C2 - PPT Cost II

Chap-
ter 9
Budgeting and Profit
Planning
BUDGETING BASICS
 A formal written statement of management’s

plans for a specified future time period, expressed
in financial terms
 Primary way to communicate agreed-upon objec-
tives to all parts of the company
 Promotes efficiency
 Control device - important basis for performance
evaluation once adopted
BUDGETING BASICS
Benefits of Budgeting
 Requires all levels of management to plan

ahead and formalize goals on a recur-
ring basis
 Provides definite objectives for evaluating
performance at each level of responsi-
bility
 Creates an early warning system
for potential problems
BUDGETING BASICS
Benefits of Budgeting
 Facilitates coordination of activities
within the business
 Results in greater management
awareness of the entity’s overall oper-
ations and the impact of external
factors
 Motivates personnel throughout orga-
nization to meet planned objectives
BUDGETING BASICS
Role of Accounting
 Historical accounting data on
revenues, costs, and expenses
help in formulating future bud-
gets
 Accountants are normally re-
sponsible for presenting man-
agement’s budgeting goals in fi-
nancial terms
 The budget and its administra-
tion are, however, entirely man-
agement’s responsibility
The Basic Framework of Budgeting
Detail
Budget
Detail
Materials
Budget
Detail
Production
Budget
Master
Budget
Sales
Summary of
a company’s
plans.
Advantages of Budgeting
Define goal
and objectives
Communicating Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
Choosing the Budget Period
Operating Budget
2008 2009 2010 2011
The annual operating budget

may be divided into monthly
or quarterly budgets.
The Perpetual Budget
Continuous or
Perpetual Budget
2008 2009 2010 2011
This budget is usually a twelve-month

budget that rolls forward one month
as the current month is completed.
Participative Budget System
Top M an ag em en t
M id d le M id d le
M an ag em en t M an ag em en t
S u p ervis or S u p ervisor S u p ervisor S u p ervis or
Flow of Budget Data

Responsibility Accounting
Managers should be held responsible for

those items — and only those items — that
the manager can actually control
to a significant extent.
The Budget Committee
A standing committee responsible for

overall policy matters relating to the budget
coordinating the preparation of the budget
Chapter 9 Quiz: Question 1
Which of the following is NOT true about the Master

Budget?

a)It is composed of many interrelated budgets.

b)It consists of 2 classes of budgets: Operating Bud-
gets and Financial Budgets.
c)Within the master budget the first budget to be
prepared is the sales budget.
d)It constitutes a plan of action for a specified period
of time.
e)All of the above are true.
The Master Budget
Sales
Budget
Ending Selling and

Production
Inventory Administrative
Budget
Budget Budget
Direct Direct Manufacturing

Materials Labor Overhead
Budget Budget Budget
The Master Budget
Sales
Budget
Ending Selling and

Production
Inventory Administrative
Budget
Budget Budget
Direct Direct Manufacturing

Materials Labor Overhead
Budget Budget Budget
Cash
Budget Budgeted Fi-
nancial State-
ments
The Sales Budget
A detailed schedule showing expected

sales for the budgeted periods ex-
pressed in units and dollars.
The Sales Budget
 First budget prepared
 Derived from the sales forecast
 Management’s best estimate of sales revenue for the
budget period
 Every other budget depends on the sales budget
 Prepared by multiplying
expected unit sales volume for each product
times
anticipated unit selling price
The Sales Budget
Factors considered in Sales Forecasting:
 General economic conditions
 Industry trends
 Market research studies
 Anticipated advertising and promotion
 Previous market share
 Price changes
 Technological developments
The Sales Budget - Example
 Royal Company is preparing budgets for the
quarter ending June 30.
 Budgeted sales for the next five months are:
 April 20,000 units
 May 50,000 units
 June 30,000 units
 July 25,000 units
 August 15,000 units.
 The selling price is $10 per unit.
The Sales Budget
April May June Quarter
Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling price
per unit
Total sales
The Sales Budget
Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling price
per unit $ 10 $ 10 $ 10 $ 10
Total sales $200,000 $500,000 $300,000 $1,000,000
The Production Budget
Sales Production
Budget Budget
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Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
 Shows the units that must be produced to meet antici-
pated sales
 Derived from sales budget plus the desired change in
ending finished goods (ending finished goods less the
beginning finished goods units)
 Required production in units formula:
 Royal Company wants ending inventory

to be equal to 20% of the following
month’s budgeted sales in units.
 On March 31, 4,000 units were on hand.
 Let’s prepare the production budget.

