Chapter
9
Profit Planning
9-2
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand why organizations budget and the
processes they use to create budgets.
2. Prepare a sales budget, including a schedule
of expected cash receipts.
3. Prepare a production budget..
4. Prepare a direct materials budget, including a
schedule of expected cash disbursements for
purchases of materials.
5. Prepare a direct labour budget.
© McGraw-Hill Ryerson Limited., 2001
9-3
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
6. Prepare a manufacturing overhead budget.
7. Prepare an ending finished goods inventory
budget.
8. Prepare a selling and administrative expense
budget.
9. Prepare a cash budget.
10. Prepare a budgeted income statement and a
budgeted balance sheet.
11. (Appendix 9A) Compute the optimum inventory
level and order size.
© McGraw-Hill Ryerson Limited., 2001
9-4
The Basic Framework of Budgeting
Detail
Budget
Production
Sales
Master
Budget
Summary of
a company’s
plans.
Detail
Budget
Ma terials
Detail
Budget
© McGraw-Hill Ryerson Limited., 2001
9-5
Planning and Control
! Planning --
involves
developing
objectives and
preparing various
budgets to achieve
these objectives.
! Control -- involves
the steps taken by
management that
attempt to ensure
the objectives are
attained.
© McGraw-Hill Ryerson Limited., 2001
9-6
Advantages of Budgeting
Define goal
and objectives
Communicating
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
© McGraw-Hill Ryerson Limited., 2001
9-7
Responsibility Accounting
Managers should be held responsible for
those items — and only those items — that
the manager can actually control
to a significant extent.
© McGraw-Hill Ryerson Limited., 2001
9-8
Choosing the Budget Period
Operating Budget
1999
2000
2001
2002
The annual operating budget
may be divided into quarterly
or monthly budgets.
© McGraw-Hill Ryerson Limited., 2001
9-9
Choosing the Budget Period
Continuous or
Perpetual Budget
1999
2000
2001
2002
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
© McGraw-Hill Ryerson Limited., 2001
9-10
Participative Budget System
Top Management
Middle
Management
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
Flow of Budget Data
© McGraw-Hill Ryerson Limited., 2001
9-11
The Budget Committee
A standing committee responsible for
"overall policy matters relating to the budget
"coordinating the preparation of the budget
© McGraw-Hill Ryerson Limited., 2001
9-12
The Master Budget
Sales
B udget
Selling and
A dm inistrative
B udget
© McGraw-Hill Ryerson Limited., 2001
9-13
The Master Budget
Sales
B udget
Ending
Inventory
B udget
Production
B udget
Selling and
A dm inistrative
B udget
D irect
M aterials
B udget
D irect
Labour
B udget
M anufacturing
O verhead
B udget
© McGraw-Hill Ryerson Limited., 2001
9-14
The Master Budget
Sales
B udget
Ending
Inventory
B udget
Production
B udget
Selling and
A dm inistrative
B udget
D irect
M aterials
B udget
D irect
Labor
B udget
M anufacturing
O verhead
B udget
C ash
B udget
Budgeted Financial Statements
© McGraw-Hill Ryerson Limited., 2001
9-15
The Sales Budget
Detailed schedule showing expected
sales for the coming periods
expressed in units and dollars.
© McGraw-Hill Ryerson Limited., 2001
9-16
Budgeting Example
#Royal Company is preparing budgets for the
quarter ending June 30.
$Budgeted sales for the next five months are:
April
May
June
July
August
20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
%The selling price is $10 per unit.
© McGraw-Hill Ryerson Limited., 2001
9-17
The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
April
May
June
20,000
50,000
30,000
Quarter
100,000
© McGraw-Hill Ryerson Limited., 2001
9-18
The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
April
May
June
Quarter
20,000
50,000
30,000
100,000
$
10
$ 200,000
$
10
$ 500,000
$
10
$ 300,000
$
10
$ 1,000,000
© McGraw-Hill Ryerson Limited., 2001
9-19
The Production Budget
Sales
Budget
p
m
o
C
Production
Budget
ed
t
le
Production must be adequate to meet budgeted
sales and provide for sufficient ending inventory.
