1. CHAPTER 9
Budgetary Planning

2. Budgeting Basics Budget
A formal written statement of management’s plans for a specified future time period, expressed in financial terms.
Primary way to communicate agreed-upon objectives to all parts of the company.
Promotes efficiency.
Control device - important basis for performance evaluation once adopted.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Concepts from the Book
Unlike some chapters, most students are familiar with the theme of this chapter.
Also, most of the material is self explanatory.
Consequently, this presentation will only highlight the concepts of the book, focusing on problems.

4. What I learned from my first budget experience
Involve the department managers.
Train.
Have the budget forms build on one another.
Get the sequence of activities right.
Document all calculations.
Provide important assumptions on inflation, volume growth and so on.

5. What I learned from my first budget experience
Make reports provided during user friendly.
Use graphics where possible.
Make sure the account names are the same.
Hold department heads accountable.

6. Games People Play Golden watch. Cut essential services—Mayor Koch.
Claim someone above the reviewer wants a line item.
Pad each line just a little.
Wait until the last minute to turn it in so there can be no review.

7. Budgeting and Human Behavior
Participative Budgeting
May inspire higher levels of performance or discourage additional effort.
Depends on how budget developed and administered.
Invite each level of management to participate.
This “bottom-to-top” approach is called
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 2: State the essentials of effective budgeting.

8. The Master Budget
A set of interrelated budgets that constitutes a plan of action for a specified time period
Contains two classes of budgets:
Operating budgets:
Individual budgets that result in the preparation of the budgeted income statement – establish goals for sales and production personnel
Financial budgets:
The capital expenditures budget, the cash budget, and the budgeted balance sheet – focus primarily on cash needs to fund operations and capital expenditures
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

9. The Master Budget - Components
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

10. Operating Budgets: Sales Budget
First budget prepared
Derived from the sales forecast
Management’s best estimate of sales revenue for the budget period
Every other budget depends on the sales budget
Prepared by multiplying
expected unit sales volume for each product
times
anticipated unit selling price
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

11. Operating Budgets: Production Budget
Shows the units that must be produced to meet anticipated sales
Derived from sales budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units)
Required production in units formula:
Essential to have a realistic estimate of ending inventory
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

12. Operating Budgets: Direct Materials Budget
Shows both the quantity and cost of direct materials to be purchased
Derived from the direct materials units required for production (from the production budget) plus the desired change in ending direct materials units
Budgeted cost of direct materials to be purchased = required units of direct materials X anticipated cost per unit
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

13. Operating Budgets: Direct Labor Budget
Shows both the quantity of hours and cost of direct labor necessary to meet production requirements
Critical in maintaining a labor force that can meet expected production
Total direct labor cost formula:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

14. Operating Budgets: Manufacturing Overhead
Shows the expected manufacturing overhead costs for the budget period
Distinguishes between fixed and variable overhead costs
Example – Hayes Company
Fixed cost amounts are assumed
Expected variable costs per direct labor hour:
indirect materials: $1.00
indirect labor: $1.40
utilities: $0.40
maintenance: $0.20
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

15. Operating Budgets: Manufacturing Overhead
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Identify the budgets that comprise the master budget.

16. Operating Budgets: Budgeted Income Statement
Important end-product of the operating budgets
Indicates expected profitability of operations
Provides a basis for evaluating company performance
Prepared from the operating budgets
Sales Budget
Production Budget
Direct Materials Budget
Direct Labor Budget
Manufacturing Overhead Budget
Selling and Administrative Expense Budget
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 4: Describe the sources for preparing the budgeted income statement.

17. Operating Budgets: Budgeted Income Statement
Example – Hayes Company
To find cost of goods sold:
First, determine the unit cost of one Kitchen-mate
Second, determine Cost of Goods Sold by multiplying units sold times unit cost:
15,000 units X $44 = $660,000
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 4: Describe the sources for preparing the budgeted income statement.

18. Operating Budgets: Budgeted Income Statement
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 4: Describe the sources for preparing the budgeted income statement.

19. Financial Budgets: Cash Budget
Shows anticipated cash flows
Often considered to be the most important output in preparing financial budgets
Contains three sections:
Cash Receipts
Cash Disbursements
Financing
Shows beginning and ending cash balances
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Explain the principal sections of a cash budget.

20. Operating Budgets: Budgeted Income Statement
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Explain the principal sections of a cash budget.