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000
Total needed 30,000
Less beginning
inventory 4,000
Required production 26,000
Budgeted sales 50,000

Desired percent 20%
Desired inventory 10,000
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000
Total needed 30,000
Less beginning
inventory 4,000
March 31
ending inventory
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000 6,000
Total needed 30,000 56,000
Less beginning
inventory 4,000

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
Total needed 30,000 56,000
Less beginning
Required production 26,000 46,000

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000
Less beginning
inventory 4,000 10,000 6,000 4,000
Required production 26,000 46,000 29,000 101,000

Direct material purchase budget
A direct materials purchases budget is a detailed plan that identifies
the quantity of purchases required to meet budgeted production
and inventory needs and the costs associated with those pupur-
chases
A purchasing department uses this information to plan purchases of
direct materials.
Accountants use the same information to estimate cash payments to

suppliers.
To prepare a direct materials purchases budget, managers must

know what production needs will be
in each accounting period in the budget; this information is pro-

vided by the production budget_x0000_
The Direct Materials Budget
 At Royal Company, five pounds of material
are required per unit of product.
 Management wants materials on hand at
the end of each month equal to 10% of the
following month’s production.
 On March 31, 13,000 pounds of material
are on hand. Material cost $0.40 per
pound.
Let’s prepare the direct materials budget.
Production (units) 26,000 46,000 29,000 101,000
Mat'l per unit (lbs)
Production needs
Add desired
Ending Inv (lbs)
Total needed
Less beginning
inventory (lbs)
Materials to be
purchased (lbs)
From production
budget
Mat'l per unit (lbs) 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add desired
Ending Inv (lbs)
Total needed
Less beginning
inventory (lbs)
Materials to be
purchased (lbs)
Add desired
Ending Inv (lbs) 23,000
Total needed 153,000
Less beginning
inventory (lbs)
Materials to be
purchased
10% of the following

month’s production
Add desired
Ending Inv (lbs) 23,000
Total needed 153,000
Less beginning
inventory (lbs) 13,000
Materials to be
purchased 140,000
March 31
inventory
Add desired
Ending Inv (lbs) 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less beginning
inventory (lbs) 13,000 23,000 14,500 13,000
Materials to be
purchased 140,000 221,500 142,000 503,500
Add desired
Ending Inv (lbs) 23,000 14,500 11,500 11,500
Total needed 153,000and Inventory
July Production 244,500 156,500 516,500
Less beginning
Sales in units 25,000
Add desired
inventory (lbs)ending 13,000
inventory 23,0003,000 14,500 13,000
Total units needed 28,000
Materials to be
Less beginning inventory 5,000
purchased
Production in units140,000 221,500
23,000 142,000 503,500
Pounds per unit 5
Total pounds 115,000
Desired percent 10%
Desired ending inventory 11,500
The Willsey Merchandise Company has budgeted

$40,000 in sales for the month of December. The
company's cost of goods sold is 30% of sales. If the
company has budgeted to purchase $18,000 in mer-
chandise during December, then the budgeted
change in inventory levels over the month of De-
cember is:
A. $ 6,000 increase.
B. $10,000 decrease.
C. $22,000 decrease.
D. $15,000 increase.
The Master Budget - Components
Expected Cash Collections
 All sales are on account.

