Ch-2.pptx cost and accounting management

Objectives of the Chapter:
• Upon completing this chapter, the learner should be able to:
 Define master budget
 Enumerate the principal advantages of budgeting
 Explain the difficulties of budgeting
 Explain the fundamental elements of budget
 Prepare the operating budget and the supporting schedules
 Prepare the financial budget

2.1. Master budget
• A budget can be defined as the quantitative expression
of a proposed plan of action by management for a
specified period.
• A budget generally includes both financial and
nonfinancial aspects of the plan, and it serves as a
blueprint for the company to follow in an upcoming
period.

…cont’d
• Short-term planning is the process of deciding
what objectives to pursue during a short period,
usually one year, and what to do to achieve those
objectives.
• Long-term planning, also known as strategic
planning, is the process of setting long-term
goals and determining the means to attain them.

2.1.1. Budgeting cycle and master budget
• Well-managed companies usually cycle through the
following budgeting steps during the course of the fiscal
year:
• 1. Working together, managers and management
accountants plan the performance of the company as a
whole and the performance of its subunits (such as
departments or divisions).
• Taking into account past performance and anticipated
changes in the future, managers at all levels reach a
common understanding on what is expected.

…cont’d
• 2. Senior managers give subordinate managers a frame
of reference, a set of specific financial or non-financial
expectations against which actual results will be
compared.
• 3. Management accountants help managers to
investigate variations from plans, such as an unexpected
decline in sales. If necessary, corrective action follows,
such as a reduction in price to boost sales or cutting of
costs to maintain profitability.

…cont’d
• 4. Managers and management accountants
take into account market feedback, changed
conditions, and their own experiences as they
begin to make plans for the next period. For
example, a decline in sales may cause
managers to make changes in product features
for the next period.

…cont’d
• The preceding four steps describe the ongoing budget
process.
• The working document at the core of this process is
called the master budget.
• The master budget expresses management’s operating
and financial plans for a specified period.
• The master budget is the initial plan of what the
company intends to accomplish in the budget period.

…cont’d
• The master budget evolves from both
operating and financing decisions made by
managers.
 Operating decisions deal with how to best use
the limited resources of an organization.
 Financing decisions deal with how to obtain
the funds to acquire those resources.

2.2. Advantageous of budget
• Budgets are an integral part of management control systems.
• When administered thoughtfully by managers, budgets do the
following:
 Promote coordination and communication among subunits
within the company
 Provide a framework for judging performance and facilitating
learning
 Motivate managers and other employees
 Means of allocation resources and create cost awareness.

Coordination and Communication
• Communication is making sure those goals are
understood by all employees.
• Coordination forces executives to think of relationships
among individual departments within the company, as
well as between the company and its supply chain
partners.
• The production manager- with the company’s marketing
team to understand when set-top boxes will be needed.

judging performance and facilitating learning
• Budgets enable a company’s managers
to measure actual performance against
predicted performance.
• One of the most valuable benefits of
budgeting is that it helps managers to
gather relevant information for
improving future performance.

Motivate managers and other employees
• Research shows that challenging
budgets improve employee performance
because employees view falling short of
budgeted number as a failure.
• Most employees are motivated to work
more intensely to avoid failure than to
achieve success.

Means of Allocating Resources
• Each person and each organization must
compare the costs and benefits of each
potential project or activity and choose those
that result in the most appropriate resource
allocation decision. Generally, organizations
resources are limited, and budgets provide one
means of allocating resources among competing
uses.

…cont’d
• Accountants and financial managers are concerned
daily about the cost implications of decisions and
activities, but many other managers are not.
• Production managers focus on input, marketing
manager’s focuses on sales.
• At budgeting time, however, all managers with budget
responsibility must convert their plans for projects and
activities to costs and benefits.

2.3. Challenges in budget administration
• The budgeting process involves all levels of management:
Top managers want lower-level managers to participate in the
budgeting process because lower-level managers have more
specialized knowledge and first-hand experience with day-to-
day aspects of running the business.
• Budgets should not be administered rigidly: Attaining the
budget is not an end in itself, especially when conditions
change dramatically.