© McGraw-Hill Ryerson Limited., 2001
9-20
The Production Budget
! 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.
© McGraw-Hill Ryerson Limited., 2001
9-21
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
4,000
26,000
Budgeted
Budgeted sales
sales
Desired
Desired percent
percent
Desired
Desired inventory
inventory
50,000
50,000
20%
20%
10,000
10,000
© McGraw-Hill Ryerson Limited., 2001
9-22
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
4,000
26,000
March
March 31
31
ending
ending inventory
inventory
© McGraw-Hill Ryerson Limited., 2001
9-23
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
Quarter
100,000
20%
10,000
30,000
6,000
56,000
4,000
26,000
© McGraw-Hill Ryerson Limited., 2001
9-24
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
10,000
30,000
6,000
56,000
4,000
26,000
10,000
46,000
June
30,000
Quarter
100,000
© McGraw-Hill Ryerson Limited., 2001
9-25
The Production Budget
Budgeted sales
Add desired ending
inventory
Total needed
Less beginning
inventory
Required production
April
20,000
May
50,000
June
30,000
Quarter
100,000
10,000
30,000
6,000
56,000
5,000
35,000
5,000
105,000
4,000
26,000
10,000
46,000
6,000
29,000
4,000
101,000
© McGraw-Hill Ryerson Limited., 2001
9-26
Expected Cash Collections
!
All sales
sales are
are on
on account.
account.
! All
!
Royal’s collection
collection pattern
pattern is:
is:
! Royal’s
70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
5%
5% is
is uncollectible.
uncollectible.
!
The March
March 31
31 accounts
accounts receivable
receivable
! The
balance
balance of
of $30,000
$30,000 will
will be
be collected
collected in
in
full.
full.
© McGraw-Hill Ryerson Limited., 2001
9-27
Expected Cash Collections
Accounts rec. - 3/31
April
$ 30,000
May
June
Quarter
$ 30,000
Total cash collections
© McGraw-Hill Ryerson Limited., 2001
9-28
Expected Cash Collections
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
Total cash collections
April
$ 30,000
May
140,000
$ 50,000
June
Quarter
$ 30,000
140,000
50,000
$ 170,000
© McGraw-Hill Ryerson Limited., 2001
9-29
Expected Cash Collections
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
Total cash collections
April
$ 30,000
May
June
140,000
140,000
50,000
$ 50,000
350,000
$ 125,000
$ 170,000
Quarter
$ 30,000
350,000
125,000
$ 400,000
© McGraw-Hill Ryerson Limited., 2001
9-30
Expected Cash Collections
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
June sales
70% x $300,000
Total cash collections
April
$ 30,000
May
June
140,000
140,000
50,000
$ 50,000
350,000
$ 170,000
$ 400,000
Quarter
$ 30,000
$ 125,000
350,000
125,000
210,000
$ 335,000
210,000
$ 905,000
© McGraw-Hill Ryerson Limited., 2001
9-31
The Direct Materials Budget
!
At Royal
Royal Company,
Company, five
five kilograms
kilograms of
of
! At
material
material are
are required
required per
per unit
unit of
of product.
product.
!
Management wants
wants materials
materials on
on hand
hand at
at
! Management
the
the end
end of
of each
each month
month equal
equal to
to 10%
10% of
of the
the
following
following month’s
month’s production.
production.
!
On March
March 31,
31, 13,000
13,000 kilograms
kilograms of
of material
material
! On
are
are on
on hand.
hand. Material
Material cost
cost $0.40
$0.40 per
per
kilogram.
