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CHAPTER REVIEW
Budgeting Basics
- (L.O. 1) A budget is a formal written statement of management’s plans for a specified time period, expressed in financial terms.
- The role of accounting during the budgeting process is to present management’s budgeting goals in financial terms. Accountants translate management’s plans and communicate the budget to employees throughout the company. However, at all times the budget itself, and the administration of the budget are entirely management responsibilities.
Benefits of Budgeting
- The primary benefits of budgeting are as follows: a. It requires all levels of management to plan ahead. b. It provides definite objectives for evaluating performance. c. It creates an early warning system for potential problems. d. It facilitates the coordination of activities within the business. e. It results in greater management awareness of the entity’s overall operations. f. It motivates personnel throughout the organization.
Essentials of Effective Budgeting
- (L.O. 2) In order to be effective management tools, budgets must be based upon a. A sound organizational structure in which authority and responsibility are clearly defined. b. Research and analysis to determine the feasibility of new products, services, and operating techniques. c. Management acceptance of the budget is directly related to the effectiveness of the budget program.
- The most common budget period is one year. A continuous twelve-month budget results from dropping the month just ended and adding a future month. The annual budget is often supplemented by monthly and quarterly budgets.
- The responsibility for coordinating the preparation of the budget is assigned to a budget committee. The budget committee usually includes the president, treasurer, chief accountant (controller), and management personnel from each major area of the company.
- A budget can have a significant impact on human behavior. A budget may have a strong positive influence on a manager when a. Each level of management is invited and encouraged to participate in developing the budget. b. Criticism of a manager’s performance is tempered with advice and assistance.
- Long-range planning involves the selection of strategies to achieve long-term goals and the development of policies and plans to implement the strategies. Long-range plans contain considerably less detail than budgets.
The Master Budget
- (L.O. 3) The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. It is developed within the framework of a sales forecast which shows potential sales for the industry and the company’s expected share of such sales.
- There are two classes of budgets in the master budget. a. Operating budgets are the individual budgets that result in the preparation of the budgeted income statement.
b. Financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.
- The sales budget is the first budget prepared. It is derived from the sales forecast, and it represents management’s best estimate of sales revenue for the budget period. It is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price.
- The production budget shows the units to produce to meet anticipated sales. It is derived from the budgeted sales units plus the desired ending finished goods units less the beginning finished goods units.
- The direct materials budget shows both the quantity and cost of direct materials to be purchased. It is derived from the direct materials units required for production plus the desired ending direct materials units less the beginning direct materials units.
- The direct labor budget shows the quantity (hours) and cost of direct labor necessary to meet production requirements. The direct labor budget is critical in maintaining a labor force that can meet expected levels of production.
- The manufacturing overhead budget shows the expected manufacturing overhead costs. The selling and administrative expense budget is a projection of anticipated operating expenses. Both budgets distinguish between fixed and variable costs.
Budgeted Income Statement
- (L.O. 4) The budgeted income statement is the important end-product in preparing operating budgets. This budget indicates the expected profitability of operations and it provides a basis for evaluating company performance. a. The budget is prepared from the budgets described in review points 11-15. b. For example, to find cost of goods sold, it is necessary to determine the total unit cost of a finished product using the direct materials, direct labor, and manufacturing overhead budgets.
Cash Budget
- (L.O. 5) The cash budget shows anticipated cash flows. It contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances. Data for preparing this budget are obtained from the other budgets.
- The budgeted balance sheet is a projection of financial position at the end of the budget period. It is developed from the budgeted balance sheet for the preceding year and the budgets for the current year.
Budgeting in Nonmanufacturing Companies
- (L.O. 6) The major differences in the master budget of a merchandiser and a manufacturer are that a merchandiser (a) uses a merchandise purchases budget instead of a production budget and (b) does not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead).
- In service enterprises, the critical factor in budgeting is coordinating professional staff needs with anticipated services. Budget data for service revenue may be obtained from expected output or expected input.
- In the budget process for not-for-profit organizations, the emphasis is on cash flows rather than on a revenue and expense basis. For governmental units, the budget must be strictly followed and overspending is often illegal.
BRIEF EXERCISE 9-
PERINE COMPANY
Direct Materials Budget For the Month Ending January 31, 2014
Units to be produced ....................................................... 4, Direct materials per unit .................................................. X 2 Total pounds required for production ............................ 8, Add: Desired ending inventory (25% X 5,000 X 2) ....... 2, Total materials required .................................................. 10, Less: Beginning materials inventory (4,000 X 2 X 25%) .................................................. 2, Direct materials purchases ............................................. 8, Cost per pound ................................................................ X $ Total cost of direct materials purchases........................ $51,
BRIEF EXERCISE 9-
MIZE COMPANY
Direct Labor Budget For the Six Months Ending June 30, 2014
Quarter (^) Six 1 2 Months Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost
X 1.
