Ch. 8 - Master Budgeting - ACCT 2302
Total manufacturing overhead costs formula
Budgeted DLH * V. man. overhead rate ------------------------------- = V. man. overhead costs + F. man. overhead costs ------------------------------- = Total man. overhead costs
Total Needs
Budgeted Sales + Desired Ending Inventory
Desired Ending Inventory
Budgeted sales of next month * Desired ending inventory %
ending finished goods inventory budget - final
Production budget (ending inventory in units = 5,000) Budgeted finished goods inventory: Ending inventory in units = 5,000 *Unit Product Cost: $4.99 =Ending finished goods inventory: $24,950
ending finished goods inventory budget - direct labor
Production cost per unit: direct labor Quantity: 0.05 hrs *Cost: $10.00 =Total: $0.50
ending finished goods inventory budget - direct materials
Production cost per unit: direct materials Quantity: 5 lbs *Cost: $0.40 =Total: $2.00
The Direct Labor Budget - Direct Labor Costs
Total Direct Labor Costs = Labor Hours Required * Hourly Wage Rate - April: 1,300 * $10 = $13,000 - May: 2,300 * $10 = $23,000 - June: 1,450 * $10 = $14,500 - Quarter: 5,050 * $10 = $50,500
Cost per Direct Labor Hour Formula
Total Man. Overhead for quarter / Total labor hours required
Materials to be Purchased
Total Needed - Beginning Inventory
Required Production
Total Needs - Beginning Inventory
Manufacturing Overhead Budget - Noncash costs (depreciation)
Total man. overhead costs - Noncash costs -------------------------------------------- = Cash disbursement for man. overhead - April: $76,000 - $20,000 = $56,000 - May: $96,000 - $20,000 = $76,000 - June: $79,000 - $20,000 = $59,000 - Quarter: $251,000 - $60,000 = $191,000 Depreciation is a noncash charge: less noncash costs
The Direct Labor Budget - Formula
Units of Production * Direct Labor Time per Unit ------------------------------- = Labor Hours Required * Hourly Wage Rate ------------------------------- = Total Direct Labor Costs
Planning
involves developing objectives and preparing various budgets to achieve those objectives
Control
involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained an that all parts of the organization are working together toward that goal.
Operating Budget
ordinarily cover a one-year period corresponding to a company's fiscal year. Many companies divide their annual budget into four quarters.
Budgeting
the act of preparing a budget
budgetary control
the use of budgets to control an organization's activities
Seeing the Big Picture - Part 1
to help you see the "big picture" keep in mind that the 10 schedules in the master budget are designed to answer the 10 questions shown on the next two screens.
Production Budget Formula
+ Budgeted Sales Units + Desired Ending Inventory ------------------------------ = Total Needs - Beginning Inventory ------------------------------ = Required Production
expected cash disbursement for materials - calculations
- 140,000 lbs * $0.40/lb = $56,000
The Direct Materials Budget
- 5 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 following month's production - on march 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound - let's prepare the direct materials budget
Manufacturing Overhead Budget - Cost per Direct Labor Hour
- April: 1,300 * $20 = $26,000 - May: 2,300 * $20 = $46,000 - June: 1,450 * $20 = $29,000 - Quarter: 5,050 * $20 = $101,000 - April: $26,000 + $50,000 = $76,000 - May: $46,000 + $50,000 = $96,000 - June: $29,000 + $50,000 = $79,000 - Quarter: $101,000 + $150,000 = $251,000 $251,000 / 5,050 = $49.70 per hour
The Direct Materials Budget - Production Needs
- April: 26,000 * 5 = 130,000 - May: 46,000 * 5 = 230,000 - June: 29,000 * 5 = 145,000 - Quarter: 101,000 * 5 = 505,000
The Direct Labor Budget
- Each unit of product requires 0.05 hours (3 minutes) of direct labor. The labor can be unskilled because the production process is relatively simple and formal training is not required. - Royal pays its workers at a rate of $10 per hour - Let's prepare the direct labor budget
expected cash disbursement for materials
- Royal pays $0.40 per pound for its materials - one-half of the month's purchases is paid for in the month of the purchase; the other half is paid in the following month - the march 31 accounts payable balance is $12,000 - let's calculate the expected cash disbursements
The Production Budget - Detail
- The management at Royal Company wants ending inventory to be equal to 20% of the following month's budgeted sales in units - On March 31st, 4,000 units were on hand - let's prepare the production budget - if Royal was a merchandising company, it would prepare a merchandising production budget instead of a production budget.