2.4. Components of Master Budget
• the master budget is the principal output of a
budgeting system that shows a comprehensive
operating and financial plans of management.
• This budget ties together all phases of an
organization’s operations and is comprised of
many separate budgets and schedules that are
interdependent.

…cont’d
• The usual master budget for merchandising
firm has the following components:
1.Operating Budget
(a)Sales budget (and other cost-driver budgets as
necessary)
(b)Purchases budget
(c)Operating expenses budget
(d)Budgeted income statement

…cont’d
1.Financial Budget
(a) Capital budget
(b) Cash budget
(c) Budgeted balance sheet

2.4.1. Operating Budget
• The operating budget focuses on the income
statement and its supporting schedules.
• The budgeting process normally begins with
the preparation of the operating budgets. An
operating budget is prepared by individual
sections within a company and becomes part
of the company’s master budget.

A. Sales Budget
• The sales budget is the starting point for
budgeting because the inventory levels,
purchases, and operating expenses are
geared to the rate of sales activities and other
cost drivers.
• A sales budget is a detailed schedule showing
the expected sales for the budget period.

…cont’d
• The sales budget typically is expressed
in both sales birr and units of product.
• An accurate sales budget is the key to
the entire budgeting process.
• All of the other parts of the master
budget are dependent on the sales
budget in some way.

…cont’d
• Notice that, to prepare the sales budget,
budgeted cash sales and budgeted credit sales
information of the original data are used and that
information can be obtained from the marketing
department or any other sales forecast related
units. Thus,
• Total Budgeted sales= Budgeted cash sales + Budgeted credit sales

B. Cash Collection Budget
• The schedule of expected cash collection is
prepared at the same time of preparing the
sales budget.
• Thus, after the sales budget is prepared, the
schedule of expected cash collections is
prepared to show how much cash is expected
to be received from customers.

…cont’d
• The cash collections include to current month’s cash
sales plus the previous month’s credit sales expected to
be collected in the current month.
Cash collection budget = previous period credit sales that collected in current
period + Current period cash sales

C. Purchases Budget
• This budget is prepared to show the amount of goods to
be purchased from suppliers during the period.
• Merchandising firms would prepare an inventory
purchases budget for each item carried in stock.
• In brief, after the sales budget is prepared, the
inventory purchases budget is prepared to show the
amount of inventory that will be needed to satisfy the
number of projected sales.

…cont’d
• Meeting the sales demand requires having
enough inventories to cover expected sales
and future sales between reorder points.
• Accordingly, the total amount of inventory
needed for each month equals the amount
needed to fulfill budgeted sales demand plus
the desired ending inventory.

D. Disbursement for Purchase Budget
• based on the purchases budget, this schedule is
later needed to prepare the overall cash budget.
• Disbursements for inventory purchases consist
of payments for purchases on account made in
prior periods plus any payment for inventory
purchases made in the current budget period.
Total disbursements for purchases = Accounts payable-beginning balance +
current period purchases

E. Operating Expenses Budget
• This budget lists the budgeted operating
expenses for the budget period. All budgeted
selling and administrative expenses would be
compiled and listed down.
• For example, the marketing manager in a large
organization would submit a budget detailing the
advertising expenses for each budget period.

…cont’d
• Examples of expenses driven by sales volume
include sales commissions and many delivery
expenses.
• Other expenses are not influenced by sales or
other cost-driver activity, and such expenses
include rent, insurance, depreciation, and
salaries within appropriate relevant ranges and
are regarded as fixed.

The operating expense budget
ABC Company
Operating Expense Budget
For the Quarter Ended December 31, 20XX
Months
Quarters
January February March
Salaries and wages Birr XX Birr XX Birr XX Birr XX
Advertising Birr XX Birr XX Birr XX Birr XX
Shipping Birr XX Birr XX Birr XX Birr XX
Depreciation Birr XX Birr XX Birr XX Birr XX
Other expenses Birr XX Birr XX Birr XX Birr XX
Total budgeted
operating
expenses
Birr XXXX Birr XXXX Birr XXXX Birr XXXX

F. Disbursements For Operating Expenses Budget
• This schedule is based on the operating
expenses budget.
• Notice that depreciation expense is not
included in the cash disbursements for
operating expenses, because
depreciation is a non-cash expense.

