Managerial Accounting 15th ed Chapter 8

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Managerial Accounting 15th ed Chapter 8

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Managerial Accounting 15th ed Chapter 8

  1. 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Master Budgeting Chapter 8
  2. 2. 8-2 Learning Objective 1 Understand why organizations budget and the processes they use to create budgets.
  3. 3. 8-3 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of preparing a budget is called budgeting. 2. The use of budgets to control an organization’s activities is known as budgetary control.
  4. 4. 8-4 Difference Between Planning and Control PlanningPlanning –– involves developinginvolves developing objectives andobjectives and preparing variouspreparing various budgets to achievebudgets to achieve those objectives.those objectives. PlanningPlanning –– involves developinginvolves developing objectives andobjectives and preparing variouspreparing various budgets to achievebudgets to achieve those objectives.those objectives. ControlControl –– involves the steps takeninvolves the steps taken by management toby management to increase the likelihood thatincrease the likelihood that the objectives set downthe objectives set down while planning are attainedwhile planning are attained and that all parts of theand that all parts of the organization are workingorganization are working together toward that goal.together toward that goal. ControlControl –– involves the steps takeninvolves the steps taken by management toby management to increase the likelihood thatincrease the likelihood that the objectives set downthe objectives set down while planning are attainedwhile planning are attained and that all parts of theand that all parts of the organization are workingorganization are working together toward that goal.together toward that goal.
  5. 5. 8-5 Advantages of Budgeting Advantages Define goalsDefine goals and objectivesand objectives Uncover potentialUncover potential bottlenecksbottlenecks CoordinateCoordinate activitiesactivities Communicate plans Means of allocatingMeans of allocating resourcesresources
  6. 6. 8-6 Responsibility Accounting Managers should be heldManagers should be held responsible for those items -responsible for those items - andand onlyonly those items - thatthose items - that they can actually controlthey can actually control to a significant extent.to a significant extent. Responsibility accountingResponsibility accounting enables organizations toenables organizations to reactreact quicklyquickly to deviations from theirto deviations from their plans and toplans and to learnlearn fromfrom feedback.feedback.
  7. 7. 8-7 Choosing the Budget Period Operating BudgetOperating Budget 2014 2015 2016 2017 Operating budgets ordinarilyOperating budgets ordinarily cover a one-year periodcover a one-year period corresponding to a company’scorresponding to a company’s fiscal year. Many companiesfiscal year. Many companies divide their annual budgetdivide their annual budget into four quarters.into four quarters. Operating budgets ordinarilyOperating budgets ordinarily cover a one-year periodcover a one-year period corresponding to a company’scorresponding to a company’s fiscal year. Many companiesfiscal year. Many companies divide their annual budgetdivide their annual budget into four quarters.into four quarters. A continuous budget is aA continuous budget is a 12-month budget that rolls12-month budget that rolls forward one month (or quarter)forward one month (or quarter) as the current month (or quarter)as the current month (or quarter) is completed.is completed. A continuous budget is aA continuous budget is a 12-month budget that rolls12-month budget that rolls forward one month (or quarter)forward one month (or quarter) as the current month (or quarter)as the current month (or quarter) is completed.is completed.
  8. 8. 8-8 Self-Imposed Budget A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels. S u p e r v is o r S u p e r v is o r M id d le M a n a g e m e n t S u p e r v is o r S u p e r v is o r M id d le M a n a g e m e n t T o p M a n a g e m e n t
  9. 9. 8-9 Advantages of Self-Imposed Budgets 1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse. 1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.
  10. 10. 8-10 Self-Imposed Budgets Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack.” Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare budgets that meet those targets. Self-imposed budgets should be reviewed by higher levels of management to prevent “budgetary slack.” Most companies issue broad guidelines in terms of overall profits or sales. Lower level managers are directed to prepare budgets that meet those targets.
  11. 11. 8-11 Human Factors in Budgeting The success of a budget program depends on three important factors: 1.Top management must be enthusiastic and committed to the budget process. 2.Top management must not use the budget to pressure employees or blame them when something goes wrong. 3.Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.
