ACCTG 225 MODULE 2

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit. What are the budgeted sales for July?

$70/unit * 10,000 units = $700,000

Variances characteristics:

Each variance, be an activity variance or a revenue/spending variance, is classified according to the impact on NOI. Favorable variances increase NOI. For example, revenues are higher than expected or costs are lower than expected. Unfavorable variances decreases NOI.

Self-Imposed Budget:

Process by which managers individually prepare their own budgets, which are reviewed by higher-level managers.

Control:

Process of both collecting information to ensure plans are being followed and changing plans when unexpected situations arise.

Participative Budget:

Process of creating budgets whereby managers ITERATIVELY PRESENT budgets to their managers.

Segment break-even:

Rev x CMR - traceable FE = Profit of 0

Traditional FA Income Statement Equation for NOI:

Revenue (Variable COGS) (Fixed COGS) = Gross Margin (Fixed Selling & Admin Costs) (Variable Selling & Admin Costs) = NOI

Contribution Margin Income Statement Equation for NOI:

Revenue (Variable Selling & Admin) (Variable COGS) = CM (Fixed Selling & Admin) (Fixed MOH) = NOI For CM I/S: Fixed MOH are never added to inventory; it is always expensed as incurred.

What NOI would appear in Larry's flexible budget for May?

Revenue 175,000 Salaries and wages (88,500) Travel expenses (21,000) Other expenses (36,000) NOI 29,500

Calculate Materials QUANTITY Variance:

SP * (Actual Quantity USED IN PRODUCTION - SQ)

1. What direct materials cost would be included in the company's planning budget for March?

SP * Planned Quantity Planned quantity = number of pounds used to make one husky toy * planned number of huskies

2. What direct materials cost would be included in the company's flexible budget for March?

SP * Standard Quantity Standard quantity = number of pounds used to make a husky toy * actual number of huskies sold

4. What is the materials quantity variance for March?

SQ x SP SQ = number of units actually sold x 5 pounds per unit =150,000 pounds SQ x SP =150,000 x SP of $8.00 =$1,200,000 materials quantity variance =1,280,000-1,200,000 =80,000 U

Calculate Labor Efficiency Variance:

SR * (Actual Hours - SH)

Calculate Production budget:

Units needed to sell this period + units needed in end. inventory = total units needed - units in beg. inventory = units to produce/buy this period

What amount of employee salaries and wages would be included in Larry's flexible budget for May?

Variable cost employee salary and wages per customer * actual activity + fixed cost of salary and wages =$1100/customers * 35 customers + $50,000 = $88,500

What amount of revenue would be included on Larry's flexible budget for May?

Variable revenue per customer * Actual activity = Flexible budget amount So: $5000/customer * 35 customers = $175,000

When preparing the planning budget he estimated that his company would serve 30 customers per month; however, during May the company actually served 35 customers. What amount of revenue would be included on Larry's PLANNING budget for May?

Variable revenue per customer * Planned activity = Planning budget amount So: $5000/customer * 30 customers = $150,000

What amount of travel expenses would be included in Larry's flexible budget for May?

Variable travel expenses per customer * actual activity = Flexible budget amount $600/customer * 35 customers = $21,000

The concept of variances:

Variances arise for reasons relating to activity levels (activity variances) and reasons not relating to activity levels (revenue and spending variances). Spending variances have two parts: -Price (or rate) variances -Quantity (or efficiency) variances

Will absorption costing NOI = variable costing NOI in 2012?

Yes.

S

cash disbursements budgeted sales

A

cash receipts financing required production

What is a planning budget?

is a budget developed at the beginning of a period that anticipates costs and revenues for a particular level of output. The planning budget is created with available information on likely: -product demand -variable costs -fixed costs The planning budget is valid for only the ESTIMATED level of activity-a planning budget based on estimations.

Activity/Revenue/Spending Variances:

differences between budgeted and actual values Activity variance: the difference between the PLANNING budget and the FLEXIBLE budget Revenue variance: actual revenue - expected revenue given actual quantity sold Spending variance: the difference between an actual cost and the cost from the flexible budget

The principal difference between variable costing and absorption costing:

whether fixed MOH should be included in product costs

*Flexible Budgeting: Differences (variances) between budgeted numbers and actual numbers arise from two general categories:

-Reasons relating to differences between budgeted and actual sales volume (activity variance) -Reasons NOT relating to differences between budgeted and actual sales volume (e.g., changes in the cost of direct materials per unit) (revenue or spending variances)

The concepts of Absorption Costing vs. Variable Costing:

1. Fixed MOH costs are ABSORBED into the inventory accounts. Fixed MOH goes to absorption costing on to the balance sheet of WIP inventory. 2. Used for financial accounting. whereas, 1. Fixed MOH costs are EXCLUDED from the inventory accounts. Fixed MOH goes to variable costing on the income statement of Period Expenses. 2. Only variable costs related to production are included in inventory. 3. Used for managerial decision making.

