Chapter 9

Profit Planning and Activity-Based Budgeting

McGraw-Hill/Irwin

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Purposes of Budgeting Systems
Budget a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
1. Planning 2. Facilitating Communication and Coordination 3. Allocating Resources 4. Controlling Profit and Operations 5. Evaluating Performance and Providing Incentives
1-2

Types of Budgets
Detail Budget
Detail Budget Detail Budget

Production

Master Budget
Covering all phases of a company’s operations.

1-3

Types of Budgets
Income Statement

Budgeted Financial Statements

Balance Sheet

Statement of Cash Flows
1-4

Long Range Budgets Continuous or 1999Rolling Budget2000 2001 2002 This budget is usually a twelve-month budget that rolls forward one month as the current month is completed. 1-5 .Types of Budgets Capital budgets with acquisitions that normally cover several years. Financial budgets with financial resource acquisitions.

Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget Ending Inventory Budget Direct Materials Direct Materials Budget Direct Labor Budget Overhead Budget Selling and Administrative Budget Cash Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 1-6 .

1-7 . and customers served. Activity-Based Budgeting (ABB) Forecast of products and services to be produced and customers served.Activity-Based Costing versus Activity-Based Budgeting Resources Activity-Based Costing (ABC) Resources Activities Activities Cost objects: products and services produced.

Sales Budget Breakers. is preparing budgets for the quarter ending June 30.000 units June 30.000 units July 25.000 units.000 units May 50. Inc. The selling price is $10 per unit. Budgeted sales for the next five months are: April 20. 1-8 .000 units August 15.

Sales Budget April Budgeted sales (units) 20.000 10 $ 500.000 $ 300.000 $ 10 $ 30.000 May June Quarter 50.000.000 $ 1.000 10 $ 100.000 1-9 .000 Selling price per unit $ 10 Total Revenue $ 200.

wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. 4. Inc.000 units were on hand. 1-10 . Let’s prepare the production budget. On March 31.Production Budget The management of Breakers.

000 4.000 units Sales in units Add: desired end.Production Budget From sales budget May sales Desired percent Desired inventory 50.000 46.000 June 30.000 105.000 6.000 5.000 Ending inventory becomes beginning inventory the next 6.000 10.000 26.000 May 50.000 29.000 10.000 5. inventory Units to be produced April 20.000 30.000 4.000 Quarter 100.000 month 35.000 March 31 ending inventory 1-11 .000 56.000 units 20% 10. inventory Total needed Less: beg.000 101.

000 pounds of material are on hand.Direct-Material Budget • At Breakers. • Management wants materials on hand at the end of each month equal to 10% of the following month’s production. five pounds of material are required per unit of product. Material cost $. 1-12 . • On March 31. Let’s prepare the direct materials budget. 13.40 per pound.

000 13.500 Production in units Materials per unit Production needs Add: desired ending inventory Total needed Less: beginning inventory Materials to be purchased 10% of the following month’s production March 31 inventory 1-13 .000 11.500 14.000 221.000 153.000 5 130.000 5 505.000 May 46.000 5 230.500 13.000 5 145.500 23.From our production budget Direct-Material Budget April 26.000 14.000 11.500 156.500 244.000 140.000 503.000 Quarter 101.500 516.500 142.500 June 29.000 23.

500 Less: beginning June Ending Inventory inventory 13.000 14.000 May Sales in units Add: Production desired ending inventory in units 26.000 46.000 Quarter 101.000 230.000 3.500 1-14 .000 5 145.500 Add: desired ending inventory 23.000 Production in units 23.000 5.000 TotalMaterials units needed per unit 528.000 23.000 244.000 5 505.500 11.500 13.000 Total units needed 115.000 Materials toproduction be Materials per unit 5 purchased 140.000 221.000 5 Less:Production beginning inventory needs 130.500 Total needed 153.500 516.000 June 29.500 July in units 23.000 Inventory percentage 10% June desired ending inventory 11.000 11.500 156.000 503.000 14.500 142.Direct-Material Budget July Production April 25.

each unit of product requires 0.Direct-Labor Budget • At Breakers. • For the next three months. • In exchange for the “no layoff” policy.000 hours per month.1 hours of direct labor. the direct labor workforce will be paid for a minimum of 3. • The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. Let’s prepare the direct labor budget. 1-15 . workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay).

