Chapter 20 Master Budgets and Performance Planning

Chapter 20 Master Budgets and Performance Planning

Financial & Managerial Accounting Information for Decisions Seventh Edition Chapter 20 Master Budgets and Performance Planning McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Learning Objectives (1 of 2) CONCEPTUAL C1 Describe the benefits of budgeting and the process of budget administration. C2 Describe a master budget and the process of preparing it. ANALYTICAL A1 Analyze expense planning using activitybased budgeting.

McGraw-Hill Education. 20-2 Learning Objectives (2 of 2) PROCEDURAL P1 Prepare the operating budget components of a master budget -- for a manufacturing company. P2 Prepare a cash budget. P3 Prepare budgeted financial statements. P4 Prepare each component of a master budget and link each to the budgeting processfor a merchandising company. (Appendix 20A) McGraw-Hill Education.

20-3 Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. McGraw-Hill Education. 20-4 Benefits of Budgeting Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. Benefits of Budgeting Coordination: activities of all units contribute to meeting the companys overall goals. Communication: management plans throughout

the organization. Motivation: through participation in the budgeting process and establishment of attainable goals. Planning: focuses on future opportunities. Control: provides a benchmark for evaluating performance. McGraw-Hill Education. 20-5 Negative Outcomes of Budgeting (1 of 2) Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. Budgets can be a positive motivating force when: 1. Affected employees are consulted

2. Goals are challenging but attainable 3. Actual and budgeted differences carefully analyzed. McGraw-Hill Education. 20-6 Negative Outcomes of Budgeting (2 of 2) Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. Potential negative outcomes of budgeted include: 1. Employees may understate sales and overstate expenses to allow cushion. 2. Pressure to meet results may lead to unethical

behavior or fraud. 3. Employees may purchase unnecessary items to ensure budget is not reduced next period. McGraw-Hill Education. 20-7 Budget Reporting and Timing (1 of 2) Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. Continuous budgeting applied by preparing rolling budgets over a twelve-month period that rolls forward one month as the current month is completed. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction

or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-8 Budget Reporting and Timing (2 of 2) Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. Companies Using Rolling Budgets Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education.

20-9 NEED-TO-KNOW 20-1 (1 of 2) Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. Label each item below with yes if it describes a benefit of budgeting or no if it describes a potential negative outcome of budgeting. 1. Budgets provide goals for employees to work toward. Yes 2. Written budgets help communicate plans to all employees. Yes McGraw-Hill Education. 20-10

NEED-TO-KNOW 20-1 (2 of 2) Learning Objective C1: Describe the benefits of budgeting and the process of budget administration. 3. Some employees might understate sales targets in budgets. No 4. A budget forces managers to spend time planning for the future. Yes 5. Some employees might always spend budgeted amounts. No 6. With rolling budgets, managers can continuously plan ahead. Yes McGraw-Hill Education. 20-11

Learning Objective C2: Describe a master budget and the process of preparing it. McGraw-Hill Education. 20-12 Master Budget Components Learning Objective C2: Describe a master budget and the process of preparing it. Exhibit 20.2 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill

Education. 20-13 Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. McGraw-Hill Education. 20-14 Sales Budget (1 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The first step in preparing the master budget is

the sales budget, which shows the planned sales units and the expected dollars from these sales. Analysis of economic and market conditions + Business capacity and advertising plans Estimated Unit Sales Estimated Unit Price Sales Budget McGraw-Hill Education. 20-15 Sales Budget (2 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company.

Example: In September 2017, Toronto Sticks Company sold 700 hockey sticks at $60 each. Toronto Sticks prepared the following sales budget for the next three months: McGraw-Hill Education. 20-16 Sales Budget (3 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. Example: TSC sold 700 hockey sticks at $60 per unit. After considering sales predictions and market conditions, TSC prepares its sales budget for the next three months. Exhibit 20.4

McGraw-Hill Education. 20-17 Production Budget (1 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. A manufacturer prepares a production budget, which shows the number of units to be produced in a period. Exhibit 20.5 The production budget is based on the unit sales projected in the sales budget, along with inventory considerations. Total units to be produced in the period = Budgeted ending inventory (units of safety stock) + Budgeted sales units for the period (from the sales budget) Number of

units In beginning inventory McGraw-Hill Education. 20-18 Production Budget (2 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. Budgeted ending inventory (units of safety stock) + Budgeted sales units for the period (from the sales budget) are the Required units for the period Note: A production budget does not show costs; it is always expressed in units of product. McGraw-Hill Education.

