· Web viewLong-range planning deals with specific areas of the company’s plans, such as future sales, long-term capital expenditures, research and development activities, financial

Chapter 15

Budgeting Profit, Sales, Costs & Expenses

Discussion Questions

1) Profit planning encompasses (a) sales estimating and sales planning programs; (b) budgeting programs for control of all costs, both manufacturing and nonmanufacturing; (c) planning and programming additions to or deletions from working capital and plant investment; and, (d) a review of all factors that have an impact on return on investment, both from a short-term viewpoint of one year and longer periods of time. The profit-planning function must not be merely financial in scope. It must disclose the methods and programs by which the financial goals are to be achieved.2) A budget is the expected target that management strives to achieve, whereas a forecast is a level of revenue or cost that an organization predicts will occur.3) The three approaches for setting profit objectives are: (a) A priori. Management specifies a given rate of return to be achieved in the long run and then draws up plans for achieving that rate. (b) A posteriori. Management draws up plans and then sets the rate resulting from the plans. (c) Pragmatic. Management uses a target profit standard that has been tested empirically and sanctioned by experience.4) Long-range planning deals with specific areas of the company’s plans, such as future sales, long-term capital expenditures, research and development activities, financial requirements, and the profit goal. Short range budgeting places the planning and particularly control into periods of three, six, or twelve months.5) A budget is a detailed financial statement of the organization’s strategy. It converts general strategy statements into specific plans of action, measured financially. It is related to control, because it is the fundamental guideline for what the organization should do. Thus, it is the benchmark against which actual performance is compared. This process of comparison is a vital part of the control function in the organization.6) In carrying out management’s functions of planning, organizing, and control for the development of a budgetary control program, it is necessary to: (a) organize the budget committee (b) organize the entire budgetary control program (c) plan sales with the sales manager (d) determine the finished goods inventory requirement in harmony with the sales budget (e) plan production with the production manager based on the sales budget (f) meet with heads of all departments—both producing

and service—relative to direct materials, direct labor, and factory overhead costs required for the production budgeted (g) establish materials purchase requirements based on production planning, a department’s materials requirements, or the production budget (h) establish expense budgets with marketing, administrative, and financial division heads (i) budget capital expenditures and prepare a research and development budget. (j) Develop a cash budget (k) coordinate and summarize companywide budgets into a master budget— summarized in the budgeted income statement and balance sheet.7) The periodic budget represents a formal communication channel within a company for the following reasons: (a) The periodic budget involves a formal commitment on the part of management to take positive actions to make actual events correspond to the formal budget. (b) The periodic budget is usually reviewed and approved by a higher authority and, once approved, is changed only in unusual specified circumstances. (c) The periodic budget contains explicit statements of the implementation of management objectives for a period of time, published to all parties with control responsibility. (d) Comparison of actual results with the periodic budget forms the basis for management control, motivation, and performance evaluation.8) Budgets are required for planning, monitoring, and motivating, and because they include estimates, they always involve uncertainty. The process of budget preparation forces identification of variables and attempts at estimation. Reiteration should improve the process, and the process should cause a positive attitude to attain goals. Of course, a poorly estimated budget can cause dysfunctional behavior. In this situation, the budget should provide incentive for going after bids. The inclusion of budgeted and actual contribution margin data in periodic reports offers an early indication of below par contribution, or the possible need to reduce bid prices, or other corrective action that may be required. CGA-Canada (adapted).9) All employees (including executive management) must accept the importance of budgeting and be willing to participate fully in budget preparation and implementation, or the budget will not work.10) Commercial expenses are grouped into functions by their actions or operating units. These functions are looked upon as departments and should be set along organizational lines in order to identify the expense with an authorized and responsible individual. Grouping by products and by territories may be desirable as well.

11) The budgeted income statement summarizes in one statement the results of the complete plan of action. It expresses in financial terms the end results

of proposed plans. It can also be used to test the adequacy or inadequacy of those plans.

Exercises

E-1

Whatley Brothers

Budget of sales revenue

For the year 19B

product Sale in pounds

Average sale price per pound

C, G, S per pound

G-P per pound

Sales revenue

Gross profit

$ $ $ $ $Barb 20000 37 28 9 740,000 180000Shirt 10500 18.72 18 0.72 196560 7560Bet 7500 23.92 23.1 0.82 179400 6150

1115960 193710

E-2

Swister Co.