kilogram.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
© McGraw-Hill Ryerson Limited., 2001
9-32
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
May
46,000
June
29,000
Quarter
101,000
From
From production
production
budget
budget
© McGraw-Hill Ryerson Limited., 2001
9-33
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
© McGraw-Hill Ryerson Limited., 2001
9-34
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
10%
10% of
of the
the following
following
month’s
month’s production
production
© McGraw-Hill Ryerson Limited., 2001
9-35
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
13,000
140,000
March
March 31
31
inventory
inventory
© McGraw-Hill Ryerson Limited., 2001
9-36
The Direct Materials Budget
Production
Materials per unit
Production needs
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
© McGraw-Hill Ryerson Limited., 2001
9-37
The Direct Materials Budget
April
26,000
5
130,000
May
46,000
5
230,000
Production
Materials per unit
Production needs
Add desired
ending inventory
23,000
14,500
July Production
a nd Inve ntory
Total needed
153,000
244,500
Salesbeginning
in units
25,000
Less
Add
desire d ending inventory
3,000
inventory
13,000
23,000
Tota l units
28,000
Materials
tonee
be ded
Le
ss beginning inve ntory
5,000
purchased
140,000
221,500
Production in units
Kilograms per unit
Tota l kilogra ms, July
Desired pe rcent
Desired ending inve ntory, June
June
29,000
5
145,000
Quarter
101,000
5
505,000
11,500
156,500
11,500
516,500
14,500
13,000
142,000
503,500
23,000
5
115,000
10%
11,500
© McGraw-Hill Ryerson Limited., 2001
9-38
Expected Cash Disbursement for Materials
!
Royal pays
pays $0.40
$0.40 per
per kilogram
kilogram for
for its
its
! Royal
materials.
materials.
!
One-half of
of aa month’s
month’s purchases
purchases are
are paid
paid
! One-half
for
for in
in the
the month
month of
of purchase;
purchase; the
the other
other
half
half is
is paid
paid in
in the
the following
following month.
month.
!
The March
March 31
31 accounts
accounts payable
payable balance
balance
! The
is
is $12,000.
$12,000.
Let’s
Let’s calculate
calculate expected
expected cash
cash
disbursements.
disbursements.
© McGraw-Hill Ryerson Limited., 2001
9-39
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
April
$ 12,000
May
June
Quarter
$ 12,000
May purchases
June purchases
Total cash
disbursements
© McGraw-Hill Ryerson Limited., 2001
9-40
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
April
$ 12,000
May
28,000
$ 28,000
June
Quarter
$ 12,000
28,000
28,000
June purchases
Total cash
disbursements
$ 40,000
140,000 lbs. × $.40/lb. = $56,000
© McGraw-Hill Ryerson Limited., 2001
9-41
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
Total cash
disbursements
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 44,300
$ 40,000
Quarter
$ 12,000
44,300
44,300
$ 72,300
© McGraw-Hill Ryerson Limited., 2001
9-42
Expected Cash Disbursement for Materials
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash
disbursements
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 40,000
$ 72,300
Quarter
$ 12,000
$ 44,300
44,300
44,300
28,400
28,400
$ 72,700
$185,000
© McGraw-Hill Ryerson Limited., 2001
9-43
The Direct Labour Budget
!
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours of
of
! At
direct
direct labour.
labour.
!
The Company
Company has
has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
! The
will
will be
be paid
paid for
for 40
40 hours
hours of
of work
work each
each week.
week.
!
In exchange
exchange for
for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agreed
agreed to
to
! In
aa wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless of
of the
the hours
hours
worked
worked (No
(No overtime
overtime pay).
pay).
!
For the
the next
next three
three months,
months, the
the direct
direct labour
labour workforce
workforce
! For
will
will be
be paid
paid for
for aa minimum
minimum of
of 1,500
1,500 hours
hours per
per month.
month.
Let’s
Let’s prepare
prepare the
the direct
direct labour
labour budget.
budget.