20-19 Production Budget (3 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The production budget is based on the unit sales projected in the sales budget, along with inventory considerations. Exhibit 20.6 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-20

NEED-TO-KNOW 20-2 Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. A manufacturing company predicts sales of 220 units for May and 250 units for June. The company wants each months ending inventory to equal 30% of next months predicted unit sales. Beginning inventory for May is 66 units. Compute the companys budgeted production in units for May. Budgeted ending inventory for May 75 Plus: Budgeted sales for May 220

Required units of available production 295 Less: Beginning inventory (units) (66) Total units to be produced during May 229 30% of 250 (Junes expected sales) Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill

McGraw-Hill Education. 20-21 Direct Materials Budget Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The direct materials budget shows the budgeted costs for the direct materials that will need to be purchased to satisfy the estimated production for the period Exhibit 20.7 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill

Education. 20-22 Direct Labor Budget Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The direct labor budget shows the budgeted costs for the direct labor that will be needed to satisfy the estimated production for the period. Exhibit 20.8 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education.

20-23 NEED-TO-KNOW 20-3 (1 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. A manufacturing company budgets production of 800 units during June and 900 units during July. Each unit of finished goods requires 2 pounds of direct materials, at a cost of $8 per pound. The company maintains an inventory of direct materials equal to 10% of next months budgeted production. Beginning direct materials inventory for June is 160 pounds. Each finished unit requires 1 hour of direct labor at the rate of $14 per hour. McGraw-Hill Education.

20-24 NEED-TO-KNOW 20-3 (2 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. Compute the budgeted (a) cost of direct materials purchases for June and (b) direct labor cost for June. Budgeted production (units) 800 Materials requirements per unit (lbs.) 2 Materials needed for production (lbs.)

1,600 Add: Budgeted ending inventory (lbs.) 180 (July production of 900 units 2 lbs. per unit 10%) Total materials requirements (lbs.) 1,780 Less: Beginning inventory (lbs.) (160) Materials to be purchased (lbs.) 1,620

Material price per pound Total cost of direct materials purchases Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. $8 $ 12,960 20-25 NEED-TO-KNOW 20-3 (3 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company.

Budgeted production (units) Labor requirements per unit (hrs.) 800 1 Total direct labor hours needed 800 Labor rate (per hour) $14 Total cost of direct labor $11,200

Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-26 Factory Overhead Budget (1 of 2) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The factory overhead budget shows the budgeted costs for factory overhead that are needed to complete the estimated production for the period. Exhibit 20.9

Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-27 Factory Overhead Budget (2 of 2) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The variable portion of factory overhead is assigned at the rate of $2.50 per unit of production. The fixed overhead is $1,500 per month. McGraw-Hill Education.

20-28 Product Cost Per Unit (1 of 2) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. TSCs can compute product cost per unit from the three manufacturing budgets (direct materials, direct labor, and factory overhead). For budgeting purposes, TSC assumes it will normally produce 3,000 units of product each quarter, yielding fixed overhead of $1.50 per unit. TSCs other product costs are all variable. McGraw-Hill Education. 20-29

Product Cost Per Unit (2 of 2) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. Exhibit 20.10 Product Cost Direct materials: 1/2 pound of materials $20 per pound of materials.. Per Unit $10.00 Direct labor: 0.25 hours of direct labor $12 per hour of direct labor. . 3.00

Variable overhead (from predetermined overhead rate) . 2.50 Fixed overhead ($4,500 total fixed overhead per quarter/3,000 units of expected production per quarter) . 1.50 Total product cost per unit*. $17.00 *At the normal production level of 3,000 units per quarter

Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-30 Selling Expense Budget (1 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The selling expense budget is an estimate of the types and amounts of selling expenses expected during the budget period. TSC pays sales commissions equal to 10% of total sales. TSC pays a monthly salary of $ 2,000 to its

sales manager. Lets prepare the selling expense budget for Toronto Sticks Company. McGraw-Hill Education. 20-31 Selling Expense Budget (2 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. Exhibit 20.11 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education.

