mga introduction project

Where are we? I. Costing

II. Chapter 7 Master Budget

III. Analyses of Costing Information

MGA 202

Traditional Innovations

1

Ch. 1 Cost Concepts

Product Costing Systems

− Ch. 9 Decentralization

− Ch. 10 Differential Analysis

– Ch. 5 CVP Analysis

– Ch. 8 Variance Analysis

− Ch. 11 NPV

 (Midterm)

(Project)

(Final)

Chapter 7. Master Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a forthcoming time period. A master budget is an integrated plan consisting of a number of supporting budgets. It communicates management's plans throughout the organization, allocates resources, and coordinates activities.

Master Budget

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Budgeting Example Manufacturer

Hampton Freeze was a premium popsicles maker. At the end of the year 2012, It was preparing budgets for the year of 2013.

A lot of information

is needed for the master budget!

 Hampton Freeze (premium popsicles maker) is preparing budgets for the year of 2013.

 Budgeted sales are: Q1 10,000 cases

Q2 30,000 cases

Q3 40,000 cases

Q4 20,000 cases

 The selling price is $20 per case.

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Budgeting Example Manufacturer

Hampton Freeze was a premium popsicles maker. At the end of the year 2012, It was preparing budgets for the year of 2013.

A lot of information

is needed for the master budget!

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The Sales Budget

managers’ input

= budgeted sales in units × unit price

Sum of four quarters

Important to understand how to correctly calculate Year column numbers!

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Info: Expected Cash Collections

• All sales are on account (on credit).

• Collection pattern is:

70% collected in the quarter of sale,

30% collected in the quarter following sale.

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Schedule of Expected Cash Collections



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Schedule of Expected Cash Collections

From Balance Sheet 2012:

Ending balance of AR 2012 =

Beginning balance of AR 2013

This amount is to be collected in Q1 of 2013.



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Schedule of Expected Cash Collections

70% 30%

70% 30%

Sum of four quarters



Production

Budget

Sales

Budget

and

Expected

Cash

Collections

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The Production Budget

Production Budget lists

the number of units

that must be produced

to satisfy sales needs

and to provide for the

desired ending

inventory.

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Info: Production

• At the beginning of the year 2013, 2,000 cases are available.

• At Hampton Freeze, management believes that an ending inventory equal to 20% of the next quarter's sales is appropriate.

• At the year end, management aims to keep an inventory of 3,000 cases.

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The Production Budget

from Sales Budget

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The Production Budget

Budgeted Q2 sales 30,000

Desired ending inventory % 20%

Desired ending inventory 6,000

?

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The Production Budget

20% 20% 20%

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The Production Budget

Last year’s ending inventory (in cases) is this year’s beginning inventory.

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The Production Budget

last quarter’s ending inventory = this quarter’s beginning inventory

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The Production Budget

Sum of four quarters

= Q4 ending inventory

= Q1 beginning inventory

= 100,000+3,000

Important to understand how to correctly calculate Year column numbers!

Sales

Budget

and

Expected

Cash

Collections

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The Direct Materials Budget

Direct Materials

Budget details the

raw materials that

must be purchased

to fulfill the

production budget

and to provide for

adequate

inventories.

Direct

Materials

Budget

Production

Budget

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• Fifteen pounds of high fructose sugar (direct materials) are required to produce one case of popsicles.

• Management wants materials on hand at the end of each quarter equal to 10% of the following quarter’s production needs. Assume the year end raw materials inventory is 22,500 pounds.

• At the beginning of the year, 21,000 pounds of sugar are on hand.

• Material cost is $0.20 per pound.

Info: Materials

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The Direct Materials Budget

from Production Budget

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The Direct Materials Budget

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The Direct Materials Budget

Budgeted Q2 RM need 480,000

Desired ending RM Inv % 10%

Desired ending RM Inv 48,000

a b

a × b

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The Direct Materials Budget

10% 10% 10%

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The Direct Materials Budget

Last year’s ending inventory (in pounds) is this year’s beginning inventory.

