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9
Profit Planning
9-2
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand why organizations budget and the
processes they use to create budgets.
2. Prepare a sales budget, including a schedule
of expected cash receipts.
3. Prepare a production budget..
4. Prepare a direct materials budget, including a
schedule of expected cash disbursements for
purchases of materials.
5. Prepare a direct labour budget.
9-3
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
6. Prepare a manufacturing overhead budget.
7. Prepare an ending finished goods inventory
budget.
8. Prepare a selling and administrative expense
budget.
9. Prepare a cash budget.
10. Prepare a budgeted income statement and a
budgeted balance sheet.
11. (Appendix 9A) Compute the optimum inventory
level and order size.
McGraw-Hill Ryerson Limited., 2001
9-4
Production
Sales
Master
Budget
Summary of
a companys
plans.
Detail
Budget
Ma terials
Detail
Budget
9-5
involves
developing
objectives and
preparing various
budgets to achieve
these objectives.
! Control -- involves
9-6
Advantages of Budgeting
Define goal
and objectives
Communicating
plans
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
9-7
Responsibility Accounting
Managers should be held responsible for
those items and only those items that
the manager can actually control
to a significant extent.
9-8
Operating Budget
1999
2000
2001
2002
9-9
1999
2000
2001
2002
9-10
Middle
Management
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
9-11
9-12
Selling and
A dm inistrative
B udget
9-13
Ending
Inventory
B udget
Production
B udget
Selling and
A dm inistrative
B udget
D irect
M aterials
B udget
D irect
Labour
B udget
M anufacturing
O verhead
B udget
9-14
Ending
Inventory
B udget
Production
B udget
Selling and
A dm inistrative
B udget
D irect
M aterials
B udget
D irect
Labor
B udget
M anufacturing
O verhead
B udget
C ash
B udget
9-15
9-16
Budgeting Example
#Royal Company is preparing budgets for the
quarter ending June 30.
$Budgeted sales for the next five months are:
April
May
June
July
August
20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
9-17
Budgeted
sales (units)
Selling price
per unit
Total sales
April
May
June
20,000
50,000
30,000
Quarter
100,000
9-18
Budgeted
sales (units)
Selling price
per unit
Total sales
April
May
June
Quarter
20,000
50,000
30,000
100,000
$
10
$ 200,000
$
10
$ 500,000
$
10
$ 300,000
$
10
$ 1,000,000
9-19
Production
Budget
ed
t
le
9-20
9-21
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
4,000
26,000
Budgeted
Budgeted sales
sales
Desired
Desired percent
percent
Desired
Desired inventory
inventory
50,000
50,000
20%
20%
10,000
10,000
9-22
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
4,000
26,000
March
March 31
31
ending
ending inventory
inventory
McGraw-Hill Ryerson Limited., 2001
9-23
April
20,000
May
50,000
June
30,000
Quarter
100,000
20%
10,000
30,000
6,000
56,000
4,000
26,000
9-24
April
20,000
May
50,000
10,000
30,000
6,000
56,000
4,000
26,000
10,000
46,000
June
30,000
Quarter
100,000
9-25
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
6,000
56,000
5,000
35,000
5,000
105,000
4,000
26,000
10,000
46,000
6,000
29,000
4,000
101,000
9-26
balance
balance of
of $30,000
$30,000 will
will be
be collected
collected in
in
full.
full.
McGraw-Hill Ryerson Limited., 2001
9-27
April
$ 30,000
May
June
Quarter
$ 30,000
9-28
April
$ 30,000
May
140,000
$ 50,000
June
Quarter
$ 30,000
140,000
50,000
$ 170,000
9-29
April
$ 30,000
May
June
140,000
140,000
50,000
$ 50,000
350,000
$ 125,000
$ 170,000
Quarter
$ 30,000
350,000
125,000
$ 400,000
9-30
April
$ 30,000
May
June
140,000
140,000
50,000
$ 50,000
350,000
$ 170,000
$ 400,000
Quarter
$ 30,000
$ 125,000
350,000
125,000
210,000
$ 335,000
210,000
$ 905,000
9-31
material
material are
are required
required per
per unit
unit of
of product.
product.
!
Management wants
wants materials
materials on
on hand
hand at
at
! Management
the
the end
end of
of each
each month
month equal
equal to
to 10%
10% of
of the
the
following
following months
months production.
production.
!
On March
March 31,
31, 13,000
13,000 kilograms
kilograms of
of material
material
! On
are
are on
on hand.
hand. Material
Material cost
cost $0.40
$0.40 per
per
kilogram.
kilogram.
Lets
Lets prepare
prepare the
the direct
direct materials
materials budget.
budget.