© McGraw-Hill Ryerson Limited., 2001
9-44
The Direct Labour Budget
Production
Direct labour hours
Labour hours required
Guaranteed labour hours
Labour hours paid
Wage rate
Total direct labour cost
April
26,000
May
46,000
June
29,000
Quarter
101,000
From production
budget
© McGraw-Hill Ryerson Limited., 2001
9-45
The Direct Labour Budget
Production
Direct labour hours
Labour hours required
Guaranteed labour hours
Labour hours paid
Wage rate
Total direct labour cost
April
26,000
0.05
1,300
May
46,000
0.05
2,300
June
29,000
0.05
1,450
Quarter
101,000
0.05
5,050
© McGraw-Hill Ryerson Limited., 2001
9-46
The Direct Labour Budget
Production
Direct labour hours
Labour hours required
Guaranteed labour hours
Labour hours paid
Wage rate
Total direct labour cost
April
26,000
0.05
1,300
1,500
1,500
May
46,000
0.05
2,300
1,500
2,300
June
29,000
0.05
1,450
1,500
1,500
Quarter
101,000
0.05
5,050
5,300
Higher
Higher of
of labour
labour hours
hours required
required
or
or labour
labour hours
hours guaranteed.
guaranteed.
© McGraw-Hill Ryerson Limited., 2001
9-47
The Direct Labour Budget
April
Production
26,000
Direct labour hours
0.05
Labour hours required
1,300
Guaranteed labour hours
1,500
Labour hours paid
1,500
Wage rate
$
10
Total direct labour cost $ 15,000
May
46,000
0.05
2,300
1,500
2,300
$
10
$ 23,000
June
29,000
0.05
1,450
1,500
1,500
$
10
$ 15,000
Quarter
101,000
0.05
5,050
5,300
$
10
$ 53,000
© McGraw-Hill Ryerson Limited., 2001
9-48
Manufacturing Overhead Budget
! Royal Company uses a variable
manufacturing overhead rate of $1 per unit
produced.
produced
! Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of non-cash
costs (primarily amortization of plant assets).
Let’s prepare the manufacturing
overhead budget.
© McGraw-Hill Ryerson Limited., 2001
9-49
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
Total mfg. OH costs
Less noncash costs
Cash disbursements
for manufacturing OH
May
46,000
$
1
$ 46,000
June
29,000
$
1
$ 29,000
Quarter
101,000
$
1
$ 101,000
From production
budget
© McGraw-Hill Ryerson Limited., 2001
9-50
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
50,000
Total mfg. OH costs
76,000
Less noncash costs
Cash disbursements
for manufacturing OH
May
46,000
$
1
$ 46,000
50,000
96,000
June
29,000
$
1
$ 29,000
50,000
79,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
© McGraw-Hill Ryerson Limited., 2001
9-51
Manufacturing Overhead Budget
April
Production in units
26,000
Variable mfg. OH rate
$
1
Variable mfg. OH costs $ 26,000
Fixed mfg. OH costs
50,000
Total mfg. OH costs
76,000
Less noncash costs
20,000
Cash disbursements
for manufacturing OH $ 56,000
May
46,000
$
1
$ 46,000
50,000
96,000
20,000
June
29,000
$
1
$ 29,000
50,000
79,000
20,000
Quarter
101,000
$
1
$ 101,000
150,000
251,000
60,000
$ 76,000
$ 59,000
$ 191,000
Amortization
Amortization is
is aa non-cash
non-cash charge.
charge.
© McGraw-Hill Ryerson Limited., 2001
9-52
Ending Finished Goods Inventory Budget
! Now, Royal can complete the ending
finished goods inventory budget.
! At Royal, manufacturing overhead is
applied to units of product on the basis of
direct labour hours.
Let’s calculate ending finished goods
inventory.
© McGraw-Hill Ryerson Limited., 2001
9-53
Ending Finished Goods Inventory Budget
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labour
Manufacturing overhead
$
Total
2.00
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct materials
budget and information
© McGraw-Hill Ryerson Limited., 2001
9-54
Ending Finished Goods Inventory Budget
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labour
0.05 hrs. $ 10.00
Manufacturing overhead
$
Total
2.00
0.50
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct labour
budget
© McGraw-Hill Ryerson Limited., 2001
9-55
Ending Finished Goods Inventory Budget
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labour
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
Total mfg. OH for quarter
Total labour hours required
$
Total
2.00
0.50
2.49
4.99
$
4.99
$
$251,000
= $49.70 per hr.*
5,050 hrs.
*rounded
© McGraw-Hill Ryerson Limited., 2001
9-56
Ending Finished Goods Inventory Budget
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labour
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
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$ 24,950
Production
Budget
© McGraw-Hill Ryerson Limited., 2001
9-57
Selling and Administrative Expense Budget
!