000 Wage rate $ 8 Total direct labot cost $ 24.600 May 46.000 0. 1-16 .800 June 29.000 0.100 10.Direct-Labor Budget Production in units Direct labor hours Labor hours required Guaranteed labor hours 3.10 2.000 Quarter 101.000 $ 8 $ 24.000 Labor hours paid 3.000 April 26.10 10.800 From our production budget This is the greater of labor hours required or labor hours guaranteed.600 $ 8 $ 84.000 0.000 0.10 2.000 3.600 $ 8 $ 36.000 4.900 3.10 4.600 3.

900 17.500 12.000 $ $ $ 1-17 .000 $ Quarter 61.300 5.300 5.900 8.800 8.200 59.800 $ 191.400 13.600 5.300 5.200 17.000 4.400 25.Overhead Budget Here is Breakers’ Overhead Budget for the quarter.600 8. April Indirect labor Indirect material Utilities Rent Insurance Maintenance $ 17.400 76.200 13.800 39.000 $ May 26.200 13.900 28.800 9.800 8.500 7.000 $ June 17.200 56.

Selling and Administrative Expense Budget • At Breakers. 1-18 .000 in depreciation expense that does not require a cash outflows for the month. • The $70. variable selling and administrative expenses are $0.000 per month. • Fixed selling and administrative expenses are $70.50 per unit sold.000 fixed expenses include $10.

000 $ 75.50 $ 25.000 June 30.000 210.50 $ 15.000 May 50.000 10.000 260.000 10.000 70.000 $ 230.50 $ 50.000 $ 0.000 $ 0.Selling and Administrative Expense Budget Sales in units Variable S&A rate Variable expense Fixed S&A expense Total expense Less: noncash expenses Cash disbursements April 20.000 $ 85.50 $ 10.000 $ 0.000 Quarter 100.000 10.000 $ 0.000 30.000 $ 70.000 70.000 From our Sales budget 1-19 .000 85.000 70.000 95.000 80.

Cash Receipts Budget • At Breakers. 25% collected in the month following sale. 1-20 . all sales are on account. • The company’s collection pattern is: 70% collected in the month of sale.000 will be collected in full. • The March 31 accounts receivable balance of $30. 5% is uncollected.

000 350.000 $ 170.000 May June Quarter $ 30.000 350.000 $ 335.000 $ 400.000 210. .Cash Receipts Budget Accounts rec.000 140.000 $ 905.000 140.000 May sales 70% x $500.3/31 April sales 70% x $200.000 Total cash collections April $ 30.000 50.000 $ 50.000 125.000 June sales 70% x $300.000 $ 125.000 25% x $200.000 25% x $500.000 210.000 1-21 .

Cash Disbursement Budget • Breakers pays $0. 1-22 . • One-half of a month’s purchases are paid for in the month of purchase.000. the other half is paid in the following month.40 per pound for its materials. • The March 31 accounts payable balance is $12. • No discounts are available.

000 28.300 $ 44.600 June purchases 50% x $56.000 $ 28.600 50% x $88.400 $ 185.000 1-23 .300 28.000 50% x $56.000 $ 72.000 May purchases 50% x $88.700 May June Quarter $ 12.400 $ 40.300 28.Cash Disbursement Budget Accounts pay.000 lbs.800 Total cash payments for materials April $ 12.000 44. 3/31 April purchases 50% x $56.000 140.40/lb.000 44. × $. = $56.300 $ 72.000 28.300 44.000 28.

– Maintains a minimum cash balance of $30. – Pays a cash dividend of $25.000.700 of equipment in May and $48. – Purchases $143.000 in April.Cash Disbursement Budget Breakers: – Maintains a 12% open line of credit for $75. 1-24 .300 in June paid in cash.000. – Has an April 1 cash balance of $40. – Borrows and repays loans on the last day of the month.000.

