Accounting Chapter 9

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<p>Profit Planning</p> <p>Chapter Nine</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-2</p> <p>Learning Objective 1</p> <p>Understand why organizations budget and the processes they use to create budgets.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-3</p> <p>The Basic Framework of Budgeting</p> <p>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 organizations activity is known as budgetary control.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-4</p> <p>Planning and ControlControl involves the steps taken by management that attempt to ensure the objectives are attained.</p> <p>Planning involves developing objectives and preparing various budgets to achieve these objectives.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-5</p> <p>Advantages of BudgetingDefine goal and objectives Communicate plans Think about and plan for the future</p> <p>AdvantagesCoordinate activities Uncover potential bottlenecks Means of allocating resources</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-6</p> <p>Responsibility Accounting</p> <p>Managers should be held responsible for those items and only those items that the manager can actually control to a significant extent.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-7</p> <p>Choosing the Budget Period</p> <p>Operating Budget</p> <p>2005</p> <p>2006</p> <p>2007</p> <p>2008</p> <p>The annual operating budget may be divided into quarterly or monthly budgets.</p> <p>A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>McGrawHill/Irwin</p> <p>9-8</p> <p>Self-Imposed BudgetTop M anagem ent</p> <p>M id d le M anagem ent</p> <p>M id d le M anagem ent</p> <p>S u p e r v is o r</p> <p>S u p e r v is o r</p> <p>S u p e r v is o r</p> <p>S u p e r v is o r</p> <p>A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a self-imposed budget.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-9</p> <p>Advantages of Self-Imposed Budgets</p> <p>1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Selfimposed budgets eliminate this excuse.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-10</p> <p>Self-Imposed BudgetsMost 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 profits or sales.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-11</p> <p>Human Factors in Budgeting</p> <p>The success of budgeting depends upon three important factors: 2. Top management must be enthusiastic and committed to the budget process. 3. Top management must not use the budget to pressure employees or blame them when something goes wrong. 4. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-12</p> <p>The Budget CommitteeA standing committee responsible for overall policy matters relating to the budget coordinating the preparation of the budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-13</p> <p>The Master Budget: An OverviewSales Budget</p> <p>Ending Finished Goods Budget</p> <p>Production Budget Direct Labor Budget</p> <p>Selling and Administrative Budget Manufacturing Overhead Budget</p> <p>Direct Materials Budget</p> <p>Cash Budget</p> <p>Budgeted Financial StatementsMcGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-14</p> <p>Learning Objective 2</p> <p>Prepare a sales budget, including a schedule of expected cash collections.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-15</p> <p>Budgeting Example</p> <p> Royal Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are:April May June July August 20,000 units 50,000 units 30,000 units 25,000 units 15,000 units.</p> <p> The selling price is $10 per unit.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-16</p> <p>The Sales Budget</p> <p>The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30th</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-17</p> <p>Expected Cash Collections All sales are on account. Royals collection pattern is:70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible.</p> <p> The March 31 accounts receivable balance of $30,000 will be collected in full.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-18</p> <p>Expected Cash Collections</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-19</p> <p>Expected Cash Collections</p> <p>From the Sales Budget for April.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-20</p> <p>Expected Cash Collections</p> <p>From the Sales Budget for May.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-21</p> <p>Quick Check What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-22</p> <p>Quick Check What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-23</p> <p>Expected Cash Collections</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-24</p> <p>Learning Objective 3</p> <p>Prepare a production budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-25</p> <p>The Production Budget</p> <p>Sales Budget ed and t e pl Expected om C Cash Collections</p> <p>Production Budget</p> <p>Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-26</p> <p>The Production Budget</p> <p> The management at Royal Company wantsending inventory to be equal to 20% of the following months budgeted sales in units.</p> <p> On March 31, 4,000 units were on hand.</p> <p>Lets prepare the production budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-27</p> <p>The Production Budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-28</p> <p>The Production Budget</p> <p>March 31 ending inventoryMcGrawHill/Irwin</p> <p>Budgeted May sales Desired ending inventory % Desired ending inventory</p> <p>50,000 20% 10,000</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-29</p> <p>Quick Check What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-30</p> <p>Quick Check What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-31</p> <p>The Production Budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-32</p> <p>The Production Budget</p> <p>Assumed ending inventory.