chap10_[管理成本会计]_CGA_MA1_Managerial_Accounting__management_accounting_课件

chap10_[管理成本会计]_CGA_MA1_Managerial_Accounting__management_accounting_课件 chap10_[管理成本会 计]_CGA_MA1_Managerial_Accounting__management_accou nting_课件 Profit Planning Chapter 10 Learning Objective 1 Understand why organizations budget and the processes they use to create budgets1>. The Basic Framework of Budgeting 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 organization’s activities is known as budgetary control. Planning and Control Planning – involves developing objectives and preparing various budgets to achieve those objectives. Control – involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal. Advantages of Budgeting Advantages Define goals and objectives Uncover potential bottlenecks Coordinate activities Communicate plans Means of allocating resources Responsibility Accounting Managers should be held responsible for those items - and only those items - that they can actually control to a significant extent. Choosing the Budget Period Operating Budget 2011 2012 2013 2014 Operating budgets ordinarily cover a one-year period corresponding to a company’s fiscal year. Many companies divide their annual budget into four quarters. A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. Learning Objective 2 Understand Basic Budgeting Terms and the Behavioral Aspects of Budgeting. Bottom-up and Top-down Budgeting Bottom-up budgeting (Self-imposed budget or Participative budget ) Top-down budgeting Advantages of the Bottom-up Budgeting (Self-Imposed Budgets) Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse. How to overcome problems of self-imposed budgets Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack (or budget padding).” Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare budgets that meet those targets. Advantages of the Top-down Budgeting Avoid the potential budgetary slack (budget padding). Provide a clearer performance goals and expectations from the top management. May provide better budget due to top management’s access to privileged/confidential market and organization information . Provide an efficient budgetary process. Budget Lapsing A popular method among government agencies, universities and organizations relying on allocated funds. Any unused funding at the end of the financial period cannot be carried forward to the following year. As a result, the following year’s budget may be cut because of the under-expenditure in the previous year. Budget Lapsing: Advantages Budget lapsing helps ensure that the appropriate level of resources is utilized in each period. Without budget lapsing, risk-averse managers may unnecessarily accumulate funds and this may adversely affect the performance of the organization. It helps provide an opportunity for a clean cut-off of expenditures and to reallocate any unused resources for other more appropriate requirements. Budget Lapsing: Potential Problem & Solution Budget lapsing can cause undesired behavior effects. For example, managers may wastefully spend their entire budget before the end of the period in order to avoid budget cuts. A system of reviewing the expenditures near end of the period may uncover unnecessary expenditures and discourage managers to wastefully spend because of budget lapsing. Incremental versus Zero-based Budgets Incremental method of budgeting is most commonly used by companies. Companies start off one year’s budget by referring back to the previous year’s figures. Adjustments are then made to the budget to account for the expected changes such as prices for the next year. While incremental method of budgeting is practical and fast, any inefficiency in the previous year’s figures may be carried forward. For example, if all along the organization is over staffed, then the budget will continually to be allowing for the over staffing situation under this method. Incremental versus Zero-based Budgets Zero-Based Budgets are prepared based on the assumption that the company has just started. Therefore, resources required have to be justified from scratch. For example, when budgeting for staff cost for a restaurant, managers using the zero-based budgeting approach will ignore the existing staff level and expenses, rather, they will examine factors such as opening hours, number of tables, expected patron numbers to work out the number of staff required at each position and level, hence the associate costs, to produce a budget. Incremental versus Zero-based Budgets Companies using the zero-based method do not simply ignore previous years’ figures. Figures generated by the zero-based method are usually compared with previous years’ figures. Any large differences are investigated. As zero-based budgeting is time consuming and costly, companies tend to use this method for the relatively large items and the incremental method for the rest. Top Management Attitude: Human Factors in Budgeting The success of a budget program depends on three important factors: Top management must be enthusiastic and committed to the budget process. Top management must not use the budget to pressure employees or blame them when something goes wrong. Budget targets should be challenging but achievable in order to have good motivational effects. The Budget Committee A standing committee responsible for overall policy matters relating to the budget coordinating the preparation of the budget resolving disputes related to the budget approving the final budget Learning Objective 3 Understand the Key Components of Master Budget in Manufacturing, Merchandising and Service Industries Understand the key components of master budget in Manufacturing, Merchandising, and Service Industries The first step of budgeting for every business is to budget for the revenue, whether it is a sales budget for providing goods or services or a funding budget. Although operational budgets are adapted according to the industries, they are very similar and typically comprise of budgets for Income statement Cash Balance sheet. The major differences of different industries include: Manufacturing: production budget is involved Merchandising: no production budget, only purchase budget of merchandise is required. Service Industries: budget for revenue and cost of providing services Not-for-profit: expected funding available and plan usage of funding. Learning Objective 4 Prepare a Master Budget for a Manufacturing Company. The Master Budget: An Overview Production budget Selling and administrative budget Direct materials budget Manufacturing overhead budget Direct labor budget Cash Budget Sales budget Ending inventory budget Budgeted balance sheet Budgeted income statement Learning Objective 4 (a) Prepare a sales budget, including a schedule of expected cash collections. 