14-1 CHAPTER 14 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Cost Analysis for Planning

14-2 Decision Making Strategic, Operational, and Financial (Planning) Planning and Control Cycle Executing operational activities (Managing) Performance analysis: Plans vs. actual results (Controlling) L O 1 Implement Plans Revisit Plans Data collection and Performance Feedback

14-3 Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. Budgeting L O 1

14-4 Benefits Enhanced managerial responsibility Assignment of decision making responsibilities Performance evaluation Coordination of activities Budgeting L O 2

14-5 Time consuming but enhances employee motivation and acceptance of goals. Participative Budgeting Flow of Budget Data L O 2

14-6 Operating Budget The annual operating budget may be divided into quarterly or monthly budgets. The Budget Time Frame L O 3 Operating Budget

Continuous or Perpetual Budget This budget is usually a four-quarter budget that rolls forward one quarter as the current quarter is completed. The Budget Time Frame L O 3 Budget for 2009 by quarters Quarter I Quarter II Quarter III Quarter IV Budget for last 3 quarters of 2009 and first quarter of 2010 Budget for 2010 by quarters 2009 Quarter IV Budget for last 2 quarters of 2009and first 2 quarters of 2010 Budget for last quarter of 2009 and first 3 quarters of 2010

14-8 OR Direct Materials Budget Production Budget (Manufacturer) Operating Expense Budget Direct Labor Budget Manufacturing Overhead Budget Sales Budget The Budgeting Process Cost of Goods Sold Budget Budgeted Balance SheetBudgeted Income StatementBudgeted Statement of Cash Flows L O 4 Purchases Budget (Merchandiser)

14-9 Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs provided by marketing personnel Sales Budget L O 4

14-10 That’s enough talking about budgets. Show me an example! Preparing the Master Budget L O 4

14-11 Jones Co. is preparing budgets for the quarter ending March 31 for its one product that sells for $25 per unit. Budgeted sales for the next four months are: Jan 10,000 $25 = $250,000 Feb 12,000 $25 = $300,000 Mar 15,000 $25 = $375,000 Apr 11,000 $25 = $275,000 The Sales Budget April is needed for March ending inventory computations. Preparing the Master Budget L O 4

14-12 Inventory Flows Beginning balance Beginning balance Available Ending balance Ending balance Additions + = Withdrawals _ = The basic inventory flow model is used for production and purchases budgets. L O 5

14-13 Sales Budget Completed Production Budget The Production Budget L O 5

14-14 Let’s prepare the production budget.  Finished goods ending inventory should be 1.4 times the next month’s budgeted sales in units.  14,000 units were on hand December 31.  Sales forecast for January is 10,000 units. The Production Budget L O 5

14-15 Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Budgeted product sales in units +Desired product units in ending inventory =Total product units needed – Product units in beginning inventory =Product units to produce The Production Budget L O 5

14-16 The Production Budget We start with the sales budget L O 5

14-17 The Production Budget 1.4 × 12, × 11, × 15,000 L O 5

14-18 The Production Budget Beginning inventory each month is the previous month’s ending inventory L O 5

14-19 Raw Materials Purchases Budget Production Budget Completed Raw Materials Purchases Budget L O 5

14-20 The materials purchases budget is based on production quantity and desired materials inventory levels. Units to produce × Material needed per unit =Material needed for units to produce +Desired units of material in ending inventory =Total units of material needed – Units of material in beginning inventory =Units of material to purchase Raw Materials Purchases Budget L O 5

14-21 Three pounds of materials are needed for each unit produced. Each pound of material costs $0.90. Jones wants to have materials on hand at the end of each month equal to 50 percent of the following month’s production needs. The materials inventory on December 31 is 19,200 pounds. Three pounds of materials are needed for each unit produced. Each pound of material costs $0.90. Jones wants to have materials on hand at the end of each month equal to 50 percent of the following month’s production needs. The materials inventory on December 31 is 19,200 pounds. Raw Materials Purchases Budget L O 5

14-22 Raw Materials Purchases Budget L O 5

14-23 Raw Materials Purchases Budget 0.5 × 48, × 28,200 Ending inventory for March will not be known until the April production budget is established. Assume this number is 17,000 pounds. L O 5

14-24 Raw Materials Purchases Budget Beginning inventory each month is the previous month’s ending inventory L O 5

14-25 Direct Labor Budget Raw Materials Purchases Budget Completed Direct Labor Budget L O 5

14-26 Each unit produced requires 6 minutes (0.10 hours) of direct labor. Jones employs 23 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour. Direct Labor Budget L O 5

14-27 Direct Labor Budget L O 5

14-28 Direct Labor Budget L O 5

14-29 Direct Labor Budget Completed Manufacturing Overhead Budget The Production Budget L O 5

14-30 Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is $50,000 per month. Manufacturing Overhead Budget L O 5

14-31 Manufacturing Overhead Budget L O 5

14-32 Selling and Administrative Expense Budget Selling and Administrative (S&A) Expense Budget Completed Manufacturing Overhead Budget L O 6

14-33  Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries.  Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices.  Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries.  Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices. Selling and Administrative (S&A) Expense Budget L O 6

14-34 Variable selling and administrative expenses are $.50 per unit sold and fixed selling and administrative expenses are $30,000 per month. Fixed selling and administrative expenses include $10,000 in depreciation which does not require a cash outflow. Selling and Administrative (S&A) Expense Budget L O 6

14-35 Selling and Administrative (S&A) Expense Budget L O 6

14-36 Selling and Administrative (S&A) Expense Budget L O 6

14-37 Budgeted Income Statement S & A Budget Completed Budgeted Income Statement L O 7

14-38 Budgeted Income Statement L O 7

14-39 Computation of unit cost follows Budgeted Income Statement L O 7

14-40 Total mfg. OH for quarter $188,400 Total labor hours required 38,400 units = $4.91 per unit (rounded) Budgeted Income Statement L O 7 Manufacturing overhead is applied based on number of units produced.