000.000 Total cash available 210.000 Mfg.000 Excess (deficiency) of Cash available over disbursements $ (5. 70.000 Equipment purchase Dividends 25.000 Add: cash collections 170.000 on its line of credit.000 Selling and admin. 1-25 .000 Direct labor 24.000 Total disbursements 215. overhead 56.000) From our Cash Disbursements Budget From our Direct Labor Budget From our Overhead Budget From our Selling and Administrative Expense Budget To maintain a cash balance of $30. Breakers must borrow $35.From our Cash Receipts Budget Cash Budget (Collections and Disbursements) May June Quarter April Beginning cash balance $ 40.000 Less: disbursements Materials 40.

000 Selling and admin.000 Total disbursements 215.000 143.000) May $ 30.200 1-26 .700 413.000 Total cash available 210.800 June Quarter Breakers must borrow an addition $13.800 to maintain a cash balance of $30. overhead 56. 70.300 36.000 Direct labor 24.000 Less: disbursements Materials 40.Cash Budget (Collections and Disbursements) April Beginning cash balance $ 40.000 Excess (deficiency) of Cash available over disbursements $ (5.000 Add: cash collections 170. $ 16.000 430.800 76.000 72.000 Mfg.000 400.000 Equipment purchase Dividends 25.000.000 85.

000 335.000 has enough cash to repay 400. 70.000 Materials 72.Cash Budget (Collections and Disbursements) April May Beginning $ 40.000 430.000 59.000 Equipment purchase 143.200 June $ 30.300 279.800 loan plus interest Less: disbursements at 12%.000 75.000 1-27 . Breakers Add: cash collections 170.000 Selling and admin.800 Mfg.000) $ 16. overhead 56.000 At thecash endbalance of June.000 $ 30.000 76.000 413.000 Quarter $ 86.000 Total disbursements 215.800 Excess (deficiency) of Cash available over disbursements $ (5. 40.000 72.000 36.700 Dividends 25.700 24.000 48.300 Direct labor 24.000 365.000 Total cash available 210.000 the $48.000 85.

000 185.000 907.000 48.000 Quarter $ 40.000 Equipment purchase Dividends 25.200 $ 86. 70.000 $ 37.800 June $ 30.300 279.000 84.700 413.000 Add: cash collections 170.000 945.000 75.000 Total cash available 210.000 Selling and admin.800 76.000 59.000 143.800 $ 16.000 25.000 72. overhead 56.000 430.700 24.000 400.000 192.000 72.Cash Budget (Collections and Disbursements) April Beginning cash balance $ 40.000 Mfg.000 335.200 1-28 .000 Total disbursements 215.000 85.000 Direct labor 24.000 Less: disbursements Materials 40.800 191.000 Excess (deficiency) of Cash available over disbursements $ (5.300 36.000 365.000 905.000) May $ 30.000 230.

362 Borrowing $ 35.200 48.000 $ 30.200 1.000 13.000 35.800) (838) (838) $ 36. Cash Budget (Financing and Repayment) April May June Quarter Excess (deficiency) of Cash available over disbursements Financing: Borrowing Repayments Interest Total financing Ending cash balance $ (5.800 × × Rate 12% = 12% = Months Outstanding × 2 mths = × 1 mth.000) 35.000 $ 16. = 1-29 .800 $ 30.000 Annual Interest $ 4.800) (838) (49.656 $ 86.800 (48.200 13.362 Interest Expense $ 700 138 $ 838 (48.638) $ 36.Ending cash balance for April is the beginning May balance.000 $ 37.800 13.

000 204.000 24. Work-in-process inventory 3.400 150.800 Deduct: End.200 201.200 88.600 4.000 9.Cost of Goods Manufactured April Direct material: Beg.600 $ June 5.200 Add: Materials purchases 56.000 Add: Beg.400 206.000 9.200 Direct material used 52.000 Manufacturing overhead 56.600 58.800 76.400 17.800 5.600 1-30 .800 16.000 141.200 Deduct: End.000 Total manufacturing costs 132.000 84.600 17.600 4.000 Material available for use 61.800 481.800 56.600 202.Work-in-process inventory 16.800 Subtotal 135.000 477.material inventory $ 5.000 36.200 221.400 $ 211.800 3.000 $ 464.200 Cost of goods manufactured $ 119.000 Direct labor 24.800 92.600 97.000 $ 133.600 $ May 9.800 191.400 Quarter $ 5.800 62. material inventory 9.000 59.

