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TM 9-1

AGENDA: PROFIT PLANNING (BUDGETING)
A.

Purposes and overview of budgeting.

B.

Building a master budget.
1. Sales budget
2. Production budget
3. Direct materials budget
4. Direct labor budget
5. Manufacturing overhead budget
6. Ending finished goods inventory budget
7. Selling and administrative expenses budget
8. Cash budget
9. Budgeted income statement
10. Budgeted balance sheet

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.

• Budgeting coordinates the activities of the entire organization. .. 2010. • Budgeting forces managers to give planning top priority. © The McGraw-Hill Companies. PURPOSES OF BUDGETING • Budgets communicate management’s plans throughout the organization. • Control: The steps taken by management to attain the objectives set down at the planning stage. • Budgets provide a means of allocating resources to their most effective uses. • Budgeting uncovers potential bottlenecks. All rights reserved. Budgeting involves two stages: • Planning: Developing objectives and preparing various detailed budgets to achieve those objectives. • Budgeting provides goals that serve as benchmarks for evaluating subsequent performance.TM 9-2 OVERVIEW OF BUDGETING A budget is a detailed plan for acquiring and using financial and other resources over a specified period. Inc.

TM 9-3 MASTER BUDGET INTERRELATIONSHIPS © The McGraw-Hill Companies. 2010. Inc. All rights reserved.. .

... 9.. July..... 7. Production budget.. Sales budget (with a schedule of expected cash collections). Budgeted balance sheet.. Budgeted income statement. Ending finished goods inventory budget. Cash budget. All rights reserved.TM 9-4 COMPREHENSIVE BUDGETING EXAMPLE Royal Company is preparing budgets for the second quarter ending June 30... 6.000 30.000 25.000 units units units units units • The selling price is $10 per unit.. Manufacturing overhead budget.000 50.. 5.. August. June. 20. 4. 10... 8. Selling and administrative expense budget..000 15. ... Inc. • Budgeted sales of the company’s only product for the next five months are: April.. Direct materials budget (with a schedule of expected cash disbursements for materials). © The McGraw-Hill Companies.. May.. • The following elements of the master budget will be prepared in this example: 1. 3.. Direct labor budget. 2010.. 2.

000 $ 30..000 50...000 30... • The accounts receivable balance on March 31 was $30. April May June 20.000 140..000 $125.000 × $10 × $10 × $10 $200....000..000 $400........ and the remaining 5% are uncollectible..000 50.000 125... 25% × $200..000.000.. Total sales.....000 $335.000 $300... Total cash collections..000 350...... • The company collects 70% of these credit sales in the month of the sale...000..000 $905... 25% × $500..... Accounts receivable beginning balance.... April May June Quarter $ 30.000 © The McGraw-Hill Companies....000...000.000 $ 50. 25% are collected in the month following sale..000 × $10 $1....000 140.000 Quarter 100. All of this balance was collectible.000 SCHEDULE OF EXPECTED CASH COLLECTIONS Additional data: • All sales are on account. June sales 70% × $300..000 210.. April sales 70% × $200...000 $170........ Selling price per unit...000... May sales 70% × $500.000 350.. ....... Inc...000 $500.....TM 9-5 SALES BUDGET Budgeted sales (units)........... 2010......000 210... All rights reserved...

.000 units × 20% = 3.000 6.. All rights reserved...000 4..000 29.000 May 50..... 4. • On March 31.000 26. Inc... Budgeted sales [TM 9-4]...000* 28... 2010. Less beginning inventory..000 23.000 5.....000 3. Required production....000 * Budgeted sales in August = 15.. Total needs.000 July 25..000 June 30.... ..000 35... © The McGraw-Hill Companies.... .....000 46...000 10.000 56..000 units...000 10.TM 9-6 PRODUCTION BUDGET Additional data: • The company desires to have inventory on hand at the end of each month equal to 20% of the following month’s budgeted unit sales.. Add desired ending inventory...000 units were on hand..000 6....000 units..000 5.. Desired ending inventory in July = 15........ April 20.000 30...

........ Raw materials to be purchased (pounds).....400 * For June: 23..000 ×5 ×5 ×5 130....000 $88....000 23. Raw materials per unit (pounds) Production needs (pounds)..000 221......000 23..... • The material costs $0..000 units produced in July [TM 9-6] × 5 pounds per unit = 115.500 153..........000 pounds...000 145.................. Required production in units [TM 9-6].000 244.... All rights reserved..500 156......... 115..000 pounds......... Inc..000 503......500 13..800 $201.....500 516.......40 per pound April May June Quarter 26....000 14. Less beginning inventory (pounds)....500 13..... 2010.500 pounds © The McGraw-Hill Companies....... ...500 11.500 11....000 230.40 per pound. Total needs (pounds).........000 46...000 14..000 ×5 505.000 140......000 101... Cost of raw materials to be purchased at $0.500 142.600 $56. Add desired ending inventory (pounds)*.. • Management desires to have materials on hand at the end of each month equal to 10% of the following month’s production needs...000 29...TM 9-7 DIRECT MATERIALS BUDGET Additional data: • 5 pounds of material are required per unit of product. • The beginning materials inventory was 13.....500 $56....000 pounds × 10% = 11.