21. Financial Budgets: Cash Budget
Cash Receipts Section
Includes expected receipts from the principal sources of revenue – usually cash sales and collections on credit sales
Shows expected interest and dividends receipts as well as proceeds from planned sales of investments, plant assets, and capital stock
Cash Disbursements Section
Includes expected cash payments for direct materials and labor, taxes, dividends, plant assets, etc.
Financing Section
Shows expected borrowings and repayments of borrowed funds plus interest
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Explain the principal sections of a cash budget.

22. Financial Budgets: Cash Budget
Must prepare in sequence.
Ending cash balance of one period is the beginning cash balance for the next.
Data obtained from other budgets and from management.
Often prepared for the year on a monthly basis.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Explain the principal sections of a cash budget.

23. Financial Budgets: Budgeted Balance Sheet
A projection of financial position at the end of the budgeted period.
Developed from the budgeted balance sheet for the preceding year and the budgets for the current year.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Explain the principal sections of a cash budget.

24. LO 5: Explain the principal sections of a cash budget.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Explain the principal sections of a cash budget.

25. Budgeting: Merchandisers
Sales Budget: Starting point and key factor in developing the master budget
Use a purchases budget instead of a production budget
Does not use the manufacturing budgets (direct materials, direct labor, manufacturing overhead)
To determine budgeted merchandise purchases:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Indicate the applicability of budgeting in nonmanufacturing companies.

26. Budgeting: Service Companies
Critical factor in budgeting is coordinating professional staff needs with anticipated services
Problems if overstaffed:
Disproportionately high labor costs
Lower profits due to additional salaries
Increased staff turnover due to lack of challenging work
Problems if understaffed:
Lost revenues because existing and future client needs for services cannot be met
Loss of professional staff due to excessive work loads
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Indicate the applicability of budgeting in manufacturing companies.

27. Budgeting: Not-for-Profit Companies
Just as important as for profit-oriented company
However, budget process differs significantly from that of a profit-oriented company
Budget on the basis of cash flows (expenditures and receipts), not on a revenue and expense basis
The starting point is usually
expenditures, not receipts
Management’s task is to find
receipts needed to support
planned expenditures
Budget must be strictly followed,
overspending often illegal
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Indicate the applicability of budgeting in nonmanufacturing companies.

28. Exercise 9-3
XYZ, CPAs are preparing their service revenue (sales) budget for the coming year.
The practice is divided into three departments auditing, tax, and consulting.
Billable hours for each department, by quarter, are provided on the following slide.. Of a

29. Exercise 9-3 Department Quarter One Quarter Two Quarter Three
Quarter Four
Auditing
2200
1600
2000
2400
Tax
3000
2500
Consulting
1500
Average hourly billing rates are: auditing $80, tax $90, and consulting $100.
Prepare a sales budget for 2008 by listing the departments and showing for each quarter and the year in total, billable hours, billable rate, and total revenue.

30. Budget--Auditing Department Quarter One Quarter Two Quarter Three
Quarter Four
Total
Billable hours
2200
1600
2000
2400
8200
Rate
$80
Revenue
$176,000
$128,000
$160,000
$192,000
$656,000
Simple formula: hours x billing rate equals revenue.

31. Budget--Tax Department Quarter One Quarter Two Quarter Three
Quarter Four
Total
Billable hours
3000
2400
2000
2500
9900
Rate
$90
Revenue
$270,000
$216,000
$180,000
$225,000
$891,000

32. Budget--Consulting Department Quarter One Quarter Two Quarter Three
Quarter Four
Total
Billable hours
1500
6000
Rate
$100
Revenue
$150,000
$600,000

33. Budget—Total Dollars Department Quarter One Quarter Two Quarter Three
Quarter Four
Total
Auditing
$176,000
$128,000
$160,000
$192,000
$656,000
Tax
$270,000
$216,000
$180,000
$225,000
$891,000
Consulting
$150,000
$600,000
$596,000
$494,000
$490,000
$567,000
$2,147,000

34. Exercise 9-5
XYZ company has adopted the following production budget for the first four months of 2009.
Month
Units
January
10,000
March
5,000
February
8,000
April
4,000

35. Exercise 9-5
Each unit requires 3 pounds of raw materials costing $2.00 per pound.
On December 31, 2008, the ending raw material inventory was 9000 pounds.
Management wants to have a raw materials inventory at the end of the month equal to 30% of the next months production requirement.
Prepare a direct materials purchase budget by month for the first quarter.