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. The Sales Budget The individual months of April, May, and June are summed to obtain the total budgeted sales in units and dollars for the quarter ended June 30th Expected Cash Collections All sales are on account. Royal’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following sale, 5% uncollectible. The March 31 accounts receivable balance of $30,000 will be collected in full. Expected Cash Collections Expected Cash Collections From the Sales Budget for April. Expected Cash Collections From the Sales Budget for May. Quick Check ?? What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 Quick Check ?? Expected Cash Collections Learning Objective 4 (b) Prepare a production budget. The Production Budget Production Budget Sales Budget and Expected Cash Collections Completed The production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory. The Production Budget The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4,000 units were on hand. Let’s prepare the production budget. The Production Budget The Production Budget March 31 ending inventory 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 What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units Quick Check ?? The Production Budget The Production Budget Assumed ending inventory. Learning Objective 4 (c) Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials. The Direct Materials Budget 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 month’s production. On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Let’s prepare the direct materials budget. The Direct Materials Budget From production budget The Direct Materials Budget The Direct Materials Budget Calculate the materials to be purchased in May. March 31 inventory 10% of following month’s production needs. Quick Check ?? How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds Quick Check ?? The Direct Materials Budget The Direct Materials Budget Assumed ending inventory Expected Cash Disbursement for Materials Royal pays $0.40 per pound for its materials. One-half of a month’s 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. Let’s calculate expected cash disbursements. Expected Cash Disbursement for Materials Expected Cash Disbursement for Materials 140,000 lbs. × $0.40/lb. = $56,000 Compute the expected cash disbursements for materials for the quarter. Quick Check ?? What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 Quick Check ?? Expected Cash Disbursement for Materials Learning Objective 4 (d) Prepare a direct labor budget. The Direct Labor Budget 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. For purposes of our illustration assume that Royal has a “no layoff” policy, workers are pay at the rate of $10 per hour regardless of the hours worked. For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month. Let’s prepare the direct labor budget. The Direct Labor Budget From production budget. The Direct Labor Budget The Direct Labor Budget Greater of labor hours required or labor hours guaranteed. The Direct Labor Budget 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 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 Quick Check ?? Learning Objective 4 (e) Prepare a manufacturing overhead budget. 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, which includes $20,000 of noncash costs (primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget. Manufacturing Overhead Budget Direct Labor Budget. Manufacturing Overhead Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour * * rounded Manufacturing Overhead Budget Depreciation is a noncash charge. Ending Finished Goods Inventory Budget Direct materials budget and information. Ending Finished Goods Inventory Budget Direct labor budget. Ending Finished Goods Inventory Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour * Ending Finished Goods Inventory Budget Production Budget. Learning Objective 4 (f) Prepare a selling and administrative expense budget. Selling and Administrative Expense Budget At Royal, the selling and administrative expense budget is divided into variable and fixed components. The variable selling and administrative expenses 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 depreciation – that are not cash outflows of the current month. Let’s prepare the company’s selling and administrative expense budget. Selling and Administrative Expense Budget Calculate the selling and administrative cash expenses for the quarter. Quick Check ?? What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 Quick Check ?? Selling Administrative Expense Budget Learning Objective 4 (g) Prepare a cash budget. Format of the Cash Budget The cash budget is divided into four sections: Cash receipts section lists all cash inflows excluding cash received from financing; Cash disbursements section consists of all cash payments excluding repayments of principal and interest; Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and Financing section details the borrowings and repayments projected to take place during the budget period. The Cash Budget Assume the following information for 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 (both purchases paid in cash) Has an April 1 cash balance of $40,000 The Cash Budget Schedule of Expected Cash Collections. The Cash Budget Direct Labor Budget. Manufacturing Overhead Budget. Selling and Administrative Expense Budget. Schedule of Expected Cash Disbursements. The Cash Budget Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit. The Cash Budget Ending cash balance for April is the beginning May balance. Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit. The Cash Budget Quick Check ?? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 Quick Check ?? The Cash Budget $50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 and repayment on June 30. The Budgeted Income Statement Cash Budget Budgeted Income Statement Completed With interest expense from the cash budget, Royal can prepare the budgeted income statement. Learning Objective 4(h) Prepare a budgeted income statement. The Budgeted Income Statement Sales Budget. Ending Finished Goods Inventory. Selling and Administrative Expense Budget. Cash Budget. Learning Objective 4 (i) Prepare a budgeted balance sheet. The Budgeted Balance Sheet Royal reported the following account balances prior to preparing its budgeted financial statements: Land - $50,000 Common stock - $200,000 Retained earnings - $146,150 (April 1) Equipment - $175,000 Learning Objective 5 Prepare Budget on the Key Components for the Service Industry Key Budget Components for the Service Industry Wonder World, a hypothetical theme park, has the following data: Main Sources of Revenue Major Expenses Departments Ticketing Food & Beverages Souvenir Shop Salaries Rent Cost of Sales Advertising Maintenance Depreciation Utilities Finance & Administration Operations Marketing Souvenir Shop Food and Beverages Maintenance Learning Objective 5 (a) Prepare a Visitorship Budget Visitorship Budget Number of Visitors Adults 750,000 Children 250,000 Total Visitors 1,000,000 Based