuous budget is a

12-month budget that rolls
forward one month (or quarter)
as the current month (or quarter)
is completed.
As a practical matter for a Manager; income may be tied to
performance to Annual Budget including objectives
8-‹#›
Operating budgets ordinarily cover a one-year period
corresponding to a company’s fiscal year. Many companies
divide their annual budget into four quarters. In this chapter, we
focus on one-year operating budgets.
A continuous or perpetual budget is a 12-month budget that
rolls forward one month (or quarter) as the current month (or
quarter) is completed. This approach keeps managers focused on
the future at least one year ahead.
8-‹#›
Self-Imposed Budget
A self-imposed budget or participative budget is a budget that is
prepared with the cooperation and participation of managers at
the level for which decision will be made at all levels.

8-‹#›
A self-imposed budget or participative budget is a budget that is
prepared with the full cooperation and participation of managers
at all levels. It is a particularly useful approach if the budget
will be used to evaluate managerial performance.
8-‹#›
Top Side Guidance
Certain Strategic & Operating objectives may be established and
provided to line/functional Management as OBJECTIVES FOR
THE BUDGET PERIOD which are to be factored into the
Budget Process:
E.g., Market share increase 3%
Sales $ up 6%
Defect level from 0.7% to 0.2%
Productivity increase of 2.5%

Product Launch on July 1
Energy Consumption reduction by 6%
Customer satisfaction improvement
Others
8-‹#›
Advantages of Self-Imposed Budgets
Individuals at all levels of the organization are viewed as
members of the team whose judgments are reviewed/valued by
top management.
Budget estimates prepared by front-line managers may be more
accurate than estimates prepared by top managers.
Motivation may be higher when individuals participate in
setting their own goals than when the goals are imposed from
above.
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.

8-‹#›
The key to self-imposed budgets is to get operational managers
involved in the budgeting process and to clearly state their
goals and expectations. Here is a list of four major advantages
of self-imposed budgets.
First, individuals at all levels of the organization are viewed as
members of the team whose judgments are valued by top
management.
Second, budget estimates prepared by front-line managers (who
have intimate knowledge of day-to-day operations) are often
more accurate than estimates prepared by top managers.
Third, motivation is generally higher when individuals
participate in setting their own goals than when the goals are
imposed from above.
Fourth, 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.
8-‹#›
Self-Imposed Budgets
Self-imposed budgets should be reviewed by higher levels of
management to prevent “budgetary slack”.
Most companies issue broad guidelines in terms of overall
profits or sales. Lower level managers are directed to prepare
budgets that meet those targets.

Bottoms-up budgets [self – imposed] are ALWAYS reviewed
and often require post review iteration. Many objectives are
driven throughout the organization. Profit [S], market share [S],
cash flow, CapX, manning levels, pay scales, efficiency …
8-‹#›
Self-imposed budgets should be reviewed by higher levels of
management. Without such a review, self-imposed budgets may
have too much “budgetary slack,” or may not be aligned with
overall strategic objectives. 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 target profits or sales. Lower
level managers are directed to prepare budgets that meet those
targets.
8-‹#›
Human Factors in Budgeting
The success of a budget depends on three important factors:
Top management must be enthusiastic and
committed to the budget process [Drive the Process].
Top management may use the budget to drive performance must
take care recognize that non-achievement of goal may be due to

factors beyond manger control.
Highly achievable budget targets are usually
preferred [ART is take out slack] when managers are
rewarded based on meeting budget targets.
8-‹#›
The success of a budget program depends upon three important
factors:
Top management must be enthusiastic and committed to the
budget process, otherwise nobody will take it seriously.
Top management must not use the budget to pressure employees
or blame them when something goes wrong. This breeds
hostility and mistrust rather than cooperative and coordinated
efforts.
Highly achievable budget targets are usually preferred (rather
than “stretch budget” targets) when managers are rewarded
based on meeting budget targets.
8-‹#›
Budget with attendant Objectives must have a degree of task
built in.
Effort is to be required for attainment of Budget with attendant

Objectives
Economic incentive often associated with budget attainment
8-‹#›
The Master Budget: An Overview: 10 items
Production budget
Period: Selling and
administrative
budget
Direct Materials
budget
Manufacturing
Overhead budget
Direct Labor
budget
Cash Budget
Sales budget:
PRIME DRIVER
Ending Inventory
budget
Budgeted
Balance Sheet
Budgeted
Income

