Professional Documents
Culture Documents
Profit Planning
7-2
Learning Objective 1
Understand why
organizations budget and the
processes they use to create
budgets.
7-3
Planning
Planning Control
Control
involves
involves involves
involves the
the steps
steps
developing
developing taken
taken by
by
objectives
objectives and
and management
management that that
preparing
preparing various
various attempt
attempt to
to ensure
ensure
budgets
budgets to
to achieve
achieve the
the objectives
objectives are
are
these
these objectives.
objectives. attained.
attained.
7-5
Advantages of Budgeting
Define goals
and objectives
Communicate Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
7-6
Responsibility Accounting
Managers should be held responsible
for those items and only those items
that the manager can actually control
to a significant extent.
7-7
Operating Budget
Self-Imposed Budget
Top M anagem ent
M id d le M id d le
M anagem ent M anagem ent
S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r
Self-Imposed Budgets
Most companies do not rely exclusively upon
self-imposed budgets in the sense that top
managers usually initiate the budget process
by issuing broad guidelines in terms of overall
target profits or sales.
Self-imposed
budgets should be Managers should
reviewed by higher watch our for
levels of budgetary slack.
management.
7-11
Budgeted Budgeted
income balance
statement sheet
7-14
Learning Objective 2
Budgeting Example
Royal
Royal Company
Company is is preparing
preparing budgets
budgets for
for the
the
quarter
quarter ending
ending June
June 30.30.
Budgeted
Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units
The
The selling
selling price
price is
is $10
$10 per
per unit.
unit.
7-16
All
All sales
sales are
are onon account.
account.
Royals
Royals collection
collection pattern
pattern is:
is:
70%
70% collected
collected inin the
the month
month of of sale,
sale,
25%
25% collected
collected inin the
the month
month following
following sale,
sale,
5% 5% uncollectible.
uncollectible.
The
The March
March 3131 accounts
accounts receivable
receivable balance
balance of
of
$30,000
$30,000 will
will be
be collected
collected in
in full.
full.
7-18
Quick Check
Quick Check
Learning Objective 3
On
On March
March 31,
31, 4,000
4,000 units
units were
were on
on hand.
hand.
Lets
Lets prepare
prepare the
the production
production budget.
budget.
7-27
March 31
ending inventory
7-29
Quick Check
What is the required production
for May?
a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units
7-30
Quick Check
What is the required production
for May?
a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units
7-31
Learning Objective 4
March 31 inventory
Quick Check
How much materials should be
purchased in May?
a. 221,500 pounds
b. 240,000 pounds
c. 230,000 pounds
d. 211,500 pounds
7-39
Quick Check
How much materials should be
purchased in May?
a. 221,500 pounds
b. 240,000 pounds
c. 230,000 pounds
d. 211,500 pounds
7-40
Quick Check
Quick Check
Learning Objective 5
Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
7-53
Quick Check
What would be the total direct labor cost
for the quarter if the company follows its
no lay-off policy, but pays $15 (time-and-a-
half) for every hour worked in excess of
1,500 hours in a month?
a. $79,500
b. $64,500
c. $61,000
d. $57,000
7-55
Quick Check
What would be the total direct labor cost
for the quarter if the company follows its
no lay-off policy, but pays $15 (time-and-a-
half) for every hour worked in excess of
1,500 hours in a month? April May June Quarter
a. $79,500 Labor hours required 1,300 2,300 1,450
Regular hours paid 1,500 1,500 1,500 4,500
b. $64,500 Overtime hours paid - 800 - 800
Learning Objective 6
Prepare a manufacturing
overhead budget.
7-57
Lets
Lets prepare
prepare the
the manufacturing
manufacturing overhead
overhead budget.
budget.
7-58
Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
7-61
Direct materials
budget and information
7-62
Production Budget
7-65
Learning Objective 7
Lets
Lets prepare
prepare the
the companys
companys selling
selling and
and
administrative
administrative expense
expense budget.
budget.
7-67
Quick Check
What are the total cash disbursements
for selling and administrative expenses
for the quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000
7-69
Quick Check
What are the total cash disbursements
for selling and administrative expenses
for the quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000
7-70
Learning Objective 8
Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections
Collections
7-75
Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements
Disbursements
Direct Labor
Budget
Manufacturing
Overhead Budget
Quick Check
What is the excess (deficiency) of
cash available over disbursements
for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000
7-80
Quick Check
What is the excess (deficiency) of
cash available over disbursements
for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000
7-81
Learning Objective 9
Prepare a budgeted
income statement.
7-83
Cash
Cash Budget
Budget
7-85
Learning Objective 10
Prepare a budgeted
balance sheet.
7-86
Royal Company
Budgeted Balance Sheet 25%
25% of
of June
June
June 30 sales
sales of
of
Current assets $300,000
$300,000
Cash $ 43,000
Accounts receivable 75,000 11,500
11,500 lbs.
lbs.
Raw materials inventory 4,600 at
at $0.40/lb.
$0.40/lb.
Finished goods inventory 24,950
Total current assets 147,550 5,000
5,000 units
units
Property and equipment at
at $4.99
$4.99 each
each
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
50%
50% of of June
June
Accounts payable $ 28,400
purchases
purchases
Common stock 200,000
of
of $56,800
$56,800
Retained earnings 336,150
Total liabilities and equities $ 564,550
7-88
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable 75,000
Beginning balance $146,150
Raw materials inventory Add:
4,600net income 239,000
Deduct: dividends (49,000)
Finished goods inventory 24,950
Ending balance $336,150
Total current assets 147,550
Property and equipment
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
End of Chapter 7