Budgeting Asst 2

8/2/2019 Budgeting Asst 2

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The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinComputer Infinity (Pvt.) Ltd Karachi Branch Council 2009 - ICMAP

Salesforecast

Productionschedule

Budgetedfinancialbudgets:

cash income balance sheet

Capitalexpenditures

budget

Operatingexpensebudgets

Cost of goodssold and ending

inventory

budgets

The Master Budget


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Thats enough talkingabout budgets, now

show me an example!

Preparing the Master Budget:An Illustration


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SalesBudget

EstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions

+Forecasts of customer needs from marketing personnel



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Ellis Magnet Co. is preparing budgets for the quarterending June 30. The sales price is $10 per magnet.

Budgeted sales for the next four months are:

April 20,000 magnets @ $10 = $200,000May 50,000 magnets @ $10 = $500,000June 30,000 magnets @ $10 = $300,000July 25,000 magnets @ $10 = $250,000

The Sales Budget

July is needed for June ending inventory computations.



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SalesBudget ProductionBudget

The Production Budget


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Ellis wants ending inventoryto be 20 percent of the next months

budgeted sales in units.

4,000 units were on hand March 31.

Lets prepare the production budget.



7/60 The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinComputer Infinity (Pvt.) Ltd Karachi Branch Council 2009 - ICMAP

Production must be adequate to meetbudgeted sales and to provide sufficient

ending inventory.

Budgeted product sales in units

+ Desired product units in ending inventory

= Total product units needed Product units in beginning inventory

= Product units to produce




April May June

Budgeted unit sales 20,000 50,000 30,000

Desired ending inventory

Total units neededLess beginning inventory

Units to produce




April May June


Desired ending inventory 10,000 6,000 5,000

Total units needed 30,000 56,000 35,000Less beginning inventory

Units to produce

Ending inventory = 20% of next month's production needs.June ending inventory = .20 25,000 July units = 5,000 units.




April May June


Desired ending inventory 10,000 6,000 5,000

Total units needed 30,000 56,000 35,000Less beginning inventory 4,000 10,000 6,000

Units to produce 26,000 46,000 29,000

Ending inventory = 20% of next month's production needs.June ending inventory = .20 25,000 July units = 5,000 units.

Beginning inventory is last month's ending inventory.




ProductionBudgetMaterial

Purchases

ProductionBudgetUnits




The material purchases budget is based onproduction quantity and desired material

inventory levels.

Units to produce

Material needed per unit

= Material needed for units to produce

+ Desired units of material in ending inventory= Total units of material needed

Units of material in beginning inventory

= Units of material to purchase

The Production BudgetMaterial Purchases



Five pounds of material are needed for eachunit produced.

Ellis wants to have materials on hand at theend of each month equal to 10 percent ofthe following months production needs.

The materials inventory on March 31 is13,000 pounds. July production is

budgeted for 23,000 units.





April May June

Units to produce 26,000 46,000 29,000

Pounds per unit 5 5 5

Material needs (lbs.) 130,000 230,000 145,000

Desired ending inventoryTotal material needs (lbs.)

Less beginning inventory

Material purchases (lbs.)


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April May June

Units to produce 26,000 46,000 29,000



Desired ending inventory 23,000 14,500 11,500Total material needs (lbs.) 153,000 244,500 156,500

Less beginning inventory

Material purchases (lbs.)

Ending inventory = 10% of next month's material needs.

June ending inventory = .10 (23,000 units 5 lbs. per unit).

June ending inventory = 11,500 lbs.


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April May June

Units to produce 26,000 46,000 29,000



Desired ending inventory 23,000 14,500 11,500Total material needs (lbs.) 153,000 244,500 156,500

Less beginning inventory 13,000 23,000 14,500

Material purchases (lbs.) 140,000 221,500 142,000

Ending inventory = 10% of next month's material needs.

June ending inventory = .10 (23,000 units 5 lbs. per unit).

June ending inventory = 11,500 lbs.

Beginning inventory is last month's ending inventory.


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Materials used in production cost $.40per pound. One-half of a months

purchases are paid for in the month of

purchase; the other half is paid for in thefollowing month.

