7-1

Choosing the Budget Period

Operating Budget

2003 2004 2005 2006

The annual operating budget

may be divided into quarterly
or monthly budgets.
7-2

Learning Objective 2

Prepare a sales budget, including

a schedule of expected cash
collections.
7-3

Budgeting Example
Royal
Royal Company
Company is is preparing
preparing budgets
budgets for
for the
the
quarter
quarter ending
ending June
June 30.
30.
Budgeted
Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
April
April 20,000
20,000 units
units
May
May 50,000
50,000 units
units
June
June 30,000
30,000 units
units
July
July 25,000
25,000 units
units
August
August 15,000
15,000 units.
units.
The
The selling
selling price
price is
is $10
$10 per
per unit.
unit.
7-4

The Sales Budget

The individual months of April, May, and June are
summed to obtain the total projected sales in units
and dollars for the quarter ended June 30 th
7-5

Expected Cash Collections

All
Allsales
salesare
areon
onaccount.
account.
Royals
Royalscollection
collectionpattern
patternis:
is:
70%
70%collected
collectedin
inthe
themonth
monthof ofsale,
sale,
25%
25%collected
collectedin
inthe
themonth
monthfollowing
followingsale,
sale,
5% 5% uncollectible.
uncollectible.
The
TheMarch
March31 31accounts
accountsreceivable
receivablebalance
balanceof
of
$30,000
$30,000will
willbe
becollected
collectedininfull.
full.
7-6

Expected Cash Collections

7-7

Expected Cash Collections

From the Sales Budget for April.

7-8

Expected Cash Collections

7-9

Quick Check

What will be the expected cash

collections in June from the June sales?
a. $125,000
b. $210,000
c. $335,000
d. $905,000
7-10

Quick Check

What will be the expected cash

collections in June from the June sales?
a. $125,000
b. $210,000
c. $335,000
d. $905,000
7-11

Expected Cash Collections

7-12

The Production Budget

Sales Production
Budget Budget
ed
and l et
p
Expected
o m
C
Cash
Collections

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
7-13

Learning Objective 3

Prepare a production budget.

7-14

The Production Budget

The
The management
management at at Royal
Royal Company
Company wants
wants
ending
ending inventory
inventory to
to be
be equal
equal to
to 20%
20% ofof the
the
following
following months
months budgeted
budgeted sales
sales in
in units.
units.

On
On March
March 31,
31, 4,000
4,000 units
units were
were on
on hand.
hand.

Lets
Lets prepare
prepare the
the production
production budget.
budget.
7-15

The Production Budget

7-16

The Production Budget

March 31
ending inventory
7-17

Quick Check

What
What is
is the
the required
required production
production for
for
May?
May?
a.
a. 56,000
56,000 units
units
b.
b. 46,000
46,000 units
units
c.
c. 62,000
62,000 units
units
d.
d. 52,000
52,000 units
units
7-18

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
7-19

The Production Budget

7-20

The Production Budget

Assumed ending inventory.

7-21

Learning Objective 4

Prepare a direct materials

budget, including a schedule
of expected cash disbursements
for purchases of materials.
7-22

The Direct Materials Budget

At
At Royal
Royal Company,
Company, five
five pounds
pounds ofof material
material are
are
required
required per
per unit
unit of
of product.
product.
Management
Management wantswants materials
materials on on hand
hand at
at the
the
end
end of
of each
each month
month equal
equal toto 10%
10% ofof the
the
following
following months
months production.
production.
On
On March
March 31,
31, 13,000
13,000 pounds
pounds ofof material
material are
are on
on
hand.
hand. Material
Material cost
cost isis $0.40
$0.40 per
per pound.
pound.
Lets
Lets prepare
prepare the
the direct
direct materials
materials budget.
budget.
7-23

The Direct Materials Budget

From production budget

7-24

The Direct Materials Budget

7-25

The Direct Materials Budget

March 31 inventory

10% of following months Calculate the materials to

production needs. by purchased in May.
7-26

Quick Check
How
How much
much materials
materials should
should be
be
purchased
purchased inin May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
7-27

Quick Check
How
How much
much materials
materials should
should be
be
purchased
purchased inin May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
7-28

The Direct Materials Budget

7-29

The Direct Materials Budget

Assumed ending inventory

7-30

Expected Cash Disbursement for

Materials
Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its materials.
materials.
One-half
One-half ofof aa months
months purchases
purchases isis paid
paid for
for in
in the
the
month
month of of purchase;
purchase; the
the other
other half
half isis paid
paid in
in the
the
following
following month.
month.
The
The March
March 3131 accounts
accounts payable
payable balance
balance isis $12,000.
$12,000.