Statement
1
2
3
5
6
7
8
9
10
4
CoGS compiled from 1, 2,3,5,6,7
8-‹#›
The master budget consists of a number of separate but
interdependent budgets. We have developed this schematic of
the budgeting process to illustrate the interdependency of the
various individual budgets. The sales budget shows the expected
sales for the budget period expressed in dollars and units. It is
usually based on a company’s sales forecast. All other parts of
the master budget are dependent on the sales budget.
The production budget is prepared after the sales budget. It lists
the number of units that must be produced during each budget

period to meet sales needs and to provide for the desired ending
inventory. The production budget in turn directly influences the
direct materials, direct labor, and manufacturing overhead
budgets, which in turn enable the preparation of the ending
finished goods inventory budget. These budgets are then
combined with data from the sales budget and the selling and
administrative expense budget to determine the cash budget.
The cash budget is a detailed plan showing how cash resources
will be acquired and used over a specified time period. All of
the operating budgets have an impact on the cash budget.
The last step of the process is to prepare a budgeted income
statement and a budgeted balance sheet.
8-‹#›
Seeing the Big Picture
To help you see the “big picture” keep in mind that the 10
schedules in the master budget are designed to answer the 10
questions shown on the next screen.
8-‹#›
Seeing the Big Picture
How much sales revenue will we earn?
How much cash will we collect from customers?

How much raw material will we need to purchase?
How much manufacturing costs will we incur?
How much cash will we pay to our suppliers [materials resource
needed] and our direct labor [labor resource needed], and how
much cash will we pay for manufacturing overhead?
What is the total cost that will be transferred from finished
goods inventory to cost of good sold [Inventory levels/Order
fulfillment & CoGS]?
How much selling and administrative expense will we incur and
how much cash will be pay related to those expenses?
How much money will we borrow from or repay to lenders –
including interest [change in Cash position] ?.
How much operating income will we earn?
What will our balance sheet look like at the end of the budget
period?
8-‹#›
The Master Budget: An Overview
A master budget is based on various estimates and assumptions.
For example, the sales budget requires three
estimates/assumptions as follows:
What in Market share [strategic] & price [strategic] then what
are the budgeted unit sales?
What is the budgeted selling price per unit?

What percentage of accounts receivable will be collected in the
period[s] being budgeted and subsequent periods.
8-‹#›
Prepare a sales budget, including cash.
8-‹#›
Learning objective number 2 is to prepare a sales budget,
including a schedule of expected cash collections.
8-‹#›

Budgeting Example
Excel A
In April Of the $175,000 A/R from March 31 25%/30% will be
collected
1
8-‹#›
The marketing department of Royal Company prepares the
following information that will be used to prepare a budget for
the quarter ending June 30th.
8-‹#›
Prepare a production budget.

8-‹#›
Learning objective number 3 is to prepare a production budget.
8-‹#›
The Production Budget
Production
Budget
Sales
Budget
and
Expected
Cash
Collections
Completed
The production budget must be
meet budgeted sales,
customer service levels [explain] and
target ending inventory.

8-‹#›
After we have budgeted our sales and expected cash collection,
we must make sure the production budget is adequate to meet
the forecasted sales and to provide for the desired ending
inventory. We need inventory on hand at the end of the period
to minimize the likelihood of an inventory stock-out.
8-‹#›
The Production Budget:
Production Qty.
The management at Royal Company wants ending inventory to
be equal to 20%* of the following month’s budgeted sales in
units [Inventory Level].
On March 31st, 4,000 units were on hand.
Let’s prepare the production budget.
* this meets customer service level of 98% order shipment in 2
days
Excel B
2
3

8-‹#›
The management at Royal wants to minimize the probability of
a stock out of inventory items. A policy has been implemented
that requires the company to maintain ending inventory of 20
percent of the following month’s budgeted sales. At the
beginning of the quarter, Royal had 4,000 units in inventory. If
Royal was a merchandising company it would prepare a
merchandise purchases budget instead of a production budget.
Let’s get started on the production budget.
8-‹#›
Prepare a direct materials budget, including cash disbursements
for materials.
8-‹#›