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The Direct Materials Budget

last quarter’s ending inventory = this quarter’s beginning inventory

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The Direct Materials Budget

a b

a × b

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Sum of four quarters

= Q4 ending inventory

= Q1 beginning inventory

The Direct Materials Budget

= 1,515,000 + 22,500

Important to understand how to correctly calculate Year column numbers!

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Info: Expected Cash Disbursement

• Hampton

pays for 50% of the purchases in the quarter of purchase;

pays for 50% in the quarter following purchase.

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Schedule of Expected Cash Disbursement for Materials

From Balance Sheet 2012:

Ending balance of AP 2012 =

Beginning balance of AP 2013

This amount is to be paid in Q1 of 2013.



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Schedule of Expected Cash Disbursement for Materials

50% 50%

50% 50%

Sum of four quarters



Direct

Materials

Budget

and

Expected

Cash

Disbursement

Sales

Budget

and

Expected

Cash

Collections

MGA 202 31

The Direct Labor Budget

Direct Labor

Budget shows

the direct labor

hours required

to satisfy the

production

budget.

Direct

Labor

Budget

Production

Budget

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• Each case of popsicles requires 0.40 hours (24 minutes) of direct labor.

• Workers are paid at the rate of $15 per hour.

Info: Labor

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The Direct Labor Budget

from Production Budget

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The Direct Labor Budget

Also Expected Cash Disbursement for Labor

Sum of four quarters a

b a × b

a b

a × b

Direct

Materials

Budget

and

Expected

Cash

Disbursement

Sales

Budget

and

Expected

Cash

Collections

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The Manufacturing Overhead Budget

Manufacturing

Overhead

Budget lists all

costs of

production other

than direct

materials and

direct labor.

Production

Budget

Direct

Labor

Budget

Mfg

Overhead

Budget

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• At Hampton Freeze, manufacturing overhead is separated into variable and fixed components. The variable component is $4 per direct labor- hour and the fixed component is $60,600 per quarter.

• The only significant noncash manufacturing overhead cost is depreciation, which is $15,000 per quarter.

Info: Mfg Overhead

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The Manufacturing Overhead Budget

from DL Budget

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The Manufacturing Overhead Budget

a b

a × b

= Variable OH + Fixed OH

Sum of four quarters

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The Manufacturing Overhead Budget

Don’t forget

CASH disbursement!

NON-CASH!!!

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Estimated Total MOH

Estimated Total DLHs Remember to calculate POHR =

The Manufacturing Overhead Budget

Direct

Materials

Budget

and

Expected

Cash

Disbursement

Sales

Budget

and

Expected

Cash

Collections

MGA 202 41

The cost of

unsold units is

computed on the

Ending Finished

Goods Inventory

Budget.

Production

Budget

Direct

Labor

Budget

Ending Finished Goods Inventory Budget

MOH

Budget

Ending

Finished

Goods

Inventory

Budget

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• Hampton Freeze decided to use absorption costing for budgeting, because their bank would very likely require absorption costing.

Info: Costing Method

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Ending Finished Goods Inventory Budget

Basic Info

POHR! (in MOH Budget)

=

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Ending Finished Goods Inventory Budget

from Basic Info

3,000 × $13.00 =

Unit product cost used in • Ending FG Inventory • COGS in the I/S

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• At Hampton Freeze, the selling and administrative expense budget is divided into variable and fixed cost components.

• The variable selling and administrative expense is $1.80 per case.

• Fixed SA expenses in each quarter include:

• Advertising – $20,000

• Executive salaries – $55,000

• Insurance – $10,000

• Property taxes – $4,000

• Depreciation – $10,000

Info: Selling and Admin Expenses

Note: depr for SA Dept., not depr in manufacturing OH

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Selling and Administrative Expense Budget

from Sales Budget

a b

a × b

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Selling and Administrative Expense Budget

Note: depreciation in the SA expenses, not depreciation in MOH.

