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Profit Planning
Management Accounting: The Cornerstone for
Business Decisions
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Define budgeting and discuss its role in planning, control, and decision making.
2. Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components.
Learning Objectives
3. Define and prepare the financial budget, identify its major components, and explain the interrelationships of its various components.
4. Describe the behavioral dimension of budgeting.
Describe Planning and Budgeting
Illustrate Goalsetting
List Four Advantages of Budgeting
1. It forces managers to plan.
2. It provides information that can be used to improve decision making.
3. It provides a standard for performance evaluation.
4. It improves communication and coordination.
Match Definitions
Master Budget
Budget Committee
Operating Budget
Describes the income generating activities of the firm
Details inflows and outflows of cash and the overall financial position
Looking backward, determining what actually happened & comparing it with previous planned outcomes
Control
Financial Budget
Comprehensive financial plan for the organization as a whole
Reviews the budget, provides guidelines and budgetary goals
How to prepare a sales budget.8-1
Buttons Company
Sales Budget
For the Year Ended December 31, 2008
1 2 3 4 Year
Units
1,200
1,500
2,000
2,400
7,100
Selling Price $ 10 $ 10 $ 10 $ 10 $ 10
Budget Sales $12,000 $15,000 $20,000 $24,000 $71,000
Budgeted units to be sold each quarter 1,200, 1,500, 2,000, and 2,400. Selling price is $10.REQUIRED: Prepare a sales budget for each quarter and the year.Calculation:
The sales budget in Cornerstone 8-1. Further, assume that company policy requires 20% of next quarter’s sales in ending inventory and that beginning inventory for the first quart of the year was 200. Assume that sales for the first quarter of 2009 are estimated at 1,200 units.
REQUIRED: Prepare a production budget for each quarter and the year.
How to prepare the production budget.8-2
How to prepare the production budget.8-2
Production Budget
Budgeted sales 1,200 1,500 2,000 2,400 7,100
Desired End Inv. 300 400 480 240 240
Total needs 1,500 1,900 2,480 2,640 7,340
Less: Beg. Inv. 200 300 400 480 200
Units to be prod. 1,300 1,600 2,080 2,160 7,140
Calculation:
The production budget in Cornerstone 8-2. Plain t-shirts cost $3 each and the ink (for the screening process) costs $0.20 per ounce. On a per-unit basis, the factory needs one plain t-shirt and 5 ounces of ink for each logo t-shirt that it produces. Button’s policy is to have 10% of the following quarter’s production needs in ending inventory. The factory has 12 plain t-shirts and 60 ounces of ink on hand on January At the end of December the desired ending inventory is 22 t-shirts and 110 ounces of ink.
REQUIRED: Prepare a direct materials (DM) purchases budget for t-shirts and ink.
How to prepare a direct materials purchases
budget.8-3
How to prepare a direct materials purchases
budget.Calculation:
8-3
Direct Materials Purchases Budget - Plain T-Shirts
Units to be prod. 1,300 1,600 2,080 2,160 7,140
DM / unit 1 1 1 1 1
Product. needs 1,300 1,600 2,080 2,160 7,140
Desired end. inv. 160 208 216 220 220
Total needs 1,460 1,808 2,296 2,380 7,360
Less: beg. inv. 120 160 208 216 120
DM to be purch. 1,340 1,648 2,088 2,164 7,240
Cost per t-shirt $ 3 $ 3 $ 3 $ 3 $ 3
Total purch. cost $ 4,020 $ 4,944 $ 6,264 $ 6,494 $ 21,720
How to prepare a direct materials purchases
budget.Calculation:
8-3
Direct Materials Purchases Budget - Ink
Units to be prod. 1,300 1,600 2,080 2,160 7,140
DM / unit 5 5 5 5 5
Product. needs 6,500 8,000 10,400 10,800 35,700
Desired end. inv. 1,600 2,080 2,160 2,200 2,200
Total needs 8,100 10,080 12,560 13,000 37,900
Less: beg. inv. 1,200 1,600 2,080 2,160 1,200
DM to be purch. 6,900 8,480 10,480 10,840 36,700
Cost per t-shirt $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
Total purch. cost $ 1,380 $ 1,696 $ 2,096 $ 2,168 $ 7,340
How to prepare a direct labor budget.
The production budget in Cornerstone 8-2. It takes .15 hour to produce one t-shirt. The average wage rate is $10 per hour.
REQUIRED: Prepare a direct labor budget.
Calculation: On the following slide.
8-4
Direct Labor Budget
Quarter
1 2 3 4 Year
Units to be prod. 1,300 1,600 2,080 2,160 7,140
DL per unit 0.15 0.15 0.15 0.15 0.15
Total hrs need. 285 240 312 324 1,071
Ave. wage / hour $10.00 $10.00 $10.00 $10.00 $ 10.00
Total DL cost $2,850 $2,400 $3,120 $3,240 $10,710
How to prepare a direct labor budget.8-4
How to prepare an overhead budget.
