Budget types. CH 6: Budgets HOW DO YOU COME UP WITH THE NUMBERS? Budget Periods WHY BUDGET?

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Egbert Derek Hensley
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1 CH 6: s WHY? PLANNING COMMUNICATION CONTROL:PERFORMANCE EVALUATION MOTIVATING types Master» Operating Sales, Production [purchases], Operating Expense. ProForma Income Statement» Financial Cash, Capital, ProForma Balance Sheet Capital» Forecast of Long term Goals and Objectives equipment, building HOW DO YOU COME UP WITH THE NUMBERS? Periods INPUT / OUTPUT APPROACH ACTIVITY BASED APPROACH INCREMENTAL APPROACH MINIMUM LEVEL APPROACH (zero based budgeting) KAIZEN APPROACH: continuous improvement Next year» By month or quarter Next 5 years Rolling or continuous budget SALES Non- Manufacturing Organization Sales Production Manufacturing Organization CASH RECEIPTS CAPITAL PURCHASES CASH PAYMENTS SELL & ADMIN. EXPENSE DM Materials Direct Labor Overhead CASH PRO FORMA FINANCIAL STATEMENTS CASH PAYMENTS

Periods INPUT / OUTPUT APPROACH ACTIVITY BASED APPROACH INCREMENTAL APPROACH MINIMUM LEVEL APPROACH (zero based budgeting) KAIZEN APPROACH: continuous improvement Next year» By month or quarter Next

2 Sales Example: Sales Forecast units Forecast sales price Who does this? Sales = units x price Sales Forecast in Units Forecasted Sales Price $30 per unit Sales Forecast (units) Unit Sales Price $30 $30 $30 $30 $3,000 $6,000 $9,000 $18,000 Cash Receipts Cash Receipts : next year Sales Price per unit $30.00 Sales Collection patterns Balance in Accounts Receivable next year Sales Price per unit $30.00 Collection Pattern 80% 20% Accounts Receivable, Beg of Yr $ 220 Collection Pattern 80% 20% Accounts Receivable, Beg of Yr $ 220 Cash Receipts in January: * 3000 = 2,620 February: +.2* * 6000 = 600+4,800 =5,400 March: +.2* *9000=1, ,200 = 8,400 Purchase Example: Purchase Sales Inventory Requirements Current Inventory level Unit cost of inventory (units)= Sales in units + Ending Inventory in units Beginning Inventory in units January : Jan sales + End Inventory Beg. Inventory= * /10 = = 109 units

Cash Receipts : next year Sales Price per unit $30.00 Sales Collection patterns Balance in Accounts Receivable next year Sales Price per unit $30.

3 PRODUCTION INVENTORY PURCHASES Desired Ending Inventory Plus:Unit Sales Total needed Less:Beg. Inventory Unit x unit cost $10.00 $10.00 $10.00 $10.00 Cost of $1,090 $2,100 $3,100 $6,290 OF PRODUCTION NEEDS» SALES + END INVENTORY BEG INVENTORY OF RM PURCHASES» PRODUCTION + END INV OF RM BEG INV OF RM OF DIRECT LABOR» PRODUCTION X DLH/UNIT X DL RATE OF OVERHEAD» PRODUCTION X DLH/UNIT X OH RATE PER DL HOUR PRODUCTION EXAMPLE next year May 400 Inventory Requirements 10% of next month's sales Inventory Costs: $10.00 /UNIT Inventory, Beg of YR $ 110 RM Inventory, Beg. Of Yr $ RM Unit Cost $ 2.00 RM units per FG 3 RM Inventory Requirements 5% (round up to whole units) Direct Labor per unit of FG $ 3.00 OH per Unit of FG $ 1.00 Production Jan Feb Mar APR Sales plus End Inv less Beg Inv (11) (20) (30) (40) Production in Units RM Purchase Jan Feb Mar Prod Needs plus Ending Inv less BEG Inv (15) (32) (47) Total (units) Unit cost $ 2.00 $ 2.00 $ 2.00 $ 688 $ 1,290 $ 1,886 Direct Labor Jan Feb Mar production DL cost per Unit $ 3.00 $ 3.00 $ 3.00 $ 327 $ 630 $ 930 OH Jan Feb Mar production OH cost per Unit $ 1.00 $ 1.00 $ 1.00 $ 109 $ 210 $ 310 Selling and Admin. Expense Sales Variable Expenses Fixed Expenses Cost equation Cost = Variable Rate (units) + Fixed Cost

00 Cost of $1,090 $2,100 $3,100 $6,290 OF PRODUCTION NEEDS» SALES + END INVENTORY BEG INVENTORY OF RM PURCHASES» PRODUCTION + END INV OF RM BEG INV OF RM OF DIRECT LABOR» PRODUCTION X DLH/UNIT X DL