...... 44..000 28...300 28... 28.700 Quarter $ 12.... All rights reserved. ..TM 9-8 SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR MATERIAL Additional data: • Half of a month’s purchases are paid for in the month of purchase. • The accounts payable balance on March 31 was $12.000 $72...300 50% × $88...000....000 April purchases: 50% × $56...600....000 © The McGraw-Hill Companies........ Inc...000 44. • No discounts are given for early payment.......400 Total cash disbursements for materials......400 $185.000 28.....800.......600. April May June Accounts payable beginning balance.. $44...........300 June purchases: 50% × $56... 28....................300 $72.....000 May purchases: 50% × $88....000. $12..... 2010.... $28.000.. the other half is paid for in the following month....300 44.000 50% × $56..... $40......

.... • Each hour of direct labor costs the company $10..... • Management fully adjusts the workforce to the workload each month. .450 × $10 $14.... .. Required production [TM 9-6].. April May June Quarter 26.TM 9-9 DIRECT LABOR BUDGET Additional data: • Each unit produced requires 0...000 1......300 × $10 $13.......05 hour of direct labor.. All rights reserved. Direct labor cost per hour.... Total direct labor–hours needed................. Total direct labor cost.500 5.000 × 0.. Inc.05 46.....000 × 0..000 × 0..05 1.. Direct labor-hours per unit.500 Note: Many companies do not fully adjust their direct labor workforce every month and in such companies direct labor behaves more like a fixed cost. © The McGraw-Hill Companies.300 × $10 $23..05 101. with additional cost if overtime is necessary. 2010...000 2..05 29.050 × $10 $50.000 × 0..

..000 $29..500 per month. April May June Budgeted direct labor-hours 1. × $20 × $20 × $20 Variable manufacturing overhead.500 in depreciation....500 Total manufacturing overhead..000 151........ Variable manufacturing overhead rate..500 Cash disbursements for manufacturing overhead.500 50.000 $59. All rights reserved.300 1....... $56...........050 × $20 $101..500 79.....500 96..... $26... 76.000 $76. 20... Inc...500 Less depreciation......500 20.000 Fixed manufacturing overhead. 2010.... 50..500 20.....500 $191.. ................ which is not a cash outflow.500 252.....000 $46..500 61.....450 [TM 9-9]... This includes $20...000 © The McGraw-Hill Companies......300 2....000 Quarter 5.TM 9-10 MANUFACTURING OVERHEAD BUDGET Additional data: • Variable manufacturing overhead is $20 per direct labor-hour......500 50.... • Fixed manufacturing overhead is $50...

........000 © The McGraw-Hill Companies..TM 9-11 ENDING FINISHED GOODS INVENTORY BUDGET Additional data: • Royal Company uses absorption costing in its budgeted income statement and balance sheet.... 5.... Quantity 5 pounds 0.050 hours Budgeted ending finished goods inventory: Ending finished goods inventory in units [TM 9-6]......50 2...... 2010.00 * Predetermined Total manufacturing overhead = overhead rate Total direct labor hours = $252. Computation of absorption unit product cost: Direct materials......... Manufacturing overhead...... Unit product cost [see above]. .......40 per pound $10....000 × $5 $25....50 $5...00 per hour* Total $2..500 = $50...00 0. Ending finished goods inventory in dollars.... Inc..00 per hour 5... All rights reserved......00 per hour $50....... Direct labor.05 hours 0...... • The company has no work in process inventories.. • Manufacturing overhead is applied to units of product on the basis of direct labor-hours.... Unit product cost...05 hours Cost $0....

. ......000 85......000 × $0....000 Less depreciation...000 10.000 per month and include $10.....000 $25..... Variable selling and administrative expense per unit...000 Cash disbursements for selling and administrative expenses.....000 © The McGraw-Hill Companies............... 2010..000 260.....000 $230.000 30. 10..000 210.....50 × $0..000 $15..000 $85.000 Fixed selling and administrative expense.......50 × $0. $10.000 50... • Fixed selling and administrative expenses are $70... × $0.000 Quarter 100...000 [TM 9-4]... Inc. April May June Budgeted sales in units 20.. $70.000 $75..50 $ 50......000 95...... 80.........000 70..50 Variable selling and administrative expense.........000 30.....50 per unit sold.000 in depreciation. 70. All rights reserved...000 Total selling and administrative expense.000 70..TM 9-12 SELLING AND ADMINISTRATIVE EXPENSE BUDGET Additional data: • Variable selling and administrative expenses are $0..000 10.....