on historical records, economic outlook, tourist arrival expectations, the following visitorship budget for the coming year is prepared: Learning Objective 5 (b) Prepare a Revenue Budget Revenue Budget Revenue per visitor Gate Collections : Adults $13 Gate Collections : Children $9 Souvenir Shop $4 Food and Beverages $6 Based on the average price charged by Wonder World and other historical data, the following revenues per visitor are budgeted and approved by the top management: Revenue Budget Revenue Gate Collections : Adults1 $9,750,000 Gate Collections : Children2 $2,250,000 Souvenir Shop3 $4,000,000 Food and Beverages4 $6,000,000 Total Revenue $22,000,000 With the budgeted number of visitors and revenues per visitor from each category, the budgeted revenues are computed: Note 1 750,000 X $13 2 250,000 X $9 3 1,000,000 X $4 4 1,000,000 X $6 Learning Objective 5 (c) Prepare a Cost of Sales Budget and Expense Budget Cost of Sales Budget Cost of Sales Souvenir Shop $2,000,000 Food and Beverage $3,000,000 Total $5,000,000 For cost of sales on souvenirs and food and beverages, the company normally makes use of the historical cost of sales % and takes into account of any expected price changes from the suppliers. For the coming year, the expected cost of sales % is 50% on sales for both the souvenir shop and food and beverages. Expenses Budget How the items are budgeted will depend on the nature of the items. Nature of expense Amount Budget approach Rental $1,100,000 5% of revenue as agreed with the landlord. Salaries $3,500,000 Zero based approach by reviewing the actual requirement of each position and its suitable rate of pay. Advertising $1,200,000 Proposed by marketing manager. Maintenance $980,000 Proposed by maintenance manager. Depreciation $890,000 Computed by the finance manager by taking into account of existing assets and proposed new assets. Utilities $580,000 Computed by maintenance manager based on the rates and usage expectations. Other operating expenses $490,000 Based on judgment and any specific requirements such as legal expenses. Total $8,740,000 Learning Objective 5 (d) Prepare a Budgeted Income Statement Budgeted Income Statement Budgeted Income Statement Revenue $22,000,000 Cost of goods sold $5,000,000 Expenses $8,740,000 Net income $8,260,000 Budgeted Income Statement can be prepared by putting all previous budgeted information together. Learning Objective 6 Explain the Costs and Benefits of Budgeting Costs and Benefits of Budgeting Budgeting is time-consuming and costly. Budgetary slack or padding is an inherent problem of budgeting. Despite the drawbacks of budgeting, most companies are still using budgets to plan, communicate, set objectives and allocate resources etc. Since budgets are still commonly used, benefits of budgeting are high and drawbacks of budgeting can be minimized by having a good budgeting system. For a good budgeting system, it is critical to have effective communication and mutual trust between the top management and its staff. Chapter 10: Profit planning. This chapter focuses on the steps taken by businesses to achieve their planned levels of profits - a process called profit planning. Profit planning is accomplished by preparing numerous budgets, which, when brought together, form an integrated business plan known as a master budget. * 9-* * Learning objective number 1 is to understand why organizations budget and the processes they use to create budgets. 9-* * 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 organization’s activities is known as budgetary control. 9-* * Planning involves developing objectives and preparing various budgets to achieve those objectives. Control involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal. To be effective, a good budgeting system must provide for both planning and control. Good planning without effective control is time wasted. 9-* * Budgets communicate management’s plans throughout the organization. Budgets force managers to think about and plan for the future. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budget process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance. While our focus in this chapter is on preparing operating budgets for a one-year time frame, longer term budgets also can be very helpful to organizations from a planning standpoint. 9-* * The premise of responsibility accounting is that managers should be held responsible only for those items that they can control to a significant extent. Responsibility accounting systems enable organizations to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets. 9-* * Part I Operating budgets ordinarily cover a one-year period corresponding to a company’s fiscal year. Many companies divide their annual budget into four quarters. In this chapter, we focus on one-year operating budgets. Part II A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. This approach keeps managers focused on the future at least one year ahead. 9-* * Learning objective number 2 is to understand basic budgeting terms and the behavioral aspects of budgeting. Bottom-up budgeting The initial flow of budget data in a bottom up budgeting system is from lower levels of management to higher levels of management. Each person with responsibility for cost or revenue will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization. Therefore, it is also called a self-imposed budget or participative budget that requires the full cooperation and participation of managers at all levels. It is a particularly useful approach if the budget will be used to evaluate managerial performance. Top-down budgeting Top management sets all the key targets for the entire company. These key targets are then move downwards for the middle and lower-level management to come up with other detailed budgeted figures. Under this approach, middle and lower-level management are tasked to complete the budget plan towards meeting the key targets set by the top management. * 9-* * The key to self-imposed budgets is to get operational managers involved in the budgeting process and to clearly state their goals and expectations. Here is a list of four major advantages of self-imposed budgets. First, individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. Second, budget estimates prepared by front-line managers (who have intimate knowledge of day-to-day operations) are often more accurate than estimates prepared by top managers. Third, motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Fourth, a manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse. 9-* * Self-imposed budgets should be reviewed by higher levels of management. Without such a review, self-imposed budgets may have too much “budgetary slack,” or may not be aligned with overall strategic objectives. Most 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 target profits or sales. Lower level managers are directed to prepare budgets that meet those targets. Problems