…cont’d
ABC Company
Cash Disbursements for Operating Expense Budget
Months
Quarters
Salaries and wages Birr XX Birr XX Birr XX Birr XX
Advertising Birr XX Birr XX Birr XX Birr XX
Shipping Birr XX Birr XX Birr XX Birr XX
Other expenses Birr XX Birr XX Birr XX Birr XX
Disbursements for
operating
expenses
Birr XXXX Birr XXXX Birr XXXX Birr XXXX

G. Budgeted Income Statement
• The budgeted income statement from operations can be
prepared from the data developed in all tables shown above.
• It shows the company’s planned profit for the upcoming
budget period, and it stands as a benchmark against which
subsequent company performance can be measured.
• If expected profitability is unsatisfactory, management may
take actions, including abandoning the project for which the
budget is prepared or altering planned activity.

…cont’d
ABC Company
Budgeted Income Statement
Sales Birr XX
Less cost of goods sold Birr XX
Gross margin Birr XX
Less operating expenses:
Salaries and wages Birr XX
Advertising Birr XX
Shipping Birr XX
Depreciation Birr XX
Other expenses Birr XX
Total operating expenses Birr XX
Net operating income Birr XX
Less interest expense Birr XX
Net income Birr XX

…cont’d
• The interest expense will be computed later
when the cash budget is prepared.
• The main reason why the budgeted income
statement is prepared before the cash budget
is to show that the ultimate output of the
operating budgets is Performa or budgeted
income statement.

Operating budget for Manufacturing Companies
Step1. Revenue budget: it is the usual
starting point for budgeting, because
production and hence costs and
inventory level generally depend on the
forecasted level of revenue.
Budgeted Revenue = Budgeted quantity x unit selling price

…cont’d
Step2. Production Budget (unit): after
revenue is budgeted, the production budget
can be prepared. The total finished goods
units to be produced depend on planned sales
and expected changes in inventory level.
Budgeted Production (unit) = Budgeted sales + Target ending FG – Beginning
FG Inventory (unit) Inventory (unit)

…cont’d
Step-3. Direct Material Usage Budget
& Direct Material Purchase Budget
• The decision on the number of units
to be produced is the key to
computing the usage of direct material
in quantities and currency.

1.1. Direct Material Usage Budget in Units and Currency
DirectMaterial=Budgetedproduction*Quantityofmaterialrequiredperunit
UsageBudget (unit)
Direct Material Usage in Currency = quantity of material used X rate per unit

1.2. Direct Material Purchase Budget
DMPB (unit) = Production Usage + Target Ending inventory of Material in Unit
–BeginningInventoryofRMin Units
DMPBinCurrency=purchasequantityXrateperunit

Step-4. Direct Manufacturing Labor Budget
These costs depend on wage rates,
production methods and hiring plans
• Budgeted Labor Hours = Budgeted
Production X Time Required per Unit
• Budgeted Labor Cost = Budgeted
Labor Hours X Labor Cost per hour

Step-5. Manufacturing overhead budget:
• The total of these costs depends on
hours individual over head costs vary
with the assumed cost driver, direct
manufacturing labor hours.
• Based on allocation base of DLH
• Total MOH/ Total labor hour

Step-6. Ending inventory budget
• RM ending Budget = Unit cost of RM X
Quantity of Ending Inventory
• FG Ending inventory = Unit Cost of
Production X Quantity of Ending
Inventory

Step-7. Cost of good sold budget
Beginning FG inventory XXX
Beginning work in process XX
Direct Material used XX
Direct Manufacturing Labour XX
Total Work in Process Inventory XX
Less: Ending Work in Process XX
Cost of goods manufactured XX
Cost of Goods Available for Sale XXX
Less: Ending Finished Good Inventory XX
Cost of Good Sold XXX

Step-8. Budgeted Income Statement
Revenue XXX
Less Cost of Goods Sold (XX)
Gross Margin XXX
Less: Operating Costs
Research & Development Costs XX
Marketing Costs XX
Distribution Costs XX
Customer service Cost XX
Administrative Costs XX XX
Operating Income XXX

Illustration
• RAMA Engineering is a machine shop that uses skilled labor and
Metal alloy to manufacture two types of air craft replacement parts
Regular & Heavy duty. After carefully examining relevant factors,
the executive of RAMA Engineering forecasts the following figures for
2006. You are now expected to prepare the budgeted income
statement for RAMA engineering. Assume that work in process
inventory is zero, units costs of direct material purchased &
finished goods sold is remain unchanged throughout the budgeted
year and
• variable production costs are variable with respect to direct
manufacturing labor hours.