Benefits of participative budgeting:

1. Individuals at all organizational levels are recognized as being part of a team; this results in greater support for the organization. 2. The budget estimates are prepared by those in directly involved in activities. 3. Managers are held responsible for reaching their goals and cannot easily shift responsibility by blaming unrealistic goals set by others.

What are the two functions of budgeting?

1. PLANNING involves developing goals and preparing various budgets to achieve those goals. 2. CONTROL involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

1. standard quantity per unit 2. standard price per unit 3. standard hours per unit 4. standard rate per hour

1. The standard QUANTITY per unit defines the amount of direct materials that should be used for each unit of finished product, including an allowance for normal inefficiencies, such as scrap and spoilage. 2. The standard PRICE per unit defines the price that should be paid for each unit of direct materials and it should reflect the final, delivered cost of those materials. 3. The standard HOURS per unit defines the amount of direct labor-hours that should be used to produce one unit of finished goods. 4. The standard RATE per hour defines the company's expected direct labor wage rate per hour, including employment taxes and fringe benefits.

Comparative NOI effects:

1. Units produced = Units sold No change in inventories AC NOI = VC NOI 2. Units produced > Units sold Inventories increase When a firm produces MORE than it sells, some F.MOH costs will be DEFERRED under absorption costing. Thus, AC NOI > VC NOI. 3. Units produced < Units sold Inventories decrease When a firm produces LESS than it sells, some previously deferred F.MOH costs will be RELEASED. Thus, AC < VC NOI. *NOI is higher under absorption costing because F.MOH cost is deferred in inventory under absorption as inventories increase. *NOI is lower under absorption costing because F.MOH cost is released from inventory under absorption as inventories decrease.

Merchandise Purchases Budget:

A comprehensive quantitative plan of FUTURE PURCHASES from suppliers needed to meet EXPECTED PRODUCTION and MINIMUM inventory levels.

Responsibility Accounting:

A corporate practice in which managers are accountable for the DIFFERENCES between BUDGETED and ACTUAL items they control, such as COSTS.

Ellie Goulding makes lights. Her beginning inventories were 0 lights, 170 lights, and 170 lights for 2011, 2012, and 2013, respectively. Her ending inventory was 100 lights in 2013. Ellie reported variable costing net operating income of $1,100,500, $1,000,000, and $998,800 for 2011, 2012, and 2013, respectively, and her fixed MOH per light was a constant $600 for all three years. For 2011, will Ellie's absorption costing NOI be higher or lower than VC NOI? By how much?

170 * $600 =102,000

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit. c. The ending finished goods inventory equals 20% of the following month's unit sales. d. The ending raw materials inventory equals 10% of the following month's raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.00 per pound. What is the estimated cost of raw materials purchases for July?

52,900 pounds (from last question) * $2/pound = $105,800

Flexible budget:

A budget prepared at the end of a period that adjusts the planning budget to reflect the actual quantity of output -takes differences between BUDGETED and ACTUAL VOLUME into account.

What is budgeting?

A detailed PLAN for the future that is usually expressed in formal QUANTITATIVE terms. Budgets: -COMMUNICATE management's plans throughout the organization. -force managers to THINK about and PLAN for the future-in the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. -the Budgeting Process provides a means of ALLOCATING RESOURCES to those parts of the organization where they can be used most effectively-can UNCOVER POTENTIAL BOTTLENECKS before they occur. -COORDINATE the activities of the entire organization by INTEGRATING the plans of its various parts. -helps to ensure that everyone in the organization is pulling in the same direction. -define goals and objectives that can serve as BENCHMARKS for evaluating subsequent performance.

Traceable fixed cost:

A fixed cost incurred because of the existence of a segment.

Common fixed cost:

A fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment.

Continuous budget:

A rolling one-year budget that starts in the CURRENT month and ENDS 12 MONTHS FROM the current month. Also known as Perpetual budget.

Segment margin:

A segment's contribution margin minus the segment's traceable fixed costs.

What is the budgeted Sales for May in $? Each water bottle sells for $0.75. The company's policy is to produce enough water bottles to have 40% of the following month's budgeted sales on hand plus an additional 10,000 for safety. Desired Ending Inventory for April is 450,000.

