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Electronic Presentation by Douglas Cloud Pepperdine University

Survey of Accounting. Electronic Presentation by Douglas Cloud Pepperdine University. Carl S.Warren. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada. Chapter 13.

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Electronic Presentation by Douglas Cloud Pepperdine University

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  1. Survey of Accounting Electronic Presentationby Douglas Cloud Pepperdine University Carl S.Warren

  2. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

  3. Chapter 13 Budgeting and Standard Cost Systems

  4. Learning Objectives 1. Describe the nature and objectives of budgeting. 2. Describe the master budget for a manufacturing business. 3. Describe the nature and use of standards. 4. Explain and illustrate how standards are used in budgeting. After studying this chapter, you should be able to: Continued

  5. Learning Objectives 5. Calculate and interpret the basic variances for direct materials and direct labor. 6. Explain how standards can be used for nonmanufacturing expenses. 7. Explain and provide examples of nonfinancial performance measures.

  6. Learning Objective 1 Describe the nature and objectives of budgeting.

  7. Nature and Objectives of Budgeting Objectives of Budgeting Establishing specific future goals Executing plans to achieve the goals Comparing actual results to the goals Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals Human Behavior and Budgeting

  8. Static Budgets Description: A budget that does not reflect potential changes in volume or activity level Simple—all expenses are budgeted as fixed costs Does not reflect changes in revenues and expenses that occur as volumes change Service organizations or administrative departments of retailers and manufacturers Strength: Weakness: Typical Usage:

  9. Flexible Budgets Description: A budget that shows revenues and expenses for a variety of volumes or activity levels Provides information needed to analyze the impact of volume changes on actual operating results Requires greater research into costs—must differentiate fixed and variable costs Operational departments of retailers and manufacturers whose costs change with sales and production Strength: Weakness: Typical Usage:

  10. Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Variable cost: Direct labor ($5 per unit) $40,000 $45,000 $50,000 Electricity ($0.5 per unit) 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000 Units of production 8,000 9,000 10,000 Cost per unit is $5.50 at all levels of activity

  11. Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Variable cost: Direct labor ($5 per unit) $40,000 $45,000 $50,000 Electricity ($0.5 per unit) 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000 Fixed cost: Electric power $ 1,000 $ 1,000 $ 1,000 Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000 Units of production 8,000 9,000 10,000

  12. Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Variable cost: Direct labor ($5 per unit) $40,000 $45,000 $50,000 Electricity ($0.5 per unit) 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000 Fixed cost: Electric power $ 1,000 $ 1,000 $ 1,000 Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000 Total department costs $60,000 $65,500 $71,000 Units of production 8,000 9,000 10,000

  13. Learning Objective 2 Describe the master budget for a manufacturing business.

  14. Income Statement Budgets Sales Budget

  15. Income Statement Budgets Sales Budget Production Budget Expected units of sales + Desired units in ending inventory - Estimated units in beginning inventory Total units to be produced

  16. Income Statement Budgets Sales Budget Production Budget Materials needed for production + Desired ending materials inventory - Estimated beginning materials inventory Direct materials to be purchased Direct Materials Purchases Budget

  17. Income Statement Budgets Sales Budget Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget

  18. Income Statement Budgets Sales Budget Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget

  19. Income Statement Budgets Sales Budget Production Budget Direct Materials Purchases Budget Cost of Goods Sold Budget Direct Labor Cost Budget Factory Overhead Cost Budget

  20. Income Statement Budgets Sales Budget Production Budget Direct Materials Purchases Budget Cost of Goods Sold Budget Direct Labor Cost Budget Selling & Administrative Expenses Budget Factory Overhead Cost Budget

  21. Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2004 Unit Sales Unit Selling Total Product and Region Volume Price Sales Wallet: East 287,000 $12.00 $3,444,000 West 241,000 12.00 2,892,000 Total 528,000 $6,336,000 How are these numbers determined?

