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Copyright
2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 9
Profit Planningand
Activity-Based
Budgeting
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Copyright
2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
1
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Purposes of Budgeting Systems
1-3
Budget
a detailed plan,expressed in
quantitative terms,that specifies howresources will be
acquired and usedduring a specifiedperiod of time.
1. Planning
2. Facilitating
Communication andCoordination
3. Allocating Resources
4. Controlling Profit and
Operations5. Evaluating
Performance andProviding Incentives
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Types of Budgets
1-4
DetailBudget
DetailBudget
DetailBudget
MasterBudget
Covering allphases of
a companysoperations.
Production
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Types of Budgets
1-5
BudgetedFinancial
Statements
BalanceSheet
IncomeStatement
Statement ofCash Flows
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Types of Budgets
1-6
1999 2000 2001 2002
Continuous orRolling Budget
This budget is usually a twelve-monthbudget that rolls forward one monthas the current month is completed.
L o n g R a n g e B u d g e t s
Capital budgets with acquisitions
that normally cover several years.
Financial budgets with financialresource acquisitions.
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2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
2
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1-8
Budgeted IncomeStatement
Cash Budget
Sales of Services or Goods
Ending
InventoryBudgetWork in Process
and FinishedGoods
ProductionBudget
Direct
MaterialsBudget
Selling and
AdministrativeBudget
Direct
LaborBudget
OverheadBudget
Ending
InventoryBudget
Direct Materials
Budgeted BalanceSheet
Budgeted Statementof Cash Flows
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2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
3
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Activity-Based Costing versusActivity-Based Budgeting
Resources
Cost objects:
products and services
produced, and
customers served.
Activities
Resources
Forecast of products
and services to be
produced and
customers served.
Activities
Activity-BasedCosting (ABC)
Activity-Based
Budgeting (ABB)
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2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
LearningObjective
4
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Sales Budget
1-12
Breakers, Inc. is preparing budgets for the quarterending June 30.
Budgeted sales for the next five months are:
April 20,000 unitsMay 50,000 units
June 30,000 units
July 25,000 unitsAugust 15,000 units.
The selling price is $10 per unit.
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Sales Budget
1-13
April May June Quarter
Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling priceper unit 10$ 10$ 10$ 10$Total
Revenue 200,000$ 500,000$ 300,000$ 1,000,000$
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Production Budget
1-14
The management of Breakers, Inc. wants endinginventory to be equal to 20% of the following
months budgeted sales in units.
On March 31, 4,000 units were on hand.
Lets prepare the production budget.
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Production Budget
1-15
April May June Quarter
Sales in units 20,000 50,000 30,000 100,000
Add: desiredend. inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000
Less: beg.
inventory 4,000 10,000 6,000 4,000Units to be
produced 26,000 46,000 29,000 101,000
From
salesbudget
March 31
ending inventory
Ending inventory becomesbeginning inventory the nextmonth
May sales 50,000 units
Desired percent 20%Desired inventory 10,000 units
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Direct-Material Budget
1-16
At Breakers, five pounds of material are requiredper unit of product.
Management wants materials on hand at the end
of each month equal to 10% of the followingmonths production.
On March 31, 13,000 pounds of material are on
hand. Material cost $.40 per pound.
Lets prepare the direct materials budget.
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Direct-Material Budget
1-17
April May June Quarter Production in units 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: desiredendinginventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less: beginning
inventory 13,000 23,000 14,500 13,000
Materials to bepurchased 140,000 221,500 142,000 503,500
From ourproduction
budget
10% of the following
months production
March 31inventory
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Direct-Material Budget
1-18
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: desired
endinginventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less: beginning
inventory 13,000 23,000 14,500 13,000Materials to be
purchased 140,000 221,500 142,000 503,500
June Ending Inventory
July production in units 23,000
Materials per unit 5Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500
July ProductionSales in units 25,000
Add: desired ending inventory 3,000
Total units needed 28,000
Less: beginning inventory 5,000
Production in units 23,000
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Direct-Labor Budget
1-19
At Breakers, each unit of product requires 0.1 hoursof direct labor.
