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Profit Planning
Learning Objective 1
Planning
Planning Control
Control
involves
involves involves
involves the
the steps
steps
developing
developing taken
taken by
by
objectives
objectives and
and management
management that that
preparing
preparing various
various attempt
attempt to
to ensure
ensure
budgets
budgets to
to achieve
achieve the
the objectives
objectives are
are
these
these objectives.
objectives. attained.
attained.
7-5
Advantages of Budgeting
Define goals
and objectives
Communicate Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
7-6
Responsibility Accounting
Operating Budget
Self-Imposed Budget
M id d le M id d le
M anagem ent M anagem ent
S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r
Self-Imposed Budgets
Self-imposed
budgets should be Managers should
reviewed by higher watch our for
levels of budgetary slack.
management.
7-11
The
The success
success of
of budgeting
budgeting depends
depends uponupon three
three
important
important factors:
factors:
1. Top
1. Top management
management must must be
be enthusiastic
enthusiastic and
and
committed
committed toto the
the budget
budget process.
process.
2. Top
2. Top management
management must must not
not use
use the
the budget
budget toto
pressure
pressure employees
employees or or blame
blame them
them when
when
something
something goes
goes wrong.
wrong.
3. Highly
3. Highly achievable
achievable budget
budget targets
targets are
are usually
usually
preferred
preferred when
when managers
managers areare rewarded
rewarded based
based
on
on meeting
meeting budget
budget targets.
targets.
7-12
A
A standing
standing committee
committee responsible
responsible for
for
overall
overall policy
policy matters
matters relating
relating to
to the
the budget
budget
coordinating
coordinating the
the preparation
preparation of
of the
the budget
budget
7-13
Budgeted Budgeted
income balance
statement sheet
7-14
Learning Objective 2
Budgeting Example
Royal
Royal Company
Company is
is preparing
preparing budgets
budgets for
for the
the
quarter
quarter ending
ending June
June 30.30.
Budgeted
Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
April
April 20,000
20,000 units
units
May
May 50,000
50,000 units
units
June
June 30,000
30,000 units
units
July
July 25,000
25,000 units
units
August
August 15,000
15,000 units.
units.
The
The selling
selling price
price is
is $10
$10 per
per unit.
unit.
7-16
All
All sales
sales are
are onon account.
account.
Royals
Royals collection
collection pattern
pattern is:
is:
70%
70% collected
collected inin the
the month
month of of sale,
sale,
25%
25% collected
collected inin the
the month
month following
following sale,
sale,
5%
5% uncollectible.
uncollectible.
The
The March
March 3131 accounts
accounts receivable
receivable balance
balance of
of
$30,000
$30,000 will
will be
be collected
collected in
in full.
full.
7-18
Quick Check
Quick Check
Sales Production
Budget Budget
ed
and l et
p
Expected
o m
C
Cash
Collections
Learning Objective 3
The
The management
management at
at Royal
Royal Company
Company wants
wants
ending
ending inventory
inventory to
to be
be equal
equal to
to 20%
20% ofof the
the
following
following months
months budgeted
budgeted sales
sales in
in units.
units.
On
On March
March 31,
31, 4,000
4,000 units
units were
were on
on hand.
hand.
Lets
Lets prepare
prepare the
the production
production budget.
budget.
7-27
March 31
ending inventory
7-29
Quick Check
What
What is
is the
the required
required production
production for
for
May?
May?
a.
a. 56,000
56,000 units
units
b.
b. 46,000
46,000 units
units
c.
c. 62,000
62,000 units
units
d.
d. 52,000
52,000 units
units
7-30
Quick Check
Learning Objective 4
At
At Royal
Royal Company,
Company, five
five pounds
pounds of
of material
material
are
are required
required per
per unit
unit of
of product.
product.
Management
Management wantswants materials
materials onon hand
hand atat the
the
end
end ofof each
each month
month equal
equal toto 10%
10% ofof the
the
following
following months
months production.
production.
On
On March
March 31,
31, 13,000
13,000 pounds
pounds of of material
material are
are
on
on hand.
hand. Material
Material cost
cost is
is $0.40
$0.40 per
per pound.
pound.
Lets
Lets prepare
prepare the
the direct
direct materials
materials budget.
budget.
7-35
March 31 inventory
Quick Check
How
How much
much materials
materials should
should be
be
purchased
purchased inin May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
7-39
Quick Check
How
How much
much materials
materials should
should be
be
purchased
purchased inin May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
7-40
Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its materials.
materials.
One-half
One-half of
of aa months
months purchases
purchases is
is paid
paid for
for in
in
the
the month
month ofof purchase;
purchase; the
the other
other half
half is
is paid
paid in
in
the
the following
following month.
month.
The
The March
March 3131 accounts
accounts payable
payable balance
balance isis
$12,000.
$12,000.
Lets
Lets calculate
calculate expected
expected cash
cash disbursements.
disbursements.
7-43
Expected Cash Disbursement for
Materials
7-44
Expected Cash Disbursement for
Materials
Quick Check
What
What areare the
the total
total cash
cash disbursements
disbursements
for
for the
the quarter?
quarter?
a.
a. $185,000
$185,000
b.
b. $$ 68,000
68,000
c.
c. $$ 56,000
56,000
d.
d. $201,400
$201,400
7-46
Quick Check
Learning Objective 5
At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours (3
(3
minutes)
minutes) ofof direct
direct labor.
labor.