14-41 Budgeted Income Statement L O 7

14-42 Budgeted Income Statement L O 7

14-43 Completed Budgeted Income Statement L O 7 Budgeted Income Statement Cash Budget

14-44 All sales are on account. Jones’ collection pattern is: 70 percent collected in month of sale 29 percent collected in month after sale 1 percent will be uncollectible Accounts receivable on December 31 is $30,000, all of which is collectible. All sales are on account. Jones’ collection pattern is: 70 percent collected in month of sale 29 percent collected in month after sale 1 percent will be uncollectible Accounts receivable on December 31 is $30,000, all of which is collectible. Cash Receipts Budget L O 8

14-45 Cash Receipts Budget L O 8

14-46 Cash Receipts Budget L O 8

14-47 Cash Receipts Budget L O 8

14-48 Cash Receipts Budget L O 8

14-49 Materials used in production cost $.90 per pound. One-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. The accounts payable balance on December 31 is $18,000. Materials used in production cost $.90 per pound. One-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. The accounts payable balance on December 31 is $18,000. Cash Payments for Materials L O 8

14-50 Cash Payments for Materials L O 8

14-51 Cash Payments for Materials L O 8

14-52 Cash Payments for Materials L O 8

14-53 Cash Payments for Materials L O 8

14-54 With just a bit more information we will be able to prepare a comprehensive cash budget. Comprehensive Cash Budget L O 8

14-55 Jones Company: Has a $100,000 line of credit at its bank, with a zero balance on January 1. Maintains a $20,000 minimum cash balance. Borrows at the beginning of a month and repays at the end of a month. Pays interest at 12 percent when a principal payment is made. Pays a $77,000 cash dividend in January. Purchases equipment costing $118,245 in February and $196,540 in March. Has a $25,175 cash balance on January 1. Jones Company: Has a $100,000 line of credit at its bank, with a zero balance on January 1. Maintains a $20,000 minimum cash balance. Borrows at the beginning of a month and repays at the end of a month. Pays interest at 12 percent when a principal payment is made. Pays a $77,000 cash dividend in January. Purchases equipment costing $118,245 in February and $196,540 in March. Has a $25,175 cash balance on January 1. Comprehensive Cash Budget L O 8

14-56 Comprehensive Cash Budget L O 8

14-57 Comprehensive Cash Budget L O 8

14-58 Comprehensive Cash Budget L O 8

14-59 Comprehensive Cash Budget L O 8 $5,000 ×.12 × 1/12 = $50

14-60 Comprehensive Cash Budget L O 8

14-61 Budgeted Balance Sheet Completed Cash Budget Budgeted Balance Sheet L O 7

14-62 Jones reports the following account balances on March 31, prior to preparing its budgeted financial statements: Land - $50,000 Building (net) - $224,500 Equipment (net) - $350,000 Common stock - $300,000 Retained earnings - $205,604 Jones reports the following account balances on March 31, prior to preparing its budgeted financial statements: Land - $50,000 Building (net) - $224,500 Equipment (net) - $350,000 Common stock - $300,000 Retained earnings - $205,604 Budgeted Balance Sheet L O 7

% of March sales of $375,000 17,000 $.90 per lb. 50% of June purchases of $27,990 15,400 $8.61 each L O 7 Budgeted Balance Sheet

14-64 L O 7 Budgeted Balance Sheet

14-65 Let’s change topics. Flexible Budgeting L O 9

14-66 Standard Costs are Based on carefully predetermined amounts. Used for planning material, labor, and overhead requirements. The expected level of performance. Benchmarks for measuring performance. Standard Costs L O 9

14-67 Are standards the same as budgets? A standard is the expected cost for one unit. A budget is the expected cost for all units. Standard Costs L O 9

14-68 Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Developing Standards L O 10

14-69 Should we use attainable standards or ideal standards? Engineer Developing Standards L O 10

14-70 Attainable standards should be set at levels that are currently achievable with reasonable and efficient effort. Production manager Developing Standards L O 10

14-71 I agree. Ideal standards, based on perfection, are unattainable and discourage most employees. Human Resources Manager Developing Standards L O 10

14-72 Developing Standards Managerial Accountant What about basing standards on past experience? L O 10

14-73 Developing Standards No. Past experience contains inefficiencies and provides little incentive for improvement. Production manager L O 10

14-74 Quantity Standards Use product design specifications. Price Standards Final, delivered cost of materials, net of discounts. Costing Products with Standard Costs L O 11

14-75 Rate Standards Use wage surveys and labor contracts. Time Standards Use time and motion studies for each labor operation. Costing Products with Standard Costs L O 11

14-76 Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead. Costing Products with Standard Costs L O 11

14-77 Standard costs for a product might look like this: Costing Products with Standard Costs L O 11

14-78 Other Uses of Standards Quality Control Inventory Control Machine Usage Service Levels Sales Levels Safety Goals Training Levels L O 11

14-79 End of Chapter 14