 Royal’s collection pattern is:
 70% collected in the month of sale,
 25% collected in the month following sale,
 5% is uncollectible.
 The March 31 accounts receivable bal-
ance of $30,000 will be collected in full.
Sales $ 200,000 $ 500,000 $ 300,000
Accounts rec. - 3/31 $ 30,000 $ 30,000
Total cash collections $ 30,000 $ -

Sales $ 200,000 $ 500,000 $ 300,000
Accounts rec. - 3/31 $ 30,000 $ 30,000

April x 70% 140,000 140,000
x 25% $ 50,000 50,000
Total cash collections $ 170,000 $ 50,000 $ 220,000

Sales $ 200,000 $ 500,000 $ 300,000
Accounts rec. - 3/31 $ 30,000 $ 30,000

April x 70% 140,000 140,000
x 25% $ 50,000 50,000
May x 70% 350,000 350,000
x 25% $ 125,000 125,000
Total cash collections $ 170,000 $ 400,000 $ 125,000 $ 695,000

Sales $ 200,000 $ 500,000 $ 300,000
Accounts rec. - 3/31 $ 30,000 $ 30,000

April x 70% 140,000 140,000
x 25% $ 50,000 50,000
May x 70% 350,000 350,000
x 25% $ 125,000 125,000
June x 70% 210,000 210,000

Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales
70% x $200,000 140,000 140,000
25% x $200,000 $ 50,000 50,000
May sales
70% x $500,000 350,000 350,000
25% x $500,000 $ 125,000 125,000
June sales
70% x $300,000 210,000 210,000
Avril Company collects it’s A/R as follows:

30% in the month of sale
60% in the month following sale
8% in the 2nd month following sale

The following sales are expected:

Jan....$100,000 Feb....$120,000 Mar....$110,000

Cash collections in March should be budgeted at:

A. $110,000. C. $105,000.
B. $110,800. D. $113,000.
Expected Cash Disbursement for Materials
 Royal pays $0.40 per pound for its mate-
rials.
 One-half of a month’s purchases are paid
for in the month of purchase; the other
half is paid in the following month.
 The March 31 accounts payable balance
is $12,000.
 Let’s calculate expected cash dis-
bursements.
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
May purchases
June purchases
Total cash
disbursements
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
June purchases
Total cash
disbursements $ 40,000
140,000 lbs. × $.40/lb. = $56,000

Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 $ 44,300 44,300
June purchases
Total cash
disbursements $ 40,000 $ 72,300
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 $ 44,300 44,300
June purchases
50% x $56,800 28,400 28,400
Total cash
disbursements $ 40,000 $ 72,300 $ 72,700 $185,000
Direct labor budget
A direct labor budget is a detailed plan that estimates the
direct labor hours needed during an accounting period
and the associated costs. Production managers’ use esti-
mated direct labor hours toplan how many employees
will be required during the period and the hours that
each will work, and accountants use estimated direct la-
bor costs to plan for cash payments to the workers.
Manager use to hire new employees or reduce the exist-

ing work force and also as a guide in training employees
The Direct Labor Budget
 At Royal, each unit of product requires 0.05 hours of di-
rect labor.
 The Company has a “no layoff” policy so all employees
will be paid for 40 hours of work each week.
 In exchange for the “no layoff” policy, workers agreed to
a wage rate of $10 per hour regardless of the hours
worked (Overtime paid as straight time).
 For the next three months, the direct labor workforce will
be paid for a minimum of 1,500 hours per month.
 Let’s prepare the direct labor budget.
Production 26,000 46,000 29,000 101,000
Direct labor hours
Labor hours required
Guaranteed labor hours
Labor hours paid
From production
Wage rate budget
Total direct labor cost
Production 26,000 46,000 29,000 101,000
Direct labor hours 0.05 0.05 0.05 0.05
Labor hours required 1,300 2,300 1,450 5,050
Guaranteed labor hours
Labor hours paid
Wage rate
Production 26,000 46,000 29,000 101,000
Guaranteed labor hours 1,500 1,500 1,500
Labor hours paid 1,500 2,300 1,500 5,300
Wage rate
Higher of labor hours required
or labor hours guaranteed.
Production 26,000 46,000 29,000 101,000
Guaranteed labor hours 1,500 1,500 1,500
Labor hours paid 1,500 2,300 1,500 5,300
Wage rate $ 10 $ 10 $ 10 $ 10
Total direct labor cost $ 15,000 $ 23,000 $ 15,000 $ 53,000
Manufacturing Overhead Budget
 is a detailed plan of anticipated manufacturing
costs, other than direct materials and direct la-
bor costs, which must be incurred to meet bud-
geted production needs.
 Royal Company uses a variable manufacturing
overhead rate of $1 per unit produced.
 Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of noncash costs
(primarily depreciation of plant assets).
 Let’s prepare the manufacturing overhead

