PRODUCTION BUDGET Budgeted sales + desired ending inventory beginning inventory = required production

Transcription

1 PARTS 3 and 4: Master Budget Formulas SALES BUDGET Forecasted units sold x selling price = total sales PRODUCTION BUDGET Budgeted sales + desired ending inventory beginning inventory = required production DIRECT MATERIALS BUDGET (Units to produce x raw materials per unit) + desired ending inventory beginning inventory = raw materials to purchase DIRECT LABOUR BUDGET Units to produce x direct labour time per unit x direct labour cost per hour = total direct labour cost MANUFACTURING OVERHEAD BUDGET (Direct labour hours x variable overhead rate) + FMOH depreciation= cash disbursements for overhead ENDING FINISHED GOOD INVENTORY BUDGET (Direct materials cost per unit + direct labour cost per unit + manufacturing overhead per unit) x ending finished goods inventory in units = ending finished goods inventory SELLING AND ADMINISTRATIVE EXPENSE BUDGET (Unit sales x variable selling and administrative expense per unit) + fixed selling and administrative expenses = total selling and administrative expenses -1- MA1_mod6_handout1.doc

2 PART 3 Slides 17 20: Question 4 March 2005 Alarums Ltd. produces alarm clock radios with CD players built into them. They had the following results for January 20XX: January Units: Beginning inventory 0 Production 1,000 Sales 900 Ending inventory (all units are finished at the end of the period there is no work in process) 100 Costs: Variable manufacturing costs per unit: Direct materials $ Direct labour 5.00 Variable manufacturing overhead 3.00 Variable marketing costs per unit 2.00 Fixed manufacturing overhead 8,000 Fixed marketing and administrative costs 12,000 Sales price per unit $ Required a. Prepare in good form a variable-costing format income statement for Alarums for the month of January. b. Prepare in good form an absorption-costing format income statement for Alarums for the month of January. c. Prepare a schedule reconciling the net incomes for January under the variable and absorption costing methods. -2- MA1_mod6_handout1.doc

3 PART 3 Slides 17 20: Question 4 March 2005 Solution a. ALARUMS LTD. Variable Costing Income Statement for the month ended January 31, 20XX Sales $ 40,500 1 Less: Variable cost of goods sold 16,200 2 Variable marketing costs 1,800 3 Contribution margin 22,500 Less: Fixed manufacturing costs 8,000 Fixed marketing and administrative costs 12,000 Net income $ 2,500 b. ALARUMS LTD. Absorption Costing Income Statement for the month ended January 31, 20XX Sales $ 40,500 1 Cost of goods sold 23,400 4 Gross margin 17,100 Marketing and administrative costs 13,800 5 Net income $ 3,300 c. Reconciliation of net incomes: Net income under absorption costing $ 3,300 Less: Costs inventoried under absorption costing [100 ($8,000/1,000)] (800) Net income under variable costing $ 2, $45 = $40, $18 = $16, $2 = $1, $18 + (8,000/1,000) 900 = $23,400 5 $12,000 + (900 $2) = $13, MA1_mod6_handout1.doc

4 PART 3 Slides 17 20: Question 2 June 2003 Boat Refit Inc. produces and sells custom parts for powerboats. The company uses a costing system based on actual costs. Selected accounting and production information for fiscal 2002 is as follows: Net income (under absorption costing) $ 400,000 Sales $ 3,400,000 Fixed factory overhead $ 600,000 Fixed selling and administrative costs (all these costs are fixed) $ 400,000 Net income (under variable costing) $ 310,000 Units produced 2,000 Units sold? Boat Refit had no work in process inventory at either the beginning or the end of fiscal The company also did not have any finished goods inventory at the beginning of the fiscal year. Required a. Calculate the units sold in fiscal b. Calculate the total contribution margin under variable costing. c. Calculate the gross margin under absorption costing. d. Calculate the cost per unit sold under variable costing. e. Calculate the cost per unit sold under absorption costing. -4- MA1_mod6_handout1.doc

