Managerial accounting

Managerial accounting

MANAGERIAL ACCOUNTING Charles E. Davis Elizabeth Davis Planning and Forecasting Planning And Budgeting Process Performance Standards Building The Master Budget: The Operating Budget Building The Master Budget: The Cash Budget Pro-forma Financial Statements Planning And Budgeting Process 1. Why do organizations prepare budgets? 2. Whose responsibility is it to set the budget? Budgeting is needed only in large organizations. As a small business owner, I dont need to waste time preparing a budget. Do you agree with this statement? Why or why not? 4. How does top-down budgeting differ from bottom-up budgeting? What are the advantages of each approach? 5. What is budgetary slack? Why is it an issue in budget preparation? 6. What is zero-based budgeting? 3. Example: exercise 1

Mark Newton has just opened a gourmet coffee bar, the first of its kind in Fountain, North Carolina. You are Marks accountant. On a recent visit to the store, you asked how the budget was coming along. Mark replied that since there was no history of gourmet coffee sales in Fountain, he didnt know how to prepare a budget, and he didnt really see the need for one. Required Explain to Mark the importance of budgeting and provide some guidance on how he should go about the process. Performance Standards 1. What is a standard? Give three examples of a standard that were not discussed in this chapter. 2. Explain the difference between ideal and practical standards. Which type of standard would you want to be evaluated against? Why? 3. What is the difference between a standard price and a standard cost? 4. What are the components of a products standard cost? Example: exercise 2 Graymont Industries purchases Solvate, a chemical compound used in several of its products, from ChemMaster. ChemMaster has just increased the list price of Solvate to $6.50