Manufacturing Overhead Budget
- at Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours - the variable manufacturing overhead rate is $20 per direct labor hour - fixed manufacturing overhead $50,000 per month which includes $20,000 on noncash costs (primarily depreciation of plant assets) - lets prepare the Manufacturing Overhead Budget
Self-imposed budgets - management review
- self-imposed budgets should be reviewed by higher levels of management to avoid "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.
Expected cash collections
1. All sales are on account 2. Royal's collection pattern is: - 70% collected in the month of sale - 30% collected in the month following the sale 3. In April, the March 31st accounts receivable balance of $30,000 will be collected in full in April
Advantages of Budgeting
1. Define goals and objectives 2. Think about and plan for the future 3. Means of allocating resources 4. Uncover potential bottlenecks 5. Coordinate activities 6. Communicate plans
Seeing the Big Picture - Details 1-10
1. How much sales revenue will we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing costs will we incur? 5. How much cash will we pay to our suppliers and direct laborers, and how much cash will we pay for manufacturing overhead resources? 6. What is the total costs that will be transferred from finished goods inventory to cost of goods sold? 7. How much selling and administrative expense will we incur and how much cash will we pay related to those expenses. 8. How much money will be borrow or repay to lenders - including interest? 9. How much operating income will we earn? 10. What will our budget sheet look like at the end of the period?
Advantages of self-imposed budgets
1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. 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.
Budgeting Example
1. Royal Company is preparing a budget for the quarter ending June 30th 2. Budgeted sales for the next 5 months are: - April: 20,000 units - May: 50,000 units - June: 30,000 units - July: 25,000 units - August: 15,000 units 3. The selling price is $10 per unit
Human Factors in Budgeting The success of a budget program depends on three important factors:
1. Top management must be enthusiastic and committed to the budget process 2. Top management must not use the budget to pressure employees or blame them when something goes wrong 3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets
The sales budget requires three estimates/assumptions as follows:
1. What are the budgeted unit sales? 2. What is the budgeted selling price per unit? 3. What percentage of accounts receivable will be collected in the current and subsequent periods?
The Production Budget
1. sales budget and expected cash collections (completed) - Production budget 2. Production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory
Responsibility Accounting
A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which they can exert significant control. Enables organizations to act quickly to deviations from their plan and learn from feedback.
