14-1 CHAPTER 14 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Cost Analysis for Planning

14-1

CHAPTER 14

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

Cost Analysis for Planning

14-2

Decision Making

Strategic, Operational,and Financial (Planning)

Planning and Control Cycle

Executing operational

activities (Managing)

Performance analysis: Plans vs.

actual results (Controlling)

L O 1

Implement Plans

Rev

isit

Pla

ns

Data collection and Performance Feedback

14-3

Control Steps taken by

management to ensure that

objectives are attained.

Planning Developing objectives for

acquisitionand use of resources.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

BudgetingL O 1

14-4

Benefits

Enhanced managerialresponsibility

Assignment of decisionmaking responsibilities

Performanceevaluation

Coordinationof activities

BudgetingL O 2

14-5

Time consuming but enhances employeemotivation and acceptance of goals.

Time consuming but enhances employeemotivation and acceptance of goals.

S u p erviso r S u p erviso r

M id d leM an ag em en t

S u p erviso r S u p erviso r

M id d leM an ag em en t

Top M an ag em en t

Participative Budgeting

Flow of Budget Data

L O 2

14-6

Operating BudgetOperating Budget

The annual operating budget may be divided into quarterly

or monthly budgets.

The Budget Time Frame

2008 2009 2010 2011

L O 3

Operating BudgetOperating Budget Operating BudgetOperating Budget

14-7

2009 20092008 2010

Continuous or Perpetual Budget

This budget is usually a four-quarterbudget that rolls forward one quarteras the current quarter is completed.

The Budget Time FrameL O 3

Budget for2009 byquarters

Quarter I

Quarter II

Quarter III

Quarter IV

Budget for last 3

quarters of 2009 and

first quarterof 2010

Budget for 2010 by quarters

2009 2009Quarter

IV

Budget for last 2

quarters of 2009and

first 2 quartersof 2010

Budget for last quarter of 2009 and

first 3 quartersof 2010

14-8

ORDirect

MaterialsBudget

Production Budget

(Manufacturer)

Operating ExpenseBudget

DirectLabor

Budget

ManufacturingOverhead

Budget

Sales Budget

The Budgeting Process

Cost of GoodsSold Budget

Budgeted Balance Sheet

Budgeted Income Statement

Budgeted Statement of Cash Flows

L O 4

Purchases Budget

(Merchandiser)

14-9

SalesBudget

EstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions

+Forecasts of customer needs provided by marketing

personnel

Sales BudgetL O 4

14-10

That’s enough talkingabout budgets.

Show me an example!

Preparing the Master BudgetL O 4

14-11

Jones Co. is preparing budgets for the quarter ending March 31 for its one product that sells for $25 per unit.

Budgeted sales for the next four months are:

Jan 10,000 units @ $25 = $250,000Feb 12,000 units @ $25 = $300,000Mar 15,000 units @ $25 = $375,000Apr 11,000 units @ $25 = $275,000

The Sales Budget

April is needed for March ending inventory computations.

Preparing the Master BudgetL O 4

14-12

Inventory Flows

Beginningbalance

Beginningbalance AvailableAvailable

Endingbalance

Endingbalance

AdditionsAdditions+ =

WithdrawalsWithdrawals

_

=

The basic inventory flow model is usedfor production and purchases budgets.The basic inventory flow model is usedfor production and purchases budgets.

L O 5

14-13

Sales Budget

Complete

d

ProductionBudget

The Production BudgetL O 5

14-14

Let’s prepare the production budget. Finished goods ending inventory should be 1.4

times the next month’s budgeted sales in units.

14,000 units were on hand December 31.

Sales forecast for January is 10,000 units.


14-15

Production must be adequate to meet budgeted sales and to provide sufficient

ending inventory.

Production must be adequate to meet budgeted sales and to provide sufficient

ending inventory.

Budgeted product sales in units

+ Desired product units in ending inventory

= Total product units needed

– Product units in beginning inventory

= Product units to produce


14-16

The Production Budget

January February MarchBudgeted unit sales 10,000 12,000 15,000 Desired ending inventoryTotal units neededLess beginning inventoryUnits to produce

January February MarchBudgeted unit sales 10,000 12,000 15,000 Desired ending inventoryTotal units neededLess beginning inventoryUnits to produce

We start with the sales budgetWe start with the sales budget

L O 5

14-17


January February MarchBudgeted unit sales 10,000 12,000 15,000 Desired ending inventory 16,800 21,000 15,400 Total units neededLess beginning inventoryUnits to produce