36. Exercise 9-5 + + = January February March Units to be produced
Direct materials per unit
Total pounds needed for production
 10,000
X  3
 30,000
  8,000
X   3
 24,000
5,000
15,000
First remember the formula:
Direct material units required for production
Desired ending direct material units
Beginning direct material units
Required direct material units to be purchased + + =

37. Exercise 9-5
January
February
March
Units to be produced
Direct materials per unit
Total pounds needed for production
 10,000
X  3
 30,000
  8,000
X   3
 24,000
5,000
15,000
Thus, in this step we calculate the direct materials needed for production by multiplying the units to be produced by the direct materials per unit.

38. Exercise 9-5
January
February
March
Units to be produced
Direct materials per unit
Total pounds needed for production
Add: Desired ending direct materials
  (pounds)*
Total materials required
 10,000
X  3
 30,000
7,200
 37,200
  8,000
X   3
 24,000
4,500
 28,500
5,000
15,000
3,600
18,600
To total pounds needed for production, we now add the desired ending inventory in pounds.

39. This gives us the total materials required for the period.
Exercise 9-5
January
February
March
Units to be produced
Direct materials per unit
Total pounds needed for production
Add: Desired ending direct materials
  (pounds)*
Total materials required
 10,000
X  3
 30,000
7,200
 37,200
  8,000
X   3
 24,000
4,500
 28,500
5,000
15,000
3,600
18,600
This gives us the total materials required for the period.

40. Exercise 9-5
January
February
March
Units to be produced
Direct materials per unit
Total pounds needed for production
Add: Desired ending direct materials
  (pounds)*
Total materials required
 10,000
X  3
 30,000
7,200
 37,200
  8,000
X   3
 24,000
4,500
 28,500
5,000
15,000
3,600
18,600
However, some of the material required for production can come from beginning inventory. Subtracting inventorying will, therefore, be our next step.

41. Exercise 9-5
January
February
March
Units to be produced
Direct materials per unit
Total pounds needed for production
Add: Desired ending direct materials
  (pounds)*
Total materials required
Less: Beginning direct materials
  (pounds)
Direct materials purchases
 10,000
X  3
 30,000
7,200
37,200
9,000
 28,200
  8,000
X   3
 24,000
4,500
 28,500
 21,300
5,000
15,000
3,600
18,600
14,100
Now we know how many pounds are needed, what we do not know is the cost.

42. Exercise 9-5 Multiply pounds by costs per pound to get total cost.
January
February
March
Units to be produced
Direct materials per unit
Total pounds needed for production
Add: Desired ending direct materials
  (pounds)*
Total materials required
Less: Beginning direct materials
  (pounds)
Direct materials purchases
Cost per pound
Total cost of direct materials
  purchases
 10,000
X  3
 30,000
7,200
 37,200
9,000
 28,200
X  $2
$56,400
  8,000
X   3
 24,000
4,500
 28,500
 21,300
$42,600
5,000
15,000
3,600
18,600
14,100
$28,200
Multiply pounds by costs per pound to get total cost.

43. Exercise 9-8
XYZ Company is preparing its manufacturing overhead budget for 2008.
Relevant cost data consists of the following:
Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000.

44. Exercise 9-8 Direct labor: time is 1.5 hours per unit.
Variable overhead costs per direct labor hour; indirect materials $0.70; indirect labor $1.20: and maintenance $0.50.
Fixed overhead costs per quarter: supervisor salaries $35,000,;depreciation $16,000; and maintenance $12,000.
Prepare the manufacturing overhead budget for the year, showing quarterly data.

45. Exercise 9-8 Things to remember when preparing an overhead budget:
Overhead budgets are flexible budgets. This means that variable costs vary with some unit of input (like direct hours) or some unit of output (like product produced).
The overhead rate is calculated by dividing the total overhead budget by the total base (direct labor hours, direct labor dollars, and so on).

46. Since the base is direct labor hours, let us calculate that first.
Quarter
One
Two
Three
Four
Total
Units to be Produced
10,000
12,000
14,000
16,000
52,000
Direct Labor Hours
15,000
18,000
21,000
24,000
78,000
Direct hours = 1.5 x direct labor hours.
We will multiply direct labor hours by variable cost/hour on the next slide.

47. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
Indirect Labor $
Maintenance $
Total Variable Costs $
Fixed Costs:
Supervisory Salaries
Depreciation
Total Fixed Costs
Total Manufacturing Overhead
Direct Labor Hours
Overhead Rate per Hour
Costs per hour are given in the problem
In the next slide we will multiply them by hours shown on previous slide to get variable costs.
Let’s do it!

48. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
$ ,500
$ ,600
$ ,700
$ ,800
$ ,600
Indirect Labor $
$ ,000
$ ,600
$ ,200
$ ,800
$ ,600
Maintenance $
$ ,500
$ ,000
$ ,000
$ ,000
Total Variable Costs $
Fixed Costs:
Supervisory Salaries
Depreciation
Total Fixed Costs
Total Manufacturing Overhead
Direct Labor Hours
Overhead Rate per Hour
Let’s sum each quarter next!

49. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
$ ,500
$ ,600
$ ,700
$ ,800
$ ,600
Indirect Labor $
$ ,000
$ ,600
$ ,200
$ ,800
$ ,600
Maintenance $
$ ,500
$ ,000
$ ,000
$ ,000
Total Variable Costs $
$ ,000
$ ,200
$ ,400
$ ,600
$ 187,200
Fixed Costs:
Supervisory Salaries
Depreciation
Total Fixed Costs
Total Manufacturing Overhead
Direct Labor Hours
Overhead Rate per Hour
Fixed costs are easy, they are the same each month regardless of production volume or direct labor hours.

50. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
$ ,500
$ ,600
$ ,700
$ ,800
$ ,600
Indirect Labor $
$ ,000
$ ,600
$ ,200
$ ,800
$ ,600
Maintenance $
$ ,500
$ ,000
$ ,000
$ ,000
Total Variable Costs $
$ ,000
$ ,200
$ ,400
$ ,600
$ 187,200
Fixed Costs:
Supervisory Salaries
$ ,000
$ 140,000
Depreciation
$ ,000
$ ,000
$ ,000
Total Fixed Costs
$ ,000
$ 252,000
Total Manufacturing Overhead
Direct Labor Hours
Overhead Rate per Hour
Now we total fixed and variable overhead to get total overhead

51. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
$ ,500
$ ,600
$ ,700
$ ,800
$ ,600
Indirect Labor $
$ ,000
$ ,600
$ ,200
$ ,800
$ ,600
Maintenance $
$ ,500
$ ,000
$ ,000
$ ,000
Total Variable Costs $
$ ,000
$ ,200
$ ,400
$ ,600
$ 187,200
Fixed Costs:
Supervisory Salaries
$ ,000
$ 140,000
Depreciation
$ ,000
$ ,000
$ ,000
Total Fixed Costs
$ ,000
$ 252,000
Total Manufacturing Overhead
$ ,000
$ 106,200
$ 113,400
$ 120,600
$ 439,200
Direct Labor Hours
Overhead Rate per Hour
Add hours for each quarter.
The suspense is killing me!

52. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
$ ,500
$ ,600
$ ,700
$ ,800
$ ,600
Indirect Labor $
$ ,000
$ ,600
$ ,200
$ ,800
$ ,600
Maintenance $
$ ,500
$ ,000
$ ,000
$ ,000
Total Variable Costs $
$ ,000
$ ,200
$ ,400
$ ,600
$ 187,200
Fixed Costs:
Supervisory Salaries
$ ,000
$ 140,000
Depreciation
$ ,000
$ ,000
$ ,000
Total Fixed Costs
$ ,000
$ 252,000
Total Manufacturing Overhead
$ ,000
$ 106,200
$ 113,400
$ 120,600
$ 439,200
Direct Labor Hours
15,000
18,000
21,000
24,000
78,000
Overhead Rate per Hour
Last of all calculate rate (OH$/DLH)

53. Now let’s calculate variable overhead costs
Variable Costs:
Costs/Hour
One
Two
Three
Four
Total
Indirect Materials $
$ ,500
$ ,600
$ ,700
$ ,800
$ ,600
Indirect Labor $
$ ,000
$ ,600
$ ,200
$ ,800
$ ,600
Maintenance $
$ ,500
$ ,000
$ ,000
$ ,000
Total Variable Costs $
$ ,000
$ ,200
$ ,400
$ ,600
$ 187,200
Fixed Costs:
Supervisory Salaries
$ ,000
$ 140,000
Depreciation
$ ,000
$ ,000
$ ,000
Total Fixed Costs
$ ,000
$ 252,000
Total Manufacturing Overhead
$ ,000
$ 106,200
$ 113,400
$ 120,600
$ 439,200
Direct Labor Hours
15,000
18,000
21,000
24,000
78,000
Overhead Rate per Hour $

54. Problem 9-2A
XYZ is preparing its annual budgets for the year ending 31/12/2009.
Accounting assistants furnish the data show on the next slide.
An accounting assistant has prepared the detailed manufacturing overhead budgets and the selling and administrative expense budget.

55. Problem 9-2A
The latter shows selling expenses of $660,000 for product JB 50 and $360,000 for product JB 60, and administrative expenses of $540,000 for product JB 50 and $340,000 for JB 60.
Income taxes are expected to be 30%.
Prepare the budgets asked for in the textbook.

