1、Profit Planning,Chapter 9,Learning Objective 9-1,Understand why organizations budget and the processes they use to create budgets.,The Basic Framework of Budgeting,A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.
2、,The act of preparing a budget is called budgeting.The use of budgets to control an organizations activities is known as budgetary control.,Planning and Control,Planning involves developing objectives and preparing various budgets to achieve those objectives.,Control involves the steps taken by mana
3、gement to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal.,Advantages of Budgeting,Advantages,Responsibility Accounting,Managers should be held responsible for those items-and only those ite
4、ms-that they can actually control to a significant extent.,Choosing the Budget Period,Operating Budget,2011,2012,2013,2014,Operating budgets ordinarily cover a one-year periodcorresponding to a companys fiscal year.Many companies divide their annual budget into four quarters.,A continuous budget is
5、a12-month budget that rollsforward one month(or quarter)as the current month(or quarter)is completed.,Self-Imposed Budget,A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.,Advantages of Self-Imposed Budge
6、ts,Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management.Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.Motivation is generally higher when individuals participate
7、 in setting their own goals than when the goals are imposed from above.A manager who is not able to meet a budget imposed from above can claim that it was unrealistic.Self-imposed budgets eliminate this excuse.,Self-Imposed Budgets,Self-imposed budgets should be reviewed by higher levels of manageme
8、nt to prevent“budgetary slack.”Most companies issue broad guidelines in terms of overall profits or sales.Lower level managers are directed to prepare budgets that meet those targets.,Human Factors in Budgeting,The success of a budget program depends on three important factors:Top management must be
9、 enthusiastic and committed to the budget process.Top management must not use the budget to pressure employees or blame them when something goes wrong.Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.,The Budget Committee,A standing co
10、mmittee responsible for overall policy matters relating to the budget coordinating the preparation of the budget resolving disputes related to the budget approving the final budget,The Master Budget:An Overview,Production budget,Selling andadministrativebudget,Direct materialsbudget,Manufacturingove
11、rhead budget,Direct laborbudget,Cash Budget,Sales budget,Ending inventorybudget,Budgetedbalance sheet,Budgetedincomestatement,Learning Objective 9-2,Prepare a sales budget,including a schedule of expected cash collections.,Budgeting Example,Royal Company is preparing budgets for the quarter ending J
12、une 30th.Budgeted sales for the next five months are:April 20,000 unitsMay 50,000 unitsJune 30,000 unitsJuly 25,000 unitsAugust 15,000 units The selling price is$10 per unit.,The Sales Budget,The individual months of April,May,and June are summed to obtain the total budgeted sales in units and dolla
13、rs for the quarter ended June 30th,Expected Cash Collections,All sales are on account.Royals collection pattern is:70%collected in the month of sale,25%collected in the month following sale,5%uncollectible.In April,the March 31st accounts receivable balance of$30,000 will be collected in full.,Expec
14、ted Cash Collections,Expected Cash Collections,Expected Cash Collections,Quick Check,What will be the total cash collections for the quarter?a.$700,000b.$220,000c.$190,000d.$905,000,Expected Cash Collections,Learning Objective 9-3,Prepare a production budget.,The Production Budget,ProductionBudget,S
15、ales BudgetandExpectedCashCollections,Completed,The production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory.,The Production Budget,The management at Royal Company wants ending inventory to be equal to 20%of the following months budgeted sales in unit
16、s.On March 31st,4,000 units were on hand.Lets prepare the production budget.,The Production Budget,The Production Budget,Quick Check,What is the required production for May?a.56,000 unitsb.46,000 unitsc.62,000 unitsd.52,000 units,The Production Budget,The Production Budget,Learning Objective 9-4,Pre
17、pare a direct materials budget,including a schedule of expected cash disbursements for purchases of materials.,The Direct Materials Budget,At Royal Company,five pounds of material are required per unit of product.Management wants materials on hand at the end of each month equal to 10%of the followin
