chapter 9 profit planning.pdf
TRANSCRIPT
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Profit Planning
Chapter
9
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LEARNING OBJECTIVES
1. Understandwhy organizations budget and the
processes they use to create budgets.2. Preparea sales budget, including a schedule
of expected cash receipts.
3. Preparea production budget..4. Preparea direct materials budget, including a
schedule of expected cash disbursements for
purchases of materials.5. Preparea direct labour budget.
After studying this chapter, you should be able to:
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LEARNING OBJECTIVES
6. Prepare a manufacturing overhead budget.
7. Preparean ending finished goods inventorybudget.
8. Preparea selling and administrative expense
budget.
9. Prepare a cash budget.
10. Preparea budgeted income statement and a
budgeted balance sheet.
11. (Appendix 9A) Computethe optimum inventorylevel and order size.
After studying this chapter, you should be able to:
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The Basic Framework of Budgeting
Detail
BudgetDetailBudget
DetailBudget
MasterBudget
Summary ofa companys
plans.
Sa
les
Pro
duction
Mate
ria
ls
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Planning and Control
!Planning--
involvesdevelopingobjectives andpreparing variousbudgets to achieve
these objectives.
!!ControlControl -- involves
the steps taken bymanagement thatattempt to ensurethe objectives areattained.
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Advantages of Budgeting
Advantages
Communicatingplans
Think about andplan for the future
Means of allocatingresources
Uncover potentialbottlenecks
Coordinateactivities
Define goal
and objectives
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Responsibility Accounting
Managers should be held responsible for
those items and onlythose items thatthe manager can actually control
to a significant extent.
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Choosing the Budget Period
Operating BudgetOperating Budget
1999 2000 2001 2002
The annual operating budget
may be divided into quarterlyor monthly budgets.
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Choosing the Budget Period
1999 2000 2001 2002
Continuous orContinuous orPerpetual BudgetPerpetual Budget
This budget is usually a twelve-month
budget that rolls forward one monthas the current month is completed.
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Participative Budget System
Flow of Budget DataFlow of Budget Data
Supervisor Supervisor
Middle
Management
Supervisor Supervisor
Middle
Management
Top Management
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The Budget Committee
A standing committee responsible for
"overall policy matters relating to the budget
"coordinating the preparation of the budget
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The Master BudgetSales
Budget
Selling and
Adm inistrative
Budget
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The Master Budget
Direct
M aterials
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Adm inistrative
Budget
Direct
Labour
Budget
M anufacturing
Overhead
Budget
Sales
Budget
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The Master Budget
Direct
M aterials
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Adm inistrative
Budget
Direct
Labor
Budget
M anufacturing
Overhead
Budget
Cash
Budget
Sales
Budget
Budgeted Financial Statements
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The Sales Budget
Detailed schedule showing expected
sales for the coming periodsexpressed in units and dollars.
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Budgeting Example#Royal Company 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 $10 per unit.
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The Sales Budget
April May June Quarter Budgeted
sales units 20,000 50,000 30,000 100,000Selling price
er unitTotal sales
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The Sales Budget
April May June Quarter Budgeted
sales units 20,000 50,000 30,000 100,000Selling price
er unit 10$ 10$ 10$ 10$Total sales 200,000$ 500,000$ 300,000$ 1,000,000$
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The Production Budget
SalesSalesBudgetBudget ProductionProductionBudgetBudget
Com
pleted
Production must be adequate to meet budgetedsales and provide for sufficient ending inventory.
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The Production Budget
!Royal Company wants ending inventory
to be equal to 20% of the followingmonths budgeted sales in units.
!On March 31, 4,000 units were on hand.
Lets prepare the production budget.Lets prepare the production budget.