  12. 12. 8-12 The Master Budget: An Overview Production budgetProduction budget Selling and administrative budget Selling and administrative budget Direct materials budget Direct materials budget Manufacturing overhead budget Manufacturing overhead budget Direct labor budget Direct labor budget Cash BudgetCash Budget Sales budgetSales budget Ending inventory budget Ending inventory budget Budgeted balance sheet Budgeted balance sheet Budgeted income statement Budgeted income statement
  13. 13. 8-13 Seeing the Big Picture To help you see the “big picture” keep in mind that the 10 schedules in the master budget are designed to answer the 10 questions shown on the next screen. To help you see the “big picture” keep in mind that the 10 schedules in the master budget are designed to answer the 10 questions shown on the next screen.
  14. 14. 8-14 Seeing the Big Picture 1. How much sales revenue will we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing costs will we incur? 5. How much cash will we pay to our suppliers and our direct laborers, and how much cash will we pay for manufacturing overhead resources? 6. What is the total cost that will be transferred from finished goods inventory to cost of good sold? 7. How much selling and administrative expense will we incur and how much cash will be pay related to those expenses? 8. How much money will we borrow from or repay to lenders – including interest? 9. How much operating income will we earn? 10.What will our balance sheet look like at the end of the budget period? 1. How much sales revenue will we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing costs will we incur? 5. How much cash will we pay to our suppliers and our direct laborers, and how much cash will we pay for manufacturing overhead resources? 6. What is the total cost that will be transferred from finished goods inventory to cost of good sold? 7. How much selling and administrative expense will we incur and how much cash will be pay related to those expenses? 8. How much money will we borrow from or repay to lenders – including interest? 9. How much operating income will we earn? 10.What will our balance sheet look like at the end of the budget period?
  15. 15. 8-15 The Master Budget: An Overview A master budget is based on various estimatesA master budget is based on various estimates and assumptions. For example, the salesand assumptions. For example, the sales budget requires threebudget requires three estimates/assumptionsestimates/assumptions as follows:as follows: 1.1.What are the budgeted unit sales?What are the budgeted unit sales? 2.2.What is the budgeted selling price per unit?What is the budgeted selling price per unit? 3.3.What percentage of accounts receivable willWhat percentage of accounts receivable will be collected in the current and subsequentbe collected in the current and subsequent periods.periods.
  16. 16. 8-16 The Master Budget: An Overview When Microsoft Excel© is used to create a master budget, these types of assumptions can be depicted in a Budget Assumptions tab, thereby enabling Excel-based budget to answer “what-if” questions.
  17. 17. 8-17 Learning Objective 2 Prepare a sales budget, including a schedule of expected cash collections.
  18. 18. 8-18 Budgeting Example  Royal Company is preparing budgets for the quarter ending June 30th .  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.
  19. 19. 8-19 The Sales Budget The individual months of April, May, and June are summed to obtain the total budgeted sales in units and dollars for the quarter ended June 30th
  20. 20. 8-20 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% uncollectible. • In April, the March 31st accounts receivable balance of $30,000 will be collected in full.
  21. 21. 8-21 Expected Cash Collections
  22. 22. 8-22 Expected Cash Collections From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.
  23. 23. 8-23 Expected Cash Collections From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.
  24. 24. 8-24 Quick Check  What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000
  25. 25. 8-25 What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 Quick Check 
  26. 26. 8-26 Expected Cash Collections
  27. 27. 8-27 Learning Objective 3 Prepare a production budget.
  28. 28. 8-28 The Production Budget ProductionProduction BudgetBudget SalesSales BudgetBudget andand ExpectedExpected CashCash CollectionsCollections Com pleted The production budget must be adequate toThe production budget must be adequate to meet budgeted sales and to provide formeet budgeted sales and to provide for the desired ending inventory.the desired ending inventory.
