two problems on Costing allocation and Planning&Budgeting

Planning and budgeting

Lecture 27

Chapter 13 * Modified from PPT slides of McGraw-Hill/Irwin

Overview:

1. Estimate sales.

2. Develop production and cost budgets.

3. Estimate cash flows.

Budgets

Financial plan of the resources needed

to carry out activities and meet financial

goals

Budget

Goals

Plans

Decision making

Performance evaluations

Organizational Plan

Financial plan of an organization for the

coming year or other planning period

Company’s broad objectives established by

management that employees work to achieve

Statement detailing steps to take to achieve a

company’s organization goals

Master Budget

Organization Goals

Strategic Long-Range Plan

Organization Individual

Organization

goals

Individual goals

and values

Sales Budget

Sales is the most difficult aspect of budgeting.

Sales Staff

Forecasting

Trend Analysis

Market Research

Example: Sales Budget (Santiago Pants)

Estimated sales = Estimated

number of units

x Budgeted

price per

unit

$7,200,000 = 160,000 x $45

Production Budget

Production plan of resources needed to meet

current sales demand and ensure that

inventory levels are sufficient for future sales

Units in

beginning

inventory

(BB)

Required

production

(units)

(TI)

Budgeted sales

(units)

(TO)

Units in ending

inventory

(EB)

=+ -

Inventories

BB TI TO EB

Production Budget, Continued. . .

Units in

beginning

inventory

(BB)

Required

production

(units)

(TI)

Budgeted

sales (units)

(TO)

Units in

ending

inventory

(EB)

-= +

5,000 units

(beginning

Inventory)

Required

production

(units)

160,000 units

(sales)

15,000 units

(ending

inventory) -= +

BBTI TO EB

BB TI TO EB

Required

production

(units)

170,000 units=

Production Budget, Continued. . .

Expected sales 160,000

Add desired ending inventory of finished goods 15,000

Total needs 175,000

Less beginning inventory of finished goods 5,000

Units to be produced 170,000

Santiago Pants Production Budget (in units)

For the Budget Year Ended December 31

Production Costs

Direct

Labor

Direct

Materials

Production

Overhead

Example: Direct Materials

Cotton Fine Cotton

Material per unit of output 3.0 yards 0.2 yards

Beginning materials inventory 10,000 yards 1,000 yards

Ending inventory 15,000 yards 1,000 yards

Cost per yard 3$ 5$

Santiago Pants

Material Data

Estimated Production

Example: Direct Materials, Continued. . .

Yards needed

Fine cotton = 170,000 x 0.2 + 1,000 - 1,000

= 34,000 yards

= 515,000 yards

Cotton = 170,000 x 3.0 + 15,000 - 10,000

Santiago Pants

Material Data

Estimated Production

Example: Direct Materials, Continued. . .

Cotton Fine Cotton

Direct materials needed per unit 3.0 yards 0.2 yards

Total production needsa 510,000 a 34,000 b

Add desired ending inventory 15,000 1,000

Total direct materials needs 525,000 35,000

Less beginning inventory of materials 10,000 1,000

Total yards to be purchased 515,000 34,000

Cost of materials, per yard $3 $5

Cost of direct materials to be purchased $1,545,000 $170,000

Total cost of direct materials ($1,545,000 + $170,000) 1,715,000$

Santiago Pants Direct Materials Budget

For the Budget Year Ended December 31

a 3.0 yards x 170,000 units

b 0.2 yards x 170,000 units

Example: Direct Labor

Units to be produced 170,000

Direct labor time per unit (in hours) 0.50

Total direct labor-hours needed 85,000

Direct labor cost per hour 22$

Total direct labor cost 1,870,000$

Santiago Pants Direct Labor Budget

For the Budget Year Ended December 31

Example: Overhead

Variable overhead needed to produce 170,000 units

Indirect materials and supplies ($0.30 per unit) 51,000

Materials handing ($0.40 per unit) 68,000

Other indirect labor ($0.10 per unit) 17,000 136,000$

Fixed manufacturing overhead

Supervisory labor 102,000

Maintenance and repairs 50,000

Plant administration 85,000

Utilities 55,000

Depreciation 140,000

Insurance 30,000

Property taxes 60,000

Other indirect labor 22,000 544,000

Total manufacturing overhead 680,000$

Santiago Pants Overhead Budget

For the Budget Year Ended December 31

Example: Cost of Goods Sold

Beginning work in process inventory

Manufacturing costs

Direct materials

Beginning inventory (10,000 cotton @ $3 + 1,000 fine cotton @ $5) 35,000$

Purchases 1,715,000

Materials available for manufacturing 1,750,000$ Less ending inventory (15,000 cotton @ $3 + 1,000 fine cotton @ $5) (50,000)

