Dutchess Community College
ACC 204 – Managerial Accounting
Quiz Prep Chapter 9
Budgetary Planning
Peter Rivera
March 2011
Disclaimer
This Quiz Prep is provided as an outline of
the key concepts from the chapter.
It is not intended to be comprehensive or
exhaustive.
Quizzes may include material from the
classroom lectures, the text or the homework
assignments.
ACC 204 Chapter 9
1
Primary Benefits of Budgeting
The primary benefits of budgeting are:
(1) It requires all levels of management to plan ahead
and to formalize goals on a recurring basis.
(2) It provides definite objectives for evaluating
performance at each level of responsibility.
(3) It creates an early warning system for potential
problems, so that management can make changes before
things get out of hand.
continued
Primary Benefits of Budgeting
(4) It facilitates the coordination of activities within
the business by correlating the goals of each segment
with overall company objectives.
(5) It results in greater management awareness of the
entity’s overall operations and the impact of external
factors such as economic trends.
(6) It motivates personnel throughout the organization
to meet planned objectives.
ACC 204 Chapter 9
2
Components of the Master Budget
Sales Budget
Operating
Budgets
Production Budget
Direct Materials
Budget
Manufacturing
Overhead Budget
Direct Labor Budget
Selling & Administration Budget
Budgeted Income Statement
Capital Expenditure
Budget
Budgeted
Balance Sheet
Cash Flow
Budget
Financial
Budgets
Sales Budget
Sales Budgets consists of • Quantity (units)
• Unit Selling Price
Expected Unit Sales
x Unit Selling Price
= Total Sales $
1Q
3,000
60
180,000
Yellow boxes in the
schedules indicate inputs.
All other numbers are either
calculated or carried
forward from a previous
schedule
ACC 204 Chapter 9
2Q
3,500
60
210,000
3Q
4,000
60
240,000
4Q
4,500
60
270,000
Year
15,000
60
900,000
The Unit Selling Price for the year =
Total Sales for the Year
Total Expected Units for the year
3
Production Budget
The 1Q from the next year is
needed for the 4Q Desired Ending
Inventory Calculation
From Sales Budget
Expected Unit Sales
Add: Desired Ending %
Add: Desired Ending Q
Less: Beginning Inv
= Production Quantity
1Q
3,000
20%
700
600
3,100
2Q
3,500
20%
800
700
3,600
3Q
4,000
20%
900
800
4,100
4Q
4,500
20%
1,000
900
4,600
Year Next Yr 1Q
5,000
15,400
The Beginning Inventory for a quarter = the
Ending Inventory from the previous quarter
Balance Sheet
Typically, the Desired Ending Inventory is a % of the next
period’s sales; e.g., 1Q 20% x 2Q Sales of 3,500 = 700
Direct Materials Budget
From Production Budget
Units to be Produced
x Direct Material per Unit
= Total DM needed
Add: Desired Ending %
Add: Desired Ending Q
Less: Beginning Inventory
= RM Purchased
x Cost per RM
= Total Cost of DM Purchase
1Q
3,100
2
6,200
10%
720
620
6,300
4
25,200
Balance Sheet
Similar process as in the
Production Budget
ACC 204 Chapter 9
2Q
3,600
2
7,200
10%
820
720
7,300
4
29,200
3Q
4,100
2
8,200
10%
920
820
8,300
4
33,200
4Q
4,600
2
9,200
10%
1,020
920
9,300
4
37,200
Year Next Yr 1Q
10,200
124,800
The 1Q from the next year is
needed for the 4Q Desired Ending
Inventory Calculation
4
Labor Budget
From Production Budget
Units to be Produced
x Direct Labor Hours per Unit
= Total # of Direct Labor Hours
x Direct Labor Cost per Hour
= Total Labor Cost
1Q
3,100
2
6,200
10
62,000
2Q
3,600
2
7,200
10
72,000
3Q
4,100
2
8,200
10
82,000
4Q
4,600
2
9,200
10
92,000
308,000
Manufacturing Overhead Budget
The Manufacturing Overhead Budget has 2 parts:
• Variable Costs
• Fixed Costs
ACC 204 Chapter 9
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Manufacturing Overhead Budget
In this example, The Variable Manufacturing Overhead is assumed
to be allocated based on Direct Labor Hours as calculated in the
Direct Labor Budget.