  29. 29. 8-29 The Production Budget • The management at Royal Company wantsThe management at Royal Company wants ending inventory to be equal toending inventory to be equal to 20%20% of theof the following month’s budgeted sales in units.following month’s budgeted sales in units. • On March 31On March 31stst , 4,000 units were on hand., 4,000 units were on hand. Let’s prepare the production budget.Let’s prepare the production budget. If Royal was a merchandising company it would prepare a merchandise purchase budget instead of a production budget. If Royal was a merchandising company it would prepare a merchandise purchase budget instead of a production budget.
  30. 30. 8-30 The Production Budget
  31. 31. 8-31 The Production Budget March 31March 31 ending inventory.ending inventory. March 31March 31 ending inventory.ending inventory. Budgeted May sales 50,000 Desired ending inventory % 20% Desired ending inventory 10,000
  32. 32. 8-32 Quick Check  What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units
  33. 33. 8-33 What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units Quick Check 
  34. 34. 8-34 The Production Budget
  35. 35. 8-35 The Production Budget Assumed ending inventory.Assumed ending inventory.Assumed ending inventory.Assumed ending inventory.
  36. 36. 8-36 Learning Objective 4 Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.
  37. 37. 8-37 The Direct Materials Budget • At Royal Company,At Royal Company, five poundsfive pounds of materialof material are required per unit of product.are required per unit of product. • Management wants materials on hand at theManagement wants materials on hand at the end of each month equal toend of each month equal to 10%10% of theof the following month’s production.following month’s production. • On March 31, 13,000 pounds of material areOn March 31, 13,000 pounds of material are on hand. Material cost ison hand. Material cost is $0.40$0.40 per pound.per pound. Let’s prepare the direct materials budget.Let’s prepare the direct materials budget.
  38. 38. 8-38 The Direct Materials Budget From production budget.From production budget.From production budget.From production budget.
  39. 39. 8-39 The Direct Materials Budget
  40. 40. 8-40 The Direct Materials Budget Calculate the materials toCalculate the materials to be purchased in May.be purchased in May. March 31 inventory.March 31 inventory.March 31 inventory.March 31 inventory. 10% of following month’s production needs. 10% of following month’s production needs.
  41. 41. 8-41 Quick Check  How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds
  42. 42. 8-42 How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds Quick Check 
  43. 43. 8-43 The Direct Materials Budget
  44. 44. 8-44 The Direct Materials Budget Assumed ending inventory.Assumed ending inventory.Assumed ending inventory.Assumed ending inventory.
  45. 45. 8-45 Expected Cash Disbursement for Materials • Royal paysRoyal pays $0.40$0.40 per poundper pound for its materials.for its materials. • One-halfOne-half of a month’s purchases is paid for inof a month’s purchases is paid for in the month of purchase; the other half is paid inthe month of purchase; the other half is paid in the following month.the following month. • The March 31 accounts payable balance isThe March 31 accounts payable balance is $12,000.$12,000. Let’s calculate expected cash disbursements.Let’s calculate expected cash disbursements.
  46. 46. 8-46 Expected Cash Disbursement for Materials
  47. 47. 8-47 Expected Cash Disbursement for Materials 140,000 lbs. × $0.40/lb. = $56,000140,000 lbs. × $0.40/lb. = $56,000140,000 lbs. × $0.40/lb. = $56,000140,000 lbs. × $0.40/lb. = $56,000 Compute the expected cashCompute the expected cash disbursements for materialsdisbursements for materials for the quarter.for the quarter. Compute the expected cashCompute the expected cash disbursements for materialsdisbursements for materials for the quarter.for the quarter.
  48. 48. 8-48 Quick Check  What are the total cash disbursements forWhat are the total cash disbursements for the quarter?the quarter? a. $185,000a. $185,000 b. $ 68,000b. $ 68,000 c. $ 56,000c. $ 56,000 d. $201,400d. $201,400 What are the total cash disbursements forWhat are the total cash disbursements for the quarter?the quarter? a. $185,000a. $185,000 b. $ 68,000b. $ 68,000 c. $ 56,000c. $ 56,000 d. $201,400d. $201,400
  49. 49. 8-49 What are the total cash disbursements forWhat are the total cash disbursements for the quarter?the quarter? a. $185,000a. $185,000 b. $ 68,000b. $ 68,000 c. $ 56,000c. $ 56,000 d. $201,400d. $201,400 What are the total cash disbursements forWhat are the total cash disbursements for the quarter?the quarter? a. $185,000a. $185,000 b. $ 68,000b. $ 68,000 c. $ 56,000c. $ 56,000 d. $201,400d. $201,400 Quick Check 
  50. 50. 8-50 Expected Cash Disbursement for Materials
  51. 51. 8-51 Learning Objective 5 Prepare a direct labor budget.