The
The Company
Company has has aa no
no layoff
layoff policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours of of work
work each
each week.
week.
In
In exchange
exchange for for the
the no
no layoff
layoff policy,
policy, workers
workers agree
agree to
to
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
For the
the next
next three
three months,
months, thethe direct
direct labor
labor workforce
workforce
will
will be
be paid
paid for
for aa minimum
minimum of of 1,500
1,500 hours
hours perper month.
month.
Lets
Lets prepare
prepare the the direct
direct labor
labor budget.
budget.
7-50
Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
7-53
Quick Check
What
What would
would be be the
the total
total direct
direct labor
labor cost
cost for for
the
the quarter
quarter ifif the
the company
company follows
follows its
its no
no lay-off
lay-off
policy,
policy, but
but pays
pays $15 $15 (time-and-a-half)
(time-and-a-half) forfor every
every
hour
hour worked
worked in in excess
excess ofof 1,500
1,500 hours
hours inin aa
month?
month?
a.
a. $79,500
$79,500
b.
b. $64,500
$64,500
c.
c. $61,000
$61,000
d.
d. $57,000
$57,000
7-55
Quick Check
d. $57,000
7-56
Learning Objective 6
Prepare a manufacturing
overhead budget.
7-57
At
At Royal
Royal manufacturing
manufacturing overhead
overhead is
is applied
applied to
to
units
units of
of product
product on
on the
the basis
basis of
of direct
direct labor
labor hours.
hours.
The
The variable
variable manufacturing
manufacturing overhead
overhead raterate is
is $20
$20
per
per direct
direct labor
labor hour.
hour.
Fixed
Fixed manufacturing
manufacturing overhead
overhead isis $50,000
$50,000 perper
month
month and
and includes
includes $20,000
$20,000 of
of noncash
noncash costs
costs
(primarily
(primarily depreciation
depreciation of
of plant
plant assets).
assets).
Lets
Lets prepare
prepare the
the manufacturing
manufacturing overhead
overhead budget.
budget.
7-58
Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
7-61
Ending Finished Goods Inventory
Budget
Direct materials
budget and information
7-62
Ending Finished Goods Inventory
Budget
Production Budget
7-65
Learning Objective 7
Lets
Lets prepare
prepare the
the companys
companys selling
selling and
and
administrative
administrative expense
expense budget.
budget.
7-67
Selling and Administrative Expense
Budget
Quick Check
What
What are
are the
the total
total cash
cash disbursements
disbursements for
for
selling
selling and
and administrative
administrative expenses
expenses for
for the
the
quarter?
quarter?
a.
a. $180,000
$180,000
b.
b. $230,000
$230,000
c.
c. $110,000
$110,000
d.
d. $$ 70,000
70,000
7-69
Quick Check
Learning Objective 8
Royal:
Royal:
Maintains
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
Borrows
Borrows onon the
the first
first day
day ofof the
the month
month andand
repays
repays loans
loans onon the
the last
last day
day of
of the
the month
month
Pays
Pays aa cash
cash dividend
dividend of of $49,000
$49,000 inin April
April
Purchases
Purchases $143,700
$143,700 of of equipment
equipment in in May
May and
and
$48,300
$48,300 inin June
June paid
paid in
in cash
cash
Has
Has an
an April
April 11 cash
cash balance
balance of of $40,000
$40,000
7-74
Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections
Collections
7-75
Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements
Disbursements
Direct Labor
Budget
Manufacturing
Overhead Budget
Quick Check
Quick Check
Learning Objective 9
Prepare a budgeted
income statement.
7-83
Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C
Sales
Sales Budget
Budget
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending
Ending Finished
Finished
Sales (100,000 units @ $10) $ 1,000,000 Goods
Cost of goods sold (100,000 @ $4.99) 499,000
Goods Inventory
Inventory
Gross margin 501,000
Selling and administrative expenses 260,000 Selling
Selling and
and
Operating income 241,000 Administrative
Administrative
Interest expense 2,000
Expense
Expense Budget
Budget
Net income $ 239,000
Cash
Cash Budget
Budget
7-85
Learning Objective 10
Prepare a budgeted
balance sheet.
7-86
Royal
Royal reported
reported the
the following
following account
account balances
balances
prior
prior to
to preparing
preparing its
its budgeted
budgeted financial
financial
statements:
statements:
Land
Land -- $50,000
$50,000
Common
Common stock
stock -- $200,000
$200,000
Retained
Retained earnings
earnings -- $146,150
$146,150
Equipment
Equipment -- $175,000
$175,000
7-87
Royal Company
Budgeted Balance Sheet 25%
25% of
of June
June
June 30 sales
sales of
of
Current assets $300,000
$300,000
Cash $ 43,000
Accounts receivable 75,000 11,500
11,500 lbs.
lbs.
Raw materials inventory 4,600 at
at $0.40/lb.
$0.40/lb.
Finished goods inventory 24,950
Total current assets 147,550 5,000
5,000 units
units
Property and equipment at
at $4.99
$4.99 each
each
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
50%
50% of of June
June
Accounts payable $ 28,400
purchases
purchases
Common stock 200,000
of
of $56,800
$56,800
Retained earnings 336,150
Total liabilities and equities $ 564,550
7-88
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable Beginning balance
75,000 $146,150
Add: net income 239,000
Raw materials inventory 4,600
Deduct: dividends (49,000)
Finished goods inventory 24,950
Ending balance $336,150
Total current assets 147,550
Property and equipment
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
End of Chapter 7