Chapter 7 Interactive Vids PDF

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Chapter 7 Interactive Vids               

All businesses take steps to achieve their plan level of profits and this process is called profit planning and is accomplished by preparing a number of budgets Master budget Budget is a detailed plan of the future usually expressed in formal quantitative terms Budgets are used for planning and control Planning involves goals and achieving them Control involves monitoring adaptability and proper execution of plans Advantages of budgets: communication, planning Budgets provide a mean of allocating resources effectively Budgets also help uncover potential bottlenecks They coordinate the activities of the entire organization by endergraving plans of its various parts Also define goals and objectives that define benchmarks Responsibility accounting: system of accountability where managers are held responsible for items of revenue and cost over which they have significant control Someone has to be responsible for each cost or else the cost will inevitable grow out of control Responsibility accounting is essential for profit planning and control Continuous budgets: 12 month budgets in which one month per quarter is added to the end of the budget as each month or quarter comes to a close (helps manager focus at least one year ahead) Top Management Middle Man.

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Middle Man.

Supervisor Supervisor Supervisor Supervisor The most successful budgets are the ones where the managers at all levels actively participate in preparing their own budgets Self imposed budget: budget that is prepared with a full cooperation and participation of managers at all levels They are advantageous because individuals at all levels are recognized as members of a team whose views and judgments are valued Budget estimates are often more accurate and reliable bc they use inputs from front line managers Budgetary slack: Managers themselves are accountable for deviations from actual results It is crucial that budgets prepared by the lower level managers are scrutinized Success of a budgeting program depends on acceptance of the budget and usage of budget data by people in key management positions Top management is not committed to a budgeting program Budget used as a pressure device and on meeting the budget

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Rather being used as a weapon, the budget should be used as a positive instrument to establish goals, measuring performance, and isolating sensitive areas The purpose of the budget is to coordinate efforts to achieve organizational goals The master budget is a summary of the company’s plans It sets specific targets for sales, productions, distribution, and financing activities The first step in the budgeting process is preparation of the sales budget The sales budget pulls together the number of units to be produced and also the projected selling and administrative expenses from the budgeted assumptions The production budget and the selling and administrative expense budget are prepared after the sales budget The production budget is used to determined the ending inventory budget and manufacturing costs like the DM budget, DL budget, and the MOH budget Those 3 with the data from the sale budget and selling/admin budget prepare the cash budget The cash budget shows how cash resources will be acquired and used After the cash budget is prepared, the budgeted income statement and then the budgeted balance sheet can be prepared Two key budget insights is that the budget is designed to answer 10 key questions and why and how a master budget is created Which of the following is true of a self imposed budget?: managers at all levels participate in preparing the budget The budgeting process begins with the preparation of the production budget: false Continuous budgets ensure that mangers do not become too narrowly focused on short term results and keep them focused for at least one year ahead: true Which explains why operating budgets generally span a period of one year?: companies choose a span of one year to correspond to their fiscal years Sales budget: starting point in preparing master budget; other budgets in master budget depend on sales budget Begin sales budget by projecting budgeted unit sales for the period Budgeted unit sales x Unit selling price = sales revenue Sales revenue then used to prepare schedule of expected cash collections Expected cash collections made from sales in the current period and from sales made from customers in prior periods Expected cash collections later used to determine cash budget QUARTER 2 1,300

QUARTER 3 1,400

1 4 Budgeted 1,500 1,300 units sales Selling $25 $25 $25 $25 price per unit Percentage of sales collected in the period of the sale 75%

YEAR 5,500 $25

Percentage of sales collected in the period after the sale 25% What is the amount of budgeted sales revenue for the last quarter?: $32,500 2. What is the amount of budgeted cash collections in the second quarter from prior period sales?: $9, 375 First quarter sales of 1,500 x $25 per unit x 25% 3. What are the expected cash collections in the third quarter?: $34,375 25% of second quarter sales and 75% of third quarter sales; ($32,500 x 25%) + ($35,000 x 75%)  

