I. Chapter Objectives

Dr. Bob’s 256 Notes, 9-1

CHAPTER 9 PROFIT PLANNING

I. CHAPTER OBJECTIVES  Understand the budgeting framework

II. OVERVIEW OF BUDGETING  A BUDGET is a detailed plan for acquiring and using financial and other resources over a specified period.  2 stages of budgeting:  ______includes developing future objectives and preparing various detailed budgets to achieve those objectives.  ______involves the steps taken by management to attain the objectives set down at the planning stage.

III. ADVANTAGES OF BUDGETING  Communicates management’s plans throughout the organization  Forces managers to give planning top priority  Provides a means of allocating resources to their most effective uses  Coordinates the activities of the entire organization  Provides goals that serve as benchmarks for evaluating subsequent performance

IV. MASTER BUDGET PROCESS:

SALES BUDGET

INVENTORY PRODUCTION SELLING & BUDGETS BUDGET ADMINISTRATIVE BUDGET

DIRECT DIRECT MANUFACTURING MATERIALS LABOR OVERHEAD BUDGET BUDGET BUDGET

CASH BUDGET

BUDGETED FINANCIAL STATEMENTS Dr. Bob’s 256 Notes, 9-2

DEMO PROBLEM – BUDGETING. Ono Co. is preparing budgets for the second quarter ending June 30.

 Budgeted sales for the next 5 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.

 We want to prepare:  Sales budget (with a schedule of expected cash collections)  Production budget  Material purchases budget (with a schedule of expected cash payments)  Direct labor budget  Manufacturing overhead budget  Selling & administrative expense budget  Cash budget  Budgeted income statement  Budgeted balance sheet

SALES BUDGET April May June Quarter Dr. Bob’s 256 Notes, 9-3

SCHEDULE OF EXPECTED CASH COLLECTIONS  All sales are on account.  Ono’s collection pattern is: 70% collected in the month of sale; 25% collected in the month following sale; and the remaining 5% is uncollectible.  The accounts receivable on March 31 was $30,000, all of which is collectible.

April May June Quarter

PRODUCTION BUDGET  Ono desires to have inventory on hand at the end of each month equal to 20% of the following month’s budgeted sales in units.  On March 31, 4,000 units were on hand.

April May June Quarter Dr. Bob’s 256 Notes, 9-4

MATERIAL PURCHASES BUDGET  5 pounds of material are required per unit of product.  Ono desires to have materials on hand at the end of each month equal to 10% of the following month’s production needs.  The beginning materials inventory was 13,000 lbs.

SCHEDULE OF EXPECTED CASH PAYMENTS FOR MATERIAL  The material used in production costs $0.40 per pound.  Half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month.  No discount terms are available for early payment.  The accounts payable balance on March 31 was $12,000.

DIRECT LABOR BUDGET  Each unit produced requires 0.05 hour of direct labor.  Each hour of direct labor costs the company $10.  The direct labor workforce is completely adjusted to the workload each month.

MANUFACTURING OVERHEAD BUDGET  Variable manufacturing overhead is $1 per unit produced.  Fixed manufacturing overhead is $50,500 per month (including $20,500 of depreciation – a noncash outflow)

Dr. Bob’s 256 Notes, 9-6

SELLING & ADMINISTRATIVE EXPENSE BUDGET  Variable selling & administrative expenses are $.50 per unit sold.  Fixed selling & administrative expenses are $70,000 per month (includes $10,000 of depreciation).

CASH BUDGET  An open line of credit is available at a local bank, which allows the company to borrow up to $75,000.  All borrowing occurs at the beginning of a month, and all repayments occur at the end of a month.  Any interest incurred during the second quarter will be paid at the end of that quarter. The interest rate is 16% per year.  The company desires a cash balance of at least $30,000 at the end of each month.  The cash balance at the beginning of April was $40,000.  Cash dividends of $51,000 are to be paid to shareholders in April.  Equipment purchases of $143,700 are scheduled for May and $48,800 for June. (The equipment will be installed and tested during the 2nd quarter and will not be become operational until July, when depreciation charges will commence.)

BUDGETED INCOME STATEMENT & BALANCE SHEET

 (We’ll need to determine the COGS and ending inventory costs first)  The company uses absorption costing in its budgeted income statement and balance sheet.  Manufacturing overhead is applied on the basis of direct labor hours.

 Computation of absorption unit product cost:

 Budgeted finished goods inventory:

 Budgeted cost of goods sold:

BUDGETED INCOME STATEMENT

Ono Co. Budgeted Income Statement For the Quarter Ending June 30 Dr. Bob’s 256 Notes, 9-9

BUDGETED BALANCE SHEET

Ono Co. Balance Sheet March 31 Current Assets: Cash $40,000 Accounts Receivable 30,000 Raw Materials Inventory 5,200 Finished Goods Inventory 20,000 $95,200 Plant & Equipment: Land 400,000 Buildings & Equipment 1,610,000 Accumulated Depreciation (750,000) 1,260,000 Total Assets $1,355,200

Liabilities: Accounts Payable $12,000 Stockholders’ Equity: Common Stock $200,000 Retained Earnings 1,143,200 1,343,200 Total Liabilities & Stockholders’ Equity $1,355,200

Ono Co. Budgeted Balance Sheet June 30