of self-imposed budget can be solved by the top-down budgeting approach. For example, it can: avoid the potential budgetary slack (budget padding). provide a clearer performance goals and expectations from the top management. provide better budget due to top management’s access to privileged/confidential market and organization information . provide an efficient budgetary process. * A popular method among government agencies, universities and organizations relying on allocated funds. Any unused funding at the end of the financial period cannot be carried forward to the following year. As a result, the following year’s budget may be cut because of the under-expenditure in the previous year. * Budget Lapsing: Advantages Budget lapsing helps ensure that the appropriate level of resources is utilized in each period. Without budget lapsing, risk-averse managers may unnecessarily accumulate funds just in case of any sudden fund requirements. Unnecessary savings from, for example, essential repair and maintenance, may adversely affect the organization. It helps provide an opportunity for a clean cut-off of expenditures and to reallocate any unused resources for other more appropriate requirements. * Budget Lapsing: Potential Problem & Solution Budget lapsing can cause undesired behavior effects. For example, managers may wastefully spend their entire budget before the end of the period in order to avoid budget cuts. A system of reviewing the expenditures near end of the period may uncover unnecessary expenditures and discourage managers to wastefully spend because of budget lapsing. * Incremental method of budgeting is most commonly used by companies. Companies start off one year’s budget by referring back to the previous year’s figures. Adjustments are then made to the budget to account for the expected changes such as prices for the next year. While incremental method of budgeting is practical and fast, any inefficiency in the previous year’s figures may be carried forward. For example, if all along the organization is over staffed, then the budget will continually to be allowing for the over staffing situation under this method. * Zero-Based Budgets are prepared based on the assumption that the company has just started. Therefore, resources required have to be justified from scratch. For example, when budgeting for staff cost for a restaurant, managers using the zero-based budgeting approach will ignore the existing staff level and expenses, rather, they will examine factors such as opening hours, number of tables, expected patron numbers to work out the number of staff required at each position and level, hence the associate costs, to produce a budget. * Companies using the zero-based method do not simply ignore previous years’ figures. Figures generated by the zero-based method are usually compared with previous years’ figures. Any large differences are investigated. As zero-based budgeting is time consuming and costly, companies tend to use this method for the relatively large items and the incremental method for the rest. * 9-* * The success of a budget program depends upon three important factors: Top management must be enthusiastic and committed to the budget process, otherwise nobody will take it seriously. Top management must not use the budget to pressure employees or blame them when something goes wrong. This breeds hostility and mistrust rather than cooperative and coordinated efforts. Budget targets should be challenging but achievable in order to have good motivational effects. 9-* * A budget committee is usually responsible for overall policy relating to the budget program, for coordinating the preparation of the budget, for resolving disputes related to the budget, and for approving the final budget. This committee may consist of the president and the vice presidents in charge of various functions such as sales, production, purchasing, and the controller. 9-* * Learning objective number 3 is to understand the Key Components of Master Budget in Manufacturing, Merchandising and Service Industries. The master budget consists of a number of separate but interdependent budgets that formally lay out the company’s sales, production, and financial goals. The master budget culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. Exhibit 10-2 provides an overview of the various parts of the master budget and how they are related. Companies in different industries adapt this master budget based on their particular needs. For a manufacturer, the first step in the budgeting process is the preparation of the sales budget, which is a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process as all other budgets such as the production budget and the income statement budget depend on the sales budget. The sales budget is compiled by taking into account, for example, past sales levels, general economic trends, competitors’ actions and pricing strategies. Once the sales budget is done, a manufacturer will do the production budget based on the sales budget and the required finished goods inventory. Finished goods inventory is necessary to cater for any unexpected change in demand. Thereafter, the production budget is utilized to determine the budgets for direct materials, direct labor and manufacturing overheads. A budget for selling and administrative expenses will then be prepared. Finally, budgeted cash statement, income statement and balance sheet are compiled. For a merchandiser, the first step is also the preparation of the sales budget. After the sales budget, a merchandiser will do a budget for the merchandise purchases. The sales budget and the inventory required are utilized to compile the budget for merchandise purchases. Production, direct materials, direct labor and manufacturing overhead budgets are not applicable for a merchandiser. Similar to a manufacturer, other budgets including selling and administrative expenses, cash, income statement and balance sheet are prepared. For a service provider, same as a manufacturer or a merchandiser, a sales budget is done first. The sales budget gives details of the services to be provided and the related income. Based on the sales budget, other budgets are then prepared. To most service providers, human capital (or human resources) budgeting/planning could be one of the most important budget after sales budget. A not-for-profit organization budget has many similarities with other organizations. The major difference is that this organization normally does not charge for its goods and services. Instead, funding is obtained from government bodies or donors. Therefore, there is no sales budget for a not-for-profit organization. Instead, it will have a budget for revenue or funding. From this budget, the organization will then plan for its activities accordingly by producing a budget for activities and expenses. Therefore, the first step of budgeting for every business is to budget for the revenue, whether it is a sales budget for providing goods or services or a funding budget. Although operational budgets are adapted according to the industries, they are very similar and typically comprise of budgets for income statement, cash and balance sheet. We will next describe the detailed budgeted information for a manufacturer. * 9-* * Learning objective number 4 is to prepare a Master Budget for a Manufacturing Company. 