The Company has a no layoff policy so allemployees will be paid for 40 hours of work each
week.
In exchange for the no layoff policy, workers agreedto a wage rate of $8 per hour regardless of the hoursworked (No overtime pay).
For the next three months, the direct labor workforcewill be paid for a minimum of 3,000 hours per month.
Lets prepare the direct labor budget.
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Direct-Labor Budget
1-20
April May June Quarter Production in units 26,000 46,000 29,000 101,000
Direct labor hours 0.10 0.10 0.10 0.10
Labor hours required 2,600 4,600 2,900 10,100
Guaranteed labor
hours 3,000 3,000 3,000Labor hours paid 3,000 4,600 3,000 10,600
Wage rate 8$ 8$ 8$ 8$
Total direct labot cost 24,000$ 36,800$ 24,000$ 84,800$
From ourproduction
budget
This is the greater oflabor hours required orlabor hours guaranteed.
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Overhead Budget
1-21
Here is Breakers Overhead Budget for the quarter.
April May June Quarter
Indirect labor 17,500$ 26,500$ 17,900$ 61,900$
Indirect material 7,000 12,600 8,600 28,200Utilities 4,200 8,400 5,200 17,800
Rent 13,300 13,300 13,300 39,900
Insurance 5,800 5,800 5,800 17,400
Maintenance 8,200 9,400 8,200 25,800
56,000$ 76,000$ 59,000$ 191,000$
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Selling and AdministrativeExpense Budget
1-22
At Breakers, variable selling and administrativeexpenses are $0.50 per unit sold.
Fixed selling and administrative expenses are$70,000 per month.
The $70,000 fixed expenses include $10,000 in
depreciation expense that does not require a cashoutflows for the month.
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Selling and AdministrativeExpense Budget
1-23
April May June Quarter
Sales in units 20,000 50,000 30,000 100,000
Variable S&A rate 0.50$ 0.50$ 0.50$ 0.50$
Variable expense 10,000$ 25,000$ 15,000$ 50,000$
Fixed S&Aexpense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less: noncash
expenses 10,000 10,000 10,000 30,000Cash
disbursements 70,000$ 85,000$ 75,000$ 230,000$
From our
Sales budget
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Cash Receipts Budget
1-24
At Breakers, all sales are on account. The companys 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
$30,000 will be collected in full.
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Cash Receipts Budget
1-25
April May June Quarter Accounts rec. - 3/31 30,000$ 30,000$
April sales
70% x $200,000 140,000 140,000
25% x $200,000 50,000$ 50,000
May sales
70% x $500,000 350,000 350,000
25% x $500,000 125,000$ 125,000
June sales
70% x $300,000 210,000 210,000
Total cash collections 170,000$ 400,000$ 335,000$ 905,000$
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Cash Disbursement Budget
1-26
Breakers pays $0.40 per pound for its materials.
One-half of a months purchases are paid for in themonth of purchase; the other half is paid in thefollowing month.
No discounts are available.
The March 31 accounts payable balance is
$12,000.
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Cash Disbursement Budget
1-27
April May June Quarter
Accounts pay. 3/31 12,000$ 12,000$
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 28,000$ 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 44,300$ 44,300
June purchases
50% x $56,800 28,400 28,400Total cash payments
for materials 40,000$ 72,300$ 72,700$ 185,000$
140,000 lbs. $.40/lb. = $56,000
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Cash Disbursement Budget
1-28
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 themonth.
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 $40,000.
From our Cash
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Cash Budget(Collections and Disbursements)
1-29
April May June Quarter Beginning cash balance 40,000$
Add: cash collections 170,000
Total cash available 210,000
Less: disbursements
Materials 40,000Direct labor 24,000
Mfg. overhead 56,000
Selling and admin. 70,000
Equipment purchase -
Dividends 25,000Total disbursements 215,000
Excess (deficiency) of
Cash available over
disbursements (5,000)$
To maintain a cashbalance of $30,000,
Breakers must borrow$35,000 on its line of credit.