January February MarchBudgeted unit sales 10,000 12,000 15,000 Desired ending inventory 16,800 21,000 15,400 Total units neededLess beginning inventoryUnits to produce

1.4 × 12,000 1.4 × 11,000

1.4 × 15,000

L O 5

14-18

January February MarchBudgeted unit sales 10,000 12,000 15,000 Desired ending inventory 16,800 21,000 15,400 Total units needed 26,800 33,000 30,400 Less beginning inventory 14,000 16,800 21,000 Units to produce 12,800 16,200 9,400


Beginning inventory each month is theprevious month’s ending inventory


L O 5

14-19

RawMaterials

PurchasesBudget

ProductionBudget

Complete

d

Raw Materials Purchases BudgetL O 5

14-20

The materials purchases budget is based on production quantity and desired materials

inventory levels.

The materials purchases budget is based on production quantity and desired materials

inventory levels.

Units to produce × Material needed per unit = Material needed for units to produce+ Desired units of material in ending

inventory= Total units of material needed– Units of material in beginning inventory= Units of material to purchase


14-21

Three pounds of materials are needed for each unit produced. Each pound of material costs $0.90.

Jones wants to have materials on hand at the end of each month equal to 50 percent of the

following month’s production needs.

The materials inventory on December 31is 19,200 pounds.

Three pounds of materials are needed for each unit produced. Each pound of material costs $0.90.

Jones wants to have materials on hand at the end of each month equal to 50 percent of the

following month’s production needs.

The materials inventory on December 31is 19,200 pounds.


14-22

Raw Materials Purchases Budget

January February MarchUnits to produce 12,800 16,200 9,400 Pounds per unit 3 3 3 Material needs (lbs.) 38,400 48,600 28,200 Desired ending inventoryTotal material needs (lbs.)Less beginning inventoryMaterial purchases (lbs.)

L O 5

14-23


January February MarchUnits to produce 12,800 16,200 9,400 Pounds per unit 3 3 3 Material needs (lbs.) 38,400 48,600 28,200 Desired ending inventory 24,300 14,100 17,000 Total material needs (lbs.) 62,700 62,700 45,200 Less beginning inventoryMaterial purchases (lbs.) 0.5 × 48,600

0.5 × 28,200

Ending inventory for March will not be known until the April production budget is established.

Assume this number is 17,000 pounds.

L O 5

14-24


January February MarchUnits to produce 12,800 16,200 9,400 Pounds per unit 3 3 3 Material needs (lbs.) 38,400 48,600 28,200 Desired ending inventory 24,300 14,100 17,000 Total material needs (lbs.) 62,700 62,700 45,200 Less beginning inventory 19,200 24,300 14,100 Material purchases (lbs.) 43,500 38,400 31,100



L O 5

14-25

DirectLabor

Budget

RawMaterials

PurchasesBudget

Complete

d

Direct Labor BudgetL O 5

14-26

Each unit produced requires 6 minutes (0.10 hours) of direct labor. Jones employs 23

persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are

obtained by hiring temporary workers also at $10 per hour.


14-27

Direct Labor Budget

January February MarchUnits to produce 12,800 16,200 9,400 Hours per unit 0.10 0.10 0.10 Total hours required 1,280 1,620 940 Wage rate per hourDirect labor cost

L O 5

14-28

January February MarchUnits to produce 12,800 16,200 9,400 Hours per unit 0.10 0.10 0.10 Total hours required 1,280 1,620 940 Wage rate per hour 10$ 10$ 10$ Direct labor cost 12,800$ 16,200$ 9,400$


14-29

DirectLabor

Budget

Complete

d


Budget


14-30

Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is

$50,000 per month.

Manufacturing Overhead BudgetL O 5

14-31

January February MarchUnits to produce 12,800 16,200 9,400 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 12,800$ 16,200$ 9,400$ Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 62,800$ 66,200$ 59,400$

Manufacturing Overhead BudgetL O 5

14-32

Sellingand

AdministrativeExpenseBudget

Selling and Administrative(S&A) Expense Budget

Complete

d


Budget

L O 6

14-33

Selling expense budgets contain both variable and fixed items.

Variable items: shipping costs and sales commissions.

Fixed items: advertising and sales salaries.

Administrative expense budgets contain mostly fixed items.Executive salaries and depreciation on company

offices.

Selling expense budgets contain both variable and fixed items.

Variable items: shipping costs and sales commissions.

Fixed items: advertising and sales salaries.

Administrative expense budgets contain mostly fixed items.Executive salaries and depreciation on company

offices.