Learning objective number 4 is to prepare a direct materials
budget, including a schedule of expected cash disbursements for
purchases of materials.
8-‹#›
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.
Excel C
5
8-‹#›
Each good unit of output requires 5 pounds of direct material.
Management does not want to run out of direct materials, so a
policy has been established that materials on hand at the end of
each month must be equal to 10% of the following month’s
production. At the beginning of the month, Royal has 13,000
pounds of direct material on hand. Each pound of direct

material costs $0.40.
Let’s complete the direct materials budget.
8-‹#›
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 relating to materials is
$12,000.
Let’s calculate expected cash disbursements.
Excel C
5
8-‹#›
Recall that Royal pays $0.40 per pound of direct materials. The
company pays for one-half of its purchases in the month of the
purchase and one-half in the following month. At the beginning
of the quarter, Royal owed creditors $12,000 for purchases of
direct materials.
Let’s begin the expected cash disbursement for direct materials

schedule.
8-‹#›
Prepare a direct labor budget.
8-‹#›
Learning objective number 5 is to prepare a direct labor budget.
8-‹#›
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 paid 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.
Excel D
6

8-‹#›
Carefully review the information on the screen. A unique aspect
of direct labor at Royal is the no overtime policy. The company
agrees to no layoffs of employees if work is slow, but in return,
pays its employees straight time at $10 per hour for all hours
worked. With the current work force, Royal will have to pay for
a minimum of 1,500 hours of direct labor regardless of the work
available.
Let’s prepare this budget.
8-‹#›
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. $45000
b. $67500
c. $45700
d. $62000

8-‹#›
Determine the total direct labor costs if Royal were to pay time-
and-one-half for all hours in excess of 1,500 hours per month.
8-‹#›
Prepare a manufacturing overhead budget.
8-‹#›
Learning objective number 6 is to prepare a manufacturing
overhead budget.
8-‹#›
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.
Excel E
7
8-‹#›
Royal applies overhead on the basis of direct labor hours. The
variable manufacturing overhead rate is $20 per direct labor
hour. The fixed manufacturing overhead is $50,000 per month,
of which $25,000 is noncash costs, primarily depreciation on
the factory assets. This budget will provide a schedule of all
costs of production other than direct materials and direct labor.
8-‹#›
Ending Finished Goods Inventory Budget
Excel F

8-‹#›
Royal can now complete the ending finished goods inventory
budget. The first step in preparing this budget is to compute
direct materials cost per unit. We know that each unit requires 5
pounds of direct material at $0.40 per pound, for a total of
$2.00 per unit. The information needed can be derived by
referring back to the direct materials budget.
8-‹#›
Prepare a selling and administrative expense budget.
8-‹#›

Learning objective number 7 is to prepare a selling and
administrative expense budget.
8-‹#›
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.
Excel G
4
8-‹#›
Royal has a variable and fixed component to its selling and
administrative (S & A) expenses. The company estimates

variable selling and administrative expenses at $0.50 per unit
sold. Fixed selling and administrative expenses are estimated at
$70,000 per month. Of this amount, $10,000 are noncash
expenses, primarily depreciation.
The selling and administrative expense budget will be prepared
in a manner similar to our overhead budget. This budget lists
the budgeted expenses for areas other than manufacturing and it
is typically a compilation of many smaller individual budgets.
8-‹#›
Prepare a cash budget.
8-‹#›
Learning objective number 8 is to prepare a cash budget.
8-‹#›
Format of the Cash Budget
The cash budget is divided into four sections:
The Direct Method used in the Example tries to conform to the
company’s cash receipts and cash disbursement – simplified
approach

