Management
Accounting: The
Cornerstone for
Business Decisions
Profit Planning
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights
reserved.
Learning Objectives
1. Define budgeting and discuss its role in
planning, control, and decision making.
2. Define and prepare the operating
budget, identify its major components,
and explain the interrelationships of its
various components.
Learning Objectives
3. Define and prepare the financial
budget, identify its major components,
and explain the interrelationships of its
various components.
4. Describe the behavioral dimension of
budgeting.
Describe Planning and
Budgeting
Illustrate Goalsetting
List Four Advantages of
Budgeting
Match Definitions
Master
Budget
Describes the income generating
activities of the firm
Operating
Budget
Looking backward, determining what
actually happened & comparing it
with previous planned outcomes
Financial
Budget
Comprehensive financial plan for the
organization as a whole
Control
Reviews the budget, provides
guidelines and budgetary goals
Budget
Committee
Details inflows and outflows of cash
and the overall financial position
8-1
How to prepare a sales
budget.
Budgeted units to be sold each quarter 1,200, 1,500, 2,000,
and 2,400. Selling price is $10.
REQUIRED: Prepare a sales budget for each quarter and
the year.
Calculation:
8-2
How to prepare the
production budget.
The sales budget in Cornerstone 8-1. Further,
assume that company policy requires 20% of
next quarter’s sales in ending inventory and
that beginning inventory for the first quart of
the year was 200. Assume that sales for the
first quarter of 2009 are estimated at 1,200
units.
REQUIRED: Prepare a production budget for
each quarter and the year.
8-2
Calculation:
How to prepare the
production budget.
8-3
How to prepare a direct
materials purchases budget.
The production budget in Cornerstone 8-2. Plain tshirts cost $3 each and the ink (for the screening
process) costs $0.20 per ounce. On a per-unit
basis, the factory needs one plain t-shirt and 5
ounces of ink for each logo t-shirt that it
produces. Button’s policy is to have 10% of the
following quarter’s production needs in ending
inventory. The factory has 12 plain t-shirts and
60 ounces of ink on hand on January At the end
of December the desired ending inventory is 22
t-shirts and 110 ounces of ink.
REQUIRED: Prepare a direct materials (DM)
purchases budget for t-shirts and ink.
8-3
How to prepare a direct
materials purchases budget.
Calculation:
8-3
How to prepare a direct
materials purchases budget.
Calculation:
How to prepare a direct labor
8-4
budget.
The production budget in
Cornerstone 8-2. It takes .15
hour to produce one t-shirt. The
average wage rate is $10 per
hour.
REQUIRED: Prepare a direct
labor budget.
Calculation: On the following
slide.
How to prepare a direct labor
8-4
budget.
8-5
How to prepare an overhead
budget.
Direct labor budget in Cornerstone 8-4.
The variable overhead rate is $5 per
direct labor hour, fixed overhead is
budgeted at $1,700 per quarter.
REQUIRED: Prepare an overhead budget
for each quarter and the year.
Calculation: Appears on the following
slide.
8-5
How to prepare an overhead
budget.
8-6
How to prepare the ending
finished goods inventory budget.
Direct materials, direct labor and overhead
budgets.
REQUIRED: Prepare an ending finished
goods inventory budget.
Calculation:
8-7
How to prepare a cost of
goods sold budget.
Direct materials, direct labor, overhead,
and ending finished goods budgets
(Cornerstones 8-3, 8-4, 8-5, 8-6).
REQUIRED: Prepare a cost of goods sold
budget.
Calculation: Appears on the following
slide.
8-7
How to prepare a cost of
goods sold budget.
8-8
How to prepare a selling and
administrative expenses budget.
Sales budget on Cornerstone 8-1. Variable
expenses are $0.10 per unit sold. Salaries
average $1,500 per quarter; utilities, $50
per quarter; and depreciation, $150 per
quarter. Advertising for quarters 1
through 4 is $100, $200, $300, and $500,
respectively. Insurance is $500 and is paid
in the second quarter.
REQUIRED: Prepare a selling and
administrative expenses budget.
8-8
How to prepare a selling and
administrative expenses budget.
8-8
How to prepare a selling and
administrative expenses budget.
8-9
How to prepare a budgeted
income statement.
The sales budget, the cost of goods sold
budget, and the selling and
administrative expense budget
(Cornerstone 8-1, 8-7, 8-8). Assume
interest expense is $100 and the tax rate is
40%.
REQUIRED: Prepare a budgeted income
statement.
Calculation: Appears on the following
slide.
8-9
How to prepare a budgeted
income statement.
Explain How Budgets Are Used
for Performance Evaluation
Define Participative
Budgeting
What are three potential problems?