5 PART 3 Slides 17 20: Question 2 June 2003 Solution a. Number of units sold: Net income under absorption costing $ 400,000 Net income under variable costing 310,000 Absorption costing exceeds variable costing $ 90,000 Since absorption costing net income exceeds variable costing net income, this means that sales must have been less than production. Fixed factory overhead/units produced = Cost per unit $600,000/2,000 = $300 Therefore, the number of units transferred to inventory = $90,000/$300 = 300 units. Sales for May = 2, = 1,700 units b. Contribution margin under variable costing: Sales $3,400,000 Variable costs? Contribution margin? Fixed overhead (600,000) Fixed selling and admin. Expenses (400,000) Net income 310,000 3,400, , , ,000 = variable costs of $2,090,000 3,400,000 2,090,000 = 1,310,000 contribution margin c. Gross margin under absorption costing: Sales 3,400,000 Cost of goods sold? Gross margin? Fixed selling and administrative expenses (400,000) Net income 400,000 3,400, , ,000 = cost of goods sold of $2,600,000 3,400,000 2,600,000 = $800,000 Gross margin d. Cost per unit sold under variable costing: Contribution margin $ 1,310,000 Add back variable manufacturing costs 2,090,000 Sales $ 3,400,000 Cost per unit ($2,090,000/1,700) $ 1, e. Cost per unit sold under absorption costing: Fixed costs of production/production level = Fixed cost per unit $600,000/2,000 units = $300 Cost per unit = $1, $300 = $1, OR Cost of goods sold calculated in part c of $2,600,000 / 1700 units = $1,529,41-5- MA1_mod6_handout1.doc

6 PART 7 Slides Exercise 9-1, page July August September Total May sales: $430,000 10% $ 43,000 $ 43,000 June sales: $540,000 70%, 10% 378,000 $ 54, ,000 July sales: $600,000 20%, 70%, 10% 120, ,000 $ 60, ,000 August sales: $900,000 20%, 70% 180, , ,000 September sales: $500,000 20% 100, ,000 Total cash collections $541,000 $654,000 $790,000 $1,985, Accounts receivable at September 30: From August sales: $900,000 10%... $ 90,000 From September sales: $500,000 (70% + 10%) ,000 Total accounts receivable... $490,000 PART 7 Slides Exercise 9-2, page 410 July August September Quarter Budgeted sales in units 30,000 45,000 60, ,000 Add desired ending inventory* 4,500 6,000 5,000 5,000 Total needs 34,500 51,000 65, ,000 Less beginning inventory 3,000 4,500 6,000 3,000 Required production 31,500 46,500 59, ,000 *10% of the following month s sales -6- MA1_mod6_handout1.doc

7 PART 8 Slides 83 86: Question 5 March 2004 OMB Ltd. s September balance sheet contains the following information: Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory $ 30,000 (dr) 100,800 (dr) 2,240 (cr) 21,000 (dr) Management has designated $30,000 as the firm s minimum monthly cash balance. Other information about the firm and its operations is as follows: 1. Sales revenues of $280,000, $336,000, and $250,000 are expected for October, November, and December, respectively. All goods are sold on account. 2. The collection pattern for accounts receivable is 55% in the month of sale, 44% in the month following the month of sale, and 1% uncollectible, which is set up as an allowance. 3. Cost of goods sold is 60% of sales revenues. 4. Management s target ending balance of merchandise inventory is 10% of the current month s sales. 5. All accounts payable for inventory are paid in the month of purchase. 6. Other monthly expenses are $37,800, which includes $2,800 of amortization but does not include bad debt expense. 7. Borrowings and investments can only be made in $5,000 increments at the end of a month. Interest is charged at the rate of 10% per year; interest will be earned at the rate of 8% per year. Required a. Prepare a cost of purchases schedule for October and November. b. Prepare the cash budgets for October and November including the effects of financing (borrowing or investing) -7- MA1_mod6_handout1.doc

8 PART 8 Slides 83 86: Question 5 March 2004 Solution a. BEFORE you attempt to answer this part of the question, review the formula for the purchase budget. October November Cost of goods sold (60% x sales) 168, ,600 Plus desired ending inventory 10% x 168,000 10% x 201,600 16,800 20,160 Total needs 184, ,760 Less beginning inventory 21,000 16,800 Cost of Purchases 163, ,960 b. October Cash Budget Beginning cash balance $ 30,000 October collections: September sales collected: A/R - AFDA 98,560 October sales collected: 280,000 x 55% 154, ,560 Total cash inflows 282,560 Disbursements Merchandise purchases 163,800 Other monthly expenses 37,800 2,800 35,000 Total disbursements (198,800) Excess of cash inflows over outflows 83,760 Investment 50,000 Ending cash balance $ 33,760 November Cash Budget Beginning cash balance $ 33,760 November collections: October sales collected: 280,000 x 44% 123,200 November sales collected: 336,000 x 55% 184, ,000 Total cash inflows 341,760 Disbursements Merchandise purchases 204,960 Other monthly expenses 37,800 2,800 35,000 Total disbursements (239,960) Excess of cash inflows over outflows 101,800 Interest on investments: 1/12 x 8% x 50, ,133 Investment 70,000 Ending cash balance $ 32, MA1_mod6_handout1.doc