  52. 52. 8-52 The Direct Labor Budget • At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor. • The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. • For purposes of our illustration assume that Royal has a “no layoff” policy, workers are paid at the rate of $10 per hour regardless of the hours worked. • 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.Let’s prepare the direct labor budget.
  53. 53. 8-53 The Direct Labor Budget From production budget.From production budget.From production budget.From production budget.
  54. 54. 8-54 The Direct Labor Budget
  55. 55. 8-55 The Direct Labor Budget Greater of labor hours requiredGreater of labor hours required or labor hours guaranteed.or labor hours guaranteed. Greater of labor hours requiredGreater of labor hours required or labor hours guaranteed.or labor hours guaranteed.
  56. 56. 8-56 The Direct Labor Budget
  57. 57. 8-57 Quick Check  What would be the total direct labor cost for the quarter if the company follows its no lay- off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000
  58. 58. 8-58 What would be the total direct labor cost for the quarter if the company follows its no lay- off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000 Quick Check  April May June Quarter Labor hours required 1,300 2,300 1,450 Regular hours paid 1,500 1,500 1,500 4,500 Overtime hours paid - 800 - 800 Total regular hours 4,500 $10 45,000$ Total overtime hours 800 $15 12,000$ Total pay 57,000$
  59. 59. 8-59 Learning Objective 6 Prepare a manufacturing overhead budget.
  60. 60. 8-60 Manufacturing Overhead Budget • At Royal, manufacturing overhead is applied toAt Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.units of product on the basis of direct labor hours. • TheThe variablevariable manufacturing overhead rate ismanufacturing overhead rate is $20$20 per direct labor hourper direct labor hour.. • Fixed manufacturing overhead isFixed manufacturing overhead is $50,000$50,000 perper month, which includesmonth, which includes $20,000 of noncash costs$20,000 of noncash costs (primarily depreciation of plant assets).(primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget.Let’s prepare the manufacturing overhead budget. • At Royal, manufacturing overhead is applied toAt Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours.units of product on the basis of direct labor hours. • TheThe variablevariable manufacturing overhead rate ismanufacturing overhead rate is $20$20 per direct labor hourper direct labor hour.. • Fixed manufacturing overhead isFixed manufacturing overhead is $50,000$50,000 perper month, which includesmonth, which includes $20,000 of noncash costs$20,000 of noncash costs (primarily depreciation of plant assets).(primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget.Let’s prepare the manufacturing overhead budget.
  61. 61. 8-61 Manufacturing Overhead Budget Direct Labor Budget.Direct Labor Budget.Direct Labor Budget.Direct Labor Budget.
  62. 62. 8-62 Manufacturing Overhead Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour * * rounded* rounded
  63. 63. 8-63 Manufacturing Overhead Budget Depreciation is a noncash charge.Depreciation is a noncash charge.Depreciation is a noncash charge.Depreciation is a noncash charge.
  64. 64. 8-64 Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49 4.99$ Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$ Ending Finished Goods Inventory Budget Direct materialsDirect materials budget and information.budget and information. Direct materialsDirect materials budget and information.budget and information.
  65. 65. 8-65 Production costs per unit Quantity Cost Total Direct 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 4.99$ Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$ Ending Finished Goods Inventory Budget Direct labor budget.Direct labor budget.Direct labor budget.Direct labor budget.
  66. 66. 8-66 Production costs per unit Quantity Cost Total Direct 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 4.99$ Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory ? Ending Finished Goods Inventory Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour
  67. 67. 8-67 Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49 4.99$ Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$ Ending Finished Goods Inventory Budget Production Budget.Production Budget.Production Budget.Production Budget.