No discount terms are available.

The accounts payable balance onMarch 31 is $12,000.

Cash Payments forMaterial Purchases


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April May June


Cost per pound 0.40$ 0.40$ 0.40$

Total cost 56,000$ 88,600$ 56,800$

Payables from March 12,000$

April purchases

May purchases

June purchases

Total payments in month



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April May June


Cost per pound 0.40$ 0.40$ 0.40$

Total cost 56,000$ 88,600$ 56,800$


April purchases 28,000 28,000$

May purchases

June purchases


$56,000 = $28,000



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April May June


Cost per pound 0.40$ 0.40$ 0.40$

Total cost 56,000$ 88,600$ 56,800$



May purchases 44,300 44,300$

June purchases


$56,000 = $28,000

$88,600 = $44,300



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April May June


Cost per pound 0.40$ 0.40$ 0.40$

Total cost 56,000$ 88,600$ 56,800$



May purchases 44,300 44,300$

June purchases 28,400

Total payments in month 40,000$ 72,300$ 72,700$

$56,000 = $28,000

$88,600 = $44,300

$56,800 = $28,400



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ProductionBudgetLabor


Material



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Each unit produced requires 3 minutes (.05hours) of direct labor. Ellis employs 30

persons for 40 hours each week at a rate of$10 per hour. Any extra hours needed areobtained by hiring temporary workers also

at $10 per hour.

The Production BudgetDirect Labor


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April May June

Units to produce 26,000 46,000 29,000

Hours per unit 0.05 0.05 0.05

Total hours required 1,300 2,300 1,450

Wage rate per hour

Direct labor cost

Cash Payments forDirect Labor


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April May June

Units to produce 26,000 46,000 29,000

Hours per unit 0.05 0.05 0.05

Total hours required 1,300 2,300 1,450

Wage rate per hour 10$ 10$ 10$

Direct labor cost 13,000$ 23,000$ 14,500$

Cash Payments forDirect Labor


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MaterialLabor

ProductionBudgetManufacturing

Overhead



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Variable manufacturing overhead is $1 perunit produced and fixed manufacturing

overhead is $50,000 per month.

Fixed manufacturing overhead includes$20,000 indepreciation which does not

require a cash outflow.

The Production BudgetManufacturing Overhead


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April May June

Units to produce 26,000 46,000 29,000

Variable overhead rate 1.00$ 1.00$ 1.00$

Variable overhead cost 26,000$ 46,000$ 29,000$

Fixed overheadTotal mfg. overhead cost

Deduct depreciation

Manufacturing overhead - cash

Cash Payments forManufacturing Overhead


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April May June

Units to produce 26,000 46,000 29,000



Fixed overhead 50,000 50,000 50,000Total mfg. overhead cost 76,000$ 96,000$ 79,000$

Deduct depreciation

Manufacturing overhead - cash



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April May June

Units to produce 26,000 46,000 29,000



Fixed overhead 50,000 50,000 50,000Total mfg. overhead cost 76,000$ 96,000$ 79,000$

Deduct depreciation 20,000 20,000 20,000

Manufacturing overhead - cash 56,000$ 76,000$ 59,000$



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ProductionBudget SellingandAdministrative

ExpenseBudget

Selling and Administrative(S&A) Expense Budget


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Selling expense budgets contain bothvariable and fixed items.

Variable items: shipping costs and salescommissions.

Fixed items: advertising and sales salaries.

Administrative expense budgets containmostly fixed items. Executive salaries and depreciation on company

offices.

Selling and Administrative(S&A) Expense Budget


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Variable selling and administrativeexpenses are $.50 per unitsoldand fixedselling and administrative expenses are

$70,000 per month.

Fixed selling and administrative expensesinclude $10,000 in depreciation which does

not require a cash outflow.