  22. Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2004 Unit Sales Unit Selling Total Product and Region Volume Price Sales Wallet: East 287,000 $12.00 $3,444,000 West 241,000 12.00 2,892,000 Total 528,000 $6,336,000 Handbag: East 156,400 $25.00 $3,910,000 West 123,600 25.00 3,090,000 Total 280,000 $7,000,000

  23. Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2004 Unit Sales Unit Selling Total Product and Region Volume Price Sales Wallet: East 287,000 $12.00 $3,444,000 West 241,000 12.00 2,892,000 Total 528,000 $6,336,000 Handbag: East 156,400 $25.00 $3,910,000 West 123,600 25.00 3,090,000 Total 280,000 $7,000,000 Total sales revenue $13,336,000

  24. Elite Accessories Inc. Production Budget For the Year Ending December 31, 2004 Units Wallet Handbag Sales 528,000 280,000 From sales budget

  25. Elite Accessories Inc. Production Budget For the Year Ending December 31, 2004 Units Wallet Handbag Sales 528,000 280,000 Plus desired ending inventory, Dec. 31, 2003 80,000 60,000 Total 608,000 340,000

  26. Elite Accessories Inc. Production Budget For the Year Ending December 31, 2004 Units Wallet Handbag Sales 528,000 280,000 Plus desired ending inventory, Dec. 31, 2003 80,000 60,000 Total 608,000 340,000 Less estimated beginning inventory, Jan. 1, 2003 88,000 48,000 Total production 520,000 292,000

  27. Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2004 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B) 365,000 Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

  28. Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2004 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B) 365,000 Plus desired inventory, Dec. 31, 2003 20,000 Total 541,000 sq. yds. Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

  29. Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2004 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B) 365,000 Plus desired inventory, Dec. 31, 2003 20,000 Total 541,000 sq. yds. Less estimated inventory, Jan. 1, 2003 18,000 Total square yards to be purchased 523,000 sq yds. Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

  30. Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2004 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B) 365,000 Plus desired inventory, Dec. 31, 2003 20,000 Total 541,000 sq. yds. Less estimated inventory, Jan. 1, 2003 18,000 Total square yards to be purchased 523,000 sq yds. Unit price x $ 4.50 Total direct materials purchased $2,353,500 Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

  31. Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2004 Cutting Sewing Total Hours required for production: Wallet (Note A) 52,000 130,000 Handbag (Note B) 43,800 116,800 Note A: Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Note B: Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.

  32. Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2004 Cutting Sewing Total Hours required for production: Wallet (Note A) 52,000 130,000 Handbag (Note B) 43,800 116,800 Total 95,800 246,800 Hourly rate x $12 x $15 Note A: Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Note B: Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.

  33. Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2004 Cutting Sewing Total Hours required for production: Wallet (Note A) 52,000 130,000 Handbag (Note B) 43,800 116,800 Total 95,800 246,800 Hourly rate x $12 x $15 Total direct labor cost $1,149,600 $3,702,000 $4,851,600 Note A: Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Note B: Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.

  34. Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2004 Indirect factory wages $ 732,800 Supervisor salaries 360,000 Power and light 306,000 Depreciation of plant and equipment 288,000 Indirect materials 182,800 Maintenance 140,280 Insurance and property taxes 79,200

  35. Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2004 Indirect factory wages $ 732,800 Supervisory salaries 360,000 Power and light 306,000 Depreciation of plant and equipment 288,000 Indirect materials 182,800 Maintenance 140,280 Insurance and property taxes 79,200 Total factory overhead cost $2,089,080

  36. Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2004 Revenue from sales $13,336,000 Cost of goods sold 9,047,780 Gross profit $4,288,220 Selling & admin. expenses: Selling expenses $1,190,000 Administrative expenses 695,000 Total sell. & admin. exp. 1,885,000 Income from operations $2,403,220 Other income: Interest revenue $ 98,000 Other expense: Interest expense 90,000 8,000 Income before income tax $2,411,220 Income tax 600,000 Net income $1,811,220

  37. Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2004 Revenue from sales $13,336,000 Cost of goods sold 9,047,780 Gross profit $4,288,220 Selling & admin. expenses: Selling expenses $1,190,000 Administrative expenses 695,000 Total sell. & admin. exp. 1,885,000 Income from operations $2,403,220 Other income: Interest revenue $ 98,000 Other expense: Interest expense 90,000 8,000 Income before income tax $2,411,220 Income tax 600,000 Net income $1,811,220