April's ending inventory = 0.40 of May's budgeted sales + 10,000 450,000 = 0.40 X + 10,000 X = 1,100,000 water bottles being May's budgeted sales in $ = 1,100,000 * 0.75 = $825,000

Variable overhead efficiency variance:

AH * SR-SH (actual output) *SR

3. What is the materials price variance for March? Direct materials: 5 pounds at $8.00 per pound $40.00 The planning budget for March was based on producing and selling 25,000 units. However, during March the company actually produced and sold 30,000 units and incurred the following three costs: (1) Purchased 160,000 pounds of raw materials at a cost of $7.50 per pound. All of this material was used in production. (2) Direct laborers worked 55,000 hours at a rate of $15.00 per hour. (3) Total variable manufacturing overhead for the month was $280,500.

AQ x AP 160,000 lbs x $7.50 per lb =$1,200,000 AQ x SP 160,000 lbs x $8.00 per lb =$1,280,000 Materials Price Variance =$80,000 F

Three types of variances:

Activity Revenue, and Spending

Calculate Labor Rate Variance:

Actual Hours * (AR - SR)

Calculate Materials PRICE Variance:

Actual Quantity PURCHASED * (AP - SP)

What is a Segment?

Any part or activity of an organization about which managers seek cost, revenue, or profit data. In practice, companies often define segments in terms of (1) product or services, or (2) geographical area.

Traditional FA Income Statement vs. Contribution Margin Income Statement:

Because of differences in how fixed MOH is expensed, these are not necessarily equal to each other. Traditional I/S use ABSORPTION COSTING CM I/S use VARIABLE COSTING

Making Budgets:

Budgets involve a beginning balance, outflows, inflows, and an ending balance. B + A - S = E

Break-even in $:

CMR = CM/Sales (traceable) Fixed Expenses/ CMR

Fixed expense consists of traceable and common fixed expenses. Company break-even in $:

Company break-even in $ = (Traceable fixed expenses + Common fixed expenses)/ Company CMR

Calculate Unit Product Cost under Variable Costing:

DM + DL + V.MOH

Calculate Unit Product Cost under Absorption Costing:

DM + DL + V.MOH + F.MOH/#units produced

Was NOI higher or lower under absorption costing and by how much?

Difference between NOI = (units produced - units sold) *FMOH/units produced

Activity variance:

Difference between a given cost, revenue, or profit in a planning budget and the flexible budget.

What amount of other expenses would be included in Larry's flexible budget for May?

The only other expenses are fixed costs, so the amount in the flexible budget is $36,000.

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. c. The ending finished goods inventory equals 20% of the following month's unit sales. According to the production budget, how many units should be produced in July? *We use the sales budget, along with the ending inventory budget, to compute the production budget.

July Finished Goods (in units): B+A=S+E B + A = 10,000 + E because budgeted sales are 10,000 (20% * 10,000) + A = 10,000 + (20% * 12,000) because beginning inventory is 20% of budgeted sales for the month, and ending inventory is 20% of budgeted sales for next month 2,000 + A = 10,000 + 2,400 A = 10,400 is required production. S = sales budget B = beginning inventory of the budgeted sales for the month E = ending inventory of budgeted sales for next month ?A = required production

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit. What is the estimated accounts payable balance for raw materials at the end of July?

July RM purchases paid for in July = 105,800 * 30% = $31,740 Unpaid portion is therefore: $105,800 - 31,740 = $74,060

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. c. The ending finished goods inventory equals 20% of the following month's unit sales. d. The ending raw materials inventory equals 10% of the following month's raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.00 per pound. If 61,000 pounds of raw materials are needed to meet production in August, how many pounds of raw materials should be purchased in July?

July Raw Materials (in pounds) B+A=S+E Beginning RM + RM Purchased = RM Used + Ending RM (10,400 * 5 * 10%) + A = (10,400 * 5) + (61,000 * 10%) A = 52,900 pounds *Raw material purchases are based on the ending inventory budget and the production budget.

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit. b. Forty percent of credit sales are collected in the month of the sale and 60% in the following month. What is the accounts receivable balance at the end of July?

July sales NOT collected in July: 10,000 units * $70 * 60% =$420,000 Uncollected sales are in accounts receivable.

a. The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit. b. Forty percent of credit sales are collected in the month of the sale and 60% in the following month. c. The ending finished goods inventory equals 20% of the following month's unit sales. d. The ending raw materials inventory equals 10% of the following month's raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.00 per pound. e. Thirty percent of raw materials purchases are paid for in the month of purchase and 70% in the following month. If the cost of raw material purchases in June in $88,880, what are July's estimated cash disbursements for raw material purchases?