Cash Payments for(S&A) Expenses


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April May June


Variable S&A per unit 0.50$ 0.50$ 0.50$

Variable S&A expense 10,000$ 25,000$ 15,000$

Fixed S&A expense 70,000 70,000 70,000

Total S&A expense 80,000$ 95,000$ 85,000$

Deduct depreciation

S&A expense - cash



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April May June


Variable S&A per unit 0.50$ 0.50$ 0.50$

Variable S&A expense 10,000$ 25,000$ 15,000$

Fixed S&A expense 70,000 70,000 70,000

Total S&A expense 80,000$ 95,000$ 85,000$

Deduct depreciation 10,000 10,000 10,000

S&A expense - cash 70,000$ 85,000$ 75,000$



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I have seen a lot of cashpayments but no cash

receipts. Show me some

cash receipts!

Cash Receipts Budget


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All sales are on account.

Elliss collection pattern is:

70 percent collected in month of sale

25 percent collected in month after sale

5 percent will be uncollectible

Accounts receivable on March 31 is$30,000, all of which is collectible.



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April May June


Price per unit 10$ 10$ 10$

Budgeted sales revenue 200,000$ 500,000$ 300,000$

Receipts from March sales 30,000$Receipts from April sales

Receipts from May sales

Receipts from June sales

Total cash receipts



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April May June




Receipts from March sales 30,000$Receipts from April sales 140,000 50,000$

Receipts from May sales


Total cash receipts 170,000$

April: .70 $200,000 = $140,000 and .25 $200,000 = $50,000



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April May June





Receipts from May sales 350,000 125,000$


Total cash receipts 170,000$ 400,000$

April: .70 $200,000 = $140,000 and .25 $200,000 = $50,000

May: .70 $500,000 = $350,000 and .25 $500,000 = $125,000



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April May June





Receipts from May sales 350,000 125,000$

Receipts from June sales 210,000

Total cash receipts 170,000$ 400,000$ 335,000$

April: .70 $200,000 = $140,000 and .25 $200,000 = $50,000

May: .70 $500,000 = $350,000 and .25 $500,000 = $125,000

June: .70 $300,000 = $210,000



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With just a little

more informationwe will be able toprepare a

comprehensivecash budget.

Comprehensive Cash Budget

C h i C h B d


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Ellis Magnet Company:

Has a $100,000 line of credit at its bank, with a zerobalance on April 1.

Maintains a $30,000 minimum cash balance.

Borrows at the beginning of a month and repays at theend of a month.

Pays interest at 16 percent when a principal payment ismade.

Pays a $51,000 cash dividend in April.

Purchases equipment costing $143,700 in May and$48,800 in June.

Has a $40,000 cash balance on April 1.

Comprehensive Cash BudgetAdditional Information


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April May June

Beginning cash balance 40,000$

Cash receipts

Cash available

Cash payments:

Materials budget

Labor budget

Manufacturing OH budgetS&A expense budget

Equipment purchases

Dividends

Total cash payments

Balance before financing

Borrowing

Principal repayment

Interest

Ending cash balance


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April May June


Cash receipts 170,000 400,000 335,000

Cash available 210,000$

Cash payments:

Materials budget

Labor budget

Manufacturing OH budgetS&A expense budget

Equipment purchases

Dividends

Total cash payments

Balance before financing

Borrowing

Principal repayment

Interest

Ending cash balance


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April May June


Cash receipts 170,000 400,000 335,000

Cash available 210,000$

Cash payments:

Materials budget 40,000$ 72,300$ 72,700$

Labor budget 13,000 23,000 14,500

Manufacturing OH budget 56,000 76,000 59,000S&A expense budget 70,000 85,000 75,000

Equipment purchases 0 143,700 48,800

Dividends 51,000 0 0

Total cash payments 230,000$ 400,000$ 270,000$

Balance before financing (20,000)$

Borrowing

Principal repayment

Interest

Ending cash balance


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April May June

Beginning cash balance 40,000$ 30,000$

Cash receipts 170,000 400,000 335,000

Cash available 210,000$ 430,000$

Cash payments:


Labor budget 13,000 23,000 14,500





Balance before financing (20,000)$ 30,000$

Borrowing 50,000

Principal repayment 0

Interest 0

Ending cash balance 30,000$


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April May June

Beginning cash balance 40,000$ 30,000$ 30,000$

Cash receipts 170,000 400,000 335,000

Cash available 210,000$ 430,000$ 365,000$

Cash payments:


Labor budget 13,000 23,000 14,500





Balance before financing (20,000)$ 30,000$ 95,000$

Borrowing 50,000 0

Principal repayment 0 0

Interest 0 0

Ending cash balance 30,000$ 30,000$


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April May June

Beginning cash balance 40,000$ 30,000$ 30,000$

Cash receipts 170,000 400,000 335,000

Cash available 210,000$ 430,000$ 365,000$

Cash payments:


Labor budget 13,000 23,000 14,500





Balance before financing (20,000)$ 30,000$ 95,000$

Borrowing 50,000 0 0

Principal repayment 0 0 (50,000)

Interest 0 0 (2,000)

Ending cash balance 30,000$ 30,000$ 43,000$

$50,000 .16 3/12 = $2,000

Th B d t d


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BudgetedIncome

Statement

Cash

Budget

The BudgetedIncome Statement

Th B d t d


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Ellis Magnet Company

Budgeted Income Statement

For the Three Months Ended June 30

Sales (100,000 units @ $10) 1,000,000$


Th B d t d


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Sales (100,000 units @ $10) 1,000,000$Cost of goods sold (100,000 @ $4.99) 499,000

Gross margin 501,000$

Computation of unit cost follows


Th B d t d


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Production costs per unit Quantity Cost TotalDirect materials 5.00 lbs. 0.40$ 2.00$

Direct labor 0.05 hrs. 10.00$ 0.50

Manufacturing overhead 0.05 hrs. 49.70$ 2.49

Total unit cost 4.99$

Total mfg. OH for quarter $251,000Total labor hours required 5,050 hrs.

= $49.70 per hr.

From labor and Mfg. OH budgets

Labor Hours Mfg. OHApril 1,300 76,000$

May 2,300 96,000

June 1,450 79,000

Total 5,050 251,000$

Manufacturingoverhead is applied

based ondirect labor hours.


Th B d t d


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Selling and administrative expenses 260,000

Operating income 241,000$From S&A Expense Budget

April 80,000$

May 95,000

June 85,000

Total 260,000$


The B dgeted


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Selling and administrative expenses 260,000

Operating income 241,000$Interest expense 2,000

Net income 239,000$


The Budgeted


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Budgeted

BalanceSheet

Budgeted

IncomeStatement

The BudgetedBalance Sheet

The Budgeted


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Ellis reports the following account balanceson June 30, prior to preparing its budgeted

financial statements: Land - $50,000

Building (net) - $174,500

Common stock - $200,000 Equipment (net) - $192,500

Retained earnings - $148,150

The BudgetedBalance Sheet

Ellis Magnet Company25% of June


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Budgeted Balance Sheet

June 30, 2002

Current assetsCash 43,000$

Accounts receivable 75,000Raw materials inventory 4,600

Finished goods inventory 24,950

Total current assets 147,550$

Property and equipment

Land 50,000$Building 174,500

Equipment 192,500

Total property and equipment 417,000$

Total assets 564,550$

Liabilities and Equities

Accounts payable 28,400$Common stock 200,000

Retained earnings 336,150

Total liabilities and equities 564,550$

25% of Junesales of$300,000

11,500 lbs.@ $.40 per lb.

50% of June

purchasesof $56,800

5,000 units@ $4.99 each



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Budgeted Balance Sheet

June 30, 2002

Current assetsCash 43,000$

Accounts receivable 75,000Raw materials inventory 4,600

Finished goods inventory 24,950

Total current assets 147,550$

Property and equipment

Land 50,000$Building 174,500

Equipment 192,500

Total property and equipment 417,000$

Total assets 564,550$

Liabilities and Equities

Accounts payable 28,400$Common stock 200,000

Retained earnings 336,150

Total liabilities and equities 564,550$

Beginning balance 148,150$

Add: net income 239,000

Deduct: dividends (51,000)

Ending balance 336,150$


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I would be happy to assistyou with your cash budget!

End & Thank you

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Budgeting Asst 2

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