L O 6

14-34

Variable selling and administrative expenses are $.50 per unit sold and fixed selling and administrative expenses are $30,000 per

month.

Fixed selling and administrative expenses include $10,000 in depreciation which does not

require a cash outflow.


L O 6

14-35


January February MarchBudgeted unit sales 10,000 12,000 15,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 5,000$ 6,000$ 7,500$ Fixed S&A expense 30,000 30,000 30,000 Total S&A expense 35,000$ 36,000$ 37,500$ Deduct depreciationS&A expense - cash

L O 6

14-36

January February MarchBudgeted unit sales 10,000 12,000 15,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 5,000$ 6,000$ 7,500$ Fixed S&A expense 30,000 30,000 30,000 Total S&A expense 35,000$ 36,000$ 37,500$ Deduct depreciation 10,000 10,000 10,000 S&A expense - cash 25,000$ 26,000$ 27,500$


L O 6

14-37

BudgetedIncome

Statement

S & ABudget

Complete

d

Budgeted Income StatementL O 7

14-38

Budgeted Income Statement

Jones CompanyBudgeted Income Statement

For the Three Months Ended March 31

Sales (37,000 units @ $25) 925,000$

L O 7

14-39



Sales (37,000 units @ $25) 925,000$ Cost of goods sold (37,000 @ $8.61) 318,570 Gross margin 606,430$

Computation of unit cost follows


14-40

Production costs per unit Quantity Cost Total Direct materials 3.00 lbs. 0.90$ 2.70$ Direct labor 0.10 hrs. 10.00$ 1.00 Manufacturing overhead 4.91 Total unit cost 8.61$

Total mfg. OH for quarter $188,400 Total labor hours required 38,400 units

= $4.91 per unit (rounded)

From production and overhead budgets

Units Produced Mfg. OHJanuary 12,800 62,800$ February 16,200 66,200 March 9,400 59,400 Total 38,400 188,400$


Manufacturing overhead is

applied based on number of units

produced.

14-41



Sales (37,000 units @ $25) 925,000$ Cost of goods sold (37,000 @ $8.61) 318,570 Gross margin 606,430$ Selling and administrative expenses 108,500 Operating income 497,930$

From S&A Expense Budget

January 35,000$ February 36,000 March 37,500 Total 108,500$


14-42



Sales (37,000 units @ $25) 925,000$ Cost of goods sold (37,000 @ $8.61) 318,570 Gross margin 606,430$ Selling and administrative expenses 108,500 Operating income 497,930$ Interest expense 50 Net income 497,880$


14-43

Complete

d


Budgeted Income

StatementCash

Budget

14-44

All sales are on account.

Jones’ collection pattern is:

70 percent collected in month of sale

29 percent collected in month after sale

1 percent will be uncollectible

Accounts receivable on December 31 is $30,000, all of which is collectible.

All sales are on account.

Jones’ collection pattern is:

70 percent collected in month of sale

29 percent collected in month after sale

1 percent will be uncollectible

Accounts receivable on December 31 is $30,000, all of which is collectible.

Cash Receipts BudgetL O 8

14-45

Cash Receipts Budget

January February MarchBudgeted unit sales 10,000 12,000 15,000 Price per unit 25$ 25$ 25$ Budgeted sales revenue 250,000$ 300,000$ 375,000$

Receipts from December sales 30,000$ Receipts from January salesReceipts from February salesReceipts from March salesTotal cash receipts 30,000$

L O 8

14-46



Receipts from December sales 30,000$ Receipts from January sales 175,000 72,500$ Receipts from February salesReceipts from March salesTotal cash receipts 205,000$

January: .70 × $250,000 = $175,000 and .29 × $250,000 = $72,500

L O 8

14-47



Receipts from December sales 30,000$ Receipts from January sales 175,000 72,500$ Receipts from February sales 210,000 87,000$ Receipts from March salesTotal cash receipts 205,000$ 282,500$

January: .70 × $250,000 = $175,000 and .29 × $250,000 = $72,500 February: .70 × $300,000 = $210,000 and .29 × $300,000 = $87,000

L O 8

14-48


Receipts from December sales 30,000$ Receipts from January sales 175,000 72,500$ Receipts from February sales 210,000 87,000$ Receipts from March sales 262,500 Total cash receipts 205,000$ 282,500$ 349,500$

January: .70 × $250,000 = $175,000 and .29 × $250,000 = $72,500 February: .70 × $300,000 = $210,000 and .29 × $300,000 = $87,000 March: .70 × $375,000 = $262,500

Cash Receipts BudgetL O 8

14-49

Materials used in production cost $.90per pound. One-half of a month’s

purchases are paid for in the month of purchase; the other half is paid for in the

following month.