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April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000Adddesired ending
inventory 10,000
Total needed 30,000Lessbeginning
inventory 4,000
Required production 26,000
The Production Budget
Budgeted sales 50,000Desired percent 20%Desired inventory 10,000
Budgeted sales 50,000Desired percent 20%Desired inventory 10,000
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April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000Adddesired ending
inventory 10,000
Total needed 30,000Lessbeginning
inventory 4,000
Required production 26,000
The Production Budget
March 31
ending inventory
March 31ending inventory
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The Production Budget
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000Adddesired ending
inventory 10,000 6,000
Total needed 30,000 56,000Lessbeginning
inventory 4,000
Required production 26,000
20%
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April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000Adddesired ending
inventory 10,000 6,000
Total needed 30,000 56,000Lessbeginning
inventory 4,000 10,000
Required production 26,000 46,000
The Production Budget
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April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000Adddesired ending
inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000Lessbeginning
inventory 4,000 10,000 6,000 4,000
Required production 26,000 46,000 29,000 101,000
The Production Budget
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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% is uncollectible.
!The March 31 accounts receivable
balance of $30,000 will be collected infull.
!All sales are on account.
!Royals collection pattern is: 70% collected in the month of sale,
25% collected in the month following sale, 5% is uncollectible.
!The March 31 accounts receivable
balance of $30,000 will be collected infull.
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Expected Cash CollectionsApril May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
Total cash collections
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Expected Cash CollectionsApril May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales 70% x $200,000 140,000 140,000
25% x $200,000 50,000$ 50,000
Total cash collections 170,000$
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Expected Cash CollectionsApril May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales 70% x $200,000 140,000 140,000
25% x $200,000 50,000$ 50,000
May sales
70% x $500,000 350,000 350,00025% x $500,000 125,000$ 125,000
Total cash collections 170,000$ 400,000$
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Expected Cash CollectionsApril May June Quarter
Accounts rec. - 3/31 30,000$ 30,000$
April sales 70% x $200,000 140,000 140,000
25% x $200,000 50,000$ 50,000
May sales
70% x $500,000 350,000 350,00025% x $500,000 125,000$ 125,000
June sales
70% x $300,000 210,000 210,000
Total cash collections 170,000$ 400,000$ 335,000$ 905,000$
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The Direct Materials Budget!At Royal Company, five kilograms of
material are required per unit of product.
!Management wants materials on hand atthe end of each month equal to 10% of the
following months production.!On March 31, 13,000 kilograms of material
are on hand. Material cost $0.40 perkilogram. Lets prepare the direct materials budget.
!At Royal Company, five kilograms ofmaterial are required per unit of product.
!Management wants materials on hand atthe end of each month equal to 10% of the
following months production.!On March 31, 13,000 kilograms of material
are on hand. Material cost $0.40 per
kilogram. Lets prepare the direct materials budget.Lets prepare the direct materials budget.
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April May June Quarter Production 26,000 46,000 29,000 101,000
Materials per unitProduction needs
Adddesired
ending inventory
Total neededLessbeginning
inventory
Materials to be
purchased
The Direct Materials Budget
From productionbudget
From productionbudget
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The Direct Materials Budget
April May June Quarter Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5Production needs 130,000 230,000 145,000 505,000
Adddesired
ending inventory
Total neededLessbeginning
inventory
Materials to be
purchased
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April May June Quarter Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5Production needs 130,000 230,000 145,000 505,000
Adddesired
ending inventory 23,000
Total needed 153,000Lessbeginning
inventory
Materials to be
purchased
The Direct Materials Budget
10% of the followingmonths production
10% of the followingmonths production
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April May June Quarter Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5Production needs 130,000 230,000 145,000 505,000
Adddesired
ending inventory 23,000
Total needed 153,000Lessbeginning
inventory 13,000
Materials to be
purchased 140,000
The Direct Materials Budget
March 31inventory
March 31inventory
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The Direct Materials Budget
April May June Quarter
Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5Production needs 130,000 230,000 145,000 505,000
Adddesired
ending inventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500Lessbeginning
inventory 13,000 23,000 14,500 13,000Materials to be
purchased 140,000 221,500 142,000 503,500
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April May June Quarter Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5Production needs 130,000 230,000 145,000 505,000
Adddesired
ending inventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500Lessbeginning
inventory 13,000 23,000 14,500 13,000
Materials to be
purchased 140,000 221,500 142,000 503,500
The Direct Materials Budget
July Production a nd InventorySales in units 25,000
Add desired ending inventory 3,000
Total units needed 28,000
Less beginning inventory 5,000
Production in units 23,000Kilograms per unit 5
Total kilograms, July 115,000
Desired percent 10%
Desired ending inventory, June 11,500
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Expected Cash Disbursement for Materials
!Royal pays $0.40 per kilogram for itsmaterials.
