Chapter 9

1. Chapter 9 Profit Planning andActivity-Based Budgeting

2. Learning Objective1

3. Purposes of Budgeting Systems Budget a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. Planning Facilitating Communication and Coordination Allocating Resources Controlling Profit and Operations Evaluating Performance and Providing Incentives

4. Types of Budgets Detail Budget Detail Budget Detail Budget Materials Master Budget Covering all phases of a company’s operations. Production Sales

5. Types of Budgets Income Statement Budgeted Financial Statements Balance Sheet Statement of Cash Flows

6. Types of Budgets Capital budgets with acquisitions that normally cover several years. Financial budgets with financial resource acquisitions. L o n g R a n g e B u d g e t s Continuous or Rolling Budget 1999 2000 2001 2002 This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.

7. Learning Objective2

8. Sales of Services or Goods Ending Inventory BudgetWork in Process and Finished Goods Production Budget Ending Inventory BudgetDirect Materials Direct Materials Budget Direct LaborBudget Overhead Budget Selling and Administrative Budget Cash Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows

9. Learning Objective3

10. Activity-BasedCosting (ABC) Activity-BasedBudgeting (ABB) Activity-Based Costing versus Activity-Based Budgeting Resources Resources Activities Activities Cost objects:products and servicesproduced, andcustomers served. Forecast of productsand services to beproduced andcustomers served.

11. Learning Objective4

12. Sales Budget • Breakers, Inc. is preparing budgets for the quarter ending June 30. • Budgeted sales for the next five months are: • April 20,000 units • May 50,000 units • June 30,000 units • July 25,000 units • August 15,000 units. • The selling price is $10 per unit.

13. Sales Budget

14. Production Budget The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4,000 units were on hand. • Let’s prepare the production budget.

15. Production Budget From sales budget Ending inventory becomes beginning inventory the next month March 31 ending inventory

16. Direct-Material Budget • At Breakers, 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 following month’s production. • On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. • Let’s prepare the direct materials budget.

17. Direct-Material Budget From ourproduction budget March 31 inventory 10% of the following month’s production

18. Direct-Material Budget

19. Direct-Labor Budget • At Breakers, each unit of product requires 0.1 hours of direct labor. • The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. • In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). • For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. • Let’s prepare the direct labor budget.

20. Direct-Labor Budget From our production budget This is the greater of labor hours required or labor hours guaranteed.

21. Overhead Budget Here is Breakers’ Overhead Budget for the quarter.

22. Selling and Administrative Expense Budget • At Breakers, variable selling and administrative expenses are $0.50 per unit sold. • Fixed selling and administrative expenses are $70,000 per month. • The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash outflows for the month.

23. Selling and Administrative Expense Budget From our Sales budget

24. Cash Receipts Budget • At Breakers, all sales are on account. • The company’s collection pattern is: • 70% collected in the month of sale, • 25% collected in the month following sale, • 5% is uncollected. • The March 31 accounts receivable balance of $30,000 will be collected in full.

25. Cash Receipts Budget

26. Cash Disbursement Budget • Breakers pays $0.40 per pound for its materials. • One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month. • No discounts are available. • The March 31 accounts payable balance is $12,000.

27. Cash Disbursement Budget 140,000 lbs. × $.40/lb. = $56,000

28. Cash Disbursement Budget Breakers: • Maintains a 12% open line of credit for $75,000. • Maintains a minimum cash balance of $30,000. • Borrows and repays loans on the last day of the month. • Pays a cash dividend of $25,000 in April. • Purchases $143,700 of equipment in May and $48,300 in June paid in cash. • Has an April 1 cash balance of $40,000.

29. From our Cash Receipts Budget Cash Budget(Collections and Disbursements) From our Cash Disbursements Budget From our Direct Labor Budget From our Overhead Budget From our Selling and Administrative Expense Budget To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of credit.

30. Cash Budget(Collections and Disbursements) Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000.

31. Cash Budget(Collections and Disbursements) At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at 12%.

32. Cash Budget(Collections and Disbursements)

33. Ending cash balance for April is the beginning May balance. Cash Budget(Financing and Repayment)

34. Cost of Goods Manufactured

35. Cost of Goods Sold

36. Budgeted Income Statement

37. Budgeted Statement of Cash Flows

38. Budgeted Balance Sheet Breakers reports the following account balances on June 30 prior to preparing its budgeted financial statements: • Land - $50,000 • Building (net) - $148,000 • Common stock - $217,000 • Retained earnings - $46,400

39. 25%of June sales of $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit. 50% of June purchases of $56,800

40. Learning Objective5

41. Sales of Services or Goods Ending Inventory BudgetWork in Process and Finished Goods Production Budget When the interactions of the elements of the master budget are expressed as a set of mathematical relations, it becomes a financial planning model that can be used to answer “what if” questions about unknown variables. Ending Inventory BudgetDirect Materials Direct Materials Budget Direct LaborBudget Overhead Budget Selling and Administrative Budget Cash Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows

42. Learning Objective6

43. Budget Administration The Budget Committee is a standing committee responsible for . . . • overall policy matters relating to the budget. • coordinating the preparation of the budget.

44. International Aspects of Budgeting Firms with international operations face special problems when preparing a budget. • Fluctuations in foreign currency exchange rates. • High inflation rates in some foreign countries. • Differences in local economic conditions.

45. Learning Objective7

46. Budgeting Product Life-Cycle Costs Product planning and concept Design. Distribution and customer service. Preliminary design. Production. Detailed design and testing.

47. Learning Objective8

48. Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.”

49. Participative Budgeting Flow of Budget Data

50. End of Chapter 9