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

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

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

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

How to prepare a direct materials purchases

budget.Calculation:

8-3

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

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

How to prepare an overhead budget.8-5

Direct materials, direct labor and overhead budgets.

REQUIRED: Prepare an ending finished goods inventory budget.

Calculation:

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

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

How to prepare a selling and administrative expenses budget.

8-8

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

Explain How Budgets Are Used for Performance

Evaluation

Define Participative Budgeting

What are three potential problems?