!One-half of a months purchases are paidfor 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 cashdisbursements.
!Royal pays $0.40 per kilogram for itsmaterials.
!One-half of a months purchases are paidfor in the month of purchase; the other
half is paid in the following month.!The March 31 accounts payable balance
is $12,000.
Lets calculate expected cashLets calculate expected cashdisbursements.disbursements.
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Expected Cash Disbursement for Materials
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
May purchases
June purchases
Total cash
disbursements
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April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000$ 28,000
May purchases
June purchases
Total cash
disbursements 40,000$
Expected Cash Disbursement for Materials
140,000 lbs. $.40/lb. = $56,000
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Expected Cash Disbursement for Materials
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000$ 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 44,300$ 44,300June purchases
Total cash
disbursements 40,000$ 72,300$
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Expected Cash Disbursement for Materials
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000$ 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 44,300$ 44,300June purchases
50% x $56,800 28,400 28,400
Total cash
disbursements 40,000$ 72,300$ 72,700$ 185,000$
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The Direct Labour Budget
! At Royal, each unit of product requires 0.05 hours ofdirect labour.
! The Company has a no layoff policy so all employeeswill be paid for 40 hours of work each week.
! In exchange for the no layoff policy, workers agreed to
a wage rate of $10 per hour regardless of the hoursworked (No overtime pay).
! For the next three months, the direct labour workforcewill be paid for a minimum of 1,500 hours per month.
Lets prepare the direct labour budget.
! At Royal, each unit of product requires 0.05 hours ofdirect labour.
! The Company has a no layoff policy so all employeeswill be paid for 40 hours of work each week.
! In exchange for the no layoff policy, workers agreed to
a wage rate of $10 per hour regardless of the hoursworked (No overtime pay).
! For the next three months, the direct labour workforcewill be paid for a minimum of 1,500 hours per month.
Lets prepare the direct labour budget.Lets prepare the direct labour budget.
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April May June Quarter
Production 26,000 46,000 29,000 101,000Direct labour hours
Labour hours required
Guaranteed labour hoursLabour hours paid
Wage rate
Total direct labour cost
The Direct Labour Budget
From productionbudget
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The Direct Labour Budget
April May June Quarter
Production 26,000 46,000 29,000 101,000Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hoursLabour hours paid
Wage rate
Total direct labour cost
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April May June Quarter
Production 26,000 46,000 29,000 101,000Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hours 1,500 1,500 1,500Labour hours paid 1,500 2,300 1,500 5,300
Wage rate
Total direct labour cost
The Direct Labour Budget
Higher of labour hours requiredor labour hours guaranteed.
Higher of labour hours requiredor labour hours guaranteed.
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The Direct Labour Budget
April May June Quarter
Production 26,000 46,000 29,000 101,000Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hours 1,500 1,500 1,500Labour hours paid 1,500 2,300 1,500 5,300
Wage rate 10$ 10$ 10$ 10$
Total direct labour cost 15,000$ 23,000$ 15,000$ 53,000$
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Manufacturing Overhead Budget
! Royal Company uses a variable
manufacturing overhead rate of $1 per unitproducedproduced.
! Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of non-cashcosts (primarily amortization of plant assets).
Lets prepare the manufacturingLets prepare the manufacturingoverhead budget.overhead budget.