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-33</p> <p>Learning Objective 4</p> <p>Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-34</p> <p>The Direct Materials Budget</p> <p> 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 months production. On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound.Lets prepare the direct materials budget.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-35</p> <p>The Direct Materials Budget</p> <p>From production budgetMcGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-36</p> <p>The Direct Materials Budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-37</p> <p>The Direct Materials Budget</p> <p>March 31 inventory</p> <p>10% of following months production needs.McGrawHill/Irwin</p> <p>Calculate the materials to be purchased in May.Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-38</p> <p>Quick Check </p> <p>How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-39</p> <p>Quick Check </p> <p>How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-40</p> <p>The Direct Materials Budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-41</p> <p>The Direct Materials Budget</p> <p>Assumed ending inventoryMcGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-42</p> <p>Expected Cash Disbursement for Materials</p> <p> Royal pays $0.40 per pound for its materials. One-half of a months purchases is paid for in the month of purchase; the other half is paid in the following month. The March 31 accounts payable balance is $12,000. Lets calculate expected cash disbursements.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-43</p> <p>Expected Cash Disbursement for Materials</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-44</p> <p>Expected Cash Disbursement for Materials</p> <p>Compute the expected cash disbursements for materials for the quarter. 140,000 lbs. $.40/lb. = $56,000McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-45</p> <p>Quick Check What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-46</p> <p>Quick Check What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-47</p> <p>Expected Cash Disbursement for Materials</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-48</p> <p>Learning Objective 5</p> <p>Prepare a direct labor budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-49</p> <p>The Direct Labor Budget</p> <p> 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. In exchange for the no layoff policy, workers agree to a wage rate of $10 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 1,500 hours per month. Lets prepare the direct labor budget.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-50</p> <p>The Direct Labor Budget</p> <p>From production budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-51</p> <p>The Direct Labor Budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-52</p> <p>The Direct Labor Budget</p> <p>Greater of labor hours required or labor hours guaranteed.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-53</p> <p>The Direct Labor Budget</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-54</p> <p>Quick Check 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. $79,500 b. $64,500 c. $61,000 d. $57,000</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-55</p> <p>Quick Check 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 April May June worked in excess of 1,500 hours in a month? Quarter Labor hours required 1,300 2,300 1,450 a. $79,500 Regular hours paid 1,500 1,500 1,500 4,500 800 800 b. $64,500 Overtime hours paid c. $61,000 Total regular hours 4,500 $10 $ 45,000 d. $57,000 Total overtime hours 800 $15 $ 12,000Total pay $ 57,000</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-56</p> <p>Learning Objective 6</p> <p>Prepare a manufacturing overhead budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-57</p> <p>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 and includes $20,000 of noncash costs (primarily depreciation of plant assets). Lets prepare the manufacturing overhead budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-58</p> <p>Manufacturing Overhead Budget</p> <p>Direct Labor Budget.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-59</p> <p>Manufacturing Overhead Budget</p> <p>Total mfg. OH for quarter $251,000 = $49.70 per hour * Total labor hours required 5,050</p> <p>* roundedMcGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-60</p> <p>Manufacturing Overhead Budget</p> <p>Depreciation is a noncash charge.McGrawHill/Irwin Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-61</p> <p>Ending Finished Goods Inventory Budget</p> <p>Production costs per unit Quantity Direct materials 5.00 lbs. Direct labor Manufacturing overhead Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory</p> <p>Cost $ 0.40</p> <p>$</p> <p>Total 2.00</p> <p>Direct materials budget and information.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-62</p> <p>Ending Finished Goods Inventory Budget</p> <p>Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor 0.05 hrs. $10.00 Manufacturing overhead Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory</p> <p>$</p> <p>Total 2.00 0.50</p> <p>Direct labor budget.</p> <p>McGrawHill/Irwin</p> <p>Copyright2008,TheMcGrawHillCompanies,Inc.</p> <p>9-63</p> <p>Ending Finished Goods Inventory Budget</p> <p>Production costs per unit Quantity Cost Direct materials 5.00 lbs. $ 0.40 Direct labor 0.05 hrs. $ 10.00 Manufacturing overhead 0.05 hrs. $ 49.70 Budgeted finished goods inventory Ending inventory in units Unit product cost Ending finished goods inventory</p> <p>$</p> <p>$</p> <p>Total 2.00 0.50 2.49 4.99</p> <p>$</p> <p>4.99 ?</p> <p>Total mfg. OH for quart...</p>