The Indirect Method commonly used in larger company’s uses
the Cash Flow Statement approach of analyzing Balance Sheet
differences and certain specific transaction [outside scope of
Ch. 8] and categorize into three categories of Operating,
Financing, and Investing; ACC310 covers Cash Flow Statements
Excel H
8
8-‹#›
The preparation of the cash budget can be quite complex. This
budget should be broken down into time periods that are as
short as feasible. It consists of four major sections:
Cash receipts section lists all cash inflows excluding cash
received from financing;
Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
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
Financing section details the borrowings and repayments

projected to take place during the budget period.
8-‹#›
The Budgeted Income Statement
Cash
Budget
Budgeted
Income
Statement
Completed
With interest expense from the cash budget, Royal can prepare
the budgeted income statement.
9
8-‹#›
We are now ready to move from the preparation of individual
budgets to preparing our budgeted financial statements. The
cash budget must be prepared first so that the interest expense

can be determined for the budgeted income statement. Let’s
begin with the budgeted income statement.
8-‹#›
Prepare a budgeted income statement.
Excel I
8-‹#›
Learning objective number 9 is to prepare a budgeted income
statement.
8-‹#›
Other elements of Budget cycle not covered in this chapter.
Accrued expenses, Capital budget, Equity, Long term Debt, …

8-‹#›
Learning objective number 10 is to prepare a budgeted balance
sheet.
8-‹#›
Prepare a budgeted balance sheet.
8-‹#›
sheet.
8-‹#›
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 - $86575 (April 1)

Equipment - $125,000
Excel J
10
8-‹#›
Please make note of this supplemental information as we will
need it to complete the budgeted balance sheet.
8-‹#›
Alternative /method to Budget Inventory & Accounts
Receivable is to Budget from performance indicator such as
Inventory Turns & A/R days or turns…

8-‹#›
sheet.
8-‹#›
End of Chapter 8
8-‹#›
End of Chapter 8.
8-‹#›
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
Middle
Management
Top Management
CH.8 ExcelDoing calendar Q2Doing calendar Q2Doing calendar

Q2Doing calendar Q2Doing calendar Q2Doing calendar
Q2JanFebMarAprMayJunJulAugSepOctNovDecUnits
Sales20,00050,00030,00025,00015,00032,00036,00042,00066,0
00Price each$ 10.00$ 10.00$ 10.00$ 10.00$ 10.00$
10.00Budgeted
Sales200,000500,000300,000250,000150,000320,000Period
ending
cashCASH90,00030%uncollectedCollections75,00025%/30% of
end Q1 A/R will be collected70% of current
priod175,000105,000224,00025%of prior
period62,50037,500SumCash
collected250,000167,500261,500679,000679,000Looking at
Q2Ending inventory units20%MarAprMayJunJulAugUnits
Sales30,00025,00015,00032,00036,00042,000Budget Ending
Inventory 4,0003,0006,4007,2008,400[20% next mo.
Sales]Sales + EndingGiven28,00021,40039,20044,400Less
Beginning = prior month-end(4,000)(3,000)(6,400)(7,200)= Unit
Production24,00018,40032,80037,200Cost/LbCost/UnitQuantity
per unit in Lbs.5.00$ 0.40$ 2.00Ending Inventory % next
month10%Looking at Q2MarAprMayJunJul= Unit Production-
024,00018,40032,80037,200Required for Production/Lbs-
0120,00092,000164,000186,000$s Into FG for Production$
48,000$ 36,800$ 65,600$ 150,400Qtr. TotalBudget Ending
Inventory 13,0009,20016,40018,60010% of following
MonthSales + Ending129,200108,400182,600Less Beginning =
prior month-end(13,000)(9,200)(16,400)Qty. Purchase
[additions] of Raw material116,20099,200166,200Material
budget$s. Purchase of Raw material$ 46,480$ 39,680$
66,480Material budget$ 0.40per lb.AprApr.CASHEnding A/P$
12,000$ 12,000Beg$ 12,000Cr. To A/P = purchases$
46,480$ 39,680$ 66,480$ 46,480Add$ 46,480Pay 50%
current [given company policy]$ 23,240$ 19,840$
33,2401/2 April$ (23,240)Paid$ (35,240)Pay prior$
12,000$ 23,240$ 19,840Cash budget$ 35,240$ 23,240Total
paid$ 35,240$ 43,080$ 53,080Cash budget$
131,400PaidA/PEndingEnding A/P [Beginning + Additions -