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April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$Fixed mfg. OH costs
Total mfg. OH costs
Lessnoncash costsCash disbursements
for manufacturing OH
Manufacturing Overhead Budget
From production
budget
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Manufacturing Overhead Budget
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000
Lessnoncash costsCash disbursements
for manufacturing OH
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Manufacturing Overhead Budget
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate 1$ 1$ 1$ 1$
Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000
Lessnoncash costs 20,000 20,000 20,000 60,000Cash disbursements
for manufacturing OH 56,000$ 76,000$ 59,000$ 191,000$
Amortization is a non-cash charge.Amortization is a non-cash charge.
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Ending Finished Goods Inventory Budget
!Now, Royal can complete the ending
finished goods inventory budget.
!At Royal, manufacturing overhead isapplied to units of product on the basis ofdirect labour hours.
Lets calculate ending finished goodsinventory.
!Now, Royal can complete the ending
finished goods inventory budget.
!At Royal, manufacturing overhead is
applied to units of product on the basis ofdirect labour hours.
Lets calculate ending finished goodsLets calculate ending finished goodsinventory.inventory.
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Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$Direct labour
Manufacturing overhead
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct materialsbudget and information
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Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$Direct labour 0.05 hrs. 10.00$ 0.50
Manufacturing overhead
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Ending Finished Goods Inventory Budget
Direct labourbudget
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Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$Direct labour 0.05 hrs. 10.00$ 0.50
Manufacturing overhea 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost 4.99$
Ending finished goods inventory
Ending Finished Goods Inventory Budget
Total mfg. OH for quarter $251,000Total labour hours required 5,050 hrs.
= $49.70 per hr.*
*rounded
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Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. 0.40$ 2.00$Direct labour 0.05 hrs. 10.00$ 0.50
Manufacturing overhea 0.05 hrs. 49.70$ 2.49
4.99$
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost 4.99$
Ending finished goods inventory 24,950$
Ending Finished Goods Inventory Budget
ProductionBudget
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Selling and Administrative Expense Budget
! At Royal, variable selling and administrativeexpenses 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 amortization that are not cash outflows of the current month.
Lets prepare the companys selling andadministrative expense budget.
! At Royal, variable selling and administrativeexpenses are $0.50 per unit sold.
! Fixed selling and administrative expenses are$70,000 per month.
! The fixed selling and administrative expenses
include $10,000 in costs primarily amortization that are not cash outflows of the current month.
Lets prepare the companys selling andadministrative expense budget.
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Selling and Administrative Expense Budget
April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000
Variable sellingand admin. rate 0.50$ 0.50$ 0.50$ 0.50$
Variable expense 10,000$ 25,000$ 15,000$ 50,000$Fixed selling and
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000Less noncash
expensesCash disburse-
ments forselling & admin.
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Selling and Administrative Expense Budget
April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000
Variable sellingand admin. rate 0.50$ 0.50$ 0.50$ 0.50$
Variable expense 10,000$ 25,000$ 15,000$ 50,000$Fixed selling and
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000Less noncash
expenses 10,000 10,000 10,000 30,000Cash disburse-
ments forselling & admin. 70,000$ 85,000$ 75,000$ 230,000$
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The Cash Budget
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The Cash Budget
Royal:
Maintains a 16% open line of credit for $75,000.Maintains a minimum cash balance of $30,000.
Borrows on the first day of the month and repays
loans on the last day of the month.Pays a cash dividend of $49,000 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.
Royal:
Maintains a 16% open line of credit for $75,000.Maintains a minimum cash balance of $30,000.
Borrows on the first day of the month and repays
loans on the last day of the month.Pays a cash dividend of $49,000 in April.
Purchases $143,700 of equipment in May and
$48,300 in June paid in cash.Has an April 1 cash balance of $40,000.