budget.
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate $ 1 $ 1 $ 1 $ 1
Variable mfg. OH costs $ 26,000 $ 46,000 $ 29,000 $ 101,000
Fixed mfg. OH costs
Total mfg. OH costs
Less noncash costs From production
Cash disbursements budget
for manufacturing OH
Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000
Less noncash costs
Cash disbursements
for manufacturing OH
Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000
Less noncash costs 20,000 20,000 20,000 60,000
Cash disbursements
for manufacturing OH $ 56,000 $ 76,000 $ 59,000 $ 191,000
Depreciation is a noncash charge.

Ending Finished Goods Inventory Budget
 Now, Royal can complete the ending fin-

ished goods inventory budget.
 At Royal, manufacturing overhead is ap-

plied to units of product on the basis of di-
rect labor hours.
 Let’s calculate ending finished goods

inventory.
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor
Manufacturing overhead
Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct materials
budget and information

Direct labor 0.05 hrs. $10.00 0.50
Manufacturing overhead

Unit product cost
Direct labor
budget
Manufacturing overhead 0.05 hrs. $49.70 2.49
$ 4.99
Unit product cost $ 4.99
Predetermined Overhead Rate:

Total mfg. OH for quarter $251,000
= $49.70 per hr.
Total labor hours required 5,050 hrs.
(rounded)
Manufacturing overhead 0.05 hrs. $49.70 2.49
$ 4.99
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $24,950
Production
Budget
Selling and administrative budget
A selling and administrative expense budget is a

detailed plan of operating expenses, other than
those related to production, that are needed to sup-
port sales and overall operations during an
accounting period.
Accountants use this budget to estimate cash pay-
ments for products or services not used in produc-
tion-related activities_x0000_
Selling and Administrative Expense Budget
 At Royal, variable selling and administrative ex-

penses are $0.50 per unit sold.
 Fixed selling and administrative expenses are
$70,000 per month.
 The fixed selling and administrative expenses in-
clude $10,000 in costs – primarily depreciation –
that are not cash outflows of the current month.
Let’s prepare the company’s selling and admin-

istrative expense budget.

Budgeted sales 20,000 50,000 30,000 100,000
Variable selling
and admin. rate $ 0.50 $ 0.50 $ 0.50 $ 0.50
Variable expense $10,000 $25,000 $15,000 $ 50,000
Fixed selling and
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less noncash
expenses
Cash disburse-
ments for
selling & admin.

Budgeted sales 20,000 50,000 30,000 100,000
Variable selling
and admin. rate $ 0.50 $ 0.50 $ 0.50 $ 0.50
Variable expense $10,000 $25,000 $15,000 $ 50,000
Fixed selling and
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less noncash
expenses 10,000 10,000 10,000 30,000
Cash disburse-
ments for
selling & admin. $70,000 $85,000 $75,000 $230,000
Cash budget
A cash budget is a projection of the cash that an organiza-
tion will receive and the cash that it will pay out during an
accounting period. It summarizes the cash flow prospects of
all transactions considered in the master budget.
The information that the cash budget provides enables
managers to
plan for short-term loans when the cash balance is low and
for short-term investments when the cash balance is high.
A cash budget excludes planned noncash transactions, such

as depreciation expense, amortization expense, issuance and
receipt of stock dividends_x0000_
The Cash Budget
 Shows anticipated cash flows

