ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 10
Professor Jeff Yu
Review: Steps for Implementing ABC
1. Define activity cost pools & activity measures.
2. Assign overhead costs to activity cost pools: first-stage
allocation.
3. Calculate activity rates: for each activity cost pool, divide
total assigned OH costs by estimated total activity levels.
4. Assign OH costs to the specific product or customer
using the activity rates: second-stage allocation
Assigned OH = Activity Rate * Actual activity level
5. Prepare management reports: calculate product margin
and customer margin.
Chapter 9: Profit Planning
Objectives
 Understand why and how firm Budget;
 Prepare sales budget and the schedule of
expected cash collections;
 Prepare production budget, DM budget and the
schedule of expected cash disbursements;
 Prepare DL budget, MOH budget, S&A expense
budget and cash budget;
 Understand the budgeted financial statements
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using resources over a
specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an organization’s
activity is known as budgetary control.
Advantages of Budgeting
Communicate
plans
Coordinate
activities
Benchmark: Define
Goal and objectives
Think about and
plan for the future
Advantages
Uncover potential
bottlenecks
Means of allocating
resources
Responsibility Accounting
Managers should be held responsible for those items
— and only those items — that the manager can
actually control to a significant extent.
 Each line item (i.e., revenue or cost) in the budget is made the
responsibility of a manager who is held responsible for subsequent
deviation between budgeted goals and actual results.
 The point is not to penalize individuals for missing targets, but the
manager should understand the sources of discrepancies, take the
initiative to correct the unfavorable discrepancies and be ready to
explain the discrepancy to higher management.
Self-Imposed Budget
T o p M an a ge m e nt
M id d le
M a na ge m e nt
S u p e rv is o r
S u p e rv is o r
M id d le
M a na ge m e nt
S u p e rv is o r
S u p e rv is o r
Self-imposed/participative budget: managers of all levels
prepare their own budget estimates.
Discuss: (1) Advantages?
(2) Disadvantages?
(3) Bottom-up vs. Top-down
The Master Budget
Sales
Budget
Ending
F.G. Inventory
Budget
Direct
Materials
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cash
Budget
Budgeted Financial Statements
Sales Budget
Starting point for the entire budgeting process - all other budgets are
driven by the sales budget: Inventory levels, purchases, production and
operating expenses are geared to budgeted sales.
Budgeted Sales $ = budgeted sales in units * unit price
A schedule of expected cash collections is prepared after the sales
budget.
Cash collections include the current month’s cash sales plus the
previous months’ credit sales collected.
Example: Sales Budget
Bella Inc. is preparing budgets for the quarter ending June 30. The
unit sales price is $10. Budgeted sales for the next 3 months are:
April
20,000 units
May
50,000 units
June
30,000 units
All of Bella’s sales are on account (credit sales). Bella’s collection
pattern is: 70% collected in the month of sale, 25% collected in
the month following sale, the remaining 5% is uncollectible.
The March 31 accounts receivable balance of $30,000 will be
collected in full in April.
Q: prepare a sales budget and a schedule of expected
cash collections.
Practice Problem
30% of HighTech Co.’s sales are for cash and 70% are credit sales.
60% of the credit sales are collected in the month of sale, 25% in the
month following the sale, 12% in the second month following sale,
and the remainder are uncollectible. The following are the sales
forecast for the first four months of the coming year.
Total sales
Jan
$50,000
Feb
$60,000
Mar
$40,000
Apr
$30,000
Q: (1) What is the expected cash inflow in March?
(2) Assume there is no account receivable balance on Jan. 1, what
is the budgeted account receivable balance on March 31?
Production Budget
Production Budget lists the number of units that must be produced
to satisfy sales needs and provide for the desired ending inventory.
Budgeted +
Sales in Units
Desired
ending inventory
Expected
Required
beginning = Production
inventory
in Units
Example: Production Budget
Bella Inc.’s budgeted sales in units are 20,000 for April, 50,000 for
May and 30,000 for June. The management would like ending
finished goods inventory to equal 20% of the next month’s
budgeted sales in units. On March 31, 4,000 units were in
finished goods inventory, and it is desired that 5,000 units were in
finished goods inventory on July 1.
Q: prepare Bella’s production budget for April, May, June and the
whole 2nd quarter.
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?
For Next Class
 Continue covering chapter 9.
 Attempt the assigned HW problems.
Homework Question 1
All of Gaylord Company's sales are credit sales. 35% of the credit
sales are collected in the month of sale, 45% in the month following
sale, and the rest are collected in the second month following sale.
There is no bad debt. Budgeted sales are as follows:
Budgeted
Sales
January
February
March
April
$50,000
$60,000
$40,000
$30,000
Q: What will be the amount of expected cash collections in March?
Homework Question 2
Pitkins Company collects 20% of a month's sales in the month of sale,
70% in the month following sale, and 10% in the second month
following sale. Last year’s balance sheet shows an A/R balance of
$60,000 on December 31, all of which will be collected in January and
February. Budgeted sales for the next four months are:
Budgeted sales
January
$200,000
February
$300,000
March
$350,000
April
$250,000
Q: (1) what is the amount of expected cash collections in April?
(2) What is the budgeted account receivable balance on March 31?
Homework Question 3
Tonga toys makes Playclay. The desired ending F.G.
inventory is 30% of the next month’s sales.
Budgeted sales in units
July August
40,000 50,000
Sept. Oct.
70,000 35,000
Q: (1) what is the budgeted production in units for August?