3.000. The cash balance at the beginning of April was $40. a. 2. This equipment will be installed and tested during the second quarter and will not become operational until July. when depreciation charges will commence. 2010..TM 9-13 CASH BUDGET Additional data: 1. 4. . The company does not have to make any payments until the end of the quarter. A line of credit is available at a local bank that allows the company to borrow up to $75.700 are scheduled for May and $48. The interest rate is 1% per month. Equipment purchases of $143. Inc.000 at the end of each month. Cash dividends of $51.800 for June. b. All borrowing occurs at the beginning of the month. and all repayments occur at the end of the month.000 are to be paid to stockholders in April.000. All rights reserved. © The McGraw-Hill Companies. c. Royal Company desires a cash balance of at least $30.

. Repayments......000) ( 2.... Total disbursements.000 430..000 45......000 230. © The McGraw-Hill Companies.....000 0 0 0 0 $ 30... Direct labor [TM 9-9]...000) 30..000 Financing: Borrowings....000 $ 30.000 × 1% × 3 = $2..000 191.000 95. 70.....000...........TM 9-14 CASH BUDGET Royal Company Cash Budget For the Quarter Ending June 30 April Cash balance......000 Equipment purchases....000 Total cash available.... Manufacturing overhead [TM 9-10].000 50.000 $ 43.......... beginning....000 230.. 210. ending........ Cash balance....000 72....000 143..........000 85......000 945......500 185..........000 $ 43..... $ 40.......000 75...000 Excess (deficiency) of cash available over disbursements.000 48..000 59........000 * $50.. $ 30.000 Quarter $ 40.........800 0 270...000 13. Interest*.000 0 51.....000 (50..... 50....000 40........000 905.... (20.......000) ( 2....000 0 0 50..000 900. 170.700 0 400.....000) ( 2..000 365..........000 192......500 51........300 23....... Selling & administrative [TM 9-12].. 2010..000) Less disbursements: Direct materials [TM 9-8]...........500 56..000) 50..... All rights reserved...000 72.......... Dividends....000 0 (50.000 335.......... Total financing.. ....000 400. Inc.000) (52.........000 Add receipts: Cash collections [TM 9-5]...000 76....000 May June $ 30.....700 14......

................... Cost of goods sold...................... 100...000 450............................. $ 950....... Cost of goods sold [see below].. $1............000 Less uncollectible amounts (5%).....000 190....... All rights reserved................... .............. 2010.......................TM 9-15 BUDGETED INCOME STATEMENT Royal Company Budgeted Income Statement For the Quarter Ending June 30 Net sales [see below].............000 500... $950............000...............000 × $5 $500.....................................000 Net sales......................... Gross margin................ Inc..000 Computation of cost of goods sold: Budgeted sales (units)......000 Computation of net sales: Sales............................................................ Interest expense [TM 9-14]..... Net income.............000 © The McGraw-Hill Companies.................. 50................... Selling & administrative expenses [TM 9-12]........000 $188................................000 260...000 2. Unit product cost.... Net operating income..........

.000) (g) $ 1.......200 12.355...200 Given Given See TM 9-8 Given Given © The McGraw-Hill Companies...... Inc........143.. Liabilities: Accounts payable.....260..................... Raw materials inventory...TM 9-16 BEGINNING BALANCE SHEET Royal Company Balance Sheet March 31 Current assets: Cash....... Total liabilities and stockholders’ equity (a) (b) (c) (d) (e) See TM 9-13 See TM 9-5 Given Given Given (f) (g) (h) (i) (j) $ 40...... Accumulated depreciation...... Stockholders’ equity: Common stock......200 20.. 2010......................000 $1........200 $1......... ....200 (j) 95......000 (a) (b) (c) (d) 400.......000 (h) 1.............000 (f) (750..... Retained earnings.. Finished goods inventory........... Accounts receivable.........343..................................... Total assets.........200 $ $ 200...... All rights reserved.355............................000 (e) 1.. Buildings and equipment........000 30........................................... Plant and equipment: Land..................000 (i) 1.610..............000 5...

. $ 43......361........ Inc...200 $1........500 + $30......000 (a) Accounts receivable.....800 purchases × 50% (i) (j) See TM 9-16 $1.....280.............. 1....... 25..400 (h) 1..000 (i) 1... Stockholders’ equity: Common stock................600 (f) $1........................600 (c) Finished goods inventory...............800 (g) $750.............. 400........000 © The McGraw-Hill Companies.......000 sales × 25% 11....200 (j) 28........... (841.40 per pound See TM 9-11 See TM 9-16 $ 147..000+ $143... 75......000 (b) Raw materials inventory..480..... All rights reserved. Retained earnings.... Total liabilities and stockholders’ equity (a) (b) (c) (d) (e) See TM 9-14 $300.....000 (h) $56...........................508... ... 2010............... 4.....802....000 + $61..................200 + $188................000 (d) Plant and equipment: Land.143...700+ $48..........600 $ $ 200..000 (e) Buildings and equipment.................508........610....000 $1. Liabilities: Accounts payable.500) (g) Total assets...500 pounds × $0......TM 9-17 BUDGETED BALANCE SHEET Royal Company Budgeted Balance Sheet June 30 Current assets: Cash....600 1..........000 – $51...500 (f) Accumulated depreciation...