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Master Budgeting
Learning objectives
Sales budget
Production budget
Direct materials budget
Direct labor budget
Manufacturing overhead budget
Ending finished goods inventory budget
Selling and administrative budget
Budget
Planning
Planning involves developing objectives and preparing various budgets
to achieve those objectives
Budgets force managers to think ahead regarding how to achieve
various financial goals
The budgeting process leads to the best way to use available resources
Coordination
Budgets highlight linkages among departments and force them to
communicate and to work toward company goals
Control
Budgets define goals and objectives that can serve as benchmark for
evaluating actual performance
Detect problem areas
Evaluate managers performance
2014
2015
2016
2017
Production
Production budget
budget
Direct
Direct labor
labor
budget
budget
Selling
Selling and
and
administrative
administrative
budget
budget
Manufacturing
Manufacturing
overhead
overhead budget
budget
Cash
Cash Budget
Budget
Not required
Budgeted
Budgeted
income
income
statement
statement
Financial budgets
7
Budgeted
Budgeted
balance
balance sheet
sheet
Sales Budget
Based on:
The budgeted price you expect to charge
Expected future unit sales (estimates from Marketing)
May
June
Quarter
Budgeted
sales in units
20,000
50,000
30,000
100,000
Selling price
$10
$10
$10
$10
Budget sales
revenue
$200,000
$500,000
$300,000
$1,000,000
Production Budget
Production
Production budget
budget
10
Production Budget
Example: The management at Royal Company wants ending inventory
to be equal to 20% of the following months budgeted sales in units
Beginning Inventory in April = Ending Inventory in March = 20,000*20%=4,000
Budgeted sales in July is 25,000 units
April
11
May
50,000
June
30,000
Quarter
Sales in units
20,000
100,000
+Desired ending
inventory
50,000*20% 30,000*20%
=10,000
=6,000
25,000*20%
=5,000
=Total requirements
30,000
56,000
35,000
105,000
-beginning inventory
4,000
10,000
6,000
4,000
=Units to be produced
26,000
46,000
29,000
101,000
5,000
=ending inventory
from previous
quarter
May
June
(1)
(4)
(6)
1,000
(3)
(5)
10,000
15,000
20,000
(2)
15,500
21,000
12
Manufacturing Overhead
Based on estimates of fixed overhead and variable
overhead per unit of product
Production
Production budget
budget
Direct
Direct materials
materials
budget
budget
13
Direct
Direct labor
labor
budget
budget
Manufacturing
Manufacturing
overhead
overhead budget
budget
Production
Production budget
budget
Direct
Direct materials
materials budget
budget
May
June
Quarter
Units to be produced
26,000
46,000
29,000
101,000
Production needs
(26000*5) =
130,000
230,000
145,000
505,000
230,000*10%
=23,000
145,000*10%
=14,500
11,500
(assumed)
11,500
Total needed
153,000
244,500
156,500
516,500
13,000
23,000
14,500
13,000
Materials to be purchased
140,000
221,500
142,000
503,500
140,000*0.4
=56,000
221,500*0.4
=88,600
142,000*0.4=
56,800
503,500*0.4
=201,400
Cost of materials
purchased
Production
Production budget
budget
Direct
Direct labor
labor budget
budget
16
May
June
Quarter
26,000
46,000
29,000
101,000
0.05
0.05
0.05
0.05
1,300
2,300
1,450
5050
1,500
1,500
1,500
1,500
2,300
1,500
5,300
$10
$10
$10
$10
1500*10=
$15,000
2300*010=
$23,000
1500*10=
$15,000
5300*10=
$53,000
Units to be produced
17
18
Production
Production budget
budget
Manufacturing
Manufacturing overhead
overhead
budget
budget
May
June
Quarter
1,300 DLH
2,300 DLH
1,450 DLH
(1300+2300
+1450)=
5,050 DLH
$ 20 per DLH
$ 20 per DLH
$ 20 per DLH
Budgeted variable
manufacturing
overhead cost
$26,000
$46,000
$29,000
$101,000
Budgeted fixed
manufacturing
overhead cost
$50,000
$50,000
$50,000
$150,000
Budgeted total
manufacturing
overhead cost
$76,000
$96,000
$79,000
$251,000
19
Production
Production budget
budget
Ending
Ending finished
finished goods
goods
inventory
inventory budget
budget
20
Quantity
Cost
Total
Direct materials
5.00 lbs.