Lets
Lets calculate
calculate expected
expected cash
cash disbursements.
disbursements.
7-31

Expected Cash Disbursement for

Materials
7-32

Expected Cash Disbursement for

Materials

Compute the expected cash

disbursements for materials
for the quarter.

140,000 lbs. $.40/lb. = $56,000

7-33

Quick Check

What
What areare the
the total
total cash
cash disbursements
disbursements for
for
the
the quarter?
quarter?
a.
a. $185,000
$185,000
b.
b. $$ 68,000
68,000
c.
c. $$ 56,000
56,000
d.
d. $201,400
$201,400
7-34

Quick Check

What are the total cash disbursements

for the quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400
7-35

Expected Cash Disbursement for

Materials
7-36

Learning Objective 5

Prepare a direct labor budget.

7-37

The Direct Labor Budget

At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours (3
(3
minutes)
minutes) of of direct
direct labor.
labor.
The
The Company
Company has has aa no
no layoff
layoff policy
policy so
so all
all employees
employees willwill
be
be paid
paid for
for 40
40 hours
hours ofof work
work each
each week.
week.
In
In exchange
exchange for for the
the no
no layoff
layoff policy,
policy, workers
workers agree
agree toto aa
wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless ofof the
the hours
hours worked
worked
(No
(No overtime
overtime pay).
pay).
For
For the
the next
next three
three months,
months, the the direct
direct labor
labor workforce
workforce 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 labor
labor budget.
budget.
7-38

The Direct Labor Budget

From production budget

7-39

The Direct Labor Budget

7-40

The Direct Labor Budget

Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
7-41

The Direct Labor Budget

7-42

Quick Check
What
What would
would be be the
the total
total direct
direct labor
labor cost
cost for
for
the
the quarter
quarter ifif the
the company
company follows
follows its
its no
no lay-
lay-
off
off policy,
policy, but
but pays
pays $15
$15 (time-and-a-half)
(time-and-a-half) forfor
every
every hour
hour worked
worked in in excess
excess of
of 1,500
1,500 hours
hours in
in
aa month?
month?
a.
a. $79,500
$79,500
b.
b. $64,500
$64,500
c.
c. $61,000
$61,000
d.
d. $57,000
$57,000
7-43

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
April May June Quarter
hour workedLabor
in excess of 1,500
hours required 1,300 hours
2,300 in a
1,450
month? Regular hours paid 1,500 1,500 1,500 4,500
Overtime hours paid - 800 - 800
a. $79,500
b. $64,500 Total regular hours
Total overtime hours
4,500
800
$10 $ 45,000
$15 $ 12,000
c. $61,000 Total pay $ 57,000

d. $57,000
7-44

Learning Objective 6

Prepare a manufacturing
overhead budget.
7-45

Manufacturing Overhead Budget

At
At Royal
Royal manufacturing
manufacturing overhead
overhead is is applied
applied toto units
units of
of
product
product onon the
the basis
basis of
of direct
direct labor
labor hours.
hours.
The
The variable
variable manufacturing
manufacturing overhead
overhead raterate is
is $20
$20 per
per
direct
direct labor
labor hour.
hour.
Fixed
Fixed manufacturing
manufacturing overhead
overhead is is $50,000
$50,000 per
per month
month
and
and includes
includes $20,000
$20,000 ofof noncash
noncash costs
costs (primarily
(primarily
depreciation
depreciation ofof plant
plant assets).
assets).

Lets
Lets prepare
prepare the
the manufacturing
manufacturing overhead
overhead budget.
budget.
7-46

Manufacturing Overhead Budget

Direct Labor Budget

7-47

Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour*
Total labor hours required 5,050 *rounded
7-48

Manufacturing Overhead Budget

Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
7-49

Ending Finished Goods Inventory

Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct materials
budget and information
7-50

Ending Finished Goods Inventory

Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct labor budget

7-51

Ending Finished Goods Inventory

Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units
Unit product cost $ 4.99
Ending finished goods inventory

Total mfg. OH for quarter $251,000

= $49.70 per hour*
Total labor hours required 5,050