McGraw-Hill Ryerson Limited., 2001
9-32
April
26,000
May
46,000
June
29,000
Quarter
101,000
From
From production
production
budget
budget
McGraw-Hill Ryerson Limited., 2001
9-33
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
9-34
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
10%
10% of
of the
the following
following
months
months production
production
McGraw-Hill Ryerson Limited., 2001
9-35
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
13,000
140,000
March
March 31
31
inventory
inventory
McGraw-Hill Ryerson Limited., 2001
9-36
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
9-37
May
46,000
5
230,000
Production
Materials per unit
Production needs
Add desired
ending inventory
23,000
14,500
July Production
a nd Inve ntory
Total needed
153,000
244,500
Salesbeginning
in units
25,000
Less
Add
desire d ending inventory
3,000
inventory
13,000
23,000
Tota l units
28,000
Materials
tonee
be ded
Le
ss beginning inve ntory
5,000
purchased
140,000
221,500
Production in units
Kilograms per unit
Tota l kilogra ms, July
Desired pe rcent
Desired ending inve ntory, June
June
29,000
5
145,000
Quarter
101,000
5
505,000
11,500
156,500
11,500
516,500
14,500
13,000
142,000
503,500
23,000
5
115,000
10%
11,500
McGraw-Hill Ryerson Limited., 2001
9-38
materials.
materials.
!
One-half of
of aa months
months purchases
purchases are
are paid
paid
! One-half
for
for in
in the
the month
month of
of purchase;
purchase; the
the other
other
half
half is
is paid
paid in
in the
the following
following month.
month.
!
The March
March 31
31 accounts
accounts payable
payable balance
balance
! The
is
is $12,000.
$12,000.
Lets
Lets calculate
calculate expected
expected cash
cash
disbursements.
disbursements.
McGraw-Hill Ryerson Limited., 2001
9-39
April
$ 12,000
May
June
Quarter
$ 12,000
May purchases
June purchases
Total cash
disbursements
9-40
April
$ 12,000
May
28,000
$ 28,000
June
Quarter
$ 12,000
28,000
28,000
June purchases
Total cash
disbursements
$ 40,000
9-41
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 44,300
$ 40,000
Quarter
$ 12,000
44,300
44,300
$ 72,300
9-42
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 40,000
$ 72,300
Quarter
$ 12,000
$ 44,300
44,300
44,300
28,400
28,400
$ 72,700
$185,000
9-43
direct
direct labour.
labour.
!
The Company
Company has
has aa no
no layoff
layoff policy
policy so
so all
all employees
employees
! The
will
will be
be paid
paid for
for 40
40 hours
hours of
of work
work each
each week.
week.
!
In exchange
exchange for
for the
the no
no layoff
layoff policy,
policy, workers
workers agreed
agreed to
to
! In
aa wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless of
of the
the hours
hours
worked
worked (No
(No overtime
overtime pay).
pay).
!
For the
the next
next three
three months,
months, the
the direct
direct labour
labour workforce
workforce
! For
will
will be
be paid
paid for
for aa minimum
minimum of
of 1,500
1,500 hours
hours per
per month.
month.
Lets
Lets prepare
prepare the
the direct
direct labour
labour budget.
budget.
9-44
April
26,000
May
46,000
June
29,000
Quarter
101,000
From production
budget
9-45
April
26,000
0.05
1,300
May
46,000
0.05
2,300
June
29,000
0.05
1,450
Quarter
101,000
0.05
5,050
9-46
April
26,000
0.05
1,300
1,500
1,500
May
46,000
0.05
2,300
1,500
2,300
June
29,000
0.05
1,450
1,500
1,500
Quarter
101,000
0.05
5,050
5,300
Higher
Higher of
of labour
labour hours
hours required
required
or
or labour
labour hours
hours guaranteed.
guaranteed.
McGraw-Hill Ryerson Limited., 2001
9-47
May
46,000
0.05
2,300
1,500
2,300
$
10
$ 23,000
June
29,000
0.05
1,450
1,500
1,500
$
10
$ 15,000
Quarter
101,000
0.05
5,050
5,300
$
10
$ 53,000
9-48
9-49
May
46,000
$
1
$ 46,000
June
29,000
$
1
$ 29,000
Quarter
101,000
$
1
$ 101,000
From production
budget
9-50
May
46,000
$
1
$ 46,000
50,000
96,000
June
29,000
$
1
$ 29,000
50,000
79,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
9-51
May
46,000
$
1
$ 46,000
50,000
96,000
20,000
June
29,000
$
1
$ 29,000
50,000
79,000
20,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
60,000
$ 76,000
$ 59,000
$ 191,000
Amortization
Amortization is
is aa non-cash
non-cash charge.
charge.