payments]$ 23,240$ 19,840$ 33,240Qtr.
TotalGuaranteedHoursRatePayment for quarter1500$
10.00Required Hrs. per unit0.053minutesDL$s. per unit$
0.50700used for ending Q2 inventoryAprMayJunQtr sum= Unit
Production24,00018,40032,80075,200HRs of Prodctn. at
Required per unit of 0.05 hrs. ea.1,2009201,6403,760DL Cost of
production into units at 10 per Hr$ 12,000$ 9,200$
16,40037,600unfavorable variance of$ 8,800Hrs
paid1,5001,5001,6404,640880Hours$s paid$ 15,000$ 15,000$
16,40046,400ADDEDProductivity at budget earned HRs/paid
HRs80%61%100%Spend > Used by$ 8,800into
CoGS*******Variable OH $s per HR$ 20.00Given: rate is per
DL hr.Required Hrs. per unit0.05Hrs. per unit3minutesVariable
OH $s per unit$ 1.00Fxd. MOH per month$50,000Non cash
MOH$20,000Cash Mfg. OH$30,000Actual Overhead rates NOT
predetermined ratesAprMayJunQtr. SumRequired Hrs. per
unit0.05= Unit Production24,00018,40032,80075,200Fxd. OH
spending$50,000$50,000$50,000# Hrs.1,2009201,640HRs of
Prodctn. at Required per unit of 0.05 hrs.
ea.1,2009201,6403,760per Hr.41.6754.3530.49VOH Cost of
production at $20 per DL Hr$24,000$18,400$32,800per
unit2.082.721.52Fixed manufacturing OH per
period$50,000$50,000$50,000$ 150,000ADDEDFxd. + Var.
Mfg. OHTotal MOH per Month$74,000$68,400$82,800$
225,200$$$$QTY$ 225,200Fxd. Mfg. OH rate/hr.$ 41.67$
54.35$ 30.4939.89$ 150,0003,7603,760Fxd. Mfg. OH unit$
2.08$ 2.72$ 1.52$ 1.990.05hrs. per unit59.89Fxd. Mfg. OH
rate/hr.Quarter
averageòAprMayJunper Hr.Budgeted MOH rate per period
Fxd.+ Var.61.6774.3550.4959.89Fxd + Var$ 41.67$ 54.35$
30.49Fxd rate$ 20.00$ 20.00$ 20.00V. Rate0Non-cash
expense($20,000)($20,000)($20,000)$ 61.67$ 74.35$
50.49Cash MOH$ 54,000$ 48,400$ 62,800$ 165,200Qtr
TotalProduct Cost using Qtr. Average
Fxd.unitVariableFixed0.40$5.00Materials$ 2.005 lbs
$0.40/lb0.05$10.00DL$ 0.50This example: Std. Hrs./unit$

100.05$20.00V Mfg. OH$ 1.000.050.05$59.89F MFG.
OH1.99This example: Actual rate for Qtr.$ 0.50Sum$ 3.50$
1.99$ 5.49average per unit for QtrProduct cost without labor
varianceCoGS chartQty4,000No WIP in Examplegiven$ 5.49$
21,979Beginning MaterialsExcel CBeginning FG$
22,0004,000Excel BBeginning FGFor Inome Statement + Input
addtionsExcel CMaterials$ 150,400CoGS =Excel DLabor$
46,400with variance+ BeginningExcel EOverhead$
225,20075,200Excel B+ AdditionsTotal$ 422,000 -
EndingEnding Inventory Q2Average per FG unit5.49Excel E=
CoGS$39,562$ 0.40per lb.- Ending7,200(39,562)7,200Excel
BEnd Qty.7,200FG18,600# lbs. = CoGS$ 404,438Each5.49End
$sRM$ 7,440$47,002$47,002total Inv.Variable unit period
cost $ 0.50Fixed period costs$ 70,000Non cash expenses$
10,000Cash Expense$ 60,000Selling and AdministrativePeriod
CostsAprMayJunQtr. SumUnits
Sales25,00015,00032,00072,000Variable Period costs/unit sold$
0.50$ 0.50$ 0.50Variable unit period
expenses12,5007,50016,00036,000Fixed Period Expense$
70,000$ 70,000$
70,000210,000Total82,50077,50086,000246,000to Income
statementNon cash
portion(10,000)(10,000)(10,000)(30,000)Cash Period
Expense72,50067,50076,000216,000CASHExample uses the
Direct Method of Receipts and Disbusrsementfor Cash Budgets;
large companies use the Balance Ssheet Indirect methodWe'll
assume the debt exists for full quarter; borrowing may be drwn
down as neededand result is different resultTarget Minimum
Cash Balance $10,000givenQuarter June 30Beginning Cash
Balance$ 40,000Given + Collections$ 679,000Excel ACash
avaialble$ 719,000Cash disbursements:Materials$
131,400Excel CDirect labor$ 46,400Excel DMfg.
Overhead=Fxd. + Var - Non-cash$ 165,200Excel Erequired
without interest$ 35,000Selling/Admin.$ 216,000Excel
GBorrowing$ 19,000Average borrowing givenEquipment
Purchased$ 125,000Given data# months3Interest$

