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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 14
Cost Planning
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McGraw-Hill/Irwin
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© 2008
The ©
McGraw-Hill
Companies,
Inc., All
Reserved.
Copyright
2011 by The McGraw-Hill
Companies,
Inc.,Rights
All Rights
Reserved.
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LO1
Budgeting
A budget is a comprehensive financial
plan for achieving the financial and
operational goals of an organization.
Planning
Control
Developing
objectives for
acquisition
and use of
resources.
Steps taken by
management to
ensure that
objectives are
attained.
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Participative Budgeting
L O2
Flow of Budget Data
Top Management
Middle
Management
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
Time consuming but enhances employee
motivation and acceptance of goals.
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The Budget Time Frame
L O3
Operating Budget
2010
Operating Budget
2011
Operating Budget
2012
2013
The annual operating budget
may be divided into quarterly
or monthly budgets.
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L O3
The Budget Time Frame
Continuous or
Perpetual Budget
2010
2011
2011
2011
2011
Quarter
IV
Quarter
I
Quarter
II
Quarter
III
Quarter
IV
Budget for
last 3
quarters
of 2011 and
first
quarter
of 2012
Budget for
last 2
quarters
of 2011and
first 2
quarters
of 2012
Budget for
last quarter
of 2011 and
first 3
quarters
of 2012
Budget for
2012 by
quarters
Budget for
2011 by
quarters
2012
This budget is usually a four-quarter
budget that rolls forward one quarter
as the current quarter is completed.
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L O4
The Budgeting Process
Sales Budget
Purchases
Budget
(Merchandiser)
OR
Direct
Materials
Budget
Operating Expense
Budget
Production
Budget
(Manufacturer)
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cost of Goods
Sold Budget
Budgeted Income Statement
Budgeted Statement of Cash Flows
Budgeted Balance Sheet
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Sales Budget
L O4
Sales
Budget
Estimated
Unit Sales
Estimated
Unit Price
Analysis of economic and market conditions
+
Forecasts of customer needs provided by marketing
personnel
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Inventory Flows
L O5
The basic inventory flow model is used
for production and purchases budgets.
Beginning
balance
+
Additions
=
Available
_
Withdrawals
=
Ending
balance
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1-9
The Production Budget
L O5
Production must be adequate to meet
budgeted sales and to provide sufficient
ending inventory.
Budgeted product sales in units
+ Desired product units in ending inventory
= Total product units needed
– Product units in beginning inventory
= Product units to produce
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L O5
Raw Materials Purchases Budget
The materials purchases budget is based on
production quantity and desired materials
inventory levels.
×
=
+
=
–
=
Units to produce
Material needed per unit
Material needed for units to produce
Desired units of material in ending inventory
Total units of material needed
Units of material in beginning inventory
Units of material to purchase
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Selling and Administrative
(S&A) Expense Budget
L O6

Selling expense budgets contain both
variable and fixed items.



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Variable items: shipping costs and sales
commissions.
Fixed items: advertising and sales salaries.
Administrative expense budgets contain
mostly fixed items.

Executive salaries and depreciation on company
offices.
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L O7
Budgeted Income Statement
Production costs per unit Quantity
Cost Total
Direct materials
3.00 lbs. $ 0.90 $ 2.70
Direct labor
0.10 hrs. $ 10.00
1.00
Manufacturing overhead
4.91
Total unit cost
$ 8.61
Total mfg. OH for quarter $188,400
= $4.91 per unit
Total labor hours required 38,400 units
(rounded)
From production and overhead budgets
Units Produced
January
12,800
February
16,200
March
9,400
Total
38,400
McGraw-Hill/Irwin
Mfg. OH
$ 62,800
66,200
59,400
$ 188,400
Manufacturing
overhead is
applied based on
number of units
produced.
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Standard Costs
LO9
Based on carefully
predetermined amounts.
Standard
Costs are
Used for planning material, labor,
and overhead requirements.
The expected level
of performance.
Are standards the same as
budgets?
A standard is the expected cost
for one unit.
A budget is the expected cost
for all units.
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Benchmarks for
measuring performance.
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L O 11
Costing Products with
Standard Costs
Price
Standards
Final, delivered
cost of materials,
net of discounts.
Rate
Standards
McGraw-Hill/Irwin
Use wage
surveys and
labor contracts.
Quantity
Standards
Use product
design specifications.
Time
Standards
Use time and
motion studies for
each labor operation.
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Costing Products with
Standard Costs
L O 11
Rate
Standards
Activity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The activity is the
base used to calculate
the predetermined
overhead.
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Costing Products with
Standard Costs
Standard costs for a product
might look like this:
Inputs
Raw materials
Direct labor
Variable overhead
Fixed overhead
Total standard unit cost
McGraw-Hill/Irwin
A
B
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
2.5 hours
$ 4.00
14.00
3.00
4.50
per
per
per
per
lb.
$
hour
hour
hour
$
12.00
35.00
7.50
11.25
65.75
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