Sum of four quarters

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The Master Budget

Budgeted

Balance

Sheet

Budgeted

Income

Statement

Sales Budget

Production Budget

Direct Materials

Budget Direct Labor

Budget

Manufacturing

Overhead Budget

Ending

Inventory Budget

Selling and

Administrative Budget





  

 

Cash Budget

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Format of the Cash Budget

The cash budget is divided into four sections:

1. Cash receipts section lists all cash inflows excluding cash

received from financing;

2. Cash disbursements section consists of all cash

payments excluding repayments of principal and interest;

3. Cash excess or deficiency section determines if the

company will need to borrow money or if it will be able to

repay funds previously borrowed; and

4. Financing section details the borrowings and repayments

projected to take place during the budget period.

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Info: Cash-related • Assume the following information for Hampton:

– In agreement with a local bank that allows the company to borrow in increments of $10,000 at the beginning of each quarter, up to $250,000. The interest rate is 1% per month, and interest is not compounded. Hampton would, as far as it is able, repay the loan plus interest at the end of the year.

– Maintains a minimum cash balance of $30,000.

– Plans to spend $130,000 during the year on equipment purchases: $50,000 in the first quarter; $40,000 in the second; $20,000 in the third; and $20,000 in the fourth. All purchases are in cash.

– The board of directors has approved cash dividends of $8,000 per quarter.

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Cash Budget

From Balance Sheet

Beginning balance of Cash

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Cash Budget

From Schedule of Expected Cash Collections

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Cash Budget

From Schedule of Expected Cash Disbursements for Materials

From Direct Labor Budget

From Manufacturing Overhead Budget From Selling and Administrative Budget

Information from management

MGA 202 54

Cash Budget

Difference between

Hampton will have a cash deficit of

$94,000 by the end of the first quarter.

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Cash Budget

Hampton will have a cash deficit of

$94,000 by the end of the first quarter.

Desired ending cash balance 30,000

+ Cash deficiency (- excess) over disbursement 94,000

Minimum required cash from borrowing 124,000

Borrowing from bank 130,000

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Cash Budget

Borrowing from bank 130,000

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Cash Budget

Ending cash balance for Q1

is the beginning Q2 balance.

Sum

MGA 202 58

Cash Budget

Borrowing from bank 70,000

Desired ending cash balance 30,000

+ Cash deficiency (- excess) over disbursement 36,100

Minimum required cash from borrowing 66,100

Difference between

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Cash Budget

Ending cash balance for Q1

is the beginning Q2 balance.

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Cash Budget

Cash in excess, satisfies minimum cash balance requirement

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Cash Budget

=130,000+70,000 =130,000 ×1% ×12 mon + 70,000 ×1% × 9 mon

MGA 202 62

Cash Budget

Sum of four quarters

= Q4 ending cash balance

=Q1 beginning cash balance

Difference between

MGA 202 63

The Master Budget

Sales Budget

Production Budget

Direct Materials

Budget Direct Labor

Budget

Manufacturing

Overhead Budget

Ending

Inventory Budget

Selling and

Administrative Budget





  

 

Cash Budget 

Budgeted

Income

Statement

Budgeted

Balance

Sheet

MGA 202 64

Sales Budget.

Cash Budget.

Ending Finished Goods Inventory

& Sales budgets

$13.00 unit product cost×100,000

Selling and

Administrative

Expense Budget.

MGA 202 65

MGA 202 66

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Cash Budget. Schedule of

Expected Cash

Collections.

=22,500 lbs ×$0.20 per lb

(net)

MGA 202 68

=3,000 cases ×$13 per case

(net)

MGA 202 69

No land purchase during 2013

(net)

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From Cash Budget, we know Hampton

purchased $130,000 of new equipment

= $ 700,000 + $130,000

(net)

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= $ 292,000 +

($15,000+$10,000) × 4

(net)

MGA 202 72

(net)

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No change for common stock

Beginning balance 449,900$

Add: net income 102,100

Deduct: dividends (32,000)

Ending balance 520,000$

(net)

MGA 202 74

Check balance! Accounting equation: A = L + E

(net)