At Royal,
Royal, variable
variable selling
selling and
and administrative
administrative
! At
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.
!
Fixed selling
selling and
and administrative
administrative expenses
expenses are
are
! Fixed
$70,000
$70,000 per
per month.
month.
!
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses
! The
include
include $10,000
$10,000 in
in costs
costs –– primarily
primarily amortization
amortization ––
that
that are
are not
not cash
cash outflows
outflows of
of the
the current
current month.
month.
Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and
administrative
administrative expense
expense budget.
budget.
© McGraw-Hill Ryerson Limited., 2001
9-58
Selling and Administrative Expense Budget
Budgeted sales
Variable selling
and admin. rate
Variable expense
Fixed selling and
admin. expense
Total expense
Less noncash
expenses
Cash disbursements for
selling & admin.
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
© McGraw-Hill Ryerson Limited., 2001
9-59
Selling and Administrative Expense Budget
Budgeted sales
Variable selling
and admin. rate
Variable expense
Fixed selling and
admin. expense
Total expense
Less noncash
expenses
Cash disbursements for
selling & admin.
April
20,000
May
50,000
June
30,000
Quarter
100,000
$ 0.50
$10,000
$ 0.50
$25,000
$ 0.50
$15,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
10,000
10,000
10,000
30,000
$70,000
$85,000
$75,000
$230,000
© McGraw-Hill Ryerson Limited., 2001
9-60
The Cash Budget
Royal:
●
Maintains aa 16%
16% open
open line
line of
of credit
credit for
for $75,000.
$75,000.
● Maintains
●
Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000.
$30,000.
● Maintains
●
Borrows on
on the
the first
first day
day of
of the
the month
month and
and repays
repays
● Borrows
loans
loans on
on the
the last
last day
day of
of the
the month.
month.
●
Pays aa cash
cash dividend
dividend of
of $49,000
$49,000 in
in April.
April.
● Pays
●
Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
● Purchases
$48,300
$48,300 in
in June
June paid
paid in
in cash.
cash.
●
Has an
an April
April 11 cash
cash balance
balance of
of $40,000.
$40,000.
● Has
© McGraw-Hill Ryerson Limited., 2001
9-61
The Cash Budget
April
$ 40,000
170,000
210,000
May
June
Qua rte r
Be ginning cash bala nce
Add cash collections
Total ca sh ava ila ble
Less disbursem ents
Ma te ria ls
40,000
Dire ct la bour
Mfg. overhea d
Se lling a nd a dm in.
Equipm ent purcha se
Schedule
Schedule of
of Expected
Expected
Divide nds
Cash
Cash Disbursements
Disbursements
Total disbursem ents
Exce ss (de ficie ncy) of
cash a vailable over Schedule
Schedule of
of Expected
Expected
disburse me nts
Cash
Cash Collections
Collections
© McGraw-Hill Ryerson Limited., 2001
9-62
The Cash Budget
Be ginning cash bala nce
Add cash collections
Total ca sh ava ila ble
Less disbursem ents
Ma te ria ls
Dire ct la bour
Mfg. overhea d
Se lling a nd a dm in.
Equipm ent purcha se
Divide nds
Total disbursem ents
Exce ss (de ficie ncy) of
cash a vailable over
disburse me nts
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
May
June
Qua rte r
Direct Labour
Budget
Manufacturing
Overhead Budget
Selling and Administrative
Expense Budget
© McGraw-Hill Ryerson Limited., 2001
9-63
The Cash Budget
Be ginning cash bala nce
Add cash collections
Total ca sh ava ila ble
Less disbursem ents
Ma te ria ls
Dire ct la bour
Mfg. overhea d
Se lling a nd a dm in.