Sales and Production

For year 5,

Peers Model Number

Sales in units

AddEndingInventory

LessBeginningInventory

Production In units

Units Units222 140 4 2 142333 400 5 5 400444 50 5 4 51

590 593

E-3

Schwankenfelder Co.

For the quarter end Jun 30

Ceno Nepo Teno

Closing inventory 6200 10500 12200

Add: Sales Forecast 21000 37500 54300

27200 48000 66500

Less: Beginning inventory 5800 11000 14500

Required Production 21400 37000 52000

E-4

Magic Enterprises

Production Budget

For the quarter end Mar 31

Budget sales unit

Add: Finished goods ending

Total units

Less: Finished goods Beg.

Units to be transferred to finished goods

Add: W-I-P ending

Less: W-I-P Beginning

Units to be produced

Moon

Glow

Enchanting Day

Dream

250,000

15000

175,000

10000

300,000

20000

265,000

16000

185,000

12000

320,000

25000

249,000

4200

173000

2000

295000

6000

253200

2000

175,000

1800

301000

6400

251200 173200 294600

E-5 (1)

Manford Industries

Production Budget

For six months period

Estimated sales units

Add: Estimated ending inventory

Less: Estimated beginning inventory

Req. production units

1001 1002 1003 2001 2002 2003

200

40

150

25

425

60

175

20

325

35

215

20

240

50

175

25

485

75

195

15

360

35

235

20

190 150 410 180 325 215

(2) Row Material Production On

Requirement:

Model No. Req. production

Raw Material Requirement per unit

Total Raw Material Requirement

1001

1002

1003

2001

2002

2003

190

150

410

180

325

215

X Y X Y

5

7

10

4

6

8

2

2

3

1.5

2

2.5

950

1050

4100

720

1950

1720

10490

380

300

1230

270

650

537.5

3367.5

E-6

(1)

Production Budget

Tribolite Polycel Poeder x

Expected sales 80,000 40000 100,000

Add: Ending inventory 6000 2000 8000

86000 42000 108000

Less: Beginning inventory 5000 4000 10000

Budgeted production 81000 38000 98000

(2)

Purchases Budget

Mat-A Mat-B

Expected Quantity (w) 157,000kg 260,000kg

Add: Ending inventory 12000 15000

169000kg 275,000kg

Less: Beginning inventory 10,000 12,000

Units to purchase 159,000kg 263,000kg

Total Cost of Purchases

Mat A = 159,000×0.20 = $31,800

Mat B = 263,000×0.10 = $26,300

E-6 (2) Working

Expected Quantity

Mat-A

Tribolite 81000×1 = 81000kg

Polycal 38000×2 = 76000kg

Powder x _

__________

157,000kg

Mat-B

Tribolite 81000×2 = 162,000kg

Polycal _

Powder x 9000×1 = 98,000

260,000kg

E-6 (3)

Tribolite Polycal Powder X TotalMaterials:A:81,000 × 1 × $.20 $16,200 $ 16,20038,000 × 2 × $.20 $15,200 15,200B:81,000 × 2 × $.10 16,200 16,20098,000 × 1 × $.10 _______ _______ $ 9,800 9,800

$32,400 $15,200 $ 9,800 $ 57,400

Direct Labor.81 × 50 × $8 $32,400 $32,40038 × 125 × $8 $38,000 38,00098 × 12.5 × $8 _______ _______ $ 9,800 9,800

$32,400 $38,000 $ 9,800 $ 80,200

Factory overhead—variable:81 × 50 × $6 $24,300 $ 24,30038 × 125 × $6 $28,500 28,50098 × 12.5 × $6 _______ ______ $ 7,350 7,350

$24,300 $28,500 $ 7,350 $ 60,150

Total variable Manufacturing cost $89,100 $81,700 $26,950 $197,750

Fixed manufacturing cost (not allocated to products) 40,000Total manufacturing cost $237,750

E-7 Sanderson Inc.