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We prepare the production budget to astertain the number of units to be produced to satisfy budgeted sales needs and maintain a desired level of ending inventory The production budget Budgeted unit sales XXXX + Desired ending inventory XXXX Total needs XXXX -Beginning inventory XXXX Production needs XXXX the desired level of inventory should be planned carefully bc it involves costs the costs can either be storage cost caused by excess inventory or costs of lost sales caused by insufficient inventory the production budget is prepared by manufactured companies a merchandise company prepares a merchandise purchases budget; determines required purchases

1. For a production budget, the __ is the beginning inventory for the year: beginning inventory for the first quarter 2. In a production budget, the production needs for the year equals __: the sum of production needs for the four quarters 3. What is a major factor that should be taken into consideration while planning the desired level of inventories?: costs of carrying inventory 4. Vineyard Corporation, a manufacturer of fine wines, began the year 2016 with 20,000 bottles in inventory. The company estimated the budgeted sales for the four quarters of 2016 to be 200,000 bottles, 150,000 bottles, 250,000 bottles, and 400,000 bottles, respectively. The management feels that an ending inventory of 10% of the subsequent quarter's sales is appropriate. What are the production needs for the first quarter?: 195,000 bottles 5. What is the desired ending inventory for the second quarter?: 25,000 bottles Third quarter sales of 250,000 bottles x ending inventory % of 10% The DM budget helps determine the raw materials to be purchased for the required level of production to maintain the desired levels of inventory 1. What is the purpose of preparing a direct materials budget?: to estimate the quantity of raw materials to be purchased 2. In a direct materials budget, the desired ending raw materials inventory for the year is equal to: the desired ending raw materials inventory for the last period

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3. In a direct materials budget, the beginning raw materials inventory for the year is the same as: the beginning raw materials inventory for the first period 4. The schedule of expected cash disbursements for raw materials helps in the preparation of: the cash budget

5. Perry, Inc. desires to maintain the ending inventory of raw materials at 40% of the next quarter’s raw materials needs. What is the cost of raw materials to be purchased in the first quarter?: $320,000 64,000 units of RM x $5. 60,000 + (50,000 x 40%) – 16,000

6. Oscar Company has an accounts payable balance of $50,000 in the beginning of the first quarter. Oscar pays for 60% of the purchases in the period of the purchase of materials and the rest in the quarter following the period of purchase.

What would be the expected cash disbursements for purchases of materials in the second quarter?: $147,900 ($151,500 x 60%) + ($142,500 x 40%) DL budget determines the labor hours required to meet the production needs By adjusting the labor needs, management can adjust the labor force accordingly Companies that neglect a budget run a risk of facing labor shortages or having to hire or lay off workers  Erratic labor policies lead to insecurities and inefficiency 1. What is a reason that companies prepare direct labor budgets?: to avoid labor shortages 2. Pro Clean Company, a manufacturer of hand sanitizers, intends to produce 40,000 units in the third quarter and 35,000 units in the fourth quarter. Each unit requires 0.50 direct labor hours to produce, and the cost of direct labor per hour is $18. What would be the total direct labor cost for the fourth quarter?: $315,000 35,000 units x 0.50 direct labor per unit x $18   

3. What is the total direct labor cost for the fourth quarter, if William has a contract with the labor union which guarantees its workers pay for at least 40,000 hours every quarter?: $480,000 The MOH budget is determine the expected cash disbursements and the PDOR for the period  Consist of variable costs and fixed costs  PDOR = total MOH/ total activity level  The ending finished goods inventory budget; finding the unit product cost  To find the unit product cost, you can use absorption costing or variable costing depending on the purpose of the budget  Unit product cost is determined by the data from the DM, DL, and MOH budget  The ending finished goods inventory helps determine the value of ending inventory  Ending finished inventory = product cost x number of units in ending inventory  Then used to determine the budgeted income statement and balance sheet 1. Precision Company estimates its machine hour requirements for the four quarters to be 35,000 hours, 20,000 hours, 15,000 hours, and 30,000 hours. The variable MOH rate is $4 per machine hours. The fixed mOH is $50,000 per quarter, which includes $20,000 of depreciation expense. Calculate VMOH: $400,000 