9 PART 9 Slides 87 88: Question 4 June 1991 The Mosquito Nest Co. Inc. presents you with the following selected information: Part of the trial balance at April 1, 1990 showed: Debits Credits Cash $ 6,000 Accounts receivable 19,500 Allowance for bad debts $ 2,400 Merchandise inventory 12,000 Accounts payable, merchandise 9,000 The company s purchases are payable within ten days. Assume that one-third of the purchases of any month are due and paid for in the following month. The unit invoice cost of the merchandise purchased is $10. At the end of each month, the company s policy is to have an inventory equal to 50% of the following month s unit sales. Sales terms include a 1% discount if payment is made by the end of the calendar month in which the sale took place. Past experience indicates that 60% of the billings will be collected during the month of the sale, 30% in the following calendar month, 6% in the next following calendar month, and 4% will be uncollectible. Sales data: Selling price per unit $ 15 February actual sales revenue 15,000 March actual sales revenue 45,000 April estimated sales revenue 36,000 May estimated sales revenue 27,000 Total sales expected in the fiscal year 450,000 The company s fiscal year begins February 1. Exclusive of bad debts, the total budgeted selling and general administrative expenses for the fiscal year are estimated at $70,500, of which $21,000 is fixed expense (inclusive of a $9,000 annual depreciation charge). These fixed expenses are incurred uniformly throughout the year. The balance of the selling and general administrative expenses varies with sales. Expenses are paid as incurred. REQUIRED: Prepare a cash budget for the month of April. -9- MA1_mod6_handout1.doc

10 PART 9 Slides 87 88: Question 4 June 1991 Solution Cash balance, beginning 6,000 Receipts From February: 6% x 15, Disbursements From March: 30% x 45,000 13,500 From April: 60% x 36,000 x.99 21,384 41,784 Purchases: March 9,000 April 14,000 1 ( 23,000) Selling and administration Variable [ (70,500 21,000) / 450,000 ] x 36,000 ( 3,960) Fixed (21,000 9,000) / 12 ( 1,000) Cash balance, April 30 13,824 Calculation 1 April May Sales $ $36,000 $27,000 Cost of sales (2/3 of sales) 24,000 18,000 Desired end invent. (50% of following month) 9,000 Total needs 33,000 Beginning inventory (Given) (12,000) Purchases 21,000 Cash disbursement for April purchase (2/3 paid in April 21,000 x 2/3) $14, MA1_mod6_handout1.doc

11 PART 10 Slides 89 90: Question 3 December 1992 Stromwitz Co. Ltd., and sells Widgets. Budgeted unit sales for the first six months of 1992 are as follows: Month Sales January 3,500 February 4,000 March 6,000 April 8,000 May 12,000 June 12,000 Each Widget requires three pounds of direct materials which cost $5.00 per pound. Stromwitz s inventory policy is to have available at the end of each month finished units equal to 25% of the following month s sales. For direct materials, their policy is to have on hand at the end of each month enough material for 30% of the following month s production. A total of 50% of purchases are paid for in the month of purchase and 50% in the following month. REQUIRED: Compute the April cash disbursements for payment of accounts payable regarding direct materials purchases. Solution March April May Sales 6,000 8,000 12,000 FG desired ending inv. 2, , ,000 3 FG, beginning (1,500) 1 (2,000) (3,000) Produced 6,500 9,000 12,000 Calculations 1 25%(6,000) = 1, %(8,000) = 2, %(12,000) = 3,000 March April Units to produce 6,500 9,000 RM per unit 3 3 RM needs 19,500 27,000 DM, ending 8, ,800 3 DM, beginning (5,850) 1 (8,100) 2 Total needs 21,750 29,700 Unit cost $5 $5 Total cost $108,750 $148,500 Payment March: $108,750 x ½ = $ 54,375 April: $148,500 x ½ = 74,250 $128,625 Calculations 1 30%(6,500 x 3) = 5, %(9,000 x 3) = 8, %(12,000 x 3) = 10, MA1_mod6_handout1.doc

