Kế toán, kiểm toán - Chapter 09: Profit planning

Profit PlanningChapter 9Learning Objective 1Understand why organizations budget and the processes they use to create budgets.The Basic Framework of BudgetingA 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 ControlPlanning – 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 BudgetingAdvantagesDefine goalsand objectivesUncover potentialbottlenecksCoordinateactivitiesCommunicateplansMeans of allocatingresourcesResponsibility 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 PeriodOperating Budget2008200920102011Operating budgets ordinarily cover a one-year periodcorresponding to a company’s fiscal year. Many companies divide their annual budget into four quarters.A continuous budget is a12-month budget that rollsforward one month (or quarter)as the current month (or quarter)is completed.Self-Imposed BudgetA self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.Advantages of Self-Imposed BudgetsIndividuals 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.Self-Imposed BudgetsSelf-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack.”Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare budgets that meet those targets.Human Factors in BudgetingThe 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. Highly achievable budget targets are usually  preferred when managers are rewarded based on  meeting budget targets.The Budget CommitteeA 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 budgetThe Master Budget: An OverviewProduction budgetSelling andadministrativebudgetDirect materialsbudgetManufacturingoverhead budgetDirect laborbudgetCash BudgetSales budgetEnding inventorybudgetBudgetedbalance sheetBudgetedincomestatementLearning Objective 2Prepare 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 unitsMay 50,000 unitsJune 30,000 unitsJuly 25,000 unitsAugust 15,000 units. The selling price is $10 per unit.The Sales BudgetThe individual months of April, May, and June are summed to obtain the total budgeted sales in units and dollars for the quarter ended June 30thExpected Cash CollectionsAll 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 CollectionsExpected Cash CollectionsFrom the Sales Budget for April.Expected Cash CollectionsFrom the Sales Budget for May.Quick Check  What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000 What will be the total cash collections for the quarter? a. $700,000b. $220,000c. $190,000d. $905,000Quick Check Expected Cash CollectionsLearning Objective 3Prepare a production budget.The Production BudgetProductionBudgetSales BudgetandExpectedCashCollectionsCompletedThe production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory.The Production BudgetThe 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 BudgetThe Production BudgetMarch 31ending inventoryQuick Check  What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 units What is the required production for May? a. 56,000 unitsb. 46,000 unitsc. 62,000 unitsd. 52,000 unitsQuick Check The Production BudgetThe Production BudgetAssumed ending inventory.Learning Objective 4Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.The Direct Materials BudgetAt 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 BudgetFrom production budgetThe Direct Materials BudgetThe Direct Materials BudgetCalculate the materials tobe purchased in May.March 31 inventory10% of following month’s production needs.Quick Check  How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 pounds How much materials should be purchased in May? a. 221,500 poundsb. 240,000 poundsc. 230,000 poundsd. 211,500 poundsQuick Check The Direct Materials BudgetThe Direct Materials BudgetAssumed ending inventoryExpected Cash Disbursement for MaterialsRoyal 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 MaterialsExpected Cash Disbursement for Materials140,000 lbs. × $0.40/lb. = $56,000Compute the expected cashdisbursements for materialsfor the quarter.Quick Check  What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400 What are the total cash disbursements for the quarter? a. $185,000b. $ 68,000c. $ 56,000d. $201,400Quick Check Expected Cash Disbursement for MaterialsLearning Objective 5Prepare a direct labor budget.The Direct Labor BudgetAt 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 BudgetFrom production budget.The Direct Labor BudgetThe Direct Labor BudgetGreater of labor hours requiredor labor hours guaranteed.The Direct Labor BudgetQuick 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. $79,500b. $64,500c. $61,000d. $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. $79,500b. $64,500c. $61,000d. $57,000Quick Check Learning Objective 6Prepare a manufacturing overhead budget.Manufacturing Overhead BudgetAt 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 BudgetDirect Labor Budget.Manufacturing Overhead BudgetTotal mfg. OH for quarter $251,000Total labor hours required 5,050= $49.70 per hour ** roundedManufacturing Overhead BudgetDepreciation is a noncash charge.Ending Finished Goods Inventory BudgetDirect materialsbudget and information.Ending Finished Goods Inventory BudgetDirect labor budget.Ending Finished Goods Inventory BudgetTotal mfg. OH for quarter $251,000Total labor hours required 5,050= $49.70 per hour *Ending Finished Goods Inventory BudgetProduction Budget.Learning Objective 7Prepare a selling and administrative expense budget.Selling and Administrative Expense BudgetAt 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 BudgetCalculate the selling and administrativecash expenses for the quarter.Quick Check  What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000b. $230,000c. $110,000d. $ 70,000Quick Check Selling Administrative Expense BudgetLearning Objective 8Prepare a cash budget.Format of the Cash BudgetThe 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; andFinancing section details the borrowings and repayments projected to take place during the budget period.The Cash BudgetAssume the following information for Royal:Maintains a 16% open line of credit for $75,000Maintains a minimum cash balance of $30,000Borrows on the first day of the month and repays loans on the last day of the monthPays a cash dividend of $49,000 in AprilPurchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash)Has an April 1 cash balance of $40,000The Cash BudgetSchedule of ExpectedCash Collections.The Cash BudgetDirect LaborBudget.ManufacturingOverhead Budget.Selling and AdministrativeExpense Budget.Schedule of ExpectedCash Disbursements.The Cash BudgetBecause Royal maintainsa cash balance of $30,000,the company must borrow $50,000 on its line-of-credit.The Cash BudgetEnding cash balance for Aprilis the beginning May balance.Because Royal maintainsa cash balance of $30,000,the company must borrow $50,000 on its line-of-credit.The Cash BudgetQuick Check  What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000b. $(10,000)c. $ 75,000d. $ 95,000 What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000b. $(10,000)c. $ 75,000d. $ 95,000Quick Check The Cash Budget$50,000 × 16% × 3/12 = $2,000Borrowings on April 1 andrepayment on June 30.The Budgeted Income StatementCash BudgetBudgetedIncomeStatementCompletedWith interest expense from the cash budget, Royal can prepare the budgeted income statement. Learning Objective 9Prepare a budgeted income statement.The Budgeted Income StatementSales Budget.Ending FinishedGoods Inventory.Selling and AdministrativeExpense Budget.Cash Budget.Learning Objective 10Prepare a budgeted balance sheet.The Budgeted Balance SheetRoyal reported the following account balances prior to preparing its budgeted financial statements:Land - $50,000Common stock - $150,000Retained earnings - $106,150 (April 1)Equipment - $175,000($143,700 + $48,300 +175,000 = $367,000 - $90,000 = $277,000)End of Chapter 9