 Often considered to be the most important output
in preparing financial budgets
 Contains three sections:
 Cash receipts
 Cash disbursements
 Financing
 Shows beginning and ending cash balances
The Cash Budget
Royal:
 Maintains a 16% open line of credit for $75,000.
 Maintains a minimum cash balance of $30,000.
 Borrows on the first day of the month and repays
loans on the last day of the month.
 Pays a cash dividend of $49,000 in April.
 Purchases $143,700 of equipment in May and
$48,300 in June paid in cash.
 Has an April 1 cash balance of $40,000.
The Cash Budget
Beginning cash balance
$ 40,000
Add cash collections 170,000
Total cash available 210,000
Less disbursements
Materials 40,000
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
cash available overSchedule of Expected
disbursements Cash Collections
The Cash Budget
Beginning cash balance
$ 40,000
Less disbursements
Materials 40,000
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase Schedule of Expected
Dividends Cash Disbursements
Total disbursements
Schedule of Expected
cash available over
disbursements Cash Collections
The Cash Budget
Beginning cash balance $ 40,000
Add cash collections 170,000 Direct Labor
Total cash available 210,000 Budget
Less disbursements
Materials 40,000
Direct labor 15,000
Mfg. overhead 56,000
Manufacturing
Selling and admin. 70,000 Overhead Budget
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of Selling and Administrative
cash available over
disbursements
Expense Budget
The Cash Budget
Beginning cash balance $ 40,000
Less disbursements
Materials 40,000
Because Royal maintains
Direct labor 15,000 a cash balance of $30,000,
Mfg. overhead 56,000 the company must
Selling and admin. 70,000 borrow on its
Equipment purchase -
line-of-credit
Dividends 49,000
Total disbursements 230,000
cash available over
disbursements $(20,000)
Financing and Repayment
Excess (deficiency)
of Cash available
over disbursements $ (20,000)
Financing:
Borrowing 50,000
Repayments -
Interest -
Total financing 50,000
Ending cash balance $ 30,000 $ 30,000 $ - $ -
Ending cash balance for April

is the beginning May balance.
CASH BUDGET
 Contributes to more effective cash

management
 Shows managers need for additional
financing before actual need arises
 Indicates when excess cash will be
available
The Cash Budget
Beginning cash balance $ 40,000 $ 30,000
Add cash collections 170,000 400,000
Total cash available 210,000 430,000
Less disbursements
Materials 40,000 72,300
Direct labor 15,000 23,000
Mfg. overhead 56,000 76,000
Selling and admin. 70,000 85,000
Equipment purchase - 143,700
Dividends 49,000 -
Total disbursements 230,000 400,000
cash available over
disbursements $(20,000) $ 30,000
Excess (deficiency)
of Cash available
over disbursements $ (20,000) $30,000
Financing:
Borrowing 50,000 -
Repayments - -
Interest - -
Total financing 50,000 -
Ending cash balance $ 30,000 $ 30,000
Because the ending cash balance is

exactly $30,000, Royal will not repay
the loan this month.
The Cash Budget
Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less disbursements
Materials 40,000 72,300 72,700 185,000
Direct labor 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
cash available over
disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000
The Cash Budget
Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less disbursements
Materials 40,000 72,300 72,700 185,000
Direct labor 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling andAtadmin.
the end of70,000 85,000 has75,000
June, Royal enough230,000
cash
Equipment purchase - 143,700 48,300 192,000
to repay the $50,000 loan plus interest at 16%.
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
cash available over
disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000
Excess (deficiency)
of Cash available
over disbursements $ (20,000) $30,000 $95,000 $45,000
Financing:
Borrowing 50,000 - - 50,000
Repayments - - (50,000) (50,000)
Interest - - (2,000) (2,000)
Total financing 50,000 - (52,000) (2,000)
Ending cash balance $ 30,000 $ 30,000 $ 43,000 $ 43,000
$50,000 × 16% × 3/12 = $2,000
Borrowings on April 1 and
repayment of June 30.
The Budgeted Income Statement
Cash Budgeted
Budget Income
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After we complete the cash budget,

we can prepare the budgeted income
statement for Royal.
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10) $ 1,000,000

Cost of goods sold (100,000 @ $4.99) 499,000
Gross margin 501,000
Selling and administrative expenses 260,000
Operating income 241,000
Interest expense 2,000
Net income $ 239,000
The Stacy Company makes and sells a single prod-

uct, Product R. Budgeted sales for April are
$300,000. Gross Margin is budgeted at 30% of sales
dollars. If the net income for April is budgeted at
$40,000, the budgeted selling and administrative ex-
penses are:
A. $133,333.
B. $50,000.
C. $102,000.
D. $78,000.
Stacy Company
Budgeted Income Statement
For the Month Ended April 30
Sales (Product R) $ 300,000