Budgeted Cost of Goods Manufactured and Sold StatementFor the year 20—

Materials:Beginning inventory $500,000Purchases 2,600,0005Materials available for use $3,100,000Ending inventory 600,000Cost of materials used $2,500,000Labor 4,340,000Factory overhead 1,840,0004Total manufacturing cost $8,680,0003Add beginning work in process inventory 100,000

$8,780,000Deduct ending work in process inventory 300,000Cost of goods manufactured $8,480,0002Add beginning finished goods inventory 800,000Cost of goods available for sale $9,280,000Deduct ending finished goods inventory 1,000,000Cost of goods sold $8,280,0001

1Earnings (6% of $20,000,000 = $1,200,000) 10% of salesMarketing, administrative, and financial expenses 21

31% of salesCost of goods sold ($8,280,000) 69

100% of sales

2Cost of goods ending finished Beginning finished Cost of goodsSold + goods inventory – goods inventory = manufactured

$8,280,000 $1,000,000 $800,000 $8,480,000

Total manufacturing cost

3Cost of goods Ending work in Beginning work in (materials, labor, and manufactured + process inventory – process inventory = factory overhead)$8,480,000 $300,000 $100,000 $8,680,000

4Total manufac- Labor (50% of Cost of materialsturing cost – manufacturing cost) – used = Factory overhead$8,680,000 $4,340,000 $2,500,000 $1,840,000

5Cost of Ending Beginningmaterials + materials – materials = Materialsused inventory inventory purchases$2,500,000 $600,000 $500,000 $2,600,000

E-8

Starness Company

Budgeted Income Statement

Second Quarter 19B

$ $

Sales (360,000×2) 720,000

Less: cost of goods sold ? 504,000

Gross Profit (720,000×30/100) 216,000

Less:

Operating expenses

Marketing expenses

Variable (720,000×10/100) 72,000

Fixed 48,000 120,000

Uncollectibles (720,000×2/100) 14400

Admin expenses

Variable (720,000×3/100) 21,600

Fixed 34,200 55800

Depreciation (800,000/20×1/4) 10000

Net Income 15800

E-9 ?

PROBLEMS

P-1

(1) Sales BudgetUnit Price Total

Thingone 60,000 $ 70 $4,200,000Thingtwo 40,000 100 4,000,000

Projected sales $8,200,000

(2)

Production BudgetThingone Thingtwo

Projected sales 60,000 40,000Desired inventories, December 31, 20B 25,000 9,000

85,000 49,000Less expected inventories, January 1, 20B 20,000 8,000Production required (units) 65,000

41,000

(3)

Raw Materials Purchases BudgetRaw Materials

A B C TotalThingone (65,000 unitsprojected to be produced) 260,000 130,000 —Thingtwo (41,000 unitsprojected to be produced) 205,000 123,000 41,000 Production requirement 465,000 253,000 41,000Add desired inventories,December 31, 20B 36,000 32,000 7,000 Total requirements. 501,000 285,000 48,000 Less expected inventories,January 1, 20B 32,000 29,000 6,000 Purchase requirements 469,000 256,000 42,000

Cost per pound or unit. $8 $5 $3____ Total cost of purchases $3,752,000 $1,280,000 $126,000 $5,158,000

(4)

Direct Labor BudgetProjected HoursProduction per(Units) Unit Total Rate Total

Thingone 65,000 2 130,000 $8 $1,040,000Thingtwo 41,000 3 123,000 9 1,107,000

$2,147,000

(5)

Finished Goods Inventory Budget, December 31, 20B

Thingone:Raw materials:

A—4 pounds @ $8 $32B—2 pounds @ $5 10 $42

Direct labor—2 hours @ $8 16Factory overhead—2 hours @ $2 per direct labor hour 4

$62$62 × 25,000 units

$1,550,000

Thingtwo:Raw materials:

A—5 pounds @ $8 $40B—3 pounds @ $5 15C—1 unit @ $3 3 $58

Direct labor—3 hours @ $9 27Factory overhead—3 hours @ $2 per direct labor hour 6

$91$91 × 9,000 units 819,000

Budgeted finished goods inventory,December 31, 20B $2,369,000

P-2 (1)

ROLETTER COMPANYBudget for Production and Direct LaborFor the Quarter Ending March 31, 20B