From our CashReceipts Budget
From our Cash DisbursementsBudget
From our Direct Labor Budget
From our Overhead Budget
From our Selling andAdministrative Expense
Budget
C h B d
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Cash Budget(Collections and Disbursements)
1-30
April May June Quarter Beginning cash balance 40,000$ 30,000$
Add: cash collections 170,000 400,000
Total cash available 210,000 430,000
Less: disbursements
Materials 40,000 72,300Direct labor 24,000 36,800
Mfg. overhead 56,000 76,000
Selling and admin. 70,000 85,000
Equipment purchase - 143,700
Dividends 25,000 -Total disbursements 215,000 413,800
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$
Breakers mustborrow an
addition $13,800to maintain a
cash balanceof $30,000.
C h B d t
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Cash Budget(Collections and Disbursements)
1-31
April May June Quarter Beginning cash balance 40,000$ 30,000$ 30,000$
Add: cash collections 170,000 400,000 335,000
Total cash available 210,000 430,000 365,000
Less: disbursements
Materials 40,000 72,300 72,700Direct labor 24,000 36,800 24,000
Mfg. overhead 56,000 76,000 59,000
Selling and admin. 70,000 85,000 75,000
Equipment purchase - 143,700 48,300
Dividends 25,000 - -Total disbursements 215,000 413,800 279,000
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$ 86,000$
At the end of June, Breakershas enough cash to repay
the $48,800 loan plus interest
at 12%.
C h B d t
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Cash Budget(Collections and Disbursements)
1-32
April May June Quarter Beginning cash balance 40,000$ 30,000$ 30,000$ 40,000$
Add: cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less: disbursements
Materials 40,000 72,300 72,700 185,000Direct labor 24,000 36,800 24,000 84,800
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividends 25,000 - - 25,000Total disbursements 215,000 413,800 279,000 907,800
Excess (deficiency) of
Cash available over
disbursements (5,000)$ 16,200$ 86,000$ 37,200$
Ending cash
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Cash Budget(Financing and Repayment)
1-33
Borrowing RateAnnualInterest
MonthsOutstanding
InterestExpense
35,000$ 12% = 4,200$ 2 mths = 700$
13,800 12% = 1,656 1 mth. = 138
838$
April May June Quarter
Excess (deficiency) of
Cash available overdisbursements (5,000)$ 16,200$ 86,000$ 37,200$
Financing: Borrowing 35,000 13,800 48,800
Repayments - - (48,800) (48,800)
Interest - - (838) (838)
Total financing 35,000 13,800 (49,638) (838)
Ending cash balance 30,000$ 30,000$ 36,362$ 36,362$
Ending cashbalance for Aprilis the beginningMay balance.
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Cost of Goods Manufactured
1-34
April May June Quarter
Direct material:
Beg.material inventory 5,200$ 9,200$ 5,800$ 5,200$
Add: Materials purchases 56,000 88,600 56,800 201,400
Material available for use 61,200 97,800 62,600 206,600
Deduct: End. material inventory 9,200 5,800 4,600 4,600Direct material used 52,000 92,000 58,000 202,000
Direct labor 24,000 36,800 24,000 84,800
Manufacturing overhead 56,000 76,000 59,000 191,000
Total manufacturing costs 132,000 204,800 141,000 477,800
Add: Beg. Work-in-process inventory 3,800 16,200 9,400 3,800
Subtotal 135,800 221,000 150,400 481,600Deduct: End.Work-in-process inventory 16,200 9,400 17,000 17,000
Cost of goods manufactured 119,600$ 211,600$ 133,400$ 464,600$
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Cost of Goods Sold
1-35
April May June Quarter
Cost of goods manufactured 119,600$ 211,600$ 133,400$ 464,600$
Add: Beg. finished-goods inventory 18,400 46,000 27,600 18,400
Cost of goods available for sale 138,000 257,600 161,000 483,000
Deduct: End. finished-goods inventory 46,000 27,600 23,000 23,000
Cost of goods sold 92,000$ 230,000$ 138,000$ 460,000$
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Budgeted Income Statement
1-36
Revenue (100,000 $10) 1,000,000$
Cost of goods sold 460,000
Gross margin 540,000Operating expenses:
Selling and admin. expenses 260,000$
Interest expense 838
Total operating expenses 260,838
Net income 279,162$
Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
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Budgeted Statement of Cash Flows
1-37
April May June Quarter
Cash flows from operating activities:
Cash receipts from customers 170,000$ 400,000$ 335,000$ 905,000$
Cash payments:
To suppliers of raw material (40,000) (72,300) (72,700) (185,000)
For direct labor (24,000) (36,800) (24,000) (84,800)
For manufacturing-overhead expenditures (56,000) (76,000) (59,000) (191,000)
For selling and administrative expenses (70,000) (85,000) (75,000) (230,000)
For interest - - (838) (838)
Total cash payments (190,000) (270,100) (231,538) (691,638)
Net cash flow from operating activities (20,000)$ 129,900$ 103,462$ 213,362$
Cash flows from investing activities:
Purchase of equipment - (143,700) (48,300) (192,000)
Net cash used by investing activities -$ (143,700)$ (48,300)$ (192,000)$
Cash flows from financing activities:Payment of dividends (25,000) - - (25,000)
Principle of bank loan 35,000 13,800 - 48,800
Repayment of bank loan - - (48,800) (48,800)
Net cash provided by financing activit ies 10,000$ 13,800$ (48,800)$ -$
Net increase in cash (10,000)$ -$ 6,362$ (3,638)$
Balance in cash, beginning 40,000 30,000 30,000 40,000
Balance in cash. end of month 30,000$ 30,000$ 36,362$ 36,362$
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Budgeted Balance Sheet
1-38
Breakers reports the following account balanceson June 30 prior to preparing its budgetedfinancial statements:
Land - $50,000 Building (net) - $148,000
Common stock - $217,000
Retained earnings - $46,400
25%of June
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1-39
Breakers, Inc.
Budgeted Balance Sheet
June 30
Current assets
Cash 36,362$
Accounts receivable 75,000
Raw materials inventory 4,600
Work-in-process inventory 17,000
Finished goods inventory 23,000
Total current assets 155,962Property and equipment
Land 50,000
Building 148,000
Equipment 192,000
Tota l property and equipment 390,000Total assets 545,962$
Accounts payable 28,400$
Common stock 217,000
Retained earnings 300,562
Total liabilities and equities 545,962$
25%of Junesales of$300,000
11,500 lbs. at$.40 per lb.
5,000 units at$4.60 per unit.
50% of Junepurchasesof $56,800
Beginning balance 46,400$
Add: net income 279,162
Deduct: dividends (25,000)
Ending balance 300,562$
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Copyright
2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning
Objective5
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1-41
Budgeted IncomeStatement
Cash Budget
Sales of Services or Goods
EndingInventoryBudget
Work in Processand Finished
Goods
Production
Budget
Direct
MaterialsBudget
Selling and
AdministrativeBudget
Direct
LaborBudget
OverheadBudget
Ending
InventoryBudget
Direct Materials
Budgeted BalanceSheet
Budgeted Statementof Cash Flows
When the interactions of the elementsof the master budget are expressed as
a set of mathematical relations, itbecomes a financial planning modelthat can be used to answer what if
questions about unknown variables.
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Copyright
2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning
Objective6
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Budget Administration
1-43
The Budget Committee is a standing
committee responsible for . . .
overall policy matters relating to the budget. coordinating the preparation of the budget.
International Aspects of
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International Aspects ofBudgeting
1-44
Firms with international operations face special problemswhen preparing a budget.
1. Fluctuations in foreign currency exchange
rates.2. High inflation rates in some foreign countries.
3. Differences in local economic conditions.
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Copyright
2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning
Objective7
Budgeting Product Life Cycle
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Budgeting Product Life-CycleCosts
1-46
Product planningand concept
Design.
Preliminary
design.
Detailed design
and testing.Production.
Distributionand customer
service.
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Copyright
2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning
Objective8
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Behavioral Impact of Budgets
1-48
Budgetary Slack: Padding the BudgetPeople often perceive that their performance will
look better in their superiors eyes if they can
beat the budget.
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Participative Budgeting
1-49
Flow of Budget Data
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End of Chapter 9