1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 10 Professor Jeff Yu

2. Review: Steps for Implementing ABC 1.Define activity cost pools & activity measures. 2.Assign overhead costs to activity cost pools: first-stage allocation. 3.Calculate activity rates: for each activity cost pool, divide total assigned OH costs by estimated total activity levels. 4.Assign OH costs to the specific product or customer using the activity rates : second-stage allocation Assigned OH = Activity Rate * Actual activity level 5. Prepare management reports : calculate product margin and customer margin.

3. Objectives  Understand why and how firm Budget;  Prepare sales budget and the schedule of expected cash collections;  Prepare production budget, DM budget and the schedule of expected cash disbursements;  Prepare DL budget, MOH budget, S&A expense budget and cash budget;  Understand the budgeted financial statements Chapter 9: Profit Planning

4. The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using 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 activity is known as budgetary control.

5. Advantages of Budgeting Advantages Benchmark: Define Goal and objectives Uncover potential bottlenecks Coordinateactivities Communicateplans Think about and plan for the future Means of allocating resources

6. Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent.  Each line item (i.e., revenue or cost) in the budget is made the responsibility of a manager who is held responsible for subsequent deviation between budgeted goals and actual results.  The point is not to penalize individuals for missing targets, but the manager should understand the sources of discrepancies, take the initiative to correct the unfavorable discrepancies and be ready to explain the discrepancy to higher management.

7. Self-Imposed Budget Self-imposed/participative budget: managers of all levels prepare their own budget estimates. Discuss: (1) Advantages? (2) Disadvantages? (3) Bottom-up vs. Top-down

8. The Master Budget Production Budget Production 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 Budget Cash Budget Sales Budget Sales Budget Budgeted Financial Statements Ending F.G. Inventory Budget Ending F.G. Inventory Budget

9. Starting point for the entire budgeting process - all other budgets are driven by the sales budget: Inventory levels, purchases, production and operating expenses are geared to budgeted sales. Budgeted Sales $ = budgeted sales in units * unit price A schedule of expected cash collections is prepared after the sales budget. Cash collections include the current month’s cash sales plus the previous months’ credit sales collected. Sales Budget

10. Bella Inc. is preparing budgets for the quarter ending June 30. The unit sales price is $10. Budgeted sales for the next 3 months are: April20,000 units May50,000 units June30,000 units All of Bella’s sales are on account (credit sales). Bella’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following sale, the remaining 5% is uncollectible. The March 31 accounts receivable balance of $30,000 will be collected in full in April. Q: prepare a sales budget and a schedule of expected cash collections. Example: Sales Budget

11. 30% of HighTech Co.’s sales are for cash and 70% are credit sales. 60% of the credit sales are collected in the month of sale, 25% in the month following the sale, 12% in the second month following sale, and the remainder are uncollectible. The following are the sales forecast for the first four months of the coming year. Jan Feb Mar Apr Total sales $50,000 $60,000 $40,000 $30,000 Q: (1) What is the expected cash inflow in March? (2) Assume there is no account receivable balance on Jan. 1, what is the budgeted account receivable balance on March 31? Practice Problem

12. Production Budget Budgeted Sales in Units Desired ending inventory + - Expected beginning inventory = Required Production in Units Production Budget lists the number of units that must be produced to satisfy sales needs and provide for the desired ending inventory.

13. Bella Inc.’s budgeted sales in units are 20,000 for April, 50,000 for May and 30,000 for June. The management would like ending finished goods inventory to equal 20% of the next month’s budgeted sales in units. On March 31, 4,000 units were in finished goods inventory, and it is desired that 5,000 units were in finished goods inventory on July 1. Q: prepare Bella’s production budget for April, May, June and the whole 2nd quarter. Example: Production Budget

14. Nina Inc.’s sales budget shows quarterly sales projection for the next year as follows: Qtr1 Qtr2 Qtr3 Qtr4 Sales in units 12,000 15,000 10,000 11,000 Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter’s sales. Q: what is the budgeted production in units for the second quarter of the next year? Practice Problem

15. For Next Class  Continue covering chapter 9.  Attempt the assigned HW problems.

16. Homework Question 1 All of Gaylord Company's sales are credit sales. 35% of the credit sales are collected in the month of sale, 45% in the month following sale, and the rest are collected in the second month following sale. There is no bad debt. Budgeted sales are as follows: Q: What will be the amount of expected cash collections in March? JanuaryFebruaryMarchApril Budgeted Sales $50,000$60,000$40,000$30,000

17. Pitkins Company collects 20% of a month's sales in the month of sale, 70% in the month following sale, and 10% in the second month following sale. Last year’s balance sheet shows an A/R balance of $60,000 on December 31, all of which will be collected in January and February. Budgeted sales for the next four months are: January February March April Budgeted sales $200,000 $300,000 $350,000 $250,000 Q: (1) what is the amount of expected cash collections in April? (2) What is the budgeted account receivable balance on March 31? Homework Question 2

18. Tonga toys makes Playclay. The desired ending F.G. inventory is 30% of the next month’s sales. July August Sept. Oct. Budgeted sales in units 40,000 50,000 70,000 35,000 Q: (1) what is the budgeted production in units for August? Homework Question 3