MonthJanuary February March Quarter

Sales (units) 10,000 12,000 8,000 30,000

Add ending inventory* 16,000 12,500 13,500 13,500 Total units required 26,000 24,500 21,500 43,500Less beginning inventory 16,000 16,000 12,500 16,000 Units to be produced 10,000 8,500 9,000 27,500

Direct labor hours per unit × 2 × 2 × 1.5

Total hours of direct labor timeNeeded 20,000 17,000 13,500 50,500

Direct labor costs:Wages ($8.00 per DLH) $160,000 $136,000 $108,000

$404,000Pension contributions($.25 per DLH) 5,000 4,250 3,375 12,625Workers’ compensationinsurance ($.10 per DLH) 2,000 1,700 1,350 5,050Employee medical insurance($.40 per DLH) 8,000 6,800 5,400 20,200Employer’s social security andunemployment taxes($8.00 × .10 = $.80 per DLH) 16,000 13,600 10,800 40,400

Total direct labor cost $191,000 $162,350 $128,925 $482,275

*100% of the first following month’s sales plus 50% of the second following month’s sales.

(2)

(a) Components of the periodic budget, other than the production budget and the direct labor budget, that would also use the sales data include:

(1) the sales budget(2) the cost of goods manufactured and sold budget(3) the marketing and administrative expenses budget(4) the budgeted income statement

(b) Components of the periodic budget, other than the production budget and the direct labor budget, that would also use the production data include:

(1) the direct materials budget(2) the factory overhead budget(3) the cost of goods manufactured and sold budget(c) Components of the periodic budget, other than the production

budget and the direct labor budget, that would also use the direct labor hour data include:

(1) the factory overhead budget (for determining the overhead application rate if based on direct labor hours)(d) Components of the periodic budget, other than the production budget and the direct labor budget, that would also use the direct labor cost data include:

(1) the factory overhead budget (for determining the overhead application rate if based on direct labor dollars and for determining the cost of employee benefits attributable to wages earned by direct labor)

(2) the cost of goods manufactured and sold budget(3) the cash budget(4) the budgeted income statement

P-3

(1) Estimated sales for third quarter (July—September) 18,000Add ending inventory (7,000 × 80%) 5,600

23,600Less beginning inventory 5,600Production 18,000

(2)

Material101 211 242

Units to be produced 18,000 18,000 18,000Materials rate × 6 × 4 × 2

Units of materials required 108,000 72,000 36,000

Add ending inventory:5,600 × 6 33,6005,600 × 4 22,4005,600 × 2 ______ ______ 11,200

141,600 94,400 47,200

Less beginning inventory 35,000 30,000 14,000

Purchases 106,600 64,400 33,200Cost per unit × $2.40 × $3.60 × $1.20Total cost of purchases $255,840 $231,840 $39,840

(3)

Hours Total Totalper Total Labor Labor

Process Production Unit Hours Rate Cost

Forming 18,000 .80 14,400 $8 $115,200

Assembly 18,000 2 36,000 5.50 198,000Finishing 18,000 .25 4,500 6 27,000

54,900 $340,200

(4)

Expected annual production 60,000 unitsActual production through June 30 27,000Expected production during last six months of 20A 33,000 unitsVariable factory overhead per unit ($162,000 ÷ 27,000) × $6Budgeted variable factory overhead $198,000Budgeted fixed factory overhead 93,000Total budgeted factory overhead $291,000

P-4

(1) Revised Sales Budget in Units Based on the IndexTerritories

6-MonthI II III Other Total

1-lb. package 9,0001 13,500 10,800 551,700 585,0002-lb. package 10,800 2 16,200 10,800 704,700 742,500 Total 19,800 29,700 21,600 1,256,400 1,327,500

110,000 × .9 = 9,000212,000 × .9 = 10,800

(2) Sales Budget in DollarsTerritories

6-MonthI II III Other Total

1-lb. package $2,2501 $ 3,375 $2,700 $137,925 $146,2502-lb. package 5,400 2 8,100 5,400 352,350 371,250Total $7,650 $11,475 $8,100 $490,275 $517,500

19,900 revised estimate × $.25 (per package) = $2,250210,800 revised estimate × $.50 (per package) = $5,400