20-32 Selling Expense Budget (3 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. From TSCs sales budget TSC pays sales commissions equal to 10 percent of total sales. TSC pays a monthly salary of $2,000 to its sales manager: Salary for sales manager is 2,000 for October, November, December. McGraw-Hill Education. 20-33

General and Administrative Expense Budget (1 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The general and administrative expense budget plans the predicted operating expenses not included in the selling expenses or manufacturing budgets. Toronto Sticks Company has general and administrative salaries of $54,000 per year or $4,500 per month. McGraw-Hill Education. 20-34 General and Administrative Expense

Budget (2 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. Lets prepare the general and administrative expense budget for TSC. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-35 General and Administrative Expense Budget (3 of 3) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company.

Toronto Sticks Company has general and administrative salaries of $54,000 per year or $4,500 per month. Exhibit 20.12 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-36 NEED-TO-KNOW 20-4 (1 of 2) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company.

A manufacturing company budgets sales of $70,000 during July. It pays sales commissions of 5% of sales and also pays a sales manager a salary of $3,000 per month. Other monthly costs include depreciation on office equipment ($500), insurance expense ($200), advertising ($1,000), and an office manager salary of $2,500 per month. For the month of July, compute the total (a) budgeted selling expense and (b) budgeted general and administrative expense. McGraw-Hill Education. 20-37 NEED-TO-KNOW 20-4 (2 of 2) Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company.

Budgeted selling expense Total Sales commissions ($70,000 5%) $3,500 Sales manager's salary 3,000 Advertising expense 1,000 Total budgeted selling expense

$7,500 Budgeted general and administrative expense Depreciation on office equipment Insurance expense Office manager's salary Total budgeted and administrative expense Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. Total $500 200 2,500 $3,200

20-38 Capital Expenditures Budget Learning Objective P1: Prepare the operating budget components of a master budget -- for a manufacturing company. The capital expenditures budget shows dollar amounts estimated to be spent to purchase additional plant assets and amounts to be received from plant asset disposals. TSC does not anticipate disposal of any plant assets through December 2017, but management is planning to acquire additional equipment for $25,000 cash in December 2017. *Since this is the only budgeted capital expenditure for the quarter, no separate capital expenditures budget is shown. McGraw-Hill Education.

20-39 Learning Objective P2: Prepare a cash budget. McGraw-Hill Education. 20-40 Cash Budgets Learning Objective P2: Prepare a cash budget. The next step is to prepare the cash budget, which shows expected cash inflows and outflows during the budget period. Exhibit 20.13 The general formula for a cash budget is: Beginning cash balance + Budgeted cash receipts

Budgeted cash payments = Preliminary cash balance Adequate Loan activity: Repay loans, buy securities Too low Loan activity: Increase short-term loans McGraw-Hill Education. 20-41

Cash Receipts from Sales Learning Objective P2: Prepare a cash budget. 40% of TSCs sales are for cash. The remaining 60% are credit sales that are collected in full in the month following the sale. Lets prepare the cash receipts budget for TSC. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-42 Budgeted Cash Receipts from Sales

(1 of 2) Learning Objective P2: Prepare a cash budget. Exhibit 20.14 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-43 Budgeted Cash Receipts from Sales (2 of 2) Learning Objective P2: Prepare a cash budget. From TSC sales budget Sales* September ($

42,000) Accounts receivable balance at the end of each month is 60% of that months budgeted sales. Less: Ending accounts receivable (60%) September (25,200**) Cash sales are 40% of each months sales Cash sales (40% of sales) October (24,000) McGraw-Hill Education. 20-44 Cash Payments for Materials (1 of 3) Learning Objective P2: Prepare a cash budget. Managers use the beginning balance sheet and the direct materials budget prepared earlier, to help prepare a schedule of cash payments for materials.

TSCs purchases of materials are entirely on account. Full payment is made in the month following the purchase. Lets look at the schedule of cash payments for materials for TSC. McGraw-Hill Education. 20-45 Cash Payments for Materials (2 of 3) Learning Objective P2: Prepare a cash budget. Exhibit 20.15 From direct materials budget $10,240 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction

or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-46 Cash Payments for Materials (3 of 3) Learning Objective P2: Prepare a cash budget. TSCs purchases of materials are entirely on account. Full payment is made in the month following the purchase. McGraw-Hill Education. 20-47

Preparing the Cash Budget Learning Objective P2: Prepare a cash budget. Beginning Cash Balance + Budgeted Cash Receipts Budgeted Cash Payments = Preliminary Cash Balance Preliminary Cash Balance If adequate, repay loans or buy securities. If inadequate, increase short-term loans. Additional information for TSCs cash budget:

Has a September 30 cash balance of $20,000. Will pay a cash dividend of $3,000 in November. McGraw-Hill Education. 20-48 Cash Budget (1 of 2) Learning Objective P2: Prepare a cash budget. Toronto Sticks Company: Has an income tax liability of $20,000 from the

previous quarter that will be paid in October. Will purchase $25,000 of equipment in December. Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. Pays interest each month equal to one percent of the prior months ending loan balance. McGraw-Hill Education. 20-49 Cash Budget (2 of 2) Learning Objective P2: Prepare a cash budget. Repays loans when the ending cash balance exceeds $20,000. Owes $10,000 on this loan arrangement on

September 30. Has 40 percent income tax rate. Will pay taxes for current quarter next year. McGraw-Hill Education. 20-50 Exhibit 20.16 (1 of 4) Learning Objective P2: Prepare a cash budget. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-51

Exhibit 20.16 (2 of 4) Learning Objective P2: Prepare a cash budget. Add: Cash receipts from customers (Exhibit 22.14) (55,200) From Cash Receipts Budget Add: Cash receipts from customers (Exhibit 22.14) (49,200) TSCs cash balance at the beginning of October is $20,000. Budgeted cash receipts for October are $49,200, resulting in a total of $69,200 available for the month. Now we are ready to look at TSCs cash payments McGraw-Hill Education. 20-52 Exhibit 20.16 (3 of 4)

Learning Objective P2: Prepare a cash budget. Income taxes of $20,000 were due as of the end of September 30, and payable in October. We next subtract expected cash payments for direct materials, direct labor, overhead, selling expenses, and general and administrative expenses. TSC has a $10,000 loan and pays interest at the rate of one percent per month. Octobers interest is $100. TSC has a dividend payment of $3,000 that it plans to pay in November. McGraw-Hill Education. 20-53 Exhibit 20.16 (4 of 4)

Learning Objective P2: Prepare a cash budget. Repayment for loan to bank (5,635) TSC has an agreement with its bank for loans at the end of each month to provide a minimum cash balance of $20,000. If the cash balance exceeds $20,000 at a month-end, as it does here, TSC uses the excess to repay loans. Ending cash balance for October is the beginning November balance. TSC interest on its outstanding loan amount in November is $44. One last item, before our cash budget is complete TSC plans to pay $25,000 in December to purchase new equipment. McGraw-Hill Education. 20-54

NEED-TO-KNOW 20-5 (1 of 5) Learning Objective P2: Prepare a cash budget. Diaz Co. predicts sales of $80,000 for January and $90,000 for February. Seventy percent of Diazs sales are for cash, and the remaining 30% are credit sales. All credit sales are collected in the month after sale. Januarys beginning accounts receivable balance is $20,000. Compute budgeted cash receipts for January and February. McGraw-Hill Education. 20-55 NEED-TO-KNOW 20-5 (2 of 5) Learning Objective P2: Prepare a cash budget. Budgeted Cash Receipts

Sales January February $80,000 $90,000 24,000 27,000 Cash sales (70% of sales) 56,000

63,000 Collections of prior month's receivables 20,000 24,000 $76,000 $87,000 Less: Ending accounts receivable (30%) Cash receipts from: Total cash receipts Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction

or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-56 NEED-TO-KNOW 20-5 (3 of 5) Learning Objective P2: Prepare a cash budget. Use the following information to prepare a cash budget for the month ended January 31 for Garcia Company. The company requires a minimum $30,000 cash balance at the end of each month. Any preliminary cash balance above $30,000 is used to repay loans (if any). Garcia has a $2,000 loan outstanding at the beginning of January.

McGraw-Hill Education. 20-57 NEED-TO-KNOW 20-5 (4 of 5) Learning Objective P2: Prepare a cash budget. a. January 1 cash balance, $30,000 b. Cash receipts from sales, $132,000 c. Budgeted cash payments for materials, $63,500 d. Budgeted cash payments for labor, $33,400 e. Other budgeted cash expenses,* $8,200 f. Cash repayment of bank loan, $2,000 *Including loan interest for January. McGraw-Hill Education. 20-58

NEED-TO-KNOW 20-5 (5 of 5) Learning Objective P2: Prepare a cash budget. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-59 Learning Objective P3: Prepare budgeted financial statements. McGraw-Hill Education. 20-60

Budgeted Income Statement (1 of 3) Learning Objective P3: Prepare budgeted financial statements. The budgeted income statement is a managerial accounting report showing predicted amounts of sales and expenses for the budget period. Cash Budget: Completed Budgeted Income Statement Lets prepare the budgeted income statement for Toronto Sticks Company. McGraw-Hill Education. 20-61 Budgeted Income Statement (2 of 3) Learning Objective P3: Prepare budgeted financial statements.

