ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 11
Professor Jeff Yu
Review:
Budgeted Sales $ = budgeted sales in Units * unit price
Expected cash collections (inflow)
Budgeted Account Receivable Balance
Budgeted Production units = budgeted Sales in Units
+ desired ending F.G. Inventory – beginning F.G. Inventory
Practice Problem
Nina Inc.’s sales budget shows quarterly sales projection for the
next year as follows:
Qtr1
Qtr2
Qtr3
Qtr4
Sales in units
12,000
15,000 10,000
11,000
Company policy is to have a finished goods inventory at the end of
each quarter equal to 20% of the next quarter’s sales.
Q: what is the budgeted production in units for the second quarter
of the next year?
Direct Materials Budget
What is the purpose of the D.M. budget?
To determine the quantity and cost of raw materials that must
be purchased to fulfill the production budget and to provide for
adequate inventories.
The calculation is similar to production budget.
Like credit sales, firms may not immediately pay the suppliers. So a
schedule of expected cash disbursement for materials are
often prepared, similar to the schedule of expected cash collections.
Calculation: Raw Material to be Purchased
Desired
Raw material
ending
needed
+ R.M.
for
inventory
production
Quantity of
Expected
R.M.
Beginning
=
to be
R.M.
purchased
inventory
Required production in units
* R.M. needed for each unit
Cost of R.M. to be purchased
= Quantity of R.M to be purchased * unit price of R.M.
Example: Direct Materials Budget
At Royal Co., 5 pounds of raw material are required per unit of
product. The production budget shows the required production is
26,000 units for April, 46,000 units for May and 29,000 for June.
Management wants ending R.M. inventory equal to 10% of the
following month’s production needs. On March 31, 13,000 pounds
are in R.M. inventory. The desired ending inventory for the second
quarter is 11,500 pounds.
Royal pays $0.40 per pound for its raw material. 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.
Q: (1) What are the budgeted raw material purchases for April, May and
June respectively? (2) What are the budgeted cash disbursements
for raw material in April and May, respectively?
Direct Labor Budget
Total DL hours needed = Budgeted production units
× the number of DL hours needed to produce each unit
Total Direct Labor Costs = total DL hours needed * DL hourly rate
The calculation of budgeted direct labor hours may involve a
comparison to a “Guaranteed Hours” amount.
If a firm’s labor policy is that employees cannot be laid off or have their
hours reduced, then the direct labor budget uses the greater of the
calculated total DL hours needed OR the “Guaranteed Hours” amount.
Practice Problem
At Royal Inc., each unit of product requires 0.05 DL hours. It has a
“no layoff” policy so all employees will be paid for a minimum of
1,500 hours per month. In exchange, workers agree to a wage rate
of $10 per hour regardless of the hours worked.
The production budget for the 2nd Quarter is as follows:
April
May
June
Quarter
Units of production
26,000 46,000 29,000 101,000
Q: (1) calculate total direct labor cost for April and May.
(2) If Royal pays $15 instead of $10 for every hour worked in
excess of 1500 hours in a month, what would be the total direct
labor cost for May?
Manufacturing Overhead Budget
A schedule of all costs of production other than direct
materials and direct labor.
Budgeted MOH = Variable MOH + Fixed MOH
Assume MOH is applied on the basis of direct labor hours:
Variable MOH = variable MOH rate * Budgeted DL hours
Non-cash charges (e.g., depreciation) are separately stated
in order to help budget for cash disbursements.
Practice Problem
At Royal Inc., 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 and includes $20,000 of noncash
costs (depreciation of plant assets). The direct labor budget shows
the budgeted direct labor hours are 1,300 for April, 2,300 for May and
1,450 for June.
Q: prepare a MOH budget for the 2nd quarter, calculate POHR for the
quarter and expected cash disbursement for MOH in May.
Selling and Administrative Expense Budget
Similar to the manufacturing overhead budget, except the
starting point is budgeted sales units rather than
budgeted DL hours.
Non-cash charges (depreciation) are separately stated so
that cash disbursements for selling and administrative
expenses are clearly visible.
Practice Problem
At Royal Inc., the variable S&A expenses are $0.50 per unit sold.
Fixed S&A expenses are $70,000 per month, which include $10,000 in
depreciation expenses (non-cash charges).
Budgeted Sales Units
April
20,000
May
50,000
June
30,000
Quarter
100,000
Q: What is the expected cash disbursements for S&A expenses in
May?
Ending Finished Goods Inventory Budget
From DM & DL budget
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labor
0.05 hrs. $10.00
Manufacturing overhead
0.05 hrs. $49.70
$
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
POHR from MOH budget
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$24,950
From Production Budget
For Next Class
 Continue covering chapter 9.
 Starting chapter 10: flexible budgets
 Attempt the assigned HW problems.
Homework Question 1
Yost Co.’s production budget for next year is as follows:
Qtr1
Qtr2
Qtr3
Qtr4
Unit to be produced
40,000 30,000 35,000 45,000
Each unit of product requires 2 pounds of raw material. Desired
beginning R.M. inventory is equal to 30% of that quarter’s R.M.
requirements. The R.M. costs $1 per pound. Purchases of R.M. are 60%
paid in the quarter of purchase, and 40% paid in the following quarter.
On January 1, the balance sheet showed $10,000 in accounts payable
for R.M. purchases, all of which will be paid for in Qtr1. The desired
ending inventory for Qtr4 is 17,000 pounds of R.M.
Q: (1) what is the budgeted R.M. purchases for Qtr3 of next year?
(2) what is the budgeted cash disbursement for R.M in Qtr 3?
Homework Question 2
Harv Co. requires 0.8 DL hours to produce each unit, and workers
are paid $11.5 per DL hour. Variable MOH rate is $2.5 per DL hour.
Fixed MOH is $90,000 per quarter. The only non-cash element of
MOH is depreciation of $34,000 per quarter.
Qtr.1
Qtr.2
Qtr.3 Qtr.4
Budgeted production units 16,000 15,000 14,000 15,000
Q: (1) what is the budgeted total DL cost for the year?
(2) for this question only, assume guaranteed hours are
12,000 DL hours per quarter, and over-time pay is $15
per DL hour, what will be the total DL cost?
(3) What is POHR for the year?
(4) what is budgeted cash disbursement for MOH in Qtr.2?