ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 12 Professor Jeff Yu

1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 12 Professor Jeff Yu

2. Review: Budgeted R.M. Purchase in units = budgeted Production in Units * R.M. needed for each unit + desired ending R.M. inventory – beginning R.M. Inventory Expected cash disbursements for R.M. (or Accounts Payable) Budgeted DL cost = budgeted DL hours * hourly rate (Adjust for “guaranteed hours” & higher hourly rate for overtime) Budgeted MOH cost (Important: calculation of POHR) Budgeted S&A expense Budgeted ending F.G. Inventory

3. Review: Ending F.G. Inventory Budget From DM & DL budget POHR from MOH budget From Production Budget

4. Practice Problem Tonga toys makes Playclay. The desired ending F.G. inventory is 30% of the next month’s sales. Each unit of Playclay sells for $10, requires 2 pounds of raw materials at $0.2 per pound, and consumes 0.25 direct labor hour at $10 per hour. POHR is $0.4 per direct labor hour. Based on historical data, Tonga estimated a cost function for total S&A expenses as Y=60,000+2X. July August Sept. Oct. Budgeted sales in units 40,000 50,000 70,000 35,000 Q: (1) what is the budgeted cost of ending F.G. inventory in August? (2) what is the budgeted cost of goods sold in August? (3) what is the budgeted total S&A expenses in August? (4) what is the budgeted net operating income in August?

5. The Cash Budget • The cash budget is a simplified cash flow statement • To understand it, break it down into 4 sections: • Cash receipts: lists all cash inflows excluding financing • Cash disbursements: lists all cash payments excluding repayment of principle and interest. • Cash excess or deficiency • Financing: lists all financing and repayments of principle and interest.

6. Example: Cash Budget Royal Inc.: • Has an April 1 cash balance of $40,000 • Pays a cash dividend of $49,000 in April • Maintains a minimum cash balance of $30,000 • Maintains a 16% open line of credit for $75,000 • Borrows on the first day of the month and repays loans on the last day of the quarter (assume interest is not compounded for simplicity). • Purchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash)

7. Schedule of Expected Cash Disbursements Schedule of Expected cash collections Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget

8. Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit. The Cash Budget

9. $50,000 × 16% × 3/12 = $2,000Borrowings on April 1 andrepayment on June 30. The Cash Budget

10. Practice Problem Garden Depot prepared the following budgeted cash flows for 2011: The beginning cash balance for 2011 is $20,000. Garden Depot requires a minimum cash balance of $10,000. It may borrow any amount needed at the beginning of each quarter from a bank at annual rate of 12%, and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time is repaid. For simplicity, assume interest is not compounded. Q: Prepare the company’s cash budget for each quarter & year 2011.

11. Practice Problem Shilow Co. maintains a minimum cash balance of at least $4,000 at the end of each month and can draw down a credit line of $20,000 at annual interest rate of 12% (assume interest is not compounded for simplicity). The budgeted cash balance on August 1, 2011 is $8,000. The cash budget for 2011 shows expected cash receipts of $56,000 and expected cash disbursements of $65,000 for August. Q: (1) Will Shilow Co. have a cash excess or deficiency in August? (2) Assume Shilow Co. expects the cash shortage in August and plans to draw down the minimum required fund on August 1, 2011 from the credit line and pay back the principle and interest on December 31, 2011. What is the budgeted interest expense?

12. Schedule of cash collections DM budget Ending FG Inventory Budget Schedule of Cash payments Example: Budgeted Balance Sheet Cash Budget

13. Sales Budget Ending FinishedGoods Inventory Budget S&AExpense Budget Cash Budget Example: Budgeted Income Statement

14. Practice Problem • Minden Co. is a chocolate retailer with the following budget data: • Budgeted sales are $200,000 for May, among which $60,000 is cash sale and the remainder is credit sales. 50% of the credit sales are collected in the month of sale and another 50% in the next month. Accounts receivable on April 30 are $54,000. • Budgeted merchandise inventory purchases are $120,000 in May. 40% of purchases are paid in the month of purchase and the remainder in the next month. Accounts payable on April 30 are $63,000. • Budgeted merchandise inventory balance is $30,000 on April 30, $40,000 on May 31. • S&A expenses are $74,000 for May, including $2,000 in depreciation. New equipment costing $6,500 will be purchased for cash in May. • Minden’s note payable of $14,500 is to be paid in full in May, with $100 in interest. Minden maintains a cash balance of $9,000 each month and can borrow any amount from local bank with a new note payable. • On April 30, PPE net of depreciation is $207,000, capital stock is $180,000 and retained earnings is $42,500. • Q: (1) Prepare a cash budget for May; (2) Prepare a budgeted income statement for May; • (3) Prepare a budgeted balance sheet as of May 31.

15. Chapter 10: Flexible Budget • The master budgets discussed in Chapter 9 could also be called STATIC budgets because they are prepared based on a fixed level of future activity. • A static budget is suitable for planning, but is inadequate for evaluating cost control.

16. Hmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges. Static Budget and Performance Analysis Static budgets are prepared fora single, planned levelof activity. Performance evaluation is difficult when actual activity level differs from the plannedactivity level.

17. Example: Inference using Static Budget

18. Example: Inference using Static Budget Did the firm do a good job in cost control? I do know thatactual activity is belowbudgeted activity which is unfavorable. But shouldn’t variable costsbe lower if actual activityis below budgeted activity? I don’t think I can answer this question using a static budget.

19. The relevant question? How much of the favorable cost variance in the example is due to lower activity level and how much is due to good cost control? To answer the question, we must thebudget to the actual level of activity.

20. May be prepared for any activity level in the relevant range. Show costs that should have beenincurred at the actual activity level, enabling “apples to apples”cost comparisons. Help managers control costs. Improve performance evaluation. Flexible Budgets

21. For Next Class • Finish chapter 10. • Attempt the assigned HW problem.

22. Homework Problem FR Co.’s May 1 cash balance is $6,000 and requires May 31 cash balance to be $5,000. Its cash budget for May is as follows: Q: (1) Will FR have a cash excess or deficiency? By how much? (2) If needed, how much will FR need to borrow? (3) If FR borrows the required fund on May 1 at the 6% annual interest rate and pay back the principle and interest on June 30, what is the budgeted interest expense (assume interest is not compounded for simplicity)?