Exhibit 20.17 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-62 Budgeted Income Statement (3 of 3) Learning Objective P3: Prepare budgeted financial statements. All information in this budgeted income statement is taken from the component budgets weve examined on previous slides. The predicted amount of income tax expense for

the quarter, computed as 40% of the budgeted pretax income, is included. McGraw-Hill Education. 20-63 Budgeted Balance Sheet (1 of 3) Learning Objective P3: Prepare budgeted financial statements. The budgeted balance sheet shows predicted amounts for the companys assets, liabilities, and equity as of the end of the budget period. Budgeted Income Statement: Completed Budgeted Balance Sheet Lets prepare the budgeted balance sheet for Toronto Sticks Company.

McGraw-Hill Education. 20-64 Budgeted Balance Sheet (2 of 3) Learning Objective P3: Prepare budgeted financial statements. Exhibit 20.18 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-65

Budgeted Balance Sheet (3 of 3) Learning Objective P3: Prepare budgeted financial statements. The budgeted balance sheet for TSC is prepared using information from the other budgets. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-66 Budgeting for Service Companies Learning Objective P3: Prepare budgeted financial statements. Service providers also use master budgets but typically

need fewer operating budgets than manufacturers. Important budgets for a service companies include: Exhibit 20.19 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-67 Learning Objective A1: Analyze expense planning using activitybased budgeting. McGraw-Hill Education. 20-68

Activity-Based Budgeting (1 of 2) Learning Objective A1: Analyze expense planning using activitybased budgeting. Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. Exhibit 20.21 Accounting Department Comparison of Activity-Based Budget with Traditional Budget Traditional Budget Salaries Activity-Based Budget $152,000 Supplies

.. 22,000 Depreciation 36,000 Utilities . 14,000 Auditing $ 58,000

Tax reporting... 71,000 Financial reporting 63,000 Cost accounting. 32,000 Total.. $224,000 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation.

without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-69 Activity-Based Budgeting (2 of 2) Learning Objective A1: Analyze expense planning using activitybased budgeting. An understanding of the resources required to perform the activities, the costs associated with these resources, and the way resource use changes with changes in activity levels allows management to better assess how expenses will change to accommodate changes in activity levels. McGraw-Hill Education.

20-70 Learning Objective P4 (Appendix A): Prepare each component of a master budget and link each to the budgeting processfor a merchandising company. McGraw-Hill Education. 20-71 Merchandise Purchases Budget (1 of 6) Learning Objective P4: Prepare each component of a master budget and link each to the budgeting processfor a merchandising company.

Unlike a manufacturing company, a merchandiser must prepare a merchandise purchases budget rather than a production budget. Exhibit 20A.1 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-72 Merchandise Purchases Budget (2 of 6) Learning Objective P4: Prepare each component of a master budget and link each to the budgeting processfor a merchandising company.

Example: Lets look at the merchandise purchases budget for Hockey Den (HD), a retailer of hockey sticks McGraw-Hill Education. 20-73 Merchandise Purchases Budget (3 of 6) Learning Objective P4: Prepare each component of a master budget and link each to the budgeting processfor a merchandising company. Example: Hockey Den buys hockey sticks for $60 each and maintains an ending inventory equal to 90 percent of the next months budgeted sales. On September 30, 1,010 hockey sticks are on hand. Exhibit 20A.2

