Transcript
Chapter 9
Profit Planning and
Activity-Based Budgeting
Purposes of Budgeting Systems
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Budget
a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
Planning
Facilitating Communication and Coordination
Allocating Resources
Controlling Profit and Operations
Evaluating Performance and Providing Incentives
Types of Budgets
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Detail
Budget
Detail
Budget
Detail
Budget
Master
Budget
Covering all
phases of
a company’s
operations.
Sales
Production
Materials
Types of Budgets
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Budgeted Financial
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Types of Budgets
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1999
2000
2001
2002
Continuous or
Rolling Budget
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
L o n g R a n g e B u d g e t s
Capital budgets with acquisitions
that normally cover several years.
Financial budgets with financial resource acquisitions.
MASTER BUDGET:
Sales budget
Production budget
Direct material budget
Direct labour budget
Overhead budget
Selling and administrative budget
Cash budget
Sales Budget
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Breakers, Inc. is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units.
The selling price is $10 per unit.
Sales Budget
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Production Budget
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The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.
On March 31, 4,000 units were on hand.
Let’s prepare the production budget.
Production Budget
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From sales
budget
March 31
ending inventory
Ending inventory becomes beginning inventory the next month
Direct-Material Budget
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At Breakers, 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 $.40 per pound.
Let’s prepare the direct materials budget.
Direct-Material Budget
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From our
production
budget
10% of the following
month’s production
March 31
inventory
Direct-Material Budget
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Direct-Labor Budget
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At Breakers, each unit of product requires 0.1 hours of direct labor.
The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.
In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay).
For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month.
Let’s prepare the direct labor budget.
Direct-Labor Budget
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From our
production
budget
This is the greater of
labor hours required or
labor hours guaranteed.
Overhead Budget
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Here is Breakers’ Overhead Budget for the quarter.
Selling and Administrative Expense Budget
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At Breakers, variable selling and administrative expenses are $0.50 per unit sold.
Fixed selling and administrative expenses are $70,000 per month.
The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash outflows for the month.
Selling and Administrative Expense Budget
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From our
Sales budget
Cash Receipts Budget
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At Breakers, all sales are on account.
The company’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% is uncollected.
The March 31 accounts receivable balance of $30,000 will be collected in full.
Cash Receipts Budget
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Cash Disbursement Budget
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Breakers pays $0.40 per pound for its materials.
One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month.
No discounts are available.
The March 31 accounts payable balance is $12,000.
Cash Disbursement Budget
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140,000 lbs. × $.40/lb. = $56,000
Cash Disbursement Budget
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Breakers:
Maintains a 12% open line of credit for $75,000.
Maintains a minimum cash balance of $30,000.
Borrows and repays loans on the last day of the month.
Pays a cash dividend of $25,000 in April.
Purchases $143,700 of equipment in May and $48,300 in June paid in cash.
Has an April 1 cash balance of $40,000.
Cash Budget
(Collections and Disbursements)
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To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
From our Cash
Receipts Budget
From our Cash Disbursements
Budget
From our Direct Labor Budget
From our Overhead Budget
From our Selling and Administrative Expense Budget
Cash Budget
(Collections and Disbursements)
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Breakers must
borrow an
addition $13,800
to maintain a
cash balance
of $30,000.
Cash Budget
(Collections and Disbursements)
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At the end of June, Breakers has enough cash to repay
the $48,800 loan plus interest at 12%.
Cash Budget
(Collections and Disbursements)
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Cash Budget
(Financing and Repayment)
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Ending cash balance for April
is the beginning May balance.
Cost of Goods Manufactured
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Cost of Goods Sold
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Budgeted Income Statement
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Budgeted Statement of Cash Flows
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Budgeted Balance Sheet
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Breakers reports the following account balances on June 30 prior to preparing its budgeted financial statements:
Land - $50,000
Building (net) - $148,000
Common stock - $217,000
Retained earnings - $46,400
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25%of June
sales of
$300,000
11,500 lbs. at
$.40 per lb.
5,000 units at
$4.60 per unit.
50% of June
purchases
of $56,800
International Aspects of Budgeting
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Firms with international operations face special problems when preparing a budget.
Fluctuations in foreign currency exchange rates.
High inflation rates in some foreign countries.
Differences in local economic conditions.
Human factors and behavioral implications
Behavioral Impact of Budgets
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Budgetary Slack: Padding the Budget
People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.”
Participative Budgeting
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Flow of Budget Data
End of Chapter 9
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