(3) Materials PurchasesGrain R Grain S Total

Bu. Cost Bu. Cost Bu. CostJanuary 5,000 $ 6,500 2,000 $ 2,400 7,000 $ 8,900February 2,000 2,800 1,000 1,200 3,000 4,000

March — — 3,000 3,750 3,000 3,750April 8,000 12,000 3,000 3,000 11,000 15,000May 3,000 4,500 — — 3,000

4,500June 4,000 6,400 4,000 4,000 8,000 10,400

22,000 $32,200 13,000 $14,350 35,000 $46,550

(4) Materials Requirements for Production

Production of 585,000 1-lb. packages 585,000 lbs.Production of 742,500 2-lb. packages 1,485,000Total materials requirements for six months 2,070,000 lbs.

Three bushels of grain in the proportions of 2R:1S produce 198 lbs. of finished product. R weighs 70 lbs. per bushel and S weighs 80 lbs. per bushel.

Weight perGrain Bushels Bushel Lbs.R 2 70 lbs. 140S 1 80 lbs. 80

220 10% loss 22

Weight of finished product 198

Since each 198 lbs. of product calls for 220 lbs. of grain, the total weight of grain required for 2,070,000 lbs. is:220/198 ×2,070,000 = 2,300,000 lbs., to be apportioned as follows:

Grain R= 140/220 x 230,000 = 1,463,636 lbs. = 20,909 bushels @70 lbs. each.Grain S= 80/220 x 230,000 = 836,364 lbs. = 10,455 bushels @80 lbs. each.

(5)Materials Account (Fifo Basis)

Grain R Grain SBu. Cost Bu. Cost

Inventory, January 1 10,000 $12,000 3,000 $3,000Purchases 22,000 32,200 13,000 14,350

Total 32,000 $44,200 16,000 $17,350Put into production:Beginning inventory 10,000 $12,000 3,000 $3,000January purchases 5,000 6,500 2,000 2,400February purchases 2,000 2,800 1,000 1,200March purchases — — 3,000 3,750April purchases 3,909 5,864 1,455 1,455Total consumption 20,909 $27,164 10,455 $11,805Inventory, June 30 11,091 $17,036 5,545 $ 5,545

P5-5 (revised) (1)

Budgeted Income Statement(000s omitted)

QuarterFirst Second Third Fourth Total

Sales:Commercial $250 $266 $275 $300

$1,091Government 100 120 110 115 445 Total $350 $386 $385 $415

$1,536

Cost of goods sold 161 178 177 191 707 Gross profit $189 $208 $208 $224 $ 829

Other operating expenses:Advertising $ 6 $ 6 $ 6 $ 6 $ 24Selling 35 39 39 42 155Administrative 32 35 35 38 140General office 23 25 25 27 100 Total $ 96 $105 $105 $113 $ 419

Operating Income $ 93 $103 $103 $111 $ 410

Add: Other Income 8 8 8 8 32

Income before Tax $101 $111 $111 $119 $442

Less: Income tax 40 44 44 47 176

Income after tax $61 $67 $67 $72 $267*

*rounding adjustment

Note: all figures have been rounded to nearest thousand, as required in the question.

(2) Budgeted Income Statement

With 5% increase in commercial sales(000s omitted)

QuarterFirst Second Third Fourth Total

Sales:Commercial $263 $279 $289 $315

$1,146Government 100 120 110 115 445 Total $363 $399 $399 $430

$1,591

Cost of goods sold 167 184 184 198 733 Gross profit $196 $215 $215 $232 $ 858

Other operating expenses:Advertising $ 6 $ 6 $ 6 $ 6 $ 24Selling 36 40 40 43 159Administrative 33 36 36 39 144General office 24 26 26 28 104 Total $ 99 $108 $108 $116 $ 431

Operating Income $ 97 $107 $107 $116 $ 427

Add: Other Income 8 8 8 8 32

Income before Tax $105 $115 $115 $124 $459

Less: Income tax 42 46 46 50 183

Income after tax $63 $69 $69 $74 $275*

*rounding adjustment

Note: all figures have been rounded to nearest thousand, as required in the question.

P-6 & P-7 skipped due to extra ordinary length of questions.