2856%interest$ 2856%Total$ 684,285Management judged
Cash balance adequate to operate did not pay down debtCash
Balance$ 34,715Could reduce Cash or change borrowingDebt
on BS$ - 0Excel K BelowCan balance BS with CASH or With
BorrowingRoyal CompanyStatement of IncomeQE: 6/30GAAP,
FACSales720,000100.0%Excel ALess: Cost of Goods Sold$
404,43856.2%Excel FGross Margin$ 315,56243.8%Selling &
Admin, Expense246,00034.2%Excel GOperating
Income69,5629.7%Interest Expense$ 2850.0%Income before
taxes$ 69,8479.7%Beg Cash$ 40,000Royal CompanyPeriod
Cash$ 34,715Month ending 6/30$ 74,715Balance
SheetAssetsdebt to BalanceCash$ 74,715Excel HKeep
Cash392,717Assetssold320,000Accounts receivable96,000Excel
A$ (33,240)70% collected(224,000)Inventory47,002Excel F$
(200,000)30% not collected96,000Land50,000Given$
(156,422)Equipment125,000Given3,055Statement of Retained
EarningsTotal assets392,717Beginning$ 86,575less:
Dividends0Liabilities & Stockholders' EquityPlus: Income$
69,847Accounts Payable$ 33,240Excel CEnding Retained
Earnings$ 156,422Long term debt$ 3,055Excel HKeep
CashBack into to BalanceCommon stock$
200,000GivenRetained Earnings$ 156,422ççrightTotal
Liabilities & Stockholders' Equity$ 392,717Minimize cash pay
debt: balance with cashCash$ 71,660Accounts Payable$
33,240debt to BalanceAccounts receivable$ 96,000Common
stock$ 200,000$ 389,662assetsInventory$ 47,002Retained
Earnings$ 156,422$ (33,240)Land$ 50,000$ 389,662$
(200,000)Equipment$ 125,000Debt to balance$ - 0$
(156,422)pay down debt to -0-$ 389,662$ 389,662$ - 0
Excel A
Sales Budget
Excel D
Direct Labor
Excel E
Manufacturing Overhead
Excel F

CoGS
Excel G
S&A Expense
Excel B
FG budget
Excel H
Cash
Excel I
Statement of Income
Excel J // Balance Sheet
2
1
5
3
6
7
4
8
9
10
Excel C
Materials
invested capital
Sheet2
Sheet3
Sheet1ACC220 / HCTCh. 8 HW Prepare:One PeriodDo not
have to do Cash portion of Budget[a]Sales budget[b]Ending FG
Budget // Production Qty.[c]Direct Material budget[d]Direct
Labor budget[e]Manufacturing Overhead Budget[f]CoGS
Chart[g]Selling Expense and Administrative Expense
Budget[h]Statement of Income through Operating Income [ No
interest]Do in order aboveNo Balance sheet // No ending
CashShow work or no partial credit givenUse Class Example or
textbook formatsData SetBudget PeriodNext PeriodUnit
Sales2200024000Sales Price per unit$ 28.00Ending FG

inventory = 1/4 next period Sales unitsBeginning Material
inventory0.00compute ending FG Qty.Beginning FG
inventory0.00Ending Material inventory = -0-Fixed
Manufacturing overhead per period = $ 60,000Variable
manufacturing overhead per unit$ 12.00applied on direct labor
hoursVariable Selling and Administrative Expense$
8.00applied per unit soldFixed Selling and Administrative
Expense$ 14,000Direct Labor rate per hr. = $ 11.00 Hr. of
direct labor per unit0.10Hr. for production = the Direct labor
hrs. paid; -0- extra hours paidlbs. of Material used per
unit0.30cost per Lb. of material$ 2.00
Sheet2
Sheet3

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