9-* * The master budget consists of a number of separate but interdependent budgets. We have developed this schematic of the budgeting process to illustrate the interdependency of the various individual budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget. The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet. 9-* * Learning objective number 4 (a) is to prepare a sales budget, including a schedule of expected cash collections. 9-* * The marketing department of Royal Company prepares the following information that will be used to prepare a budget for the quarter ending June 30th. 9-* * Royal sells only one product and that product has a selling price of $10 per unit. To calculate the total sales in dollars for any period, we multiply the budgeted sales in units times the unit selling price. As you can see, Royal forecasts unit sales of 100,000 and total sales revenue of $1,000,000 for the quarter ended June 30th. Once we complete the sales budget, we can move on to the expected cash collections from sales. 9-* * All sales at Royal are made on account. The company collects 70 percent of the sales revenue in the month of sale, 25 percent in the following month, and estimates that 5 percent of all credit sales will prove uncollectible. At the start of the quarter, Royal had $30,000 in accounts receivable that were deemed to be fully collectible. Let’s prepare the budget of expected cash collections on sales. 9-* * The first step in calculating Royal’s cash collections is to insert the beginning accounts receivable, $30,000, into the April column of the cash collections schedule. This balance will be collected in full in April. 9-* * The second step is to calculate the April credit sales that will be collected during each month of the quarter. We will collect another $140,000 ($200,000 times 70 percent) in April. In addition, 25% of April projected sales will be collected in May, so $50,000 of April sales will be collected in May. Finally, 5 percent of April’s sales will prove to be uncollectible. This amounts to $10,000 ($200,000 times 5 percent). 9-* * The third step is to calculate the May credit sales that will be collected during each month of the quarter. We will collect $350,000 ($500,000 times 70 percent) in the month of May and an additional 25 percent of the $500,000 will be collected in June. Finally, 5 percent of May’s sales will prove to be uncollectible. The uncollectible amount will be $25,000 ($500,000 times 5 percent). Can you complete the final month of June to get the total expected cash collections for the quarter? 9-* * Take your time and remember that we are asking for the total cash collections for the quarter ended June 30th. 9-* * How did you do? We will show you the computations on the next screen. 9-* * The fourth step is to calculate the June credit sales that will be collected during the month of June. We expect to collect $210,000 ($300,000 times 70 percent) from June sales in the month of June. The fifth step is to calculate the total for each column in the schedule and the total for the quarter ($905,000). Now let’s turn our attention to the production budget. 9-* * Learning objective number 4 (b) is to prepare a production budget. 9-* * After we have budgeted our sales and expected cash collection, we must make sure the production budget is adequate to meet the forecasted sales and to provide for the desired ending inventory. We need inventory on hand at the end of the period to minimize the likelihood of an inventory stock-out. 9-* * The management at Royal wants to minimize the probability of a stock out of inventory items. A policy has been implemented that requires the company to maintain ending inventory of 20 percent of the following month’s budgeted sales. At the beginning of the quarter, Royal had 4,000 units in inventory. If Royal was a merchandising company it would prepare a merchandise purchases budget instead of a production budget. Let’s get started on the production budget. 9-* * The first step in preparing the production budget is to insert the budgeted sales in units from the sales budget. 9-* * The second step is to calculate the required production in units for April (26,000 units). Notice, the desired ending inventory in units for April (10,000 units) and the beginning inventory in units for April (4,000 units). 9-* * What did you calculate as the required production for May? 9-* * The correct answer is 46,000 units. We will show you the calculation of this amount on the next screen. 9-* * The third step is to calculate the required production for May (46,000 units). Notice, April’s desired ending inventory (10,000 units) becomes May’s beginning inventory. 9-* * Part I The fourth step is to calculate the required production for June (29,000 units). Notice, we are assuming a desired ending inventory of 5,000 units. This implies that projected sales in July are 25,000 units because 20 percent of 25,000 units is 5,000 units. Part II The fifth step is to complete the Quarter columns. Notice, April’s beginning inventory and June’s ending inventory are carried over to the column. For the quarter, we will need to produce 101,000 units to meet our sales and inventory goals. Now that we know our required production, let’s look at the direct materials budget. 9-* * Learning objective number 4 (c) is to prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials. 9-* * Each good unit of output requires 5 pounds of direct material. Management does not want to run out of direct materials, so a policy has been established that materials on hand at the end of each month must be equal to 10% of the following month’s production. At the beginning of the month, Royal has 13,000 pounds of direct material on hand. Each pound of direct material costs $0.40. Let’s complete the direct materials budget. 9-* * The first step in preparing the direct materials budget is to insert the required production in units from the production budget. 9-* * The second step is to calculate the monthly and quarterly production needs, which in this case are stated in terms of pounds of direct material. 9-* * Part I The third step is to calculate the materials to be purchased for April (140,000 pounds). Part II April’s desired ending inventory is equal to 10% of May’s production needs, or 23,000 pounds. The total number of pounds needed in April is 153,000 pounds. Part II Finally, we subtract our materials on hand to determine the number of pounds of material that must be purchased. During April, Royal must purchase 140,000 pounds of direct materials. 