Cost of goods sold (@ 70%) 210,000
Gross margin (@ 30%) 90,000
Selling and administrative expenses
Net income $ 40,000
The Budgeted Balance Sheet
Royal reported the following account
balances on March 31 prior to prepar-
ing its budgeted financial statements:
Land - $50,000
Building (net) - $175,000
Common stock - $200,000
Retained earnings - $146,150
Royal Company
Budgeted Balance Sheet
25%of June
June 30
sales of
Current assets $300,000
Cash $ 43,000
Accounts receivable 75,000
11,500 lbs.
Raw materials inventory 4,600
Finished goods inventory 24,950
at $0.40/lb.
Total current assets 147,550
Property and equipment
5,000 units
Land 50,000 at $4.99 each
Building 175,000
Equipment 192,000
Total property and equipment 417,000
Total assets $ 564,550
50% of June
Accounts payable $ 28,400 purchases
Common stock 200,000 of $56,800
Retained earnings 336,150
Total liabilities and equities $ 564,550
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable 75,000
Beginning balance $146,150
Raw materials inventory 4,600
Add: net income 239,000
Finished goods inventory 24,950
Deduct: dividends (49,000)
Total current assets Ending balance
147,550 $336,150
Property and equipment
Land 50,000
Building 175,000
Equipment 192,000
Total property and equipment 417,000
Total assets $ 564,550
Accounts payable $ 28,400

Common stock 200,000
Retained earnings 336,150
Total liabilities and equities $ 564,550
Zero-Base Budgeting
Managers are required to justify all budgeted

expenditures, not just changes in the budget
from the previous year. The baseline is zero
rather than last year’s budget.
International Aspects of Budgeting
Multinational companies face special prob-

lems when preparing a budget.
 Fluctuations in foreign currency exchange rates.
 High inflation rates in some foreign countries.
 Differences in local economic conditions.
 Local governmental policies.
End of Chapter 9

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Chap-

 A formal written statement of management’s

 Requires all levels of management to plan

2008 2009 2010 2011

The annual operating budget

2008 2009 2010 2011

This budget is usually a twelve-month

S u p ervis or S u p ervisor S u p ervisor S u p ervis or

Flow of Budget Data

Managers should be held responsible for

A standing committee responsible for

Which of the following is NOT true about the Master

a)It is composed of many interrelated budgets.

Ending Selling and

Direct Direct Manufacturing

Ending Selling and

Direct Direct Manufacturing

A detailed schedule showing expected

Production must be adequate to meet budgeted

 Royal Company wants ending inventory

 On March 31, 4,000 units were on hand.

 Let’s prepare the production budget.

Budgeted sales 50,000

Required production 26,000

Required production 26,000 46,000

Required production 26,000 46,000 29,000 101,000

Accountants use the same information to estimate cash payments to

To prepare a direct materials purchases budget, managers must

in each accounting period in the budget; this information is pro-

10% of the following

The Willsey Merchandise Company has budgeted

 All sales are on account.

Accounts rec. - 3/31 $ 30,000 $ 30,000

Total cash collections $ 30,000 $ -

Accounts rec. - 3/31 $ 30,000 $ 30,000

Total cash collections $ 170,000 $ 50,000 $ 220,000

Accounts rec. - 3/31 $ 30,000 $ 30,000

Total cash collections $ 170,000 $ 400,000 $ 125,000 $ 695,000

Accounts rec. - 3/31 $ 30,000 $ 30,000

Total cash collections $ 170,000 $ 400,000 $ 335,000 $ 905,000

Avril Company collects it’s A/R as follows:

The following sales are expected:

Cash collections in March should be budgeted at:

140,000 lbs. × $.40/lb. = $56,000

Manager use to hire new employees or reduce the exist-

 Let’s prepare the manufacturing overhead

Depreciation is a noncash charge.

 Now, Royal can complete the ending fin-

 At Royal, manufacturing overhead is ap-

 Let’s calculate ending finished goods

Budgeted finished goods inventory

Production costs per unit Quantity Cost Total

Budgeted finished goods inventory

Predetermined Overhead Rate:

A selling and administrative expense budget is a

 At Royal, variable selling and administrative ex-

Let’s prepare the company’s selling and admin-

April May June Quarter

April May June Quarter