9-61
The Cash Budget
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April May June Quarter
Beginning cash balance 40,000$
Addcash collections 170,000
Total cash available 210,000
Lessdisbursements
Materia ls 40,000
Direct labour
Mfg. overhea d
Selling and admin. Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
The Cash Budget
Schedule of ExpectedCash Collections
Schedule of ExpectedCash Collections
Schedule of ExpectedCash Disbursements
Schedule of ExpectedCash Disbursements
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The Cash Budget
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April May June Quarter
Beginning cash balance 40,000$
Addcash collections 170,000
Total cash available 210,000
Lessdisbursements
Materia ls 40,000
Direct labour 15,000
Mfg. overhead 56,000
Selling and admin. 70,000Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
The Cash Budget
Direct Labour
Budget
Manufacturing
Overhead Budget
Selling and AdministrativeExpense Budget
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The Cash Budget
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April May June Quarter
Beginning cash balance 40,000$
Addcash collections 170,000
Total cash available 210,000
Lessdisbursements
Materia ls 40,000
Direct labour 15,000
Mfg. overhead 56,000
Selling and admin. 70,000Equipment purchase -
Dividends 49,000
Total disbursements 230,000
Excess (deficiency) of
cash available over
disbursements (20,000)$
The Cash Budget
Because Royal maintainsa cash balance of $30,000,
the company must
borrow on itsline-of-credit
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Financing and Repayment
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April May June Quarter
Excess (deficiency)
of Cash available
over disbursements (20,000)$Financing:
Borrowing 50,000
Repayments -
Interest -
Total financing 50,000
Ending cash balance 30,000$ 30,000$ -$ -$
Financing and Repayment
Ending cash balance for Aprilis the beginning May balance.
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The Cash Budget
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The Cash Budget
April May June Quarter
Beginning cash balance 40,000$ 30,000$
Addcash collections 170,000 400,000
Total cash available 210,000 430,000
Lessdisbursements
Materia ls 40,000 72,300
Direct labour 15,000 23,000
Mfg. overhead 56,000 76,000
Selling and admin. 70,000 85,000Equipment purchase - 143,700
Dividends 49,000 -
Total disbursements 230,000 400,000
Excess (deficiency) of
cash available overdisbursements (20,000)$ 30,000$
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Financing and Repayment
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Financing and Repayment
Because the ending cash balance is
exactly $30,000, Royal will not repaythe loan this month.
April May June Quarter
Excess (deficiency)
of Cash available
over disbursements (20,000)$ 30,000$Financing:
Borrowing 50,000 -
Repayments - -
Interest - -
Total financing 50,000 -
Ending cash balance 30,000$ 30,000$
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The Cash Budget
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The Cash Budget
April May June Quarter
Beginning cash balance 40,000$ 30,000$ 30,000$ 40,000$
Addcash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Lessdisbursements
Materia ls 40,000 72,300 72,700 185,000
Direct labour 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
Excess (deficiency) of
cash available overdisbursements (20,000)$ 30,000$ 95,000$ 45,000$
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The Cash Budget
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April May June Quarter
Beginning cash balance 40,000$ 30,000$ 30,000$ 40,000$
Addcash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Lessdisbursements
Materia ls 40,000 72,300 72,700 185,000
Direct labour 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
Excess (deficiency) of
cash available overdisbursements (20,000)$ 30,000$ 95,000$ 45,000$
The Cash Budget
At the end of June, Royal has enough cashto repay the $50,000 loan plus interest at 16%.
At the end of June, Royal has enough cashto repay the $50,000 loan plus interest at 16%.
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Financing and Repayment
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April May June Quarter
Excess (deficiency)
of Cash available
over disbursements (20,000)$ 30,000$ 95,000$ 45,000$Financing:
Borrowing 50,000 - - 50,000
Repayments - - (50,000) (50,000)
Interest - - (2,000) (2,000)
Total financing 50,000 - (52,000) (2,000)Ending cash balance 30,000$ 30,000$ 43,000$ 43,000$
Financing and Repayment
$50,000 16% 3/12 = $2,000Borrowings on April 1 and
repayment of June 30.
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The Budgeted Income Statement
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The Budgeted Income Statement
Cash
Budget
Budgeted
IncomeStatement
Com
pleted
After we complete the cash budget,After we complete the cash budget,we can prepare the budgeted incomewe can prepare the budgeted income
statement for Royal.statement for Royal.