  38. Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2004 Revenue from sales $13,336,000 Cost of goods sold 9,047,780 Gross profit $4,288,220 Selling & admin. expenses: Selling expenses $1,190,000 Administrative expenses 695,000 Total sell. & admin. exp. 1,885,000 Income from operations $2,403,220 Other income: Interest revenue $ 98,000 Other expense: Interest expense 90,000 8,000 Income before income tax $2,411,220 Income tax 600,000 Net income $1,811,220

  39. Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2004 Revenue from sales $13,336,000 Cost of goods sold 9,047,780 Gross profit $4,288,220 Selling & admin. expenses: Selling expenses $1,190,000 Administrative expenses 695,000 Total sell. & admin. exp. 1,885,000 Income from operations $2,403,220 Other income: Interest revenue $ 98,000 Other expense: Interest expense 90,000 8,000 Income before income tax $2,411,220 Income tax 600,000 Net income $1,811,220

  40. Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2004 January February March Budgeted sales $1,080,000 $1,240,000 $970,000 Cash sales (10%) 108,000 124,000 97,000 Credit sales (90%) $972,000 $1,116,000 $873,000

  41. Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2004 January February March Budgeted sales $1,080,000 $1,240,000 $970,000 Cash sales (10%) 108,000 124,000 97,000 Credit sales (90%) $972,000 $1,116,000 $873,000 Collections on account: Current month (60%) $583,200 $669,600 $523,800

  42. Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2004 January February March Budgeted sales $1,080,000 $1,240,000 $970,000 Cash sales (10%) 108,000 124,000 97,000 Credit sales (90%) $972,000 $1,116,000 $873,000 Collections on account: Current month (60%) $583,200 $669,600 $523,800 Prior month (40%) 370,000 388,800 446,400 Total on account $953,200 $1,058,400 $970,200

  43. Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2004 January February March Budgeted sales $1,080,000 $1,240,000 $970,000 Cash sales (10%) 108,000 124,000 97,000 Credit sales (90%) $972,000 $1,116,000 $873,000 Collections on account: Current month (60%) $583,200 $669,600 $523,800 Prior month (40%) 370,000 388,800 446,400 Total on account $953,200 $1,058,400 $970,200 Plus cash sales 108,000 124,000 97,000 Total collections $1,061,200 $1,182,400 $1,067,200

  44. Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2004 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue — — 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700

  45. Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2004 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue — — 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions — 274,000 — Interest expense 22,500 — — Income taxes — — 150,000 Total cash payments $984,500 $1,210,000 $1,075,000

  46. Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2004 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue — — 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions — 274,000 — Interest expense 22,500 — — Income taxes — — 150,000 Total cash payments $984,500 $1,210,000 $1,075,000 Cash increase (decrease) $76,700 $(27,600) $16,700

  47. Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2004 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue — — 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions — 274,000 — Interest expense 22,500 — — Income taxes — — 150,000 Total cash payments $984,500 $1,210,000 $1,075,000 Cash increase (decrease) $76,700 $(27,600) $16,700 Beginning cash balance 280,000 356,700 329,100 Ending cash balance $356,700 329,100 $345,800

  48. Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2004 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue — — 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions — 274,000 — Interest expense 22,500 — — Income taxes — — 150,000 Total cash payments $984,500 $1,210,000 $1,075,000 Cash increase (decrease) $76,700 $(27,600) $16,700 Beginning cash balance 280,000 356,700 329,100 Ending cash balance $356,700 329,100 $345,800 Minimum cash balance 340,000 340,000 340,000 Excess (deficiency) $16,700 $ (10,900) $ 5,800

  49. Learning Objective 3 Describe the nature and use of standards.

  50. Standards — Performance Benchmarks Setting Standards Requires joint effortsof accountants, engineers, and other management personnel. Theoretical standards (ideal standards). Currently attainable standards (normal standards). Should be revised when they no longer reflect operating conditions they intended to measure. Types of Standards Reviewing and Revising Standards

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