McGraw-Hill Ryerson Limited., 2001
9-52
9-53
Total
2.00
Direct materials
budget and information
McGraw-Hill Ryerson Limited., 2001
9-54
Total
2.00
0.50
Direct labour
budget
McGraw-Hill Ryerson Limited., 2001
9-55
Total
2.00
0.50
2.49
4.99
4.99
$251,000
= $49.70 per hr.*
5,050 hrs.
*rounded
McGraw-Hill Ryerson Limited., 2001
9-56
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$ 24,950
Production
Budget
McGraw-Hill Ryerson Limited., 2001
9-57
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.
!
Fixed selling
selling and
and administrative
administrative expenses
expenses are
are
! Fixed
$70,000
$70,000 per
per month.
month.
!
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses
! The
include
include $10,000
$10,000 in
in costs
costs primarily
primarily amortization
amortization
that
that are
are not
not cash
cash outflows
outflows of
of the
the current
current month.
month.
Lets
Lets prepare
prepare the
the companys
companys selling
selling and
and
administrative
administrative expense
expense budget.
budget.
9-58
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
9-59
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
10,000
10,000
10,000
30,000
$70,000
$85,000
$75,000
$230,000
9-60
Maintains aa 16%
16% open
open line
line of
of credit
credit for
for $75,000.
$75,000.
Maintains
Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000.
$30,000.
Maintains
Borrows on
on the
the first
first day
day of
of the
the month
month and
and repays
repays
Borrows
loans
loans on
on the
the last
last day
day of
of the
the month.
month.
Pays aa cash
cash dividend
dividend of
of $49,000
$49,000 in
in April.
April.
Pays
Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
Purchases
$48,300
$48,300 in
in June
June paid
paid in
in cash.
cash.
Has an
an April
April 11 cash
cash balance
balance of
of $40,000.
$40,000.
Has
McGraw-Hill Ryerson Limited., 2001
9-61
May
June
Qua rte r
9-62
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
May
June
Qua rte r
Direct Labour
Budget
Manufacturing
Overhead Budget
9-63
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
49,000
230,000
May
June
Qua rte r
$ (20,000)
9-64
May
June
Quarter
$(20,000)
50,000
50,000
$ 30,000
$30,000
9-65
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
$ (20,000)
$ 30,000
June
Qua rte r
9-66
April
May
$(20,000)
$30,000
50,000
50,000
$ 30,000
$30,000
June
Quarter
9-67
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Qua rte r
$ 40,000
905,000
945,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
72,700
15,000
59,000
75,000
48,300
270,000
185,000
53,000
191,000
230,000
192,000
49,000
900,000
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
9-68
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Qua rte r
$ 40,000
905,000
945,000
9-69
April
May
June
Quarter
$(20,000)
$30,000
$95,000
$45,000
50,000
50,000
$ 30,000
$30,000
(50,000)
(2,000)
(52,000)
$ 43,000
50,000
(50,000)
(2,000)
(2,000)
$43,000
9-70
ed
t
le
Budgeted
Income
Statement
9-71
$1,000,000
499,000
501,000
260,000
241,000
2,000
$ 239,000
9-72
9-73
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
43,000
75,000
4,600
24,950
147,550
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
25%of
25%of June
June
sales
sales of
of
$300,000
$300,000
11,500
11,500 kg
kg
at
at $0.40/kg
$0.40/kg
5,000
5,000 units
units
at
at $4.99
$4.99 each
each
50%
50% of
of June
June
purchases
purchases
of
of $56,800
$56,800
McGraw-Hill Ryerson Limited., 2001
9-74
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
43,000
75,000
Beginning balance
4,600
Add:
net income
24,950
Deduct: dividends
Ending balance
147,550
$146,150
239,000
(49,000)
$336,150
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
McGraw-Hill Ryerson Limited., 2001
9-75
Zero-Base Budgeting
Managers are required to justify all budgeted
expenditures, not just changes in the budget
from the previous year. The baseline is zero
rather than last years budget.
9-76
Appendix
9A
Inventory Decisions
9-78
Transportation
Costs
9-79
Handling Cost
Insurance
Property
Taxes
Obsolescence
Losses
Interest on
Capital invested
in Inventory
McGraw-Hill Ryerson Limited., 2001
9-80
Customer
ill will
Lost
sales
Erratic
production
Added
transportation
costs
Inefficiency of
production runs
McGraw-Hill Ryerson Limited., 2001
9-81
Inventory Problems
! How much to order - Economic Order
Quantity (EOQ)
and
! When to order - Reorder Point
9-82
9-83
9-84
9-85
place an order
"Depends on economic order quantity, lead
against a stock-out
"Reorder point is then calculated by adding
9-86
End of Chapter 9