  68. 68. 8-68 Learning Objective 7 Prepare a selling and administrative expense budget.
  69. 69. 8-69 Selling and Administrative Expense Budget • At Royal, the selling and administrative expense budget isAt Royal, the selling and administrative expense budget is divided into variable and fixed components.divided into variable and fixed components. • TheThe variablevariable selling and administrative expenses are $0.50selling and administrative expenses are $0.50 per unit sold.per unit sold. • FixedFixed selling and administrative expenses are $70,000 perselling and administrative expenses are $70,000 per month.month. • The fixed selling and administrative expenses includeThe fixed selling and administrative expenses include $10,000 in costs – primarily depreciation – that are not cash$10,000 in costs – primarily depreciation – that are not cash outflows of the current month.outflows of the current month. Let’s prepare the company’s selling and administrativeLet’s prepare the company’s selling and administrative expense budget.expense budget.
  70. 70. 8-70 Selling and Administrative Expense Budget Calculate the selling and administrativeCalculate the selling and administrative cash expenses for the quarter.cash expenses for the quarter. Calculate the selling and administrativeCalculate the selling and administrative cash expenses for the quarter.cash expenses for the quarter.
  71. 71. 8-71 Quick Check  What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000
  72. 72. 8-72 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 Quick Check 
  73. 73. 8-73 Selling Administrative Expense Budget
  74. 74. 8-74 Learning Objective 8 Prepare a cash budget.
  75. 75. 8-75 Format of the Cash Budget The cash budget is divided into four sections:The cash budget is divided into four sections: 1.1. Cash receiptsCash receipts section lists all cash inflows excluding cashsection lists all cash inflows excluding cash received from financing;received from financing; 2.2. Cash disbursementsCash disbursements section consists of all cash paymentssection consists of all cash payments excluding repayments of principal and interest;excluding repayments of principal and interest; 3.3. Cash excess or deficiency section determines if theCash excess or deficiency section determines if the company willcompany will need to borrow moneyneed to borrow money or if it will be able toor if it will be able to repay funds previously borrowed; andrepay funds previously borrowed; and 4.4. Financing sectionFinancing section details the borrowings and repaymentsdetails the borrowings and repayments projected to take place during the budget period.projected to take place during the budget period. The cash budget is divided into four sections:The cash budget is divided into four sections: 1.1. Cash receiptsCash receipts section lists all cash inflows excluding cashsection lists all cash inflows excluding cash received from financing;received from financing; 2.2. Cash disbursementsCash disbursements section consists of all cash paymentssection consists of all cash payments excluding repayments of principal and interest;excluding repayments of principal and interest; 3.3. Cash excess or deficiency section determines if theCash excess or deficiency section determines if the company willcompany will need to borrow moneyneed to borrow money or if it will be able toor if it will be able to repay funds previously borrowed; andrepay funds previously borrowed; and 4.4. Financing sectionFinancing section details the borrowings and repaymentsdetails the borrowings and repayments projected to take place during the budget period.projected to take place during the budget period.
  76. 76. 8-76 The Cash Budget Assume the following information for Royal:Assume the following information for Royal:  Maintains a 16% open line of credit for $75,000.Maintains a 16% open line of credit for $75,000.  Maintains a minimum cash balance of $30,000.Maintains a minimum cash balance of $30,000.  Borrows on the first day of the month and repaysBorrows on the first day of the month and repays loans on the last day of the month.loans on the last day of the month.  Pays a cash dividend of $49,000 in April.Pays a cash dividend of $49,000 in April.  Purchases $143,700 of equipment in May andPurchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash).$48,300 in June (both purchases paid in cash).  Has an April 1 cash balance of $40,000.Has an April 1 cash balance of $40,000.
  77. 77. 8-77 The Cash Budget Schedule of ExpectedSchedule of Expected Cash Collections.Cash Collections. Schedule of ExpectedSchedule of Expected Cash Collections.Cash Collections.
