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Chapter 13

Chapter 13. The Master Budget. Chapter 13: Objectives. Assess the importance of budgeting. Prepare a master budget. Discuss the uses of a rolling budget. Explain how standard costs are used in preparing budgets and assessing responsibility.

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Chapter 13

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  1. Chapter 13 The Master Budget

  2. Chapter 13: Objectives • Assess the importance of budgeting. • Prepare a master budget. • Discuss the uses of a rolling budget. • Explain how standard costs are used in preparing budgets and assessing responsibility. • Calculate material and labor variances for purposes of control and performance evaluation. Chapter 13

  3. Budgeting The process of budgeting is the interpretation of future plans into monetary amounts so that progress toward organizational goals can be determined. A budget is a financial plan for the future . Chapter 13

  4. Ways of Budgeting Top Down Participatory Chapter 13

  5. Master Budget Cash Budget Cash Collections from Sales Cash Payments for Purchases Operating Budgets Sales Budget Production Budget Purchases Budget Direct Labor Budget Overhead Budget Capital Budget Budgeted Financial Statements Cost of Goods Manufactured Income Statement Balance Sheet Statement of Cash Flows Chapter 13

  6. EXHIBIT 13.2 Fast-Food Funthings Sales Budget JanuaryFebruaryMarchQuarter AprilMay Sales in units 200,000 150,000 90,000 440,000 50,000 70,000 Unit sales price $2.00 $2.00 $2.00 $2.00 $2.00 $2.00 Sales in dollars $400,000 $300,000$180,000$880,000 $100,000$140,000 Chapter 13

  7. EXHIBIT 13.3 Fast-Food Funthings Production Budget January February March Quarter April May Sales in units 200,000 150,000 90,000 440,000 50,000 70,000 Desired EI (10%) 15,000 9,000 5,000 5,000 7,000 Total needed 215,000 159,000 95,000 445,000 57,000 BI (Exh. 13.1) (20,000) (15,000) (9,000) (20,000) (5,000) Production in units 195,000 144,000 86,000 425,000 52,000 Chapter 13

  8. EXHIBIT 13.4 Fast-Food Funthings Purchases Budget January February March Quarter April Finished Units Production in units 195,000 144,000 86,000 425,000 52,000 Desired EI in units (15%) 21,600 12,900 7,800 7,800 Total needed 216,600 156,900 93,800 432,800 BI units (Exh. 13.1) (29,250) (21,600) (12,900) (29,250) Purchases in units 187,350 135,300 80,900 403,550 Raw Materials Ounces per unit × 3 × 3 × 3 × 3 Total ounces to purchase 562,050 405,900 242,700 1,210,650 Cost per ounce × $.20 × $.20 × $.20 × $.20 Total cost of plastic $112,410 $81,180 $48,540 $242,130

  9. EXHIBIT 13.5 Fast-Food Funthings Direct Labor Budget January February March Quarter Production in units 195,000 144,000 86,000 425,000 DL hours needed per unit × .01 × .01 × .01 × .01 Total DL hours 1,950 1,440 860 4,250 DL wage rate per hour × $9 × $9 × $9 × $9 Total DL cost (cash) $17,550 $12,960 $7,740 $38,250 Chapter 13

  10. EXHIBIT 13.6 Fast-Food Funthings Overhead Budget January February March Quarter Production in units 195,000 144,000 86,000 425,000 Variable cost per unit x $.084 x $.084 x $.084 x $.084 Total production OH cost $16,380 $12,096 $7,224 $35,700 Sales in dollars $400,000 $300,000 $180,000 $880,000 Variable commission rate x .05 x .05 x .05 x .05 Variable commission cost $ 20,000 $ 15,000 $ 9,000 $ 44,000 Fixed salesperson salary cost 2,000 2,000 2,000 6,000 Fixed administrative salary cost 9,000 9,000 9,000 27,000 Fixed depreciation expense 1,000 1,000 1,000 3,000 Total S&A cost $32,000 $27,000 $21,000 $ 80,000 Total production OH cost $16,380 $12,096 $ 7,224 $ 35,700 Total S&A cost 32,000 27,000 21,000 80,000 Total OH cost $48,380 $39,096 $28,224 $115,700 Total OH cash cost (no depr.) $47,380 $38,096 $27,224 $112,700

  11. EXHIBIT 13.7 Fast-Food Funthings Capital Budget January February MarchQuarter Equipment acquisitions $ 0 $300,000 $ 0 $300,000 Cash payments for plant assets $ 0 $210,000 $90,000 $300,000 Chapter 13

  12. EXHIBIT 13.8 Fast-Food Funthings Schedule of Cash Collections from Sales January February March Quarter Collection of Nov. sales ($84,000 x 10%) $ 8,400 $ 8,400 Collection of Dec. sales ($76,000 x 60%) 45,600 45,600 ($76,000 x 10%) $ 7,600 7,600 Collection of Jan. sales ($400,000 x 30%) 120,000 120,000 ($400,000 x 60%) 240,000 240,000 ($400,000 x 10%) $ 40,000 40,000 Collection of Feb. sales ($300,000 x 30%) 90,000 90,000 ($300,000 x 60%) 180,000 180,000 Collection of March sales ($180,000 x 30%) 54,000 54,000 Total collections $174,000 $337,600 $274,000 $785,600

  13. EXHIBIT 13.9 Fast-Food Funthings Schedule of Cash Payments for Purchases January February March Quarter Payment for Dec. purchases ($90,000 x 80%) $72,000 $ 72,000 Payment for Jan. purchases ($112,410 x 20%) 22,482 22,482 ($112,410 x 80%) $ 89,928 89,928 Payment for Feb. purchases ($81,180 x 20%) 16,236 16,236 ($81,180 x 80%) $64,944 64,944 Payment for March purchases ($48,540 x 20%) 9,708 9,708 Total payments $94,482 $106,164 $74,652 $275,298