9-* * Refer back to the previous slide and determine how much materials should be purchased in May. 9-* * The correct answer is 221,500 pounds. Let’s see how we got this value. 9-* * The fourth step is to calculate the materials to be purchased for May (221,500 pounds). Notice that April’s desired ending inventory becomes May’s beginning inventory. May’s desired ending inventory is 10% of June’s production needs of 145,000 pounds. 9-* * The fifth step is to calculate the materials to be purchased for June (142,000 pounds). The desired ending inventory for May becomes the beginning inventory for June. We are assuming a desired ending inventory for June of 11,500 pounds. April’s beginning inventory and June’s ending inventory carry over to the quarter columns. 9-* * Recall that Royal pays $0.40 per pound of direct materials. The company pays for one-half of its purchases in the month of the purchase and one-half in the following month. At the beginning of the quarter, Royal owed creditors $12,000 for purchases of direct materials. Let’s begin the expected cash disbursement for direct materials schedule. 9-* * The first step in calculating Royal’s cash disbursements is to insert the beginning accounts payable balance ($12,000) into the April column of the cash disbursements schedule. This balance will be paid in full in April. 9-* * The second step is to calculate the April credit purchases that will be paid during each month of the quarter. In April $28,000 ($56,000 x 50%) will be paid in April and $28,000 will be paid in May. The $56,000 is derived by multiplying 140,000 pounds by the $0.40 per pound purchase price. Now it is time for you to go to work. See if you can complete the expected cash disbursements for materials for the quarter. Please complete the schedule for the quarter and see how your work is progressing. 9-* * Which answer did you get for total cash disbursements for the quarter? 9-* * The correct answer is $185,000. Let’s look at the completed schedule to see how we arrived at this answer. 9-* * The remaining steps include calculating the May and June credit purchases that are paid during each month of the quarter. We also calculate the totals for all columns in the schedule and the total for the quarter ($185,000). Now let’s move to the direct labor budget. 9-* * Learning objective number 4d is to prepare a direct labor budget. 9-* * Carefully review the information on the screen. A unique aspect of direct labor at Royal is the no overtime policy. The company agrees to no layoffs of employees if work is slow, but in return, pays its employees straight time at $10 per hour for all hours worked. With the current work force, Royal will have to pay for a minimum of 1,500 hours of direct labor regardless of the work available. Let’s prepare this budget. 9-* * The first step in preparing the direct labor budget is to insert the production in units from the production budget. 9-* * The second step is to compute the direct labor hours required to meet the production needs. Remember each unit of output requires 0.05 direct labor hour. We will require 1,300 direct labor hours in April, 2,300 direct labor hours in May, and 1,450 direct labor hours in June. 9-* * Because of the no layoff policy, Royal is committed to paying for a minimum of 1,500 hours per month. The third step, in this example, is to compute the direct labor hours paid each month and for the quarter. The number of hours paid will be the greater of the direct labor hours required, or 1,500 hours. In April, Royal will pay for 1,500 direct labor hours when there is only work for 1,300 hours. In May, Royal will pay for 2,300 direct labor hours, and the company will pay for 1,500 hours in June. For the quarter, the company will pay for 5,300 direct labor hours. 9-* * The fourth step is to compute the total direct labor cost. Based on the $10 per hour rate, Royal will pay $15,000 for direct labor in April, $23,000 in May, and $15,000 in June, for a total of $53,000 for the quarter. 9-* * Determine the total direct labor costs if Royal were to pay time-and-one-half for all hours in excess of 1,500 hours per month. 9-* * How did you do? Did you get the correct answer of $57,000? The table on the right shows the detail computations. 9-* * Learning objective number 4 (e) is to prepare a manufacturing overhead budget. 9-* * Royal applies overhead on the basis of direct labor hours. The variable manufacturing overhead rate is $20 per direct labor hour. The fixed manufacturing overhead is $50,000 per month, of which $25,000 is noncash costs, primarily depreciation on the factory assets. This budget will provide a schedule of all costs of production other than direct materials and direct labor. 9-* * The first step in preparing the manufacturing overhead budget is to calculate the variable manufacturing overhead costs for each month and in total. We begin by multiplying our variable manufacturing overhead rate of $20 times the number of direct labor hours used in the month. For April, we expect to apply $26,000 of variable overhead. 9-* * The second step is to add the fixed manufacturing overhead costs ($50,000 per month) to the variable overhead costs to arrive at total manufacturing overhead costs for each month and in total. We estimate total overhead of $76,000 in April and for the quarter, we expect a total of $251,000. If we divide the manufacturing overhead of $251,000 by the total labor hours required during the quarter, we get a predetermined overhead rate of $49.70 (rounded). Once the level of fixed costs has been determined in the budget, the costs really are fixed; hence, the time to adjust fixed costs is during the budgeting process. 9-* * The third step is to calculate the cash disbursements for manufacturing overhead by subtracting noncash expenses from the total manufacturing overhead costs. When we subtract the noncash overhead costs from the total manufacturing overhead costs, we get the cash paid for overhead costs. We will use this cash overhead amount in our cash budget. In our example, $20,000 of depreciation is deducted from each month’s total overhead costs to arrive at the cash disbursements for manufacturing overhead. 9-* * Royal can now complete the ending finished goods inventory budget. The first step in preparing this budget is to compute direct materials cost per unit. We know that each unit requires 5 pounds of direct material at $0.40 per pound, for a total of $2.00 per unit. The information needed can be derived by referring back to the direct materials budget. 9-* * The second step is to compute the direct labor cost per unit. It takes 0.05 hours to produce one unit and the pay rate is $10 per hour. We have a direct labor cost per unit of $0.50. The information needed can be derived by referring back to the direct labor budget. 