2. Calculate Precision Surgical Company’s PDOR for the year: $6 (($4 x 100,000 machine hrs) + ($50,000 per quarter x 4 quarters)) / 100,000 machine hours or ($400,000 + $200,000) / 100,000 machine hours 3. Some MOH costs such as depreciation are non cash expenses and are not considered in the preparation of the MOH budget: false The selling and admin expense budget is prepared for non manufacturing expenses  Summary of smaller or individual budgets (marketing, accounting, tax, facilities) made from inputs or department heads  Noncash expenses (depreciation) are subtracted from the total of the selling and admin expenses to determine the cash disbursements towards selling and admin expenses 1. Which is deducted from the total selling and admin expense budget to determine the cash disbursements for selling and admin expense budget?: depreciation 2. A company determines that the number of units sold is the cost driver for its variable selling and admin expense budget. The product of its variable selling and admin rate and budgeted unit sales will be: total variable selling and admin expense budget 

The cash budget combines data from the sales, production, DM, DL, MOH, and selling/admin expense budget  Divided into four sections which are the receipts, disbursements, cash excess or deficiency or financing section  Receipt section lists all cash inflows except for the ones in financing activities  Disbursements sections lists all cash outflows except the ones for financing act  Cash excess or deficiency section computes the excess or deficiency of cash based on the beginning balance and the expected cash inflows and outflows; funds need to be borrowed  If there are excess funds, it could be used to repay borrowings or invest  Financing section explains how the excess or deficiency of cash was dealt with  Important for cash budget to be broken down to a time period short enough to identify major fluctuation 1. Striker Company determines its expected receipts for the period to be $80,000 and expected disbursements to be $70,000. The beginning cash balance for the period was $5,000. The management wants to maintain a minimum balance of $40,000. What is the required borrowing?: $25,000 $40,000 – (($80,000 - $70,000) + $5,000) 2. What is the required borrowing assuming that the bank lends only in multiples of $10,000?: $30,000 

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The budgeted income statement is the data that is budgeted from the previous income statement One of the most important budgets prepared because it shows the company’s planned profits Also served as benchmark at which performance will be measured

1. In a budgeted income statement, __ is subtracted from net operating income to arrive at net income: interest expense 2. Smarton Company is in the process of preparing its budgeted income statement. It has determined its estimated gross margin to be $90,000. The company also expects to incur selling and admin expenses of $30,000 and interest expense of $12,000. What would be Smarton’s budgeted net income?: $48,000 The budgeted balance sheet is derived from other budgets and also the balance sheet from the beginning of the period  Accounts receivable is the schedule of expected cash collections, amount that remains uncollected at the end of the period  Inventory can be finished goods or raw materials  The value of the finished goods comes from the ending finished goods inv budget  Raw materials inventory come from the direct materials budget  New plant and equipment balance – new accumulated depreciation balance = net plant and equipment balance  Adding total current assets to that gives you the total total assets  Liabilities/ stockholders Equity. Accounts payable is from raw materials and comes from the schedule of expected cash dis for purchases of materials  Common stock, look at values from previous period and adjust it to changes during the period; issues of additional shares or redemption of shares  Retained earnings, you begin with the beginning retained earnings + net income – dividends paid to get budget retained earnings  Common stock + retained earnings = total stockholders’ equity 1. For the budget period ending December 31, 2015, Aaron Corp. estimates its ending balances for cash as $4,000, AR as $16,000, finished goods inventory as $12,000 and RM inventory as $8,000. RM worth $14,000 will be unpaid. Determine amount of total current assets that will be reported on budgeted balance sheet: $40,000 2. What would be the amount of AP reported on the budgeted balance sheet?: $14,000 = balance of RM that are unpaid at end of period 3. Film studio, Inc, has beginning retained earnings of $80,000 and expects to earn net income of $70,000 during the budget period. What would be the budgeted closing and retained earnings balance if the company pays dividends of $50,000?: $100,000 $80,000 + $70,000 - $50,000 ...