Total direct material costs 1,700,000$

Direct labor 1,870,000

Manufacturing overhead 680,000

Total manufacturing costs 4,250,000$

Less ending work in process inventory -0-

Cost of goods manufactured 4,250,000$

Add beginning finished goods inventory (5,000 units)a 125,000

Less ending finished goods inventory (@ 15,000 units)b (375,000)

Cost of goods sold 3,990,000$

a Management estimate b Finished goods are valued at $25 per unit ($4,250,000/170,000 units produced).

Hence, ending finished goods inventory is estimated to be $375,000 (15,000 units x $25).

Santiago Pants

Budgeted Statement of Cost of Goods Sold

For the Budget Year Ended December 31

Example: Marketing and Administrative Budget

Variable marketing costs

Sales commissions ($1.50 per unit) 240,000$

Other marketing ($0.75 per unit) 120,000

Total variable marketing costs 360,000$

Fixed marketing costs

Sales salaries 130,000$

Advertising 153,000

Other marketing 67,000

Total fixed marketing costs 350,000

Total marketing costs 710,000$

Administrative costs (all fixed)

Administrative salaries 241,000$

Legal and accounting staff 136,000

Data processing services 127,000

Outside professional services 32,000

Depreciation: building, furniture, and equipment 84,000

Other, including interest 36,000

Taxes-other than income 140,000

Total administrative costs 796,000

Total budgeted marketing and administrative costs 1,506,000$

Santiago Pants Schedule of Budgeted Marketing and Administrative Costs

For the Budget Year Ended December 31

Example: Income Statement

Budgeted revenues

Sales (160,000 units at $45) 7,200,000$

Costs

Cost of goods sold 3,990,000$

Marketing and administrative costs 1,506,000

Total budgeted costs 5,496,000

Operating profit 1,699,000$

Federal and other income taxesa 550,000

Operating profit after taxes 1,149,000$

a Computed by the compay's tax staff

Santiago Pants Budgeted Income Statement

For the Budget Year Ended December 31

Cash Budget

Statement of cash on hand at the start of the budget period,

expected cash receipts, expected cash disbursements, and

the resulting cash balance at the end of the budget period.

Collections of accounts receivable

Cash sales

Sales of assets

Borrowing

Issuing stock

Other

HC has just made it sales forecasts and its marketing department estimates that the company will sell 24,000 units during the coming year. In the past, management has maintained inventories of finished good at approximately one month’s sales. The inventory at the start of the budget period is 1,300 units, Sales occur evenly throughout the year .

Practice Problem 1: Estimate Production Level

Estimate the production level required for the coming year to meet these objectives.

East Mountain Bike expects to sell 25,000 electronic bicycles next year. The management estimates that the beginning and ending inventory will be 2,000 units and 3,500 units, respectively.

Practice Problem 2: Estimate Production Level

Estimate the production level required for the coming year to meet these objectives.

East Mountain Bike expects to sell 25,000 electronic bicycles next year. The management estimates that the beginning and ending inventory will be 2,000 units and 3,500 units, respectively.

Practice Problem 3: Estimate Direct Material Cost

Refer to Practice problem 2

Estimate the total cost of direct materials budgeted

East Mountain Bike expects to sell 25,000 electronic bicycles next year. The management estimates that the beginning and ending inventory will be 2,000 units and 3,500 units, respectively.

Practice Problem 3: Estimate Direct Material Cost

Refer to Practice problem 2

East Mountain Bike expects to sell 25,000 electronic bicycles next year. The management estimates that the beginning and ending inventory will be 2,000 units and 3,500 units, respectively.

Practice Problem 4: Estimate Direct labor Cost

Refer to Practice problem 2

Direct labor time per unit (in hours) 0.20

Total direct labor-hours needed (a) = 26,500*0.2 = 5,300

Direct labor cost per hour 20SR

Total direct labor cost (b) = 5,300*20 = 106,000

Estimate the total cost of direct labor budgeted

Final Exam Information

• Date: May 18, 2014 (Sunday)

• Time: 07:00 PM

• Location: 14-108

• Coverage: Chapters 7, 8, 9, 11, and 13

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