000 138.600 $ 211.000 23.400 161.600 27. finished-goods inventory Cost of goods available for sale Deduct: End.Cost of Goods Sold April May $ 119.400 $ 464.000 $ June Quarter 133.600 46.400 46.600 18. finished-goods inventory Cost of goods sold 1-31 .600 $ 92.000 $ 230.000 $ 460.000 483.000 Cost of goods manufactured Add: Beg.600 $ 18.000 23.000 138.000 257.000 27.

Inc.000 460.000 540.162 1-32 . Budgeted Income Statement For the Three Months Ended June 30 Revenue (100.000 838 $ 260.000 × $10) Cost of goods sold Gross margin Operating expenses: Selling and admin.000 $ 260. expenses Interest expense Total operating expenses Net income $ 1.838 279.Budgeted Income Statement Breakers.000.

000 (185.000 $ (72.000 13.000 $ (72.$ (143.462 $ (48.000 $ (40.000) (84.638) 213.800) (48.638) 40.800) $ 6.300) $ (48.$ 30.000 $ (10.800 (48.000) (190.700) (24. beginning Balance in cash.800) (3. end of month $ $ 170.000) (838) (231.000) (75.000) $ $ May 400.000 $ $ $ $ 10.000) (20.800 $ .362 .000 30.000) (85.000 36.Budgeted Statement of Cash Flows April Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers of raw material For direct labor For manufacturing-overhead expenditures For selling and administrative expenses For interest Total cash payments Net cash flow from operating activities Cash flows from investing activities: Purchase of equipment Net cash used by investing activities Cash flows from financing activities: Payment of dividends Principle of bank loan Repayment of bank loan Net cash provided by financing activities Net increase in cash Balance in cash.000) (270.100) 129.000 $ 1-33 .000) $ 40.800) (191.000) (192.900 $ (143.700) $ (25.362 $ 30.300) (48.000) (24.362 $ Quarter 905.300) (36.362 (192.000) (70.000) (838) (691.800 13.000) (59.000) (230.800) (76.000) 48.000 36.700) June 335.000) (25.538) 103.000) (56.000 30.000) 35.

000 • Retained earnings .000 • Building (net) .Budgeted Balance Sheet Breakers reports the following account balances on June 30 prior to preparing its budgeted financial statements: • Land .400 1-34 .$217.$46.$50.000 • Common stock .$148.

000 300.000 23.962 $ 46.40 per lb.362 75.000 545. 50% of June purchases of $56. Inc.162 (25. 5.000 148.562 Common stock $ $ Retained earnings Total liabilities and equities $ 1-35 .000 4. at $.000) Accounts payable $300.800 Beginning balance Add: net income Deduct: dividends Ending balance Breakers.25%of June sales of $300.000 units at $4.962 28.400 279.400 217.000 11.962 50.000 155. Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Work-in-process inventory Finished goods inventory Total current assets Property and equipment Land Building Equipment Total property and equipment Total assets $ 36.000 390.562 545.60 per unit.600 17.000 192.500 lbs.

Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 1-36 .Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget When the interactions of the elements Selling Ending Direct budget Directare expressed of the master as and Overhead Inventory Materials Labor Administrative Budget a set of mathematical relations. it Budget Budget Budget Budget Direct Materials becomes a financial planning model that can be used to answer “what if” Cash Budget questions about unknown variables.

 1-37 .Budget Administration The Budget Committee is a standing committee responsible for . overall policy matters relating to the budget.  coordinating the preparation of the budget. . .

2. 3.International Aspects of Budgeting Firms with international operations face special problems when preparing a budget. Differences in local economic conditions. Fluctuations in foreign currency exchange rates. 1-38 . 1. High inflation rates in some foreign countries.

Budgeting Product Life-Cycle Costs Product planning and concept Design. Distribution and customer service. Detailed design and testing. Production. 1-39 . Preliminary design.

Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.” 1-40 .

Participative Budgeting Flow of Budget Data 1-41 .

End of Chapter 9 1-42 .

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