  78. 78. 8-78 The Cash Budget Direct LaborDirect Labor Budget.Budget. Direct LaborDirect Labor Budget.Budget. ManufacturingManufacturing Overhead Budget.Overhead Budget. ManufacturingManufacturing Overhead Budget.Overhead Budget. Selling and AdministrativeSelling and Administrative Expense Budget.Expense Budget. Selling and AdministrativeSelling and Administrative Expense Budget.Expense Budget. Schedule of ExpectedSchedule of Expected Cash Disbursements.Cash Disbursements. Schedule of ExpectedSchedule of Expected Cash Disbursements.Cash Disbursements.
  79. 79. 8-79 The Cash Budget Because Royal maintainsBecause Royal maintains a cash balance of $30,000,a cash balance of $30,000, the company must borrowthe company must borrow $50,000 on its line-of-credit.$50,000 on its line-of-credit. Because Royal maintainsBecause Royal maintains a cash balance of $30,000,a cash balance of $30,000, the company must borrowthe company must borrow $50,000 on its line-of-credit.$50,000 on its line-of-credit.
  80. 80. 8-80 The Cash Budget Ending cash balance for AprilEnding cash balance for April is the beginning May balance.is the beginning May balance. Ending cash balance for AprilEnding cash balance for April is the beginning May balance.is the beginning May balance. Because Royal maintainsBecause Royal maintains a cash balance of $30,000,a cash balance of $30,000, the company must borrowthe company must borrow $50,000 on its line-of-credit.$50,000 on its line-of-credit. Because Royal maintainsBecause Royal maintains a cash balance of $30,000,a cash balance of $30,000, the company must borrowthe company must borrow $50,000 on its line-of-credit.$50,000 on its line-of-credit.
  81. 81. 8-81 The Cash Budget
  82. 82. 8-82 Quick Check  What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000
  83. 83. 8-83 What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 Quick Check 
  84. 84. 8-84 The Cash Budget $50,000 × 16% × 3/12 = $2,000$50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 andBorrowings on April 1 and repayment on June 30.repayment on June 30. $50,000 × 16% × 3/12 = $2,000$50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 andBorrowings on April 1 and repayment on June 30.repayment on June 30.
  85. 85. 8-85 The Budgeted Income Statement Cash Budget Budgeted Income Statement Com pleted With interest expense from the cash budget, Royal can prepare the budgeted income statement.
  86. 86. 8-86 Learning Objective 9 Prepare a budgeted income statement.
  87. 87. 8-87 The Budgeted Income Statement 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 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000 Interest expense 2,000 Net income 239,000$ Sales Budget.Sales Budget.Sales Budget.Sales Budget. Ending FinishedEnding Finished Goods Inventory.Goods Inventory. Ending FinishedEnding Finished Goods Inventory.Goods Inventory. Selling andSelling and AdministrativeAdministrative Expense Budget.Expense Budget. Selling andSelling and AdministrativeAdministrative Expense Budget.Expense Budget. Cash Budget.Cash Budget.Cash Budget.Cash Budget.
  88. 88. 8-88 Learning Objective 10 Prepare a budgeted balance sheet.
  89. 89. 8-89 The Budgeted Balance Sheet Royal reported the following accountRoyal reported the following account balances prior to preparing its budgetedbalances prior to preparing its budgeted financial statements:financial statements: • Land - $50,000Land - $50,000 • Common stock - $200,000Common stock - $200,000 • Retained earnings - $146,150 (April 1)Retained earnings - $146,150 (April 1) • Equipment - $175,000Equipment - $175,000
  90. 90. 8-90 Royal Company Budgeted Balance Sheet June 30 Assets: Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Land 50,000 Equipment 367,000 Total assets 564,550 Liabilities and Stockholders' Equity Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and stockholders' equity 564,550$
  91. 91. 8-91 Royal Company Budgeted Balance Sheet June 30 Assets: Cash 43,000$ Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950 Land 50,000 Equipment 367,000 Total assets 564,550 Liabilities and Stockholders' Equity Accounts payable 28,400$ Common stock 200,000 Retained earnings 336,150 Total liabilities and stockholders' equity 564,550$ Beginning balance 146,150$ Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$
  92. 92. 8-92 End of Chapter 8

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