X $
X 1.
X $
BRIEF EXERCISE 9-
ROCHE INC.
Manufacturing Overhead Budget For the Year Ending December 31, 2014
Quarter 1 2 3 4 Year Variable costs Fixed costs Total manufacturing overhead
$20, 40, $60,
$25, 40, $65,
$30, 40, $70,
$35, 40, $75,
$110, 160, $270,
BRIEF EXERCISE 9-
NOBLE COMPANY
Selling and Administrative Expense Budget For the Year Ending December 31, 2014
Quarter 1 2 3 4 Year Variable expenses Fixed expenses Total selling and administrative expenses
$22, 40,
$62,
$26, 40,
$66,
$30, 40,
$70,
$34, 40,
$74,
$112, 160,
$272,
BRIEF EXERCISE 9-
NORTH COMPANY
Budgeted Income Statement For the Year Ending December 31, 2014
Sales .................................................................................. $2,250, Cost of goods sold (50,000 X $25) ................................... 1,250, Gross profit ....................................................................... 1,000, Selling and administrative expenses............................... 300, Income before income taxes ............................................ 700, Income tax expense .......................................................... 210, Net income ........................................................................ $ 490,
For the Six Months Ending June 30, 2014
Quarter (^) Six 1 2 Months
Expected unit sales ........................................... Add: Desired ending finished goods units ........................................................ Total required units ........................................... Less: Beginning finished goods units ............ Required production units ................................
PROBLEM 9-1A (Continued)
GLENDO FARM SUPPLY COMPANY Direct Materials Budget — Gumm For the Six Months Ending June 30, 2014
Quarter (^) Six 1 2 Months
Units to be produced .................................... Direct materials per unit ............................... Total pounds needed for production .......... Add: Desired ending direct materials (pounds) ............................................. Total materials required ............................... Less: Beginning direct materials (pounds) ............................................ Direct materials purchases .......................... Cost per pound .............................................. Total cost of direct materials purchases ..................................................
37, X 4 148,
10, 158,
9, 149, X $3.
$566,
45, X 4 180,
13, 193,
10, 183, X $3.
$695,400 $1,261,
GLENDO FARM SUPPLY COMPANY
Direct Labor Budget For the Six Months Ending June 30, 2014
Quarter Six 1 2 Months
Units to be produced ............................ Direct labor time (hours) per unit ........ Total required direct labor hours ......... Direct labor cost per hour .................... Total direct labor cost ..........................
X 1/
X $
X 1/
X $
PROBLEM 9-2A
(a) DELEON INC. Sales Budget For the Year Ending December 31, 2014
JB 50 JB 60 Total Expected unit sales ............. Unit selling price .................. Total sales ............................
X $
X $
(b) DELEON INC. Production Budget For the Year Ending December 31, 2014
JB 50 JB 60 Expected unit sales .............................. Add: Desired ending finished goods units................................ Total required units .............................. Less: Beginning finished goods units ........................................... Required production units ...................
PROBLEM 9-2A (Continued)
(c) DELEON INC. Direct Materials Budget For the Year Ending December 31, 2014
JB 50 JB 60 Total Units to be produced ...................... Direct materials per unit ................. Total pounds needed for production.................................... Add: Desired ending direct materials (pounds) ............... Total materials required ................. Less: Beginning direct materials (pounds) ............... Direct materials purchases ............ Cost per pound ................................ Total cost of direct materials purchases ...................................
405, X 2
810,
30, 840,
40, 800, X $
$2,400,
205, X 3
615,
10, 625,
15, 610, X $
$2,440,000 $4,840,
(d) DELEON INC. Direct Labor Budget For the Year Ending December 31, 2014
JB 50 JB 60 Total Units to be produced ...................... Direct labor time (hours) per unit ................................................ Total required direct labor hours ............................................ Direct labor cost per hour .............. Total direct labor cost .....................
405,
X.
162, X $ $1,944,
205,
X.
123, X $ $1,476,
650,
—
301, X $ $3,420,
PROBLEM 9-3A
(a) MARSH INDUSTRIES Sales Budget For the Year Ending December 31, 2014
Plan A Plan B Expected unit sales .................................... Unit selling price ........................................ Total sales ...................................................
