Budget / questions on operating budgets and financial budgets PDF

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Managerial Accounting
TOOLS FOR BUSINESS DECISION MAKing /Budgetary Planning/Preparing the Operating Budgets/labor budgets /overhead budgets/ income statement budget/ cash budgets...

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Part 1 operating budgets Example 1 (sales budget )

Example 2 (production budget)

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Example 3 (Direct material budget) Key Co. manufactures beanies. The budgeted units to be produced and sold are below:

Solution

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Example 4(Direct labor budget)

This budget distinguishes between variable and fixed overhead costs. Example 5

At Hayes Company, two hours of direct labor are required to produce each unit of finished goods.

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Hayes Company expects variable costs to fluctuate with production volume on the basis of the following rates per direct labor hour: indirect materials $1.00, indirect labor $1.40, utilities $0.40, and maintenance $0.20. Fixed costs per quarter Fixed costs Supervisory salaries Depreciation Property taxes and insurance Maintenance

$ 20,000 3,800 9,000 5,700

Solution

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SELLING AND ADMINISTRATIVE EXPENSE BUDGET

The selling and administrative expense budget. This budget projects anticipated selling and administrative expenses for the budget period.

Example 6 Hayes Company expects sales volume to be 3,000 units in the first quarter, with 500-unit increases in each succeeding quarter. The variable expense rates per unit of sales are sales commissions $3 and freight-out $1. Variable expenses per quarter are based on the unit sales from the sales budget Fixed expenses per quarter Advertising Sales salaries Office salaries Depreciation Property taxes and insurance

5,000 15,000 7,500 1,000 1,500

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Required prepare selling and administration budget

BUDGETED INCOME STATEMENT The budgeted income statement is the important end-product of the operating budgets. This budget indicates the expected profitability of operations for the budget period. The budgeted income statement provides the basis for evaluating company performance. Example 7

Solution 6

Example 8 Clark and Associates provides accounting services. It is preparing its quarterly budgeted income statement for 2013. Ms. Clark anticipates that billable hours (units)in the first quarter of 2013 will increase by 5% over the same quarter of the preceding year, and by 6% in the second quarter. There were 700 billable hours in the first quarter of 2012, and 600 in the second quarter. Ms. Clark billed clients $200 per hour(price per unit) in 2012, and due to strong competition is unable to raise that rate for the foreseeable future. Salary expenses for both accountants and support staff are $20,000 plus 70% of revenue per quarter. Income tax is 30%. Other quarterly expenses are estimated to be as follows:

Instructions Prepare a budgeted quarterly income statement for the first quarter of 2013. (Show computations.)

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Example 9 Sales: Sales for the year are expected to total 1,200,000 units. Quarterly sales, as a percent of total sales, are 20%, 25%, 30%, and 25%, respectively. The sales price is expected to be $50 per unit for the first three quarters and $55 per unit beginning in the fourth quarter. Sales in the first quarter of 2012 are expected to be 10% higher than the budgeted sales for the first quarter of 2011. Direct materials: Each unit requires 3 pounds of raw materials at a cost of $5 per pound., Soriano budgets 0.5 hours of direct labor per unit, labor costs at $15 per hour, and manufacturing overhead at $25 per direct labor hour. It’s budgeted selling and administrative expenses for 2011 are $12,000,000. (a) Calculate the budgeted total unit cost. (b) Prepare the budgeted income statement for 2011. Solution

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Part 2 Preparing the Financial Budgets The financial budgets consist of the capital expenditure budget, the cash budget, and the budgeted balance sheet. CASH BUDGET 9

The cash budget shows anticipated cash flows. Because cash is so vital, this budget is often considered to be the most important financial budget. The cash budget contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances, as shown in Illustration

The cash receipts section includes expected receipts from the company’s principal source(s) of revenue. These are usually cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company’s capital stock. The cash disbursements section shows expected cash payments. Such payments include direct materials, direct labor, manufacturing overhead, and selling and administrative expenses. This section also includes projected payments for income taxes, dividends, investments, and plant assets. The financing section shows expected borrowings and the repayment of the borrowed funds plus interest. Companies need this section when there is a cash deficiency or when the cash balance is below management’s minimum required balance. Data in the cash budget are prepared in sequence. The ending cash balance of one period becomes the beginning cash balance for the next period. Companies obtain data for preparing the cash budget from other budgets and from information provided by management. In practice, cash budgets are often prepared for the year on a monthly basis. To minimize detail, we will assume Steps to prepare the cash budget Frist prepare collection schedules 10

Second disbursement schedules

Example 1

Example 2

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Solution

Example 3

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True and false question 1. Budgets represent management’s plans in financial terms. 2. Budgets promote efficiency and serve as a deterrent to waste. 3. A budget can be a means of communicating a company's objectives to external parties. 4. A budget facilitates coordination of activities within the business but is a poor tool for evaluating performance. 5. A budget is more beneficial if accepted by lower level management.

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6. The budget itself and the administration of the budget are the responsibility of management. 7. the most common budget period is one year. 8. The flow of input data for budgeting should be from the lowest levels of responsibility to the highest level. 9. Budgets, by their very nature, create a negative effect on human behaviour within companies because they imply that management is trying to control. 10. A budget committee coordinates the budget activities of a company. 11. The shorter the budget period, the more reliable the estimates of future outcomes. 12. Upper level managers are responsible for preparing the entire budget. 13. The last step in the budgeting process is developing a sales forecast. 14. Budgeting and long-range planning differ in the emphasis and the time period involved. 15. Long-range plans are used primarily as an evaluation of specific results to be achieved. 16. Long-range plans reflect management's long-term plans encompassing five years or more.

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17. The master budget consists of a plan of action for a specified time period. 18. Operating budgets must be completed before the financial budgets can be prepared. 19. The production budget must be completed before the materials purchases budget because the number of units to be produced must be known to determine how much material to buy. 20. The number of direct labour hours needed for production is obtained from the direct labour budget. 21. Companies can use either a predetermined overhead rate or a manufacturing overhead budget. 22. The manufacturing overhead budget generally has separate sections for variable and fixed costs. 23. A sales budget should be prepared before the production budget. 24. The direct materials budget contains only quantity data so the purchasing department knows how much materials should be purchased. 25. The budgeted income statement indicates the expected amount of cash expected to be acquired from operations. 26. Companies that do not prepare cash budgets have significant cash deficiencies. 15

27. In preparing the budgeted balance sheet, management should not be concerned if it does not balance since it does not reflect actual results. 28. The first budget prepared should be the sales budget. 29. A merchandiser has a merchandise purchases budget, and a manufacturer has a materials purchases budget. 30. A service company has no purchases budget.

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