Direct Material cost per unit
• Direct Material cost per unit
• Material 111 alloy $7perKG
• Material 112alloy $10perKg
• Direct manufacturing labor $20 per hour

Products (Regular and Heavy Duty)
Content of each product unit Regular Heavy duty
Direct material 111alloy 12 kgs per unit 12kgs per unit
Direct material 112 alloy 6 kgs per unit 8 kgs per unit
Direct manufacturing labour 4 hours per unit 6 hours per unit

additional information regarding the
year 2006 is as follows:
Regular Heavy duty
Expected sales in units 5000 1000
Selling price per unit $600 $800
Target ending inventory in
unit
1,100 50
Beg. Inventory in units 100 50
Beg. Inventory in dollars $38,400 $26,200

Direct Material
111 alloy 112alloy
Beg. Inventory in kg 7,000 6000
Target ending inventory in Kg 8000 2000

Budgeted Manufacturing Overhead
Cost
Variable Cost $780,000
Fixed Cost $420,000
Total manufacturing overhead Cost $1,200,000
Other (Non- Manufacturing) Cost
Variable Cost $475,000
Fixed Cost $395,000
Total $870,000

1. Budgeted Revenue = Budgeted
quantity x unit selling price
Items Value
Regular 5,000 X 600 = Birr 3,000,000
Heavy Duty 1,000 X 800 = 800,000
Total Birr 3,800,000

2. Budgeted Production (unit) = Budgeted sales +
TE FG I (U) – BFGI (U)
Product
Regular Heavy Duty
Budgeted sales in unit 5,000 1,000
Add: target ending inventory in units 1,100 50
Total Requirement 6,100 1,050
Less: beginning inventory 100 50
Product budget 6,000 1,000

3.Direct Material usage Budget In Kgs & in Birr
• DM usage (in units) = budgeted production *
quantity of Dm required per unit
• Dm usage (in birr) = Total Dm usage * cost per
unit

…cont’d
Material Total
111 Alloy 112 Alloy
DM to be used for R (12, 6 X 6,000) 72,000 36,000
DM to be used for HD (12, 8 X 1,000) 12,000 8,000
Total DM to be used 84,000 kg 44,000 kg
Multiplied by: Unit cost Birr 7 Birr 10
Cost of DM to be used Birr 588,000 Birr 440,000 Birr 1,028,000

4. DM Purchase Budget
• DMPB = DM usage + Targeted Ending RmI (in
unit) – Beg. RMI (in unit)
• DMPB (in biir) = DMP * cost per unit

…cont’d
Material Total
111 Alloy 112 Alloy
DM to be used (in KG) 84,000 44,000
Add: Targeted ending DMI (kgs) 8,000 2,000
Total Requirement 92,000 46,000
Less: BDMI (kgs) 7,000 6,000
DM to be purchased 85,000 40,000
Multiplied By: Unit Cost Birr 7 Birr 10
Cost of DM purchased Birr 595,000 Birr 400,000 Birr 995,000

5. Direct Manufacturing Labor Budget
• Budgeted Labor Hours = Budgeted Production
X Time Required per Unit
• Budgeted Labor Cost = Budgeted Labor Hours
X Labor Cost per hour

…cont’d
Product Output units
produced
Direct mfg labor
hours per unit
Total
hours
Hourly
wage rate
Total
Regular 6,000 4 hrs. 24,000 Birr 20 Birr 480,000
Heavy Duty 1,000 6 hrs. 6,000 Birr 20 120,000
Total 30,000 Birr 600,000

6.Manufacturing Overhead Budgets
• At the budgeted level of 30,000 direct manufacturing
labor hours
• MOH per Hours = Birr 1,200,000/ 30,000 =
Birr 40/hours, when production increases
MOH decreases.