  14. EXHIBIT 13.10 Fast-Food Funthings Cash Budget January February March Beginning cash balance $ 5,000 $ 5,588 $ 5,180 Cash collections (Exh. 13.8) 174,000 337,600 274,000 Cash available $179,000 $343,188 $279,108 Cash paid for --DL (Exh. 13.5) (17,550) (12,960) (7,740) --OH (Exh. 13.6) (47,380) (38,096) (27,224) --PA (Exh. 13.7) (0) (210,000) (90,000) --Purchases (Exh. 13.9) (94,482) (106,164) (74,652) Cash available (needed) $ 19,588 $(24,032) $79,492 Borrow (repay) 15,000 (15,000) Sell (acquire) investments (14,000) 14,000 (59,000) Interest received (paid) 0 140* (150)** Remainder(minimum $5,000) $ 5,588 $ 5,108 $ 5,342 *Interest on investment for one month ($14,000 x .01 = $140) **Interest on borrowing for one month ($15,000 x .01 = $150)

  15. Fast-Food Funthings Pro Forma Schedule of Cost of Goods Manufactured For the Quarter Ending March 31, 2004 Beginning work in process inventory (1/1/04) $ 0 Direct material used: Beginning balance of DM (Exh. 13.1) $ 17,550 + Purchases (Exh. 13.3) 242,130 - Ending balance of DM (Note A) (4,680) = DM used 255,000 Direct labor (Exh. 13.5) 38,250 Production overhead (Exh. 13.6) 35,700 Total costs to be accounted for $328,950 Ending work in process inventory (0) Cost of goods manufactured (Note B) $328,950 Note A: Ending balance of direct material in units (Exh. 13.5) 7,800 Number of ounces needed for one unit x 3 Total number of ounces 23,400 Cost per ounce x $.20 Ending balance of direct material in dollars $4,680 Chapter 13

  16. Pro Forma Income Statement Fast-Food Funthings Pro Forma Income Statement (For the Quarter Ending March 31, 2004 Sales (Exh. 13.2) $880,000 Cost of goods sold Beginning finished goods inventory (Exh. 13.1) $ 15,000 Cost of goods manufactured 328,950 Ending finished goods inventory (Note A) (3,870) (340,080) Gross margin $539,920 Expenses Selling and administrative expenses (Exh. 13.6) $(80,000) Interest expense (net) (Exh. 13.10) (10) (80,010) Income before income taxes $459,910 Income taxes (assumed rate of 30%) (137,973) Net income $321,937 Note A: Units in ending FG (Exh. 13.3) x Cost per unit (Exh. 13.11; Note B) 5,000 x $.774 = $3,870 Chapter 13

  17. Fast-Food Funthings Pro Forma Balance Sheet March 31, 2004 Assets Cash (Exh. 13.10) $ 5,342 Accounts Receivable (10% x $300,000 + 70% x $180,000) 156,000 Inventories Direct Material (Exh. 13.4*) $ 4,680 Finished Goods (Exh. 13.11) 3,870 8,550 Investment (Exh. 13.10) 59,000 Plant Assets (Exh. 13.1 and 13.7) $400,000 Less Accumulated Depreciation (Exh. 13.1 and 13.6) (33,000) 367,000 Total Assets $595,892 Liabilities and Stockholders' Equity Accounts Payable (80% x $48,540) $ 38,832 Taxes Payable (Exh. 13.12) 137,973 Common Stock (Exh. 13.1 $ 80,000 Retained Earnings (Exh. 13.1 and 13.12) 339,087 419,087 Total Liabilities and Stockholders' Equity $595,892

  18. Pro Forma Statement of Cash Flows For the Quarter Ending March 31, 2004 Operating Activities: Net income $321,937 + Depreciation (Exh. 13.6) 3,000 - Increase in Accounts Receivable ($61,600 - $156,000) (94,400) + Decrease in DM Inventory ($17,550 - $4,680) 12,870 + Decrease in FG Inventory ($15,000 - $3,870) 11,130 - Decrease in Accounts Payable ($72,000 - $38,832) (33,168) + Increase in Taxes Payable ($0 - $137,973) 137,973 Net cash inflow from operations $359,342 Investing Activities: Purchase of plant assets (Exh. 13.7) $(300,000) Short-term cash investment (Exh. 13.10) (59,000) Net cash outflow from investing (359,000) Financing Activities: Issuance of short-term note (Exh. 13.10) $ 15,000 Repayment of short-term note (Exh. 13.10) (15,000) Net cash flow from financing 0 Net increase in cash $ 342 Beginning cash balance (Exh. 13.1) 5,000 Ending cash balance (Exh. 13.13) $ 5,342

  19. Variance Analysis A standard is simply a norm or average. A standard cost is the budgeted cost to make one unit of product (or perform one unit of service). Variance analysis is the process of determining the standard-to-actual differences and assessing whether that difference is favorable or unfavorable. Chapter 13

  20. Figure 13.1 Material Variance Calculations Actual Cost Standard Cost AP x AQ SP x AQ SP x SQ Material Price Variance Material Quantity Variance Total Material Variance Where AP = actual price AQ = actual quantity SP = standard price Chapter 13

  21. Figure 13.2 Labor Variance Calculations Actual Cost Standard Cost AP x AQ SP x AQ SP x SQ Labor Rate Variance Labor Efficiency Variance Total Labor Variance Where AP = actual price (rate of pay) AQ = actual quantity (hours of work) SP = standard price (rate of pay) SQ = standard quantity (hours of work) Chapter 13

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