9-* * The third step is to compute the manufacturing overhead cost per unit. Royal uses adsorption costing for valuing inventory. We apply overhead on the basis of direct labor hours, so we multiply 0.05 times the predetermined rate of $49.70, which yields an overhead cost per unit of $2.49. Our total unit cost is $4.99. The predetermined overhead rate was calculated when we prepared the manufacturing overhead budget. Next, we will calculate the cost of our ending finished goods inventory. 9-* * The fourth step is to calculate the value of the ending finished goods inventory. We estimate there will be 5,000 units in ending inventory and at a per unit cost of $4.99, we have a total cost of $24,950. The finished goods inventory will appear on our budgeted balance sheet. The ending inventory in units is derived from the production budget. 9-* * Learning objective number 4 (f) is to prepare a selling and administrative expense budget. 9-* * Royal has a variable and fixed component to its selling and administrative (S & A) expenses. The company estimates variable selling and administrative expenses at $0.50 per unit sold. Fixed selling and administrative expenses are estimated at $70,000 per month. Of this amount, $10,000 are noncash expenses, primarily depreciation. The selling and administrative expense budget will be prepared in a manner similar to our overhead budget. This budget lists the budgeted expenses for areas other than manufacturing and it is typically a compilation of many smaller individual budgets. 9-* * The first step in preparing this budget is to multiply the variable selling and administrative (S & A) rate by the number of units sold. In April, we expect to sell 20,000 units and apply the variable rate of $0.50 per unit. The second step is to add in the fixed S & A expenses to arrive at total S & A expenses. To our variable expenses, we add our estimated $70,000 fixed selling and administrative expenses to get total selling and administrative expenses of $80,000. The third step is to deduct noncash S & A expenses to arrive at cash disbursements for S & A expenses. Cash selling and administrative expenses for April of $70,000. Take a few minutes to complete the schedule and see what kind of progress you are making. 9-* * What are the total cash selling and administrative expenses for the quarter? 9-* * Did you get $230,000? Let’s look at the schedule on the next screen and compare it to your work. 9-* * The same steps are followed for the months of May and June to arrive at total cash disbursements for S & A expenses for the quarter of $230,000. 9-* * Learning objective number 4g is to prepare a cash budget. 9-* * The preparation of the cash budget can be quite complex. This budget should be broken down into time periods that are as short as feasible. It consists of four major sections: Cash receipts section lists all cash inflows excluding cash received from financing; Cash disbursements section consists of all cash payments excluding repayments of principal and interest; Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and Financing section details the borrowings and repayments projected to take place during the budget period. 9-* * It would be a good idea to jot down this additional information or merely print the screen. We will need all of this information to prepare the cash budget. 9-* * The first step in preparing this budget is to calculate the total cash available. We began April with $40,000 in cash. To this amount, we add our expected cash collections from sales of $170,000 for the month of April. We complete the first section by calculating the total cash available of $210,000. Now, let’s continue with the budget preparation. 9-* * The second step is to calculate the total cash disbursements. During April, we expect to pay $40,000 for raw materials, $15,000 for direct labor, $56,000 for cash manufacturing overhead, and $70,000 for selling and administrative expense. This is not the total manufacturing overhead because we have excluded noncash depreciation costs. During April, the Board of Directors paid a cash dividend of $49,000. We have now completed the second major section of the cash budget, the cash disbursements. 9-* * The third step is to calculate the excess (deficiency) of cash available over disbursements. In the month of April, we expect to have a cash deficiency of $20,000, given that Royal has a policy that the company will always maintain an ending cash balance of $30,000. 9-* * The fourth step is to determine the financing requirements and the ending cash balance. After Royal borrows $50,000 on its line-of-credit, it will have an ending cash balance of $30,000. The ending cash balance for April becomes the beginning cash balance for May. Let’s complete the cash budget for the month of May. 9-* * These four steps are repeated for the month of May. The result is a $30,000 excess of cash available over disbursements. Since Royal must maintain a minimum cash balance of $30,000 it will not repay any of its loan in May. 9-* * Now, it’s your turn to calculate the cash excess or deficiency for the month of June. Which amount did you determine to be correct? 9-* * $95,000 is the correct answer. Let’s look at the completed schedule on the next screen. 9-* * The same four steps are repeated for June. The result is an excess of cash available of $95,000. At the end of June, Royal will have sufficient cash to repay the $50,000 borrowed in April plus the interest on the loan. The total interest is $2,000 as demonstrated in the computation of interest box on the left side of your screen. Royal will end the quarter with $43,000 cash on hand. This cash balance will appear on our budgeted balance sheet. 9-* * We are now ready to move from the preparation of individual budgets to preparing our budgeted financial statements. The cash budget must be prepared first so that the interest expense can be determined for the budgeted income statement. Let’s begin with the budgeted income statement. 9-* * Learning objective number 4(h) is to prepare a budgeted income statement. 9-* * The numbers for the budgeted income statement come from other budgets that have already been prepared. More specifically, the sales revenue comes from the sales budget. The cost of goods sold, on a per unit basis comes from the ending finished goods inventory budget. The selling and administrative expenses come from the S & A budget. The interest expense comes from the cash budget. Royal calculates budgeted net income for the quarter is $239,000. With the income statement complete, we can move on to the budgeted balance sheet. 9-* * Learning objective number 4 (i) is to prepare a budgeted balance sheet. 9-* * Please make note of this supplemental information as we will need it to complete the budgeted balance sheet. 