Direct labor budget in Cornerstone 8-4. The variable overhead rate is $5 per direct labor hour, fixed overhead is budgeted at $1,700 per quarter.
REQUIRED: Prepare an overhead budget for each quarter and the year.
Calculation: Appears on the following slide.
8-5
Overhead Budget
Quarter
1 2 3 4 Year
Budgeted DL hrs 285 240 312 324 1,071
Var. Ovhd Rate $ 5 $ 5 $ 5 $ 5 $ 5
Bud. Var. Ovhd $1,425 $1,200 $1,560 $1,620 $5,355
Bud. Fixed Ovhd $1,700 $1,700 $1,700 $1,700 $6,800
Total Overhead $3,125 $2,900 $3,260 $3,320 $12,155
How to prepare an overhead budget.8-5
Direct materials, direct labor and overhead budgets.
REQUIRED: Prepare an ending finished goods inventory budget.
Calculation:Ending Finished Goods Inventory Budget
Unit Cost Computation:Direct materials ($3 + $1) $4.00Direct labor (0.15 x $10) 1.50
OverheadVariable (0.15 x $5) .75Fixed (0.15 x $6.36) .95
Total unit costs $7.20Finished goods 240 t-shirts @ $7.20 = $1,728
How to prepare the ending finished goods inventory
budget.8-6
Direct materials, direct labor, overhead, and ending finished goods budgets (Cornerstones 8-3, 8-4, 8-5, 8-6).
REQUIRED: Prepare a cost of goods sold budget.
Calculation: Appears on the following slide.
How to prepare a cost of goods sold budget.8-7
How to prepare a cost of goods sold budget.8-7
Cost of Goods Sold Budget
Direct materials used $ 29,660
Direct labor used 10,710
Overhead) 12,155
Budgeted manuf. cost $ 52,525
Begin. finished goods ($7.20 x 200) 1,440
Goods avail. for sale $ 53,965
Less: End. finish goods 1,728
Bud. cost of goods sold $ 52,237
How to prepare a selling and administrative expenses budget.
Sales budget on Cornerstone 8-1. Variable expenses are $0.10 per unit sold. Salaries average $1,500 per quarter; utilities, $50 per quarter; and depreciation, $150 per quarter. Advertising for quarters 1 through 4 is $100, $200, $300, and $500, respectively. Insurance is $500 and is paid in the second quarter.
REQUIRED: Prepare a selling and administrative expenses budget.
8-8
How to prepare a selling and administrative expenses budget.
8-8
Selling and Administrative Expenses Budget
Quarter
1 2 3 4 Year
Planned sales 1,200 1,500 2,000 2,400 7,100
Var. S&A
Exp. per unit $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.10
Total var. exp. $ 120 $ 150 $ 200 $ 240 $ 710
How to prepare a selling and administrative expenses budget.
8-8
Fix. S&A exp.
Salaries $1,500 $ 1,500 $ 1,500 $ 1,500 $ 6,000
Utilites 50 50 50 50 200
Advertising 100 200 300 500 1,100
Depreciation 150 150 150 150 600
Insurance - 500 - - 500
Total fix. exp. $1,800 $ 2,400 $ 2,000 $ 2,200 $ 8,400
Total S&A Exp. $1,920 $ 2,550 $ 2,200 $ 2,440 $ 9,110
The sales budget, the cost of goods sold budget, and the selling and administrative expense budget (Cornerstone 8-1, 8-7, 8-8). Assume interest expense is $100 and the tax rate is 40%.
REQUIRED: Prepare a budgeted income statement.
Calculation: Appears on the following slide.
How to prepare a budgeted income
statement.8-9
How to prepare a budgeted income
statement.8-9
Budgeted Income Statement
Sales $71,000
Cost of goods sold 52,237
Gross margin $ 18,763
Less: S & A exp. 9,110
Operating income $ 9,653
Less: Interest expense 100
Income before taxes $ 9,553
Income taxes (40%) 3,821
Net income $ 5,732
Explain How Budgets Are Used for Performance
Evaluation◙ Bonuses, salary increase and
promotions are often determined by a managers ability to achieve or exceed budget goals.
◙ Aligning with budget goals is viewed as positive behavior and is called goal congruence.
◙ Subverting the organization’s goals by improperly administering the budget is regarded as dysfunctional behavior.
Define Participative Budgeting
◙ Subordinate managers have considerable voice in how the budgets are established.
◙ This helps establish a sense of responsibility to accomplish the budget.
What are three potential problems?
1. Standards set too high or too low
2. Building slack (padding) into the budget
3. Pseudoparticipation