Equipm ent purcha se
Divide nds
Total disbursem ents
Exce ss (de ficie ncy) of
cash a vailable over
disburse me nts
April
$ 40,000
170,000
210,000
40,000
15,000
56,000
70,000
49,000
230,000
May
June
Qua rte r
Because Royal maintains
a cash balance of $30,000,
the company must
borrow on its
line-of-credit
$ (20,000)
© McGraw-Hill Ryerson Limited., 2001
9-64
Financing and Repayment
April
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
May
June
Quarter
$(20,000)
50,000
50,000
$ 30,000
$30,000
$
-
$
-
Ending cash balance for April
is the beginning May balance.
© McGraw-Hill Ryerson Limited., 2001
9-65
The Cash Budget
Be ginning cash bala nce
Add cash collections
Total ca sh ava ila ble
Less disbursem ents
Ma te ria ls
Dire ct la bour
Mfg. overhea d
Se lling a nd a dm in.
Equipm ent purcha se
Divide nds
Total disbursem ents
Exce ss (de ficie ncy) of
cash a vailable over
disburse me nts
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
$ (20,000)
$ 30,000
June
Qua rte r
© McGraw-Hill Ryerson Limited., 2001
9-66
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
April
May
$(20,000)
$30,000
50,000
50,000
$ 30,000
$30,000
June
Quarter
Because the ending cash balance is
exactly $30,000, Royal will not repay
the loan this month.
© McGraw-Hill Ryerson Limited., 2001
9-67
The Cash Budget
Be ginning cash bala nce
Add cash collections
Total ca sh ava ila ble
Less disbursem ents
Ma te ria ls
Dire ct la bour
Mfg. overhea d
Se lling a nd a dm in.
Equipm ent purcha se
Divide nds
Total disbursem ents
Exce ss (de ficie ncy) of
cash a vailable over
disburse me nts
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Qua rte r
$ 40,000
905,000
945,000
40,000
15,000
56,000
70,000
49,000
230,000
72,300
23,000
76,000
85,000
143,700
400,000
72,700
15,000
59,000
75,000
48,300
270,000
185,000
53,000
191,000
230,000
192,000
49,000
900,000
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
© McGraw-Hill Ryerson Limited., 2001
9-68
The Cash Budget
April
$ 40,000
170,000
210,000
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Qua rte r
$ 40,000
905,000
945,000
Be ginning cash bala nce
Add cash collections
Total ca sh ava ila ble
Less disbursem ents
Ma te ria ls
40,000
72,300
72,700
185,000
Dire ct la bour
15,000
23,000
15,000
53,000
Mfg. overhea d
56,000
76,000
59,000
191,000
Se lling a nd a dm in.
70,000
85,000
75,000
230,000
At
the
end
of
June,
Royal
has
enough
cash
At the
Royal has48,300
enough192,000
cash
Equipm ent purcha
se end of- June,143,700
$50,000
at
16%.
to repay
repay the
the49,000
$50,000 loan
loan
plus interest
interest
at49,000
16%.
Divide nds to
- plus
Total disbursem ents
230,000
400,000
270,000
900,000
Exce ss (de ficie ncy) of
cash a vailable over
disburse me nts
$ (20,000)
$ 30,000
$ 95,000
$ 45,000
© McGraw-Hill Ryerson Limited., 2001
9-69
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
April
May
June
Quarter
$(20,000)
$30,000
$95,000
$45,000
50,000
50,000
$ 30,000
$30,000
(50,000)
(2,000)
(52,000)
$ 43,000
50,000
(50,000)
(2,000)
(2,000)
$43,000
$50,000 × 16% × 3/12 = $2,000
Borrowings on April 1 and
repayment of June 30.
© McGraw-Hill Ryerson Limited., 2001
9-70
The Budgeted Income Statement
Cash
Budget
p
m
Co
ed
t
le
Budgeted
Income
Statement
After we complete the cash budget,
we can prepare the budgeted income
statement for Royal.