June RM purchases paid for in July = 88,880 * 70% = $62,216 July RM purchases paid for in July = 105,800 * 30% = $31,740 Total cash disbursements = $93,956 *Raw material purchases affect the cash budget.

b. All sales are on credit. Forty percent of credit sales are collected in the month of the sale and 60% in the following month. What are the expected cash collections for July?

June sales collected in July: 8400units * $70 * 60% =$352,800 July sales collected in July: 10,000 units * $70 * 40% =$280,000 Total = $632,800

If Labor rate variance was $3,400 unfavorable, what was the standard hourly labor rate?

LRV = AH (AR - SR)

Theo's plans to make 3,300 bars, but actually makes 3,400 chocolate bars. Theo's direct laborers work 350 hours. The actual labor rate is $17.5 per hour, the standard rate is $15per hour, and the standard hours are 0.1 per bar. What is Theo's labor efficiency variance?

Labor Efficiency Variance = $15 * (350 - (0.1 * 3400) ) =$150 U because actual hours are higher than standard

Theo's plans to make 3,300 bars, but actually makes 3,400 chocolate bars. Theo's direct laborers work 350 hours. The actual labor rate is $17.5 per hour, the standard rate is $15per hour, and the standard hours are 0.1 per bar. What is Theo's labor rate variance?

Labor Rate Variance = 350 * ($17.5 - $15) = $875 U

MPV:

MPV = Actual quantity purchased * (Actual price - Standard price) MPV = AQpurchased * (AP - SP)

MQV:

MQV = Standard price * (Actual quantity used - Standard quantity for actual output) MQV = SP * (AQused - SQ)

Theo's plans to make 3,300 bars, but actually makes 3,400 chocolate bars. Theo's purchases 3000 pounds of chocolate and uses 3500 pounds in production. The actual price of chocolate is $1.1 per pound, the standard price is $1.2 per pound, and the standard quantity is 1.0 pounds per bar. What is Theo's materials price variance?

Materials Price Variance = 3000 pounds ∗ ($1.1 - $1.2) = 300 F because paying less than standard

Theo's plans to make 3,300 bars, but actually makes 3,400 chocolate bars. Theo's purchases 3000 pounds of chocolate and uses 3500 pounds in production. The actual price of chocolate is $1.1 per pound, the standard price is $1.2 per pound, and the standard quantity is 1.0 pounds per bar. What is Theo's materials quantity variance?

Materials Quantity Variance = $1.2 * (3500 - 1 * 3400) =$120 U

The primary goals of management at traditional for-profit corporations:

Maximize firm value Maximize cash flows in the current period and future periods

Planning:

The process of creating business objectives and determining how to best meet those objectives.

*Master Budgeting* the interrelationships ***know how to draw the entire diagram for June 2 Final

Sales budget: a comprehensive quantitative plan of future sales in units and in $. Production budget: a comprehensive quantitative plan of future production needed to meet expected customer demand and minimum finished goods and inventory levels. Ending (Finished Goods) Inventory budget: a comprehensive quantitative plan of future unsold finished goods. Direct Materials budget: a comprehensive quantitative plan of future direct materials needed to meet expected production. Direct Labor budget: a comprehensive quantitative plan of future direct labor needed to meet expected production. Manufacturing overhead budget: a comprehensive quantitative plan of future manufacturing overhead costs needed to meet expected production. Cash budget: a comprehensive quantitative plan for future cash inflows and outflows. -We use the sales budget to compute cash collections for the cash budget Selling and Admin expense budget: a comprehensive quantitative plan of future selling and admin expenses needed to meet expected customer demand. Master budget: a compilation of all budgets, which starts with budgeted sales.

At segment level: Segment break-even in $:

Segment break-even in $ = Segment traceable fixed expenses/ Segment CMR

What amount appears for direct materials in Theo's flexible budget?

Standard cost * actual activity $1.50 * 1100 bars =$1,650

Theo Chocolate makes milk chocolate bars. Theo's standard quantity is 3.0 ounces per bar, and Theo's standard price is $0.5 per ounce. In February, Theo expects to sell 1000 bars and has actual sales of 1100 bars. What amount appears for direct materials in Theo's planning budget?

Standard cost * planned activity =3.0($0.50) =$1.50 $1.50 * 1000 bars =$1,500

When fixed MOH is released during the period, this implies what?

The company sold more units than they produced during the period. Produced<Sold