…cont’d
Variable Manufacturing Over Head Birr 780,000
Fixed Manufacturing Over Head 420,000
Total Birr 1,200,000

7. Ending Inventory Budget
• RM ending Budget = Quantity of Ending
Inventory X Unit cost of RM
• FG Ending inventory = Quantity of Ending
Inventory X Unit Cost of Production

Computation of unit cost of Manufacturing Finished Goods
Product
Regular Heavy Duty
Cost per unit of
input
Input per
unit of
output
Amount Input Amount
Material 111 Alloy Birr 7 12 Kg Birr 84 12 Kg Birr 84
Material 112 Alloy 10 6 Kg 60 8 Kg 80
D Mfg Labor 20 4 Hrs 80 6 Hrs 120
MOH 40 4 Hrs 160 6 Hrs 240
Total Birr 384 Birr 524

Ending Inventory Budget
DM ending inventory Kgs Cost per KG Total
111 Alloy 8,000 Birr 7 Birr 56,000
112 Alloy 2,000 10 20,000
Total Birr 76,000
FG ending inventory Units Cost Per Unit Total
FG regular 1,100 Birr 384 Birr 422, 400
FG Heavy Duty 50 524 26,200
Total Birr 448,600

8. Cost of Goods Sold Budget
Beginning FGI {(R, 100*384(unit cost); (HD, 50*524) Birr 64,600
DM cost Birr 1,028,000
Direct labor cost 600,000
MOH 1,200,000
Cost of Goods Manufactured 2,828,000
Goods Available for Sale Birr 2,892,600
Less: Ending FGI 448,000
CGS Birr 2,444,600

9. Budget Income statement
Revenue Birr 3,800,000
Less: CGS 2,444,000
Gross Margin Birr 1,356,000
Operating Cost
Operating Variable Cost Birr 475,000
Operating Fixed Cost 395,000 870,000
Operating Income Birr 486,000

2.4.2. Financial Budget
• The second major part of the master budget is the
financial budget, which consists of the capital budget,
cash budget, budgeted balance sheet, & budgeted
statement of cash flows.
• The financial budget focuses on the effects that the
operating budget and other plans (such as capital
budgeting and repayment of debt) will have on cash.

A. Capital Budget
• The capital budget is prepared for
additions to property and equipment. This
budget is used to describe a company’s
long-term plans regarding investment in
facilities, equipment, new products, store
outlets, and lines of business.

…cont’d
• The capital expenditure budget or capital budget is a very
important budget as it throws light on a firm’s outlay and
expansion and diversification program.
• . While preparing this budget, factors such as sales
potential for the increased production, possibility of
price reduction, and increased selling and administrative
costs are to be considered

B. Cash Budget
• A cash budget is a detailed plan showing how
cash resources will be acquired and used over
some specified time period.
• All of the operating budgets have an impact on
the cash budget.
• In the case of the sales budget, the impact
comes from planned cash receipts to be collected
from sales to customers.

…cont’d
• Most of the raw data needed to prepare the cash budget
are included in the cash receipts and disbursements
schedules.
The cash budget is composed of four major sections.
• 1. The cash receipt section
• 2. The cash disbursement section
• 3. The excess (deficiency) of cash section
• 3. Financing section

…cont’d
1. The Receipts Section.
This section consists of a listing of all of
the cash inflows, except for financing,
expected during the budget period.
Generally, the major source of receipts
will be from sales.

…cont’d
2. The Disbursements Section.
• This section consists of all cash payments that are
planned for the budget period. These payments will
include raw materials purchases, direct labor
payments, manufacturing overhead costs, operating
expenses, and so on, as contained in their respective
budgets. In addition, other cash disbursements such as
equipment purchases, dividends, and other cash
withdrawals by owners

…cont’d
1.The Cash Excess or Deficiency Section.
Cash Balance, Beginning Birr XX
Add Cash Received Birr XX
Total cash available before financing Birr XX
Less disbursement Birr XX
Excess (deficiency) of cash Birr XX

…cont’d
• If there is a cash deficiency during any
budget period, the company will need to
borrow funds.
• If there is cash excess during any budget
period, funds borrowed in previous periods
can be repaid or the idle funds can be placed
in short-term or other investments.