$0.4
$2.00
Direct labor
0.05 hrs.
$10.0
$0.50
Manufacturing overhead
0.05 hrs.
$49.7
$2.49
$4.99
$4.99
???
21
Quantity
Cost
Total
Direct materials
5.00 lbs.
$0.4
$2.00
Direct labor
0.05 hrs.
$10.0
$0.50
Manufacturing overhead
0.05 hrs.
$49.7
$2.49
$4.99
5,000
$4.99
24,950
Production Budget
22
23
Sales
Sales budget
budget
Selling
Selling &
& Administrative
Administrative
Budget
Budget
April
May
June
Quarter
20,000
50,000
30,000
100,000
0.5
0.5
0.5
0.5
10,000
15,000
15,000
50,000
70,000
70,000
70,000
210,000
80,000
95,000
85,000
260,000
Budgeted sales
24
Financial budgets
25
Production
Production budget
budget
Direct
Direct labor
labor
budget
budget
Budgeted
Budgeted
income
income
statement
statement
Selling
Selling and
and
administrative
administrative
budget
budget
Manufacturing
Manufacturing
overhead
overhead budget
budget
Cash
Cash budget
budget
26
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
Less: Cost of goods sold (100,000 @
$1,000,000
$499,000
$4.99)
Gross margin
27
Sales Budget
Ending Finished
Goods Inventory
Budget
$501,000
$260,000
Operating income
$241,000
Selling and
Administrative
Expense Budget
Cash Budget
28
29
30
Sales
$150
$100
May
$130
Month
March
April
May
March
150x60%1
150x35% =
52.5
150x5% =
7.5
100x60%=
60
100x35% =
35
April
31
May
130x60% =
78
Cash
Collection
78+35 +7.5
= 120.5
32
January
$150,000
February
$160,000
March
$172,000
The company expects to collect 75% of a months
sales in the month of sale and 25% in the following
month.
Question: What are the cash receipts for February?
April
May
June
Quarter
20,000
50,000
30,000
100,000
$10
$10
$10
$10
$200,000
$500,000
$300,000
$1,000,000
33
May
June
Quarter
$30,000
$30,000
$140,000
$140,000
April Sales
70% * $200,000
25% * $200,000
$50,000
$50,000
$350,000
$350,000
May Sales
70%*$500,000
25%*$500,000
$125,000
$125,000
$210,000
$210,000
$335,000
$905,000
June Sales
70%*$300,000
$170,000
$400,000
35
April
May
June
Quarter
140,000
221,500
142,000
503,500
$0.4
$0.4
$0.4
$0.4
$56,000
$88,600
$56,800
$201,400
36
May
June
Quarter
$12,000
$12,000
$28,000
$28,000
April Purchases
50% * $56,000
50% * $56,000
$28,000
$28,000
$44,300
$44,300
May Purchases
50%*$88,600
50%*$88,600
$44,300
$44,300
$28,400
$28,400
$72,700
$185,000
June Purchases
50%*$56,800
37
$40,000
$72,300
May
June
Quarter
$15,000
$23,000
$15,000
$53,000
$26,000
$46,000
$29,000
$101,000
50,000-20,000
50,000-20,000
50,000-20,000
$90,000
=30,000
=30,000
10,000
15,000
15,000
$50,000
70,000-10,000
70,000-10,000
70,000-10,000
=60,000
=60,000
=60,000
$180,000
Cash disbursement
38
=30,000
Special Items
39
May
June
Quarter
$40,000
$30,000
$30,000
$40,000
$170,000
$400,000
$335,000
$905,000
$210,000
$430,000
Materials
$40,000
$72,300
$72,700
$185,000
Direct labor
$15,000
$23,000
$15,000
$53,000
Manufacturing overhead
$56,000
$76,000
$59,000
$191,000
$70,000
$75,000
$75,000
$230,000
$143,700
$48,300
$192,000
$49,000
$49,000
Total disbursements
$230,000
$400,000
270,000
$900,000
Excess (deficiency)
$(20,000)
$30,000
95,000
$45,000
$50,000
$50,000
Total financing
$50,000
$30,000
$30,000
$95,000
Equipment purchase
Dividend
Financing:
Borrowing
Repayments
40
$95,000