No discount terms are available.

The accounts payable balance onDecember 31 is $18,000.

Materials used in production cost $.90per pound. One-half of a month’s

purchases are paid for in the month of purchase; the other half is paid for in the

following month.

No discount terms are available.

The accounts payable balance onDecember 31 is $18,000.

Cash Payments for MaterialsL O 8

14-50

Cash Payments for Materials

January February MarchMaterial purchases (lbs.) 43,500 38,400 31,100 Cost per pound 0.90$ 0.90$ 0.90$ Total cost 39,150$ 34,560$ 27,990$

Payables from December 18,000$ January purchasesFebruary purchasesMarch purchasesTotal payments in month

L O 8

14-51



Payables from December 18,000$ January purchases 19,575 19,575 February purchasesMarch purchasesTotal payments in month 37,575$

½ × $39,150 = $19,575

L O 8

14-52



Payables from December 18,000$ January purchases 19,575 19,575 February purchases 17,280 17,280 March purchasesTotal payments in month 37,575$ 36,855$

½ × $39,150 = $19,575½ × $34,560 = $17,280

L O 8

14-53


Payables from December 18,000$ January purchases 19,575 19,575 February purchases 17,280 17,280 March purchases 13,995 Total payments in month 37,575$ 36,855$ 31,275$

½ × $39,150 = $19,575½ × $34,560 = $17,280½ × $27,990 = $13,995

Cash Payments for MaterialsL O 8

14-54

With just a bit more information we will

be able to prepare a comprehensive cash

budget.

Comprehensive Cash BudgetL O 8

14-55

Jones Company:Has a $100,000 line of credit at its bank, with a zero

balance on January 1.Maintains a $20,000 minimum cash balance.Borrows at the beginning of a month and repays at

the end of a month.Pays interest at 12 percent when a principal payment

is made.Pays a $77,000 cash dividend in January.Purchases equipment costing $118,245 in February

and $196,540 in March.Has a $25,175 cash balance on January 1.

Jones Company:Has a $100,000 line of credit at its bank, with a zero

balance on January 1.Maintains a $20,000 minimum cash balance.Borrows at the beginning of a month and repays at

the end of a month.Pays interest at 12 percent when a principal payment

is made.Pays a $77,000 cash dividend in January.Purchases equipment costing $118,245 in February

and $196,540 in March.Has a $25,175 cash balance on January 1.


14-56

January February March

Beginning cash balance 25,175$ Cash receipts 205,000 282,500 349,500

Cash available 230,175$

Cash payments: Materials budget Labor budget Manufacturing OH budget S&A expense budget Equipment purchases Dividends

Total cash payments

Balance before financing

BorrowingPrincipal repaymentInterest

Ending cash balance


14-57


Beginning cash balance 25,175$ Cash receipts 205,000 282,500 349,500

Cash available 230,175$

Cash payments: Materials budget 37,575$ 36,855$ 31,275$ Labor budget 12,800 16,200 9,400 Manufacturing OH budget 62,800 66,200 59,400 S&A expense budget 25,000 26,000 27,500 Equipment purchases 0 118,245 196,540 Dividends 77,000 0 0

Total cash payments 215,175$ 263,500$ 324,115$

Balance before financing 15,000$

BorrowingPrincipal repaymentInterest

Ending cash balance


14-58


Beginning cash balance 25,175$ 20,000$ Cash receipts 205,000 282,500 349,500

Cash available 230,175$ 302,500$



Balance before financing 15,000$ 39,000$

Borrowing 5,000 Principal repayment 0Interest 0

Ending cash balance 20,000$


14-59


Beginning cash balance 25,175$ 20,000$ 33,950$ Cash receipts 205,000 282,500 349,500

Cash available 230,175$ 302,500$ 383,450$



Balance before financing 15,000$ 39,000$ 59,335$

Borrowing 5,000 0Principal repayment 0 (5,000) Interest 0 (50)

Ending cash balance 20,000$ 33,950$


$5,000 × .12 × 1/12 = $50

14-60


Beginning cash balance 25,175$ 20,000$ 33,950$ Cash receipts 205,000 282,500 349,500

Cash available 230,175$ 302,500$ 383,450$



Balance before financing 15,000$ 39,000$ 59,335$

Borrowing 5,000 0 0Principal repayment 0 (5,000) Interest 0 (50)