…cont’d
1.The Financing Section.
• This section provides a detailed account of
the borrowings and repayments projected to
take place during the budget period.
• It also includes a detail of interest payments
that will be due on money borrowed.

…cont’d
(a)Cash balance, beginning. It is taken from the original
information given or available, that is, a cash balance
on December 31, 20XX in the case of ABC Company
Moreover, the beginning cash balance for the quarter
means the same as the beginning cash balance for
January. This is so because the quarter begins on
January 1.
(b)Collections from customers. The collections from
customers are brought from the schedule of expected
cash collections.

…cont’d
(a) Purchases of inventory. The figures for purchases of inventory are
taken from the schedule of expected cash disbursements for
purchases.
(b) Operating expenses. The figures for operating expenses are taken
from the schedule of expected cash disbursements for operating
expenses.
(c) Purchases of equipment and cash dividends. While the figures for
purchases of equipment are taken from information given or
available and the figure for cash dividends.
(d) Financing. From money borrowed and principal and interest repaid.

ABC Company
Cash Budget
Months
Quarters
Cash balance, beginning Birr XX - - Birr XX
Add Cash Received
Collection from customers Birr XX Birr XX Birr XX Birr XX
Total cash available [a] Birr XX Birr XX Birr XX Birr XX
Less disbursements:
Purchases of inventory Birr XX Birr XX Birr XX Birr XX
Operating expenses Birr XX Birr XX Birr XX Birr XX
Purchases of equipment - Birr XX Birr XX Birr XX
Cash dividends Birr XX - - Birr XX
Total disbursements [b] Birr XX Birr XX Birr XX Birr XX
Excess (deficiency) of cash [c] = [a] + [b] Birr XX Birr XX Birr XX Birr XX
Financing:
Borrowings (at beginning) Birr XX - - Birr XX
Repayments (at ending) - - Birr XX Birr XX
Interest - - Birr XX Birr XX
Total financing [d] Birr XX - Birr XX Birr XX
Cash balance, ending [e] = [c] + [d] Birr XXXX Birr XXXX Birr XXXX Birr XXXX

…cont’d
A. Budgeted Balance Sheet
• To construct the budgeted balance sheet, we start with
the general ledger account balances as of December
31,20XX given or available data in the case of ABC
Company and adjust each balance sheet account
balance for the changes expected to take place during
20XX. The budgeted balance sheet for ABC Company is
shown in table below.

…cont’d
ABC Company
Budgeted Balance Sheet
December 31, 20XX
Assets
Current assets:
Cash Birr XX
Accounts receivable Birr XX
Inventory Birr XX
Total current assets Birr XX
Plant assets:
Building and equipment (net) Birr XX
Total Assets Birr XX
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable Birr XX
Stockholders’ equity:
Capital stock Birr XX
Retained earnings Birr XX
Total stockholders’ equity Birr XX
Total Liabilities and Stockholders’ Equity Birr XXX

…cont’d
• Example 1:
To illustrate the budget process for merchandising
firms, a hypothetical office supplies specialty store
in Addis Ababa called ANC Company will be
considered. The company prepares its master
budget on a quarterly basis. The following data
have been assembled to assist in the preparation of
the master budget for the first quarter of 2007:

(a)As of December 31, 2006, the company’s general ledger
showed the following account balances:
Debit Credit
Cash Birr 48,000
Accounts receivable 224,000
Inventory 60,000
Building and equipment (net) 370,000
Accounts payable Birr 93,000
Capital stock 500,000
Retained earnings 109,000
Total Birr 702,000 Birr 702,000

(b). Actual sales for December 2006 and budgeted sales for the next
four months of 2007 are as follows:
December (actual) Birr 280,000
Budgeted sales of 2007:
January 400,000
February 600,000
March 300,000
April 200,000

…cont’d
(c). Sales are 20% for cash and 80% on
credit. All payments on credit sales are
collected in the month following sale. The
accounts receivable at December 31, 2006
are a result of December credit sales.
(d). The company’s gross profit rate is 40%
of sales.