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The Budgeted Income Statement
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The Budgeted Income Statement
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10) 1,000,000$
Cost of goods sold (100,000 @ $4.99) 499,000
Gross margin 501,000Selling and administrative expenses 260,000
Operating income 241,000
Interest expense 2,000
Net income 239,000$
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The Budgeted Balance Sheet
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e udge ed ce S ee
Royal reported the following account
balances on June 30 prior to preparing itsbudgeted financial statements:
"Land - $50,000
"Building (net) - $175,000
"Common stock - $200,000
"Retained earnings - $146,150
Royal reported the following account
balances on June 30 prior to preparing itsbudgeted financial statements:
"Land - $50,000
"Building (net) - $175,000"Common stock - $200,000
"Retained earnings - $146,150
9-73
Royal Company
Budgeted Balance Sheet
June 30 25%of June
25%of June
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Current assets
Cash 43,000$
Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 24,950Total current assets 147,550
Property and equipment
Land 50,000
Building 175,000Equipment 192,000
Total property and equipment 417,000
Total assets 564,550$
Accounts payable 28,400$
Common stock 200,000
Retained earnings 336,150
Total liabilities and equities 564,550$
sales of$300,000sales of$300,000
5,000 unitsat $4.99 each
5,000 unitsat $4.99 each
11,500 kg
at $0.40/kg
11,500 kg
at $0.40/kg
50% of Junepurchasesof $56,800
50% of Junepurchasesof $56,800
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Royal Company
Budgeted Balance Sheet
June 30
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Current assets
Cash 43,000$
Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 24,950Total current assets 147,550
Property and equipment
Land 50,000
Building 175,000Equipment 192,000
Total property and equipment 417,000
Total assets 564,550$
Accounts payable 28,400$
Common stock 200,000
Retained earnings 336,150
Total liabilities and equities 564,550$
Beginning balance 146,150$
Add: net income 239,000
Deduct: dividends (49,000)Ending balance 336,150$
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Zero-Base Budgeting
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g g
Managers are required to justify all budgeted
expenditures, not just changes in the budgetfrom the previous year. The baseline is zerorather than last years budget.
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International Aspects of Budgeting
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p g g
Multinational companies 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."Local governmental policies.
Appendix
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Inventory Decisions
9A
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Costs Associated with Inventory
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Inventory Ordering Costs
Clerical CostsTransportation
Costs
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Costs Associated with Inventory
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Inventory Carrying Costs
Storage Space Handling Cost
Insurance
PropertyTaxes
Interest onCapital invested
in Inventory
ObsolescenceLosses
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Costs Associated with Inventory
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Cost of not carryingsufficient inventory
Customer
ill will
Quantitydiscounts lost Erratic
production
Lostsales
Inefficiency ofproduction runs
Addedtransportation
costs
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Inventory Problems
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! How much to order - Economic Order
Quantity (EOQ)
and
! When to order - Reorder Point
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Economic Order Quantity (EOQ)
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!Tabular approach
"Tabulates total cost at various ordersizes.
"Lowest cost indicates EOQ.
"Requires trial and error to determineexact order quantity.
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! Graphic approach
" Graph cost relationships between totalcost, annual carrying cost and annualpurchase order cost.
" Total cost is minimized where annualcarrying cost equals annual purchaseorder cost
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Economic Order Quantity (EOQ)
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! Formula approach
" E= 2QP C
where
E= order size in unitsQ= annual quantity used in units
P= cost of placing one order
C= annual cost of carrying one unit in stock
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Reorder Point/ Safety Stock
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!Reorder Point - tells manager when to
place an order"Depends on economic order quantity, lead
times and rate of usage during lead time
!Safety Stock - provides a buffer to protectagainst a stock-out
"Reorder point is then calculated by adding
the safety stock to the average usage duringthe lead time
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End of Chapter 9End of Chapter 9
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