12 PART 11 Slides Multiple Choice Questions - Module 6 Q1. Parts (a), (b), (c), and (d) refer to the following information: March 2003 exam The following information is from Skiros Company s records for the year ended December 31, 2002: Sales $1,400,000 Cost of goods manufactured: Variable $ 630,000 Fixed $ 315,000 Operating expenses: Variable $ 98,000 Fixed $ 140,000 Units manufactured 70,000 units Units sold 60,000 units Finished goods inventory, January 1, units There were no work in process inventories at the beginning or end of the year. a. What would be the cost of the ending finished goods inventory cost under variable costing? 1) $ 90,000 10,000 (DM + DL + VOH) 2) $104,000 = 10,000 (630,000/70,000) 3) $105,000 = 10,000 (9) 4) $135,000 = 90,000 answer: 1) b. What would be the cost of the ending finished goods inventory cost under absorption costing? 1) $ 90,000 10,000 (DM + DL + VOH + FOH) 2) $104,000 = 10,000 ( ,000/70,000) 3) $105,000 = 10,000 ( ) 4) $135,000 = 135,000 answer: 4) c. What would be the operating profit for the year under absorption costing? 1) $217,000 Sales 1,400,000 2) $307,000 COGS 60,000(13.50) 810,000 3) $352,000 Gross profit 590,000 4) $374,000 Fixed selling ( 140,000) Variable selling ( ) answer: 3) Operating profit 352,000 d. What would be the operating profit for the year under variable costing? 1) $135,000 Sales 1,400,000 2) $217,000 Variable COGS (60,000 x 9) ( 540,000) 3) $307,000 Variable selling ( 98,000) 4) $352,000 Contribution margin 762,000 FOH + FSE (315, ,000) ( 455,000) answer: 3) Operating profit 307, MA1_mod6_handout1.doc

13 PART 11 Slides Multiple Choice Questions (continued) Q2. The following data were collected by Balto Co. for the month of May: Master budget data: Sales 9,000 $30 Variable costs $23 per unit Total fixed costs $18,800 Actual results: Sales 9,600 $29 Variable costs $24 per unit Total fixed costs $18,200 What was the May variance from the master budget operating income? 1) $14,400 F Plan Actual 2) $14,400 U Sales: 9,000 x 30; 9,600 x , ,400 3) $29,800 U VC: 9,000 x 23; 9,600 x 24 (207,000) ( 230,400) 4) $44,200 F Fixed costs ( 18,800) ( 18,200) Operating profit 44,200 28,800 June 2003 exam answer: 2) You have 14,400 less income than planned. Thus it is unfavourable. Q3. A company has the following incomplete production budget data for the first quarter: January February March Expected unit sales 1,000 3,000 4,000 In the previous December, ending inventory was 100 units, which was the minimum required, at 10% of projected sales units in the coming month. What is the expected production in February? 1) 3,000 units Find a formula! 2) 3,100 units 3) 3,400 units Unit sales + desired ending inv. beg inventory = production 4) 3,600 units 3,000 + (10% of 4,000) - (10% of 3,000) = 3,100 March 2006 exam Production = 3,100 units answer: 2) -13- MA1_mod6_handout1.doc

14 PART 11 Slides Multiple Choice Questions (continued) Q4. Which of the following statements regarding the use of variable costing versus absorption costing is true? 1) Absorption costing treats all costs of production as product costs, regardless of whether the costs are variable or fixed. 2) Absorption costing treats only variable costs of production as product costs. 3) Absorption costing treats only fixed costs of production as product costs. 4) Absorption costing harmonizes fully with the contribution approach and cost-volume-profit concepts. March 2007 exam answer: 1) Q5. How does the accounting treatment of selling and administration costs differ between absorption and variable costing if more units are produced than are sold? 1) The variable portion is added to the cost of ending inventory based on a pro rata portion of units produced to those sold. 2) The fixed portion is added to the costs of ending inventory based on a pro rata portion of units produced to those sold. 3) There is no difference in the treatment. 4) Both fixed and variable portions are added to the cost of ending inventory based on a pro rata portion of units produced to those sold. March 2007 exam answer: 3) Fixed selling and administration costs are treated as period costs under both methods. Q6. Use the following information to answer parts (a) and (b) December 2006 exam For the year ended December 31, 2005, Ventor Corporation has the following records of its costs: Direct materials used $ 600,000 Direct labour 200,000 Variable manufacturing overhead 100,000 Fixed manufacturing overhead 160,000 Selling and administrative costs (variable) 80,000 Selling and administrative costs (fixed) 40,000 a. If Ventor uses variable costing, what would the inventoriable costs for the year ended December 31, 2005 be? For variable costing, only variable manufacturing costs are inventoriable: 1) $ 800,000 2) $ 900,000 3) $ 980,000 4) $ 1,060,000 December 2007 exam answer: 2) b. If Ventor were to use absorption costing instead, what would the inventoriable costs be? 1) $ 800,000 2) $ 900,000 3) $ 1,060,000 4) $ 1,180,000 December 2007 exam answer: 3) Total inventoriable costs = Direct material + Direct labour + Variable manufacturing overhead = $600, , ,000 = $900,000 For absorption costing, all costs of production are capitalized into inventory: Total inventoriable costs = Variable manufacturing cost + Fixed manufacturing overhead = $900,000 + $160,000 = $1,060, MA1_mod6_handout1.doc