(e) Monthly expenses are budgeted as follows:
Salaries and wages Birr 27,000 per month
Advertising Birr 70,000 per month
Shipping 5% of sales
Depreciation Birr 14,000 per month
Other expenses 3% of sales

…cont’d
(f). At the end of each month, inventory is to be on hand (minimum
required or desired inventory level) equal to 25% of the following
month’s sales needs, stated at cost.
(g). One-half of a month’s inventory purchases are paid for in the
month of purchase, the other half is paid for in the following
month.
(h). During February, the company will purchase a new copy
machine for Birr 1,700 cash. During March, other equipment will
be purchased for cash at a cost of Birr 84,500.

…cont’d
(i). During January, the company will
declare and pay Birr 45,000 in cash
dividends.
(j). The company must maintain a
minimum cash balance of Birr 30,000 each
month.

…cont’d
(k). An open line of credit is available at a local
bank for any borrowing that may be needed
during the quarter. All borrowing is done at the
beginning of a month, and all repayments are
made at the end of a month. Borrowings and
repayments of principal Birr 80,000. Interest is
paid only at the time of payment of principal. The
annual interest rate is 12%.

Step2: Cash Collections Budget
Schedule 1(b): Schedule of Expected Cash Collections
ANC Company
Cash Collection Budget
For the Quarter Ended March 31, 2007
Months
Quarters
Accounts Receivable-beginning balance Birr 224,000* - - Birr 224,000
January sales (Birr 400,000)X20%, 80% 80,000 Birr
320,000
- 400,000
February sales (Birr 600,000) X 20%,80% - 120,000 480,000 600,000
March sales (Birr 300,000) X 20% - - 60,000** 60,000
Total expected cash collections Birr 304,000 Birr
440,000
Birr
540,000
Birr 1,284,000
* Cash collection from last year’s (year 2006) December sales.
** 80% X Birr 300,000 = Birr 240,000. This represents uncollected march sales and will appear as accounts
receivable on the balance sheet prepared as of March 31, 2007.

Step 3: Inventory Purchase Budget
• Budgeted cost of goods sold
Months Budgeted sales
[a]
Cost of goods sold
to sales percentage
[b]
Budgeted Cost
Of goods sold [c] =
[a] x [b]
January Birr 400,000 60% Birr 240,000
February 600,000 60% 360,000
March 300,000 60% 180,000

…cont’d
Schedule 1 (c): Inventory Purchases Budget
ANC Company
Inventory Purchases Budget
For the Quarter Ended March 31,2007
Months
Quarters
Budgeted costs of goods sold Birr 240,000 Birr 360,000 Birr 180,000 Birr 780,000
Add: Desired ending inventory 90,000 45,000 30,000 30,000
Total inventory needed Birr 330,000 Birr 405,000 Birr 210,000 Birr 810,000
Less: Beginning inventory 60,000 90,000 45,000 60,000
Required purchases Birr 270,00 Birr 315,000 Birr 165,000 Birr 750,000

Computation of Desired-ending inventory
[a]
Cost of goods sold
to sales percentage
[b]
Sales needs stated
At cost [c] = [a] x
[b]
January Birr 400,000 60% Birr 240,000
February 600,000 60% 360,000
March 300,000 60% 180,000
April 200,000 60% 120,000
Desired ending inventory:
January = 25% x Birr 360,000 = Birr 90,000
February = 25% x Birr 180,000 = Birr 45,000
March = 25% x Birr 120,000 = Birr 30,000

Step 4: Cash Disbursement Budget
Schedule 1(d): Schedule of Expected Cash Disbursements for Inventory Purchases
ANC Company
Expected Cash Disbursements for Purchases Budget
Months
Quarters
Accounts payable-beginning balance Birr 93,000* - - Birr 93,000
January purchases (Birr 270,000) X 50%, 50% Birr 135,000 Birr 135,000 - Birr 270,000
February purchases (Birr 315,000) X 50%, 50% - 157,500 157,500 315,000
March purchases (Birr 165,000) X 50% - - 82,500** 82,500
Total disbursements for purchases Birr 228,000 Birr 292,500 Birr
240,000
Birr 760,500