© McGraw-Hill Ryerson Limited., 2001
9-71
The Budgeted Income Statement
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
Cost of goods sold (100,000 @ $4.99)
Gross margin
Selling and administrative expenses
Operating income
Interest expense
Net income
$1,000,000
499,000
501,000
260,000
241,000
2,000
$ 239,000
© McGraw-Hill Ryerson Limited., 2001
9-72
The Budgeted Balance Sheet
Royal
Royal reported
reported the
the following
following account
account
balances
balances on
on June
June 30
30 prior
prior to
to preparing
preparing its
its
budgeted
budgeted financial
financial statements:
statements:
"
"Land
Land -- $50,000
$50,000
"
"Building
Building (net)
(net) -- $175,000
$175,000
"
"Common
Common stock
stock -- $200,000
$200,000
"
"Retained
Retained earnings
earnings -- $146,150
$146,150
© McGraw-Hill Ryerson Limited., 2001
9-73
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
$
43,000
75,000
4,600
24,950
147,550
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
25%of
25%of June
June
sales
sales of
of
$300,000
$300,000
11,500
11,500 kg
kg
at
at $0.40/kg
$0.40/kg
5,000
5,000 units
units
at
at $4.99
$4.99 each
each
50%
50% of
of June
June
purchases
purchases
of
of $56,800
$56,800
© McGraw-Hill Ryerson Limited., 2001
9-74
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
$
43,000
75,000
Beginning balance
4,600
Add:
net income
24,950
Deduct: dividends
Ending balance
147,550
$146,150
239,000
(49,000)
$336,150
50,000
175,000
192,000
417,000
$ 564,550
$
28,400
200,000
336,150
$ 564,550
© McGraw-Hill Ryerson Limited., 2001
9-75
Zero-Base Budgeting
Managers are required to justify all budgeted
expenditures, not just changes in the budget
from the previous year. The baseline is zero
rather than last year’s budget.
© McGraw-Hill Ryerson Limited., 2001
9-76
International Aspects of Budgeting
Multinational companies face special
problems when preparing a budget.
" Fluctuations in foreign currency exchange rates.
" High inflation rates in some foreign countries.
" Differences in local economic conditions.
" Local governmental policies.
© McGraw-Hill Ryerson Limited., 2001
Appendix
9A
Inventory Decisions
9-78
Costs Associated with Inventory
Clerical Costs
Transportation
Costs
Inventory Ordering Costs
© McGraw-Hill Ryerson Limited., 2001
9-79
Costs Associated with Inventory
Storage Space
Handling Cost
Insurance
Property
Taxes
Inventory Carrying Costs
Obsolescence
Losses
Interest on
Capital invested
in Inventory
© McGraw-Hill Ryerson Limited., 2001
9-80
Costs Associated with Inventory
Quantity
discounts lost
Customer
ill will
Lost
sales
Erratic
production
Cost of not carrying
sufficient inventory
Added
transportation
costs
Inefficiency of
production runs
© McGraw-Hill Ryerson Limited., 2001
9-81
Inventory Problems
! How much to order - Economic Order
Quantity (EOQ)
and
! When to order - Reorder Point
© McGraw-Hill Ryerson Limited., 2001
9-82
Economic Order Quantity (EOQ)
! Tabular approach
"Tabulates total cost at various order
sizes.
"Lowest cost indicates EOQ.
"Requires trial and error to determine
exact order quantity.
© McGraw-Hill Ryerson Limited., 2001
9-83
Economic Order Quantity (EOQ)
! Graphic approach
" Graph cost relationships between total
cost, annual carrying cost and annual
purchase order cost.
" Total cost is minimized where annual
carrying cost equals annual purchase
order cost
© McGraw-Hill Ryerson Limited., 2001
9-84
Economic Order Quantity (EOQ)
! Formula approach
" E=
2QP
C
where
E= order size in units
Q= annual quantity used in units
P= cost of placing one order
C= annual cost of carrying one unit in stock
© McGraw-Hill Ryerson Limited., 2001
9-85
Reorder Point/ Safety Stock
! Reorder Point - tells manager when to
place an order
"Depends on economic order quantity, lead
times and rate of usage during lead time
! Safety Stock - provides a buffer to protect
against a stock-out
"Reorder point is then calculated by adding
the safety stock to the average usage during
the lead time
© McGraw-Hill Ryerson Limited., 2001
9-86
End of Chapter 9
© McGraw-Hill Ryerson Limited., 2001