9-* * You can see our cash balance of $43,000 comes directly from the cash budget. Accounts receivable ($75,000) is 25% of June’s sales ($300,000). Raw materials inventory ($4,600) is calculated by multiplying the ending inventory of raw material in pounds (11,500) by the cost per pound. The finished goods inventory ($24,950) is taken from the ending finished goods inventory budget. The Land and Equipment amounts are given. Accounts payable ($28,400) is 50% of June’s purchases ($56,800). The balance in the Common stock account is given. 9-* * The balance of retained earnings at June 30 is $336,150, which is based on: beginning balance + net income - dividends paid ($146,150 + $239,000 - $49,000). 9-* * Learning objective number 5 is to prepare budget on the key components for the service industry. This section illustrates the essential aspects of budgeting of a theme park (a hypothetical one). Wonder World is a theme park which has some mechanical rides, an aquarium and a dolphin pool. On average, about one million visitors including locals and tourists are attracted to the theme park annually. Wonder World is a very profitable company. Wonder World has three main sources of revenue, namely, ticketing, food and beverages and the souvenir shop. For expenses, the major ones are salaries, rent and cost of sales for selling food and beverages and souvenir items. Wonder World has a number of departments, Finance and Administration, Operations, Marketing, Souvenir Shop, Food and Beverages and Maintenance. Each of the department head provides input of his or her area of responsibility for the company’s annual budget. * 9-* * Learning objective number 5a is to prepare a visitorship budget. Based on historical records, economic outlook, tourist arrival expectations, the visitorship budget is then prepared. This is the important first step of the budgeting process for a theme park as revenue and expenses are driven by these numbers. In this example, Adults and Children numbers are estimated as 750,000 and 250,000 respectively, totaling 1,000,000 . * 9-* * Learning objective number 5 (b) is to prepare a revenue budget. Based on the average price charged by Wonder World and other historical data, the revenues budget, including gate collection (i.e. entrance ticket), souvenir shop revenue, and food and beverages revenue per visitor are prepared and approved by the top management. * With the budgeted number of visitors and revenues per visitor from each category, the budgeted revenues are computed. In this example, a total of $22,000,000 is budgeted. * 9-* * Learning objective number 5 (c) is to prepare a cost of sales budget and an expenses budget. For cost of sales on souvenirs and food and beverages, the company normally makes use of the historical cost of sales percentage and takes into account of any expected price changes from the suppliers. For the coming year, the expected cost of sales percentage is is budgeted at 50% on sales for both the souvenir shop and food and beverages. * Regarding rental expense, Wonder World has an agreement with its landlord to pay either a lump sum of $200,000 or 5% of the revenue, whichever is higher. Since opening of the attraction, Wonder World’s 5% of revenue has always exceeded the $200,000 lump sum by a very far amount, therefore, its budgeted rent can simply be computed at 5% of sales. Salary expense is a top expense item for Wonder World. Each year, the head of finance will analyze and discuss salary expense with top management and recommend the appropriate amount to be budgeted for next year. Generally, for salaries, the zero-based approach is used to estimate the budgeted figure. For incremental approach, we take last year’s expense and adjust for changes in headcounts and rate of pay. For the zero-based approach, we do not start off with last year’s figure; instead, we review from scratch the number of staff required based on tasks and duties to be performed. Suitable rates of pay for different levels of staff are discussed. With this method, any inappropriate staff number or pay will not be carried forward into next year. Advertising is more of a discretionary item for Wonder World. The marketing manager will propose the amount to be spent and estimate the effect of the advertising before seeking the approval of the top management. For TV advertising, viewership demography together with detailed costing will have to be presented to the top management for approval. In the end, the top management will decide on the types of advertisement and the total to be spent. Maintenance expenditure is more of a technical area and safety cannot be compromised. The maintenance manager has a bigger role to play in terms of the amount required. The maintenance manager will list down the various maintenance and enhancement jobs required to be done next year and estimate the total budget required for these jobs. Top management will go through the list and discuss with the maintenance manager to decide on the timing of the jobs. For maintenance jobs, they normally get approved and for the enhancement jobs, top management may decide to delay the jobs for a while. Depreciation expense is mainly computed by the Finance Department. The expense can be computed by using all the existing depreciable assets’ values and depreciation policies plus any applicable additional depreciation for assets to be acquired in the coming year. If all planned purchases are according to the original plan, depreciation expense budget can be fairly accurate. The maintenance department is also responsible for estimating the amount to be budgeted for utilities. Current facilities, planned new facilities, change in rates of utilities will be taken into account to estimate the utilities expense for next year. It should be noted that Wonder World utilities are not so sensitive to change in number of visitors. Even with a very low level of visitors, air conditioning and lightings for all the indoor facilities have to be kept on, the life support system, which consumes a lot of electricity, has to be kept on for fishes and dolphins. Other operating expenses such as legal and audit fees, travel and fish food are estimated based on a combination of historical information and human judgment. In general, the smaller items require less time to estimate based on the cost and benefit rule. * 9-* * Learning objective number 5 (d) is to prepare a budgeted income statement. Budgeted Income Statement can be prepared by putting all previous budgeted information together. * 9-* * Learning objective number 6 is to explain the costs and benefits of budgeting. Budgeting is time-consuming and costly. Budgetary slack or padding is an inherent problem of budgeting. Despite the drawbacks of budgeting, most companies are still using budgets to plan, communicate, set objectives and allocate resources etc. Since budgets are still commonly used, benefits of budgeting must be high and drawbacks of budgeting can be minimized by having a good budgeting system. For a good budgeting system, it is critical to have effective communication and mutual trust between the top management and its staff. *