56. Data Given Product JB 50 Product JB 60 Sales Budget:
Anticipated volume in units
400,000
200,000
Unit selling price
$20
$25
Production Budget:
Desired ending finished goods units
25,000
15,000
Beginning finished good units
30,000
10,000
Direct materials budget:
Direct materials per unit (pounds) 2 3
Desired ending direct material pounds
Beginning direct material pounds
40,000
Cost per pound $3 $4

57. Data Given Product JB 50 Product JB 60 Direct labor budget:
Direct labor time per unit
0.4
0.6
Direct labor rate per hour
$12
Budgeted income statement:
Total unit cost
$21

58. Simple calculation: units x sales price = total sales dollars.
Sales Budget
JB 50
JB 60
Total
Expected unit sales
Unit selling price
Total sales
   400,000
   X $20
$8,000,000
   200,000
   X $25
$5,000,000
$13,000,000
Simple calculation: units x sales price = total sales dollars.

59. Budget Formula
There is a generic formula we use in many of the budgets, it is:
Transferred out + ending inventory – beginning inventory = transferred in.
Converting this generic formula to terms consistent with the production budget:
Units sold + ending inventory – beginning inventory = units to be produced.
Knowing the generic formula will help you if you get a “brain cramp” on the test and forget a specific formula.

60. Production Budget We use the formula:
Sales + ending inventory – beginning inventory = production in units
JB 50
JB 60
Total
Expected unit sales
Add: Desired ending finished
  goods units
Total required units
Less: Beginning finished goods
  units
Required production units
400,000  
25,000
425,000
30,000
395,000
200,000
 15,000
215,000
10,000
205,000
600,000

61. Direct Materials Budget
For the Year Ending December 31, 2009 __
JB 50
JB 60
Total
Units to be produced
Direct materials per unit
Total pounds needed for
  production
   395,000
      X 2   
790,000
    
   205,000
      X 3
615,000
Our first step is to calculate total pounds needed for production by multiplying
units to be produced (calculated in the sales budget) by the direct materials
per unit given in the problem.

62. Direct Materials Budget For the Year Ending December 31, 2009 JB 50 __
JB 50
JB 60
Total
Units to be produced
Direct materials per unit
Total pounds needed for
  production
Add: Desired ending direct
  materials (pounds)
Total materials required
Less: Beginning direct
Direct materials purchases
   395,000
      X 2   
790,000
30,000
   820,000
    
40,000
   780,000
    
   205,000
      X 3
615,000
15,000
   630,000
10,000
   620,000
   
Now we use the formula we learned earlier: units transferred out + ending inventory – beginning inventory = units transferred in.
Once we have the direct material in pounds, we need to calculate the dollar amount.

63. Direct Materials Budget For the Year Ending December 31, 2009 JB 50 __
JB 50
JB 60
Total
Units to be produced
Direct materials per unit
Total pounds needed for
  production
Add: Desired ending direct
  materials (pounds)
Total materials required
Less: Beginning direct
Direct materials purchases
Cost per pound
Total cost of direct materials
  purchases
   395,000
      X 2
   790,000
    
30,000
   820,000
40,000
   780,000
     X $3
$2,340,000
   205,000
      X 3
   615,000
15,000
   630,000
10,000
   620,000
     X $4
$2,480,000
$4,820,000

64. Direct Labor Budget
For the Year Ending December 31, 2009
JB 50
JB 60
Total
Units to be produced
Direct labor time (hours) per
  unit
Total required direct labor
  hours
Direct labor cost per hour
Total direct labor cost
395,000   
    X .4
158,000
    X $12
$1,896,000
   205,000
     
X .6
123,000
$1,476,000
   650,000
301,000
X $10
$3,372,000
Two steps: Calculate hours first and then calculate dollar amount.

65. Now all we have to do is put this all together in the form of an income statement!
JB 50
JB 60
Total
Sales
Cost of goods sold
Gross profit
Operating expenses
  Selling expenses
  Administrative
    expenses
      Total operating
        expenses
Income before income
  taxes
Income tax expense
  (30%)
Net income
$8,000,000
 4,800,000
 3,200,000
   660,000   
540,000  
1,200,000
$2,000,000
(1)
$5,000,000
4,200,000
  800,000
360,000
340,000
700,000
$  100,000
(2)
$13,000,000
  9,000,000
  4,000,000
1,020,000
   
880,000
1,900,000
2,100,000
  630,000
$ 1,470,000

66. The End!!!