18、g months production.On March 31,13,000 pounds of material are on hand.Material cost is$0.40 per pound.Lets prepare the direct materials budget.,The Direct Materials Budget,The Direct Materials Budget,The Direct Materials Budget,Calculate the materials tobe purchased in May.,Quick Check,How much mate
19、rials should be purchased in May?a.221,500 poundsb.240,000 poundsc.230,000 poundsd.211,500 pounds,The Direct Materials Budget,The Direct Materials Budget,Expected Cash Disbursement for Materials,Royal pays$0.40 per pound for its materials.One-half of a months purchases is paid for in the month of pu
20、rchase;the other half is paid in the following month.The March 31 accounts payable balance is$12,000.Lets calculate expected cash disbursements.,Expected Cash Disbursement for Materials,Expected Cash Disbursement for Materials,Compute the expected cashdisbursements for materialsfor the quarter.,Quic
21、k Check,What are the total cash disbursements for the quarter?a.$185,000b.$68,000c.$56,000d.$201,400,Expected Cash Disbursement for Materials,Learning Objective 9-5,Prepare a direct labor budget.,The Direct Labor Budget,At Royal,each unit of product requires 0.05 hours(3 minutes)of direct labor.The
22、Company has a“no layoff”policy so all employees will be paid for 40 hours of work each week.For purposes of our illustration assume that Royal has a“no layoff”policy,workers are paid at the rate of$10 per hour regardless of the hours worked.For the next three months,the direct labor workforce will b
23、e paid for a minimum of 1,500 hours per month.Lets prepare the direct labor budget.,The Direct Labor Budget,The Direct Labor Budget,The Direct Labor Budget,The Direct Labor Budget,Quick Check,What would be the total direct labor cost for the quarter if the company follows its no lay-off policy,but p
24、ays$15(time-and-a-half)for every hour worked in excess of 1,500 hours in a month?a.$79,500b.$64,500c.$61,000d.$57,000,Learning Objective 9-6,Prepare a manufacturing overhead budget.,Manufacturing Overhead Budget,At Royal,manufacturing overhead is applied to units of product on the basis of direct la
25、bor hours.The variable manufacturing overhead rate is$20 per direct labor hour.Fixed manufacturing overhead is$50,000 per month,which includes$20,000 of noncash costs(primarily depreciation of plant assets).Lets prepare the manufacturing overhead budget.,Manufacturing Overhead Budget,Manufacturing O
26、verhead Budget,Manufacturing Overhead Budget,Ending Finished Goods Inventory Budget,Direct materialsbudget and information.,Ending Finished Goods Inventory Budget,Direct labor budget.,Ending Finished Goods Inventory Budget,Ending Finished Goods Inventory Budget,Production Budget.,Learning Objective
27、9-7,Prepare a selling and administrative expense budget.,Selling and Administrative Expense Budget,At Royal,the selling and administrative expense budget is divided into variable and fixed components.The variable selling and administrative expenses are$0.50 per unit sold.Fixed selling and administra
28、tive expenses are$70,000 per month.The fixed selling and administrative expenses include$10,000 in costs primarily depreciation that are not cash outflows of the current month.Lets prepare the companys selling and administrative expense budget.,Selling and Administrative Expense Budget,Calculate the
29、 selling and administrativecash expenses for the quarter.,Quick Check,What are the total cash disbursements for selling and administrative expenses for the quarter?a.$180,000b.$230,000c.$110,000d.$70,000,Selling Administrative Expense Budget,Learning Objective 9-8,Prepare a cash budget.,Format of th
30、e Cash Budget,The cash budget is divided into four sections:Cash receipts section lists all cash inflows excluding cash received from financing;Cash disbursements section consists of all cash payments excluding repayments of principal and interest;Cash excess or deficiency section determines if the
31、company will need to borrow money or if it will be able to repay funds previously borrowed;andFinancing section details the borrowings and repayments projected to take place during the budget period.,The Cash Budget,Assume the following information for Royal:Maintains a 16%open line of credit for$75
32、,000 Maintains a minimum cash balance of$30,000 Borrows on the first day of the month and repays loans on the last day of the month Pays a cash dividend of$49,000 in April Purchases$143,700 of equipment in May and$48,300 in June(both purchases paid in cash)Has an April 1 cash balance of$40,000,The C
33、ash Budget,The Cash Budget,The Cash Budget,The Cash Budget,Ending cash balance for Aprilis the beginning May balance.,The Cash Budget,Quick Check,What is the excess(deficiency)of cash available over disbursements for June?a.$85,000b.$(10,000)c.$75,000d.$95,000,The Cash Budget,The Budgeted Income Statement,Cash Budget,BudgetedIncomeStatement,Completed,With interest expense from the cash budget,Roya