Step 5: Operating Expense Budget
Schedule 1 (e): Operating Expense Budget
ANC Company
Operating Expense Budget
Months
Quarters
Salaries and wages Birr 27,000 Birr 27,000 Birr 27,000 Birr 81,000
Advertising 70,000 70,000 70,000 210,000
Shipping (5% of sales)* 20,000 30,000 15,000 65,000
Depreciation 14,000 14,000 14,000 42,000
Other expenses (3% of sales)** 12,000 18,000 9,000 39,000
Total budgeted operating expenses Birr 143,000 Birr
159,000
Birr 135,000 Birr 437,000

Computation of shipping and other expenses
[a]
Shipping * (5%
of sales)
[b] = 5% x [a]
Other expenses
(3% of sales)**
[c] = 3% x [a]
January Birr 400,000 Birr 20,000 Birr 12,000
February 600,000 Birr 30,000 18,000
March 300,000 Birr 15,000 9,000

Step 6: Disbursements for Operating Expenses Budget
Schedule 1(f): Schedule of Expected Cash Disbursements for operating expenses
ANC Company
Schedule of Expected Cash Disbursements for Operating Expense
Months
Quarters
Salaries and wages Birr 27,000 Birr 27,000 Birr 27,000 Birr 81,000
Advertising 70,000 70,000 70,000 210,000
Shipping (5% of sales) 20,000 30,000 15,000 65,000
Other expenses (3% of sales) 12,000 18,000 9,000 39,000
Total disbursements for operating expenses Birr 129,000 Birr 145,000 Birr 121,000 Birr 395,000

Step 7: Budgeted Income Statement
Schedule 1 (g): Budgeted Income Statement
ANC Company
Budgeted Income Statement
For the Quarter Ended March 31, 2007
Data Source
Sales Birr 1,300,000 schedule 1(a)
Less: cost of goods sold 780,000 schedule1 (c)
Gross margin 520,00
Less: operating expenses:
Salaries and wages Birr 81,000 schedule 1(e)
Advertising 210,000 schedule 1(e)
Shipping 65,000 schedule 1(e)
Depreciation 42,000 schedule 1(e)
Other expenses 39,000 schedule 1(e)
Total operating expenses Birr 437,000 schedule 1(e)
Net operating income Birr 83,000
Less interest expense* 2,400 schedule 2(a)
Net income Birr 80,600

Financial Budget Step 1: Cash Budget
Schedule 2 (a): Cash Budget
ANC Company
Cash Budget
Months
Quarters
Cash balance, beginning Birr 48,000 Birr 30,000 Birr 30,000 Birr 48,000
Add Cash Received
Collection from customers 304,000 440,000 540,000 1,284,000
Total cash available [a] Birr 352,000 Birr 470,00 Birr 570,000 V1,332,000
Less disbursements:
Purchases of inventory 228,000 292,000 240,000 760,500
Operating expenses 129,000 145,000 121,000 395,000
Purchases of equipment - 1,700 84,500 86,200
Cash dividends 45,000 - - 45,000
Total disbursements [b] 402,000 439,200 445,500 1,286,700
Excess (deficiency) of cash [c] = [a] + [b] Birr (50,000) Birr 30,800 Birr 125,300 Birr 45,300
Financing:
Borrowings (at beginning) 80,000 - - 80,000
Repayments (at ending) - - (80,000) (80,000)
Interest - - (2,400) (2,400)
Total financing [d] 80,000 - (82,400) (2,400)
Cash balance, ending [e] = [c] + [d] Birr 30,000 Birr 30,800 Birr 42,900 Birr 42,900

Step 2: Budgeted Balance Sheet
Schedule 2 (b): Budgeted Balance Sheet
ANC Company
Budgeted Balance Sheet
March 31,2007
Assets
Current assets:
Cash Birr 42,900
Accounts receivable 240,000
Inventory 30,000
Total current assets Birr 312,900
Plant assets:
Building and equipment (net) 414,200
Total Assets Birr 727,100
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable Birr 82,500
Stockholders’ equity:
Capital stock Birr 500,000
Retained earnings 144,600
Total stockholders’ equity Birr 644,600
Total Liabilities and Stockholders’ Equity Birr727,100

Ch-2.pptx cost and accounting management

Recommended

Recommended

More Related Content

Similar to Ch-2.pptx cost and accounting management

Similar to Ch-2.pptx cost and accounting management (20)

Recently uploaded

Recently uploaded (20)

Ch-2.pptx cost and accounting management