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Profit Planning Master Budget Chapter 7

Profit Planning Master Budget Chapter 7. Introduction to Managerial Accounting, Brewer, Garrison,Noreen Power Points from website - a dapted by Cynthia Fortin, CPA, CMA. http://highered.mheducation.com/sites/0078025419/student_view0/chapter12/index.html. Planning Develop objectives

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Profit Planning Master Budget Chapter 7

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  1. Profit PlanningMaster BudgetChapter 7 Introduction to Managerial Accounting, Brewer, Garrison,Noreen Power Points from website - adapted by Cynthia Fortin, CPA, CMA http://highered.mheducation.com/sites/0078025419/student_view0/chapter12/index.html

  2. Planning • Develop objectives • Prepare various budgets • To achieve those objectives

  3. Control Take steps to meet objectives

  4. Budgeting allows a company to 1. Think about and plan for the future 2. Allocate resources 3. Uncover potential bottlenecks 4. Coordinate activities 5. Define and communicate objectives

  5. Managers held responsible for items they can actually control. Responsibility Accounting

  6. Master Budget • A comprehensive plan for the upcoming accounting period • Usually prepared for a one-year period • Based on a series of budget assumptions

  7. The Master Budget: An Overview Sales budget Selling and administrative budget Production budget Ending inventory budget Direct materials budget Direct laborbudget Manufacturing overhead budget Cash budget Budgetedincomestatement Budgetedbalance sheet

  8. Assumptions Sales Forecasting • Project past sales trends using judgment or statistical methods. • Estimate sales based on industry data for similar businesses. • Predict sales based on forecasted economic variables. • Gather sales predictions from sales and other personnel. • Conduct market research to estimate customer demand.

  9. Assumptions Cost Forecasting • Budget individual costs as • % of revenues or • % change from the prior year • Evaluate cost behaviour

  10. Assumptions Cash flow forecasting • Identify Sources and Uses of cash • Estimate their Timing

  11. Operating Budgets • Sales • Production • Direct materials • Direct labor • Manufacturing overhead • Ending Finished Goods Inventory • Sales and Administration

  12. Financial Budgets • Cash • Budgeted financial statements • Income • Balance Sheet

  13. Revenue and Production Budgets SJ, Inc., makes a tool used by auto mechanics that sells for $68/unit. It expects to sell6,000 units in April and 7,000 units in May. SJ prefers to end each period with a finished goods inventory equal to 10% of the next period’s sales in units and a direct materials inventory equal to 20% of the direct materials required for the next period’s production. The company never has any beginning or ending work-in-process inventories. There were 400 units in finished goods inventory on April 1. Prepare the revenue and production budgets for April. How much Revenue will SJ earn? How many units will SJ produce?

  14. Direct Materials Purchase Budget SJ’s product uses 0.3 kg of direct material per unit, at a cost of $4/kg. There were 220 kg of direct material on hand on April 1. Assume that budgeted production for May is 6,500 units. Prepare the direct materials budget for April. From production budget Given Given 6500*0.3*20% given How much DM must SJ purchase to produce the budget units?

  15. Direct Labour Budget SJ’s product uses 0.2 hours of direct labour at a cost of $12/hr. Prepare the direct labour budget for April. How many labour hours are needed? How much will DL cost?

  16. Manufacturing Overhead Budget SJ’s budgeted fixed manufacturing overhead for April is $167,000, and variable manufacturing overhead is budgeted at $6 per direct labour hour. Prepare the manufacturing overhead budget for April. From labor budget Given given How much total overhead will be incurred?

  17. Direct Materials Used and Ending inventory budget Prepare the April ending inventories budget for direct materials. From DM budget 220 * $4 390 * $4 How much DM will be used to produce the budget units?

  18. Finished Goods Ending Inventory Budget Prepare the April ending inventories budget for finished goods. Total cost Divided by Unit cost Multiply by What will the ending inventory of FG be? First compute unit cost of FG then apply it to FG ending inventory units

  19. Cost of goods sold Budget Assume that SJ’s April 1 finished goods inventory had a cost of $12,146. Prepare the cost of goods sold budget for April. Given Previous slide Previous slide We need cost of goods sold for the Income statement budget

  20. Selling & Administration Budget SJ’s budget for April includes $22,000 for administrative costs, $34,000 for fixed distribution costs, $18,000 for research and development, and $13,000 for fixed marketing costs. Additionally, the budgeted variable costs for distribution are $0.75/unit sold and the budgeted variable costs for marketing are 4% of sales revenue. Prepare the support department budget for April.

  21. Income Statement Budget Suppose that SJ’s income tax rate is 28%. Prepare the budgeted income statement for April.

  22. How is a cash budget developed?

  23. Cash Budgets • Summary of the expected amounts and timing of cash receipts and disbursements. • Operating cash receipts estimated from budgeted revenues. • Operating cash disbursements estimated from the budgets for DM, DL, O/H and support departments.

  24. Cash budgets 1. Cash receipts 2. Cash disbursements 3. Short-term borrowings or investments

  25. Cash Budget Example Race Manufacturing is preparing a cash budget for a new division that will begin operations on January 1, 2015. Race expects sales to be 40% cash and 60% on account, with 45% of credit sales are collected in the month of the sale. In the month after the sale, 50% of credit sales should be collected, with the remainder collected two months after the sale. Budgeted sales for the first three months are $100,000, $150,000 and $200,000. Prepare a cash receipts budget for the first three months of 2015.

  26. Cash Budget Example Race Manufacturing budgets direct labour costs to be 30% of sales revenue and expects to pay this in the month the costs are incurred. Direct materials purchases will be on account, and paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Budgeted direct material purchases for the first 3 months of 2010 are $20,000, $35,000 and $45,000. Compute the budgeted cash disbursements for direct materials and labour for the first 3 months of 2012.

  27. Cash Budget Example Race Manufacturing budgets other variable costs at 4% of sales revenue and will be paid in the month after the costs are incurred. Other budgeted fixed costs are $6,000 per month and will be paid in the month incurred. Prepare a cash disbursements budget for all costs, including direct materials and labour.

  28. Cash Budget Example Using the information from the prior slides, prepare a schedule of budgeted cash flows for Race Manufacturing’s new division for the first three months of 2015.

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