The general layout for the purchases budget in equation form is: Merchandise Inventory to be purchased = Budgeted ending merchandise Inventory + Budgeted sales for the period Budgeted beginning merchandise Inventory Lets prepare the purchases budget for Hockey Den. McGraw-Hill Education. 20-74 Merchandise Purchases Budget (4 of 6) Learning Objective P4: Prepare each component of a master budget and link each to the budgeting processfor a merchandising company. Exhibit 20A.3 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction

or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 20-75 Merchandise Purchases Budget (5 of 6) Learning Objective P4: Prepare each component of a master budget and link each to the budgeting processfor a merchandising company. Next month budget sales (units) (800) From the sales budget. Budgeted ending inventory (units) (720) Ending inventory for a month in units, should equal 90% of next months unit sales. Add: Budgeted sales units (1000) Next we add

the unit sales for each month to the desired ending inventory to get the total needs for each month. McGraw-Hill Education. 20-76 Merchandise Purchases Budget (6 of 6) Learning Objective P4: Prepare each component of a master budget and link each to the budgeting processfor a merchandising company. Required units of available merchandise. 1,720 Deduct: beginning inventory (units) (1,010*) Subtract beginning inventory to determine the budgeted number of units to be purchased. Budgeted cost of the purchases, computed as: number of units cost per unit.

McGraw-Hill Education. 20-77 NEED-TO-KNOW 20-8 Learning Objective P4: Prepare each component of a master budget and link each to the budgeting process for a merchandising company. In preparing monthly budgets for the third quarter, a company budgeted sales of 120 units for July and 140 units for August. Management wants each months ending inventory to be 60% of next months sales. The June 30 inventory consists of 50 units, which does not comply with the company's inventory policy. How many units should be purchased in July? Next month's budgeted sales (units) Ratio of inventory to future sales Budgeted ending inventory (units)

140 60% 84 Add: Budgeted sales (units) 120 Required units of available merchandise 204 Deduct: Beginning inventory (units) (72) Units to be purchased

132 McGraw-Hill Education. 20-78 End of Presentation McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 20-79

Recently Viewed Presentations

  • Haitian Slave revolution & Roman slave Rebellion

    Haitian Slave revolution & Roman slave Rebellion

    With reading the Briton revolution paper, I would say that the Haitian rebellion made it all the way to the last stage in the process of revolution. The roman rebellion made it to about the 3rd stage of the crisis...
  • Stormwater Drainage Area Selection: Setting BMP Priorities in ...

    Stormwater Drainage Area Selection: Setting BMP Priorities in ...

    SSCHC Medical Clinics & WIC Clinic. Door to Door Canvassing. Community Partners & Community Outreach. Referral Reasons: BLL's in the 5-14µg/dL Range. Provider or Family Concerns. 1,099 Active Families; 1,266 Children (July 2011) SSCHC's Childhood Lead Poisoning Prevention Program.
  • Mental Math Math Mental March 18th - Your

    Mental Math Math Mental March 18th - Your

    Reflect & Share sheet . for your group. March 19th-Your next hand-in day is Monday, March 24. th- ... The bottom rectangular face will be covered in rubber and will not be painted. What is the total surface area Jessie...
  • A Blueprint For Alignment

    A Blueprint For Alignment

    The steal skeleton is now a brightly colored, seven story monument to all the children receiving treatment at the clinic. The children watched their names added to the steel, providing a spray-painted tribute given them a few moments of joy...
  • INDONESIA MENUJU AEC 2015 DAN VISI MARITIM Faisal

    INDONESIA MENUJU AEC 2015 DAN VISI MARITIM Faisal

    INDONESIA MENUJU AEC 2015 DAN VISI MARITIM Faisal Basri 8 November 2014 * * * * * * * * * Menunggu otoritas pengawal laut dan pantai Selama ini yang sudah ada adalah Kesatuan Penjaga Laut dan Pantai RI (Indonesia...
  • VOLUNTEER ORIENTATION - Illinois Legal Aid Online

    VOLUNTEER ORIENTATION - Illinois Legal Aid Online

    Chicago has twice as many false confessions as any other city. ... Juvenile Intervention & Support Center (JISC) (312)747-3934. Other Locations: Hospitals, Schools, Special Units, Federal Custody . Call District or Area Headquarters where client may be located .
  • Essential Statistics

    Essential Statistics

    Be able to calculate the inter-quartile range, three quartiles, Pearson's Index of Skewness, z-score, Coefficient of Variation. Be familiar with symmetry vs. skewness and distribution shapes. Be able to build both traditional and modified box plots (aka: box-and-whiskers plot). Correlation...
  • Ionic Compounds and Metals

    Ionic Compounds and Metals

    Section Summary. Ionic compounds contain ionic bonds formed by the attraction of oppositely charged ions. Ions in an ionic compound are arranged in a repeating pattern called a lattice. Ionic compounds are electrolytes; they conduct electricity in liquid and aqueous...