X $8.
X $7.
(2) (3)
(1)$6,400,000 ÷ $8 = 800,000 X 90% = 720,000.
(b) MARSH INDUSTRIES Production Budget For the Year Ending December 31, 2014
Plan A Plan B Expected unit sales .............................................. Add: Desired ending finished goods units ....... Total required units .............................................. Less: Beginning finished goods units ............... Required production units ...................................
(1)
(1)720,000 X 5%
(c) Variable costs = $4.30 per unit ($1.80 + $1.30 + $1.20) for both plans.
Plan A Plan B Total variable costs Total fixed costs Total costs (a)
Total units (b)
Unit cost (a) ÷ (b)
$3,087, 1,895, $4,982,
718,
$6.
(718,000 X $4.30) $3,964, 1,895, $5,859,
922,
$6.
(922,000 X $4.30)
The difference is due to the fact that fixed costs are spread over a larger number of units (204,000) in Plan B.
PROBLEM 9-3A (Continued)
(d) Gross Profit
Plan A Plan B Sales Cost of goods sold Gross profit
$6,048, 4,996, $1,051,
(720,000 X $6.94)
$6,750, 5,724, $1,026,
(900,000 X $6.36)
Plan A should be accepted because it produces a higher gross profit than Plan B.
PROBLEM 9-4A (Continued)
(b) COLTER COMPANY Cash Budget For the Two Months Ending February 28, 2014
January February Beginning cash balance................................... Add: Receipts Collections from customers ............. [See Schedule (1)] Notes receivable ................................ Sale of securities ............................... Total receipts ............................. Total available cash ..........................................
Less: Disbursements Direct materials ................................ [See Schedule 2] Direct labor ....................................... Manufacturing overhead ................. Selling and administrative expenses* ..................................... Cash dividend .................................. Total disbursements ................ Excess (deficiency) of available cash over cash disbursements ............................ Financing Add: Borrowings ............................................ Less: Repayments ........................................... Ending cash balance ........................................
*Selling and administrative expenses less $1,000 depreciation.
PROBLEM 9-5A
(a) LITWIN COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2014
May June Budgeted cost of goods sold .......................... Add: Desired ending merchandise inventory .... Total .................................................................. Less: Beginning merchandise inventory ........ Required merchandise purchases ..................
(2)
(4)
(1) (3)
(1)$800,000 X 105% = $840,000; $840,000 X 75% = $630,000.
(2)$630,000 X 15% = $94,500.
(3)$840,000 X 105% = $882,000; $882,000 X 75% = $661,500; $661,500 X
(4)$600,000 X 15% = $90,000.
PROBLEM 9-6A
KRAUSE INDUSTRIES
Budgeted Income Statement For the Year Ending December 31, 2014
Sales (8,000 X $32) ................................................... $256, Cost of goods sold Finished goods inventory, January 1 ............. $ 15, Cost of goods manufactured ($62,500 + $50,900 + $48,600) ...................... 162, Cost of goods available for sale...................... 177, Finished goods inventory, December 31 (3,000 X $18) ................................................. 54, Cost of goods sold ................................... 123, Gross profit .............................................................. 133, Selling and administrative expenses...................... 75, Income from operations .......................................... 58, Interest expense....................................................... 3, Income before income taxes ................................... 54, Income tax expense (40%) ...................................... 21, Net income ............................................................... $ 32,
PROBLEM 9-6A (Continued)
KRAUSE INDUSTRIES Budgeted Balance Sheet December 31, 2014
Assets Current assets Cash ...................................................................... $ 6, Accounts receivable ($76,800 X 40%) ................. 30, Finished goods inventory (3,000 units X $18) ............................................ 54, Total current assets ...................................... $91,
Property, plant, and equipment Equipment ($40,000 + $9,000) .............................. $49, Less: Accumulated depreciation ($10,000 + $4,000) ...................................... 14,000 35, Total assets ................................................... $126,
Liabilities and Stockholders’ Equity Liabilities Notes payable ($25,000 – $8,000) ........................ $17, Accounts payable ($8,500* + $6,500) .................. 15, Income taxes payable .......................................... 5, Total liabilities ............................................... $ 37,
Stockholders’ equity Common stock ..................................................... $40, Retained earnings ($25,000 + $32,700 – $8,000) ............................ 49, Total stockholders’ equity ........................... 89, Total liabilities and stockholders ’ equity ......................................................... $126,
*$17,000 X 50%