4 Example: Selling and Admin. Expense Selling and Administrative Expense Commissions 5% per unit Delivery $ 1 per unit Sales Salaries $ 1,000 per month Administrative Supplies $ 2 per unit Administrative Salaries $ 1,500 per month Admininstrative Depreciatio $ 50 per month Sales price per unit = $30 Example: Selling and Admin. Expense (cont) SELLING AND ADMINISTRATIVE EXPENSE Jan Feb March Commissions $150 $300 $450 Delivery Sales Salaries 1,000 1,000 1,000 Administrative Supplies Administrative Salaries 1,500 1,500 1,500 Admininstrative Depreciation Total $3,000 $3,450 $3,900 Cash Payments Selling and Administrative Expense Payment patterns Account Payable balance Cash Payments Example g p y INVENTORY PURCHASES Jan Feb March Desired Ending Inventory Plus:Unit Sales SELLING AND 340 ADMINISTRATIVE EXPENSE Total needed 120 Less:Beg. Inventory Jan Feb March Unit Commissions 310 $150 $300 $ x unit cost $10.00 $10.00 Delivery $10.00 Sales Salaries 1,000 1,000 1,000 Cost of $1,090 $2,100 $3,100 Administrative Supplies Administrative Salaries 1,500 1,500 1,500 Admininstrative Depreciation Total $3,000 $3,450 $3,900 Cash Payments History 90% in month purchased 10% in month following purchase All other 100% in month incurred Accounts Payable, beg of YR $900 Cash Payments Cash Payments for in January: January x.9 + Accounts Pay,Dec x = = 1,881 Cash Payments for Selling and Adm. Expenses January Expenses x 100% - depreciation = 3, = 2,950 Cash Payments SCHEDULE OF CASH PAYMENTS Current Month $ 981 $ 1,890 $ 2,790 $ 5,661 Prior Month ,219 Total CP for $ 1,881 $ 1,999 $ 3,000 $ 6,880 Selling and Adm. Expens $ 3,000 $ 3,450 $ 3,900 $ 10,350 Less: Depreciation (50) (50) (50) (150) Total S&A Cash Paymen $ 2,950 $ 3,400 $ 3,850 $ 10,200 Total Cash Payments $ 4,831 $ 5,399 $ 6,850 $ 17,080

month Admininstrative Depreciatio $ 50 per month Sales price per unit = $30 Expense (cont) SELLING AND ADMINISTRATIVE EXPENSE Jan Feb March Commissions $150 $300 $450 Delivery 100 200 300 Sales

5 Cash Cash Receipts Cash Payments Beginning Cash Balance Capital, Dividend Policy Minimum Cash Balance Requirements Borrowing policy Cash Example: Cash SCHEDULE OF CASH RECEIPTS Current Qtr $2,400 $4,800 $7,200 $14,400 Prior Qtr $220 $600 $1,200 $2,020 g p $2,620 y $5,400 $8,400 $16,420 SCHEDULE OF CASH PAYMENTS Current Month $ 981 $ 1,890 $ 2,790 $ 5,661 Prior Month ,219 Total CP for $ 1,881 $ 1,999 $ 3,000 $ 6,880 Selling and Adm. Expens $ 3,000 $ 3,450 $ 3,900 $ 10,350 Less: Depreciation (50) (50) (50) (150) Total S&A Cash Paymen $ 2,950 $ 3,400 $ 3,850 $ 10,200 Total Cash Payments $ 4,831 $ 5,399 $ 6,850 $ 17,080 Minimum Cash Balance $500 Borrows and repays in multiples of $100 Borrow at beg. of month, repay at end of month Interest Rate 0.00% per annum, interest is due at end of each month Jan Feb Mar Equipment $1,000 $0 $0 Dividend Payments $0 $200 $0 Cash, Dec 31, 2000 $518 Cash CASH Beginning Cash Balance $518 $507 $508 $518 Add: Cash Receipts 2,620 5,400 8,400 16,420 Total Available 3,138 5,907 8,908 16,938 Less: Cash Payments $1,881 $1,999 $3,000 $6,880 Selling & Admin 2,950 3,400 3,850 $10,200 Equipment 1, $1,000 Dividends Total Cash payments 5,831 5,599 6,850 18,280 Cash Balance Before Financing (2,693) 308 2,058 (1,342) Borrowing 3, $3,400 Repayments 0 0 1,500 $1,500 Interest $0 Cash Balance,Ending Pro Forma Income Statement INCOME STATEMENT Jan-March Sales $18,000 Less: CGS 6,000 GROSS MARGIN 12,000 LESS: SELLING & ADM. EXPENSES 10,350 Income Before Tax 1,650 PRO FORMA BALANCE SHEET Balance Sheet Mar 31,2001 Cash $558 Accounts Payable $310 Accounts Receivable 1,800 NOTES PAYABLE 1,900 Inventory 400 Land 10,000 Capital Stock 20,000 Building, Equipment 31,000 Retained Earnings 6,398 less:accum. Depreciation (15,150) $28,608 $28,608 Balance Sheet Last year (historical) Cash $518 Accounts Payable $900 Accounts Receivable 220 Notes Payable Inventory 110 Land 10,000 Building, Equipment 30,000 Capital Stock 20,000 less:accum. Depreci (15,000) Retained Earnings 4,948 $25,848 $25,848 Pro Forma Balance Sheet: Land = 10,000 Building = 30, ,000 (from capital budget) Accumulated Depreciation = *3 =15,150 ($50 from S&A )

for $ 1,881 $ 1,999 $ 3,000 $ 6,880 Selling and Adm.

6 Balance Sheet Common Stock = $20,000» Historical Balance Sheet Retained Earnings = $6,398» Beg. Ret. Earnings (Historical Balance Sheet) + Net Income - Dividends

Dutchess Community College ACC 204 Managerial Accounting Quiz Prep Chapter 9

Dutchess Community College ACC 204 Managerial Accounting Quiz Prep Chapter 9 Budgetary Planning Peter Rivera March 2011 Disclaimer This Quiz Prep is provided as an outline of the key concepts from the