Expected cash collections - calculations for April
Accounts Receivable 6/30 = 30% * $300,000 = $90,000
expected cash disbursement for materials - ending accounts payable balance
Accounts payable at July 30 = $56,800 * 50% = $28,400
What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units
April 30 Ending Inventory = 10,000 Desired ending inventory = Budgeted June Sales * Desired Ending Inventory % Desired ending inventory = 30,000 * .2 = 6,000 + Budgeted Sales Units = 50,000 + Desired Ending Inventory = 6,000 ---------------------------------------- = Total Needs = 56,000 - Beginning Inventory = 10,000 ---------------------------------------- = Required Production = 46,000 b. 46,000 units
How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds
April 30 inventory = 23,000 10% of following month's needs = 14,500 Production = 46,000 * Materials per unit = 5 ------------------------------------------ = Production Need = 230,000 + Desired Ending Inventory = 14,500 ------------------------------------------ = Total Needed = 244,500 - Beginning Inventory = 23,000 ------------------------------------------ = Materials to be Purchased = 221,500 a. 221,500 pounds
What would be the total direct labor cost for the quarter if the company pays time and one half ($10 * 1.5 = $15) for all hours worked by employees over 2,000 per month? a. $51,700 b. $52,000 c. $53,250 d. $57,000
April: 26,000 * 0.05 = 1,300 May: 46,000 * 0.05 = 2,300 June: 29,000 * 0.05 = 1,450 April: (1,300 * 10) + 0 May: (2,000 * 10) + (300 * 10 * 1.5) June: (1,450 * 10) + 0 April: $13,000 + May: $24,500 + June: $14,500 = $52,000 b. $52,000
Manufacturing Overhead Budget - Direct Labor Hours
From Direct Labor Budget: - April: 1,300 - May: 2,300 - June: 1,450 - Quarter: 5,050
The Direct Labor Budget - Units of Production
From the Production Budget: - April: 26,000 - May: 46,000 - June: 29,000 - Quarter: 101,000
The Direct Materials Budget - Production
From the Production Budget: - April: 26,000 - May: 46,000 - June: 29,000 - Quarter: 101,000
Expected cash collections - calculations for May
From the Sales Budget for April: Accounts Accounts Receivable 6/30 = 30% * $300,000 = $90,000
Expected cash collections - calculations for June
From the Sales Budget for May: Accounts Accounts Receivable 6/30 = 30% * $300,000 = $90,000
The Direct Labor Budget - Labor Hours Required
Labor Hours Required = Units of Production * Direct Labor Time per Unit - 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
The Production Budget - Calculations for April
March 31 Ending Inventory = 4,000 Desired ending inventory = Budgeted May Sales * Desired Ending Inventory % Desired ending inventory = 50,000 * .2 = 10,000 + Budgeted Sales Units = 20,000 + Desired Ending Inventory = 10,000 ---------------------------------------- = Total Needs = 30,000 - Beginning Inventory = 4,000 ---------------------------------------- = Required Production = 26,000
The Direct Materials Budget - Calculations for April
March 31 inventory = 13,000 10% of following month's needs = 23,000 Production = 26,000 * Materials per unit = 5 ------------------------------------------ = Production Need = 130,000 + Desired Ending Inventory = 23,000 ------------------------------------------ = Total Needed = 153,000 - Beginning Inventory = 13,000 ------------------------------------------ = Materials to be Purchased = 140,000
The Production Budget - Calculations for June
May 31 Ending Inventory = 10,000 Desired ending inventory = Budgeted June Sales * Desired Ending Inventory % Desired ending inventory = 25,000 * .2 = 5,000 + Budgeted Sales Units = 30,000 + Desired Ending Inventory = 5,000 ---------------------------------------- = Total Needs = 35,000 - Beginning Inventory = 6,000 ---------------------------------------- = Required Production = 29,000
Direct Materials Budget Formula
Production * Materials per unit -------------------------------- = Production Need + Desired Ending Inventory -------------------------------- = Total Needed - Beginning Inventory -------------------------------- = Materials to be Purchased
Production Need
Production * Materials per unit
Total Needed
Production Needs + Desired Ending Inventory
ending finished goods inventory budget - cost per direct labor
Production cost per unit: man. overhead Quantity: 0.05 hrs *Cost: $49.70 =Total: $2.49 Budgeted finished goods inventory: Unit Product Cost: $2.00 + $0.50 + $2.49 = $4.99
Desired Ending Inventory
Production of next month * Desired ending inventory %
Continuous Budget
a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed
Self-imposed budget (participative budget)
a budget that is prepared with the full cooperation and participation of managers at all levels
Budget
a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period
What are the total cash disbursements for the quarter? a. $185,000 b. $68,000 c. $56,000 d. $201,400
a. $185,000
What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $940,000
d. $940,000