Ending cash balance 20,000$ 33,950$ 59,335$


14-61

BudgetedBalance

Sheet

Complete

d

Cash Budget

Budgeted Balance SheetL O 7

14-62

Jones reports the following account balances on March 31, prior to preparing its budgeted

financial statements: Land - $50,000 Building (net) - $224,500 Equipment (net) - $350,000 Common stock - $300,000 Retained earnings - $205,604

Jones reports the following account balances on March 31, prior to preparing its budgeted

financial statements: Land - $50,000 Building (net) - $224,500 Equipment (net) - $350,000 Common stock - $300,000 Retained earnings - $205,604

Budgeted Balance SheetL O 7

14-63

Jones CompanyBudgeted Balance Sheet

March 31Current assets Cash 59,335$ Accounts receivable (net) 108,750 Raw materials inventory 15,300 Finished goods inventory 132,594

Total current assets 315,979$ Property and equipment Land 50,000$ Building (net) 224,500 Equipment (net) 350,000 Total property and equipment 624,500$

Total assets 940,479$

Liabilities and Equities Accounts payable 13,995$ Common stock 300,000 Retained earnings 626,484 Total liabilities and equities 940,479$

29% of Marchsales of $375,000

17,000 lbs. @ $.90 per lb.

50% of Junepurchases of $27,990

15,400 units@ $8.61

each

L O 7 Budgeted Balance Sheet

14-64

Jones CompanyBudgeted Balance Sheet

March 31Current assets Cash 59,335$ Accounts receivable (net) 108,750 Raw materials inventory 15,300 Finished goods inventory 132,594

Total current assets 315,979$ Property and equipment Land 50,000$ Building (net) 224,500 Equipment (net) 350,000 Total property and equipment 624,500$

Total assets 940,479$

Liabilities and Equities Accounts payable 13,995$ Common stock 300,000 Retained earnings 626,484 Total liabilities and equities 940,479$

L O 7 Budgeted Balance Sheet

Beginning balance 205,604$ Add: net income 497,880 Deduct: dividends (77,000) Ending balance 626,484$

14-65

Let’s change

topics.

Flexible BudgetingL O 9

14-66

Standard Costs are

Based on carefullypredetermined amounts.

Used for planning material, labor, and overhead requirements.

The expected levelof performance.

Benchmarks formeasuring performance.

Standard CostsL O 9

14-67

Are standards the same as budgets?

A standard is the expected cost for one

unit.

A budget is the expected cost for all

units.

Standard CostsL O 9

14-68

Accountants, engineers, personnel administrators, and production managers combine efforts to set standards

based on experience and expectations.

Developing StandardsL O 10

14-69

Should we useattainable standardsor ideal standards?

Engineer


14-70

Attainable standards should be set at levels that are currently

achievable with reasonable and efficient effort.Production

manager


14-71

I agree. Ideal standards, based on perfection,are unattainable and

discourage mostemployees.

Human ResourcesManager


14-72

Developing Standards

ManagerialAccountant

What aboutbasing standards on

past experience?

L O 10

14-73

Developing Standards

No. Past experience contains inefficiencies and provides little

incentive for improvement.Production

manager

L O 10

14-74

QuantityStandards

Use product design specifications.

PriceStandards

Final, deliveredcost of materials,net of discounts.

Costing Products withStandard Costs

L O 11

14-75

RateStandards

Use wage surveys and

labor contracts.

TimeStandards

Use time and motion studies for

each labor operation.


L O 11

14-76

RateStandards

The rate is the variable portion of the

predetermined overhead rate.

ActivityStandards

The activity is the base used to calculate

the predetermined overhead.


L O 11

14-77

Standard costs for a productmight look like this:

A A x BStandard Standard StandardQuantity Price Cost

Inputs or Hours or Rate per Unit

Raw materials 3.0 lbs. 4.00$ per lb. 12.00$ Direct labor 2.5 hours 14.00 per hour 35.00 Variable overhead 2.5 hours 3.00 per hour 7.50 Fixed overhead 2.5 hours 4.50 per hour 11.25 Total standard unit cost 65.75$

B


L O 11

14-78

Other Uses of Standards

QualityControlQualityControl

InventoryControl

InventoryControl

MachineUsage

MachineUsage

ServiceLevels

ServiceLevels

SalesLevelsSalesLevels

SafetyGoalsSafetyGoals

TrainingLevels

TrainingLevels

L O 11

14-79

End of Chapter 14

Documents

14-1 CHAPTER 14 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Cost Analysis for Planning