1Q
6,200
Total # of Direct Labor Hours
Variable
Indirect materials
Indirect Labor
Utilities
Maintenance
Total variable costs
Indirect materials
Indirect Labor
Utilities
Maintenance
Total variable costs
$
$
$
$
$
1.00
1.40
0.40
0.20
3.00
6,200
8,680
2,480
1,240
18,600
2Q
7,200
$
$
$
$
$
1.00
1.40
0.40
0.20
3.00
7,200
10,080
2,880
1,440
21,600
3Q
8,200
$
$
$
$
$
1.00
1.40
0.40
0.20
3.00
8,200
11,480
3,280
1,640
24,600
4Q
9,200
$
$
$
$
$
Year
1.00
1.40
0.40
0.20
3.00
9,200
12,880
3,680
1,840
27,600
30,800
43,120
12,320
6,160
92,400
Manufacturing Overhead Budget
+
Total variable costs
1Q
18,600
2Q
21,600
3Q
24,600
4Q
27,600
92,400
Fixed Costs
Supervisory Salaries
Depreciation
Prop Taxes & Insurance
Maintenance
Total Fixed Costs
20,000
3,800
9,000
5,700
38,500
20,000
3,800
9,000
5,700
38,500
20,000
3,800
9,000
5,700
38,500
20,000
3,800
9,000
5,700
38,500
80,000
15,200
36,000
22,800
154,000
57,100
6,200
60,100
7,200
63,100
8,200
66,100
9,200
246,400
30,800
$
8.00
Total OH
/ Direct Labor Hours
OH Rate per hour
ACC 204 Chapter 9
6
Selling & Administrative Expense Budget
Similar to the Manufacturing Overhead Budget,
the Selling & Administrative Expense Budget has
2 parts:
• Variable Costs
• Fixed Costs
Selling & Administrative Expense Budget
In this example, The Variable Selling & Administrative Expenses are
assumed to be based on Sales Units as calculated in the Sales Budget.
+
ACC 204 Chapter 9
Budgeted Sales in Units
1Q
3,000
2Q
3,500
3Q
4,000
4Q
4,500
15,000
Variable Expense
x Selling Commissions Rate
= Selling Commissions
3
9,000
3
10,500
3
12,000
3
13,500
45,000
1
3,000
12,000
1
3,500
14,000
1
4,000
16,000
1
4,500
18,000
15,000
60,000
x Freight-out Rate
= Freight-out Cost
Total Variable
7
Selling & Administrative Expense Budget
+
Total Variable
1Q
12,000
2Q
14,000
3Q
16,000
4Q
18,000
60,000
Fixed Expenses
Advertising
Sales Salaries
Office Salaries
Depreciation
Property Taxes & Insurance
Total Fixed
5,000
15,000
7,500
1,000
1,500
30,000
5,000
15,000
7,500
1,000
1,500
30,000
5,000
15,000
7,500
1,000
1,500
30,000
5,000
15,000
7,500
1,000
1,500
30,000
20,000
60,000
30,000
4,000
6,000
120,000
Total Selling & Administrative
42,000
44,000
46,000
48,000
180,000
Budgeted Income Statement
Sales Budget
Sales Revenues
COGS per Unit
Direct Materials
Direct Labor
Maufacturing Overhead
Total COGS Per Unit
Estimated Total # of Units Sold
- COGS $
= Gross Profit
- Selling & Administrative Expenses
= Operating Income
- Interest Exp
= Income Before Taxes
- Income Tax Expense
= Net Income
ACC 204 Chapter 9
$ 900,000
$
$
$
$
Direct Materials Budget:
2 RM per Unit @ $4
Direct Labor Budget:
2 Hrs per Unit @ $10
8.00
20.00
16.00
44.00
15,000
660,000
240,000
180,000
60,000
100
59,900
12,000
$ 47,900
Manufacturing Overhead
Budget:
2 Hrs per Unit @ $8
Production Budget
Selling &
Administration Budget
8
Capital Expenditure Budget
PP&E, Beginning
+ Purchases:
Truck
- Disposals
= PP&E, Ending
1Q
182,000
2Q
182,000
3Q
192,000
4Q
192,000
10,000
182,000
192,000
Year
10,000
192,000
192,000
Cash Budget
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This example assumes that the company wishes to maintain
a minimum cash balance of $15,000.
They will plan to borrow when the estimated available cash
is below this and plan to repay any borrowings when there is
more than the minimum amount.
There are 2 preliminary schedules that must be calculated:
• Collection of Accounts Receivable
• Payment of Accounts Payable
ACC 204 Chapter 9
9
Cash Budget
Other assumptions include:
• Short Term Investments of $2,000 are to be sold in 1 Q
• Direct Labor is paid in the current quarter
• Manufacturing Overhead in paid in the current quarter;
NOTE that Depreciation is NOT a cash expenditure
• Selling & Administration Expenses are paid in the
current quarter; NOTE that Depreciation is NOT a cash
expenditure
• Income Taxes are paid on an equal quarterly basis
Cash Budget
Collection of Accounts Receivable
In this example it is assumed that 60% of accounts receivable
are collected in the current quarter with the remainder in the
next quarter, e.g.:
1Q Sales = 180,000 * 60% = 108,000 in 1Q
180,000 Total – 108,000 in 1Q = 72,000 in 2Q
Assumption % collected in current Q =
Accts Receivable Opening
1Q
2Q
3Q
4Q
Total Collections
ACC 204 Chapter 9
1Q
60,000
108,000
168,000
60%
2Q
72,000
126,000
198,000
3Q
84,000
144,000
228,000
4Q
96,000
162,000
258,000
10
Cash Budget
Payment of Accounts Payable
In this example it is assumed that 50% of accounts payable
are paid in the current quarter with the remainder in the next
quarter, e.g.:
1Q Purchases = 25,200 * 50% = 12,600 in 1Q
25,200 Total – 12,600 in 1Q = 12,600 in 2Q
Assumption % paid in current Q =
Accounts Payable opening
1Q
2Q
3Q
4Q
Total Payments
Beginning Cash Balance
ADD: Receipts
Collection of Accounts Receivable
Sale of Securities
Total Receipts
Total Available Cash
LESS: Disbursements
Direct Materials
Direct Labor
Manufacturing Overhead: Cash
Selling & Admin Expenses: Cash
Purchase of Truck
Income Tax Expense
Total Disbursements
Excess (Deficiency) of Cash
Total Tax
$12,000 / 4
ACC 204 Chapter 9
12,600
14,600
23,200
27,200
Cash Budget
Balance Sheet
Financing
Borrowings
Repayments + $100 interest
Ending Cash Balance
10,600
12,600
1Q
38,000
2Q
25,500
50%
3Q
15,000
14,600
16,600
31,200
16,600
18,600
35,200
The Beginning Cash =
Ending Cash from
previous Q
4Q
19,400
168,000
2,000
170,000
208,000
198,000
198,000
223,500
228,000
228,000
243,000
258,000
258,000
277,400
23,200
62,000
53,300
41,000
31,200
82,000
59,300
45,000
35,200
92,000
62,300
47,000
3,000
182,500
25,500
27,200
72,000
56,300
43,000
10,000
3,000
211,500
12,000
3,000
220,500
22,500
3,000
239,500
37,900
25,500
3,000
15,000
3,100
19,400
37,900
AR Schedule
AP Schedule
DL Budget
Borrowing to maintain
minimum $15,000
Man. OH Budget
LESS
Depreciation
S & A Budget
LESS
Depreciation
Repay loan
+ interest
11
Capital Expenditure
Budget
Budgeted Balance Sheet
Cash Budget
Cash
Accounts Receivable
Inventory: Finished Goods
Inventory: Raw materials
PP&E
Less: Accumulated Depreciation
= Net PP&E
Total Assets
Accounts Payable
Common Stock
Retained Earnings: Beginning
+ Net Income
= Retained Earnings: Ending
Total Liabilities & Equity
AP Schedule
ACC 204 Chapter 9
Budgeted
Income
Statement
AR Schedule
$
37,900
108,000
44,000
4,080
192,000
48,000
144,000
$ 337,980
18,600
225,000
46,480
47,900
94,380
$ 337,980
4Q Prod. Budget Q
x Est. Unit Cost
4Q RM Budget Q
x Unit Cost
Accum. Depreciation
Beginning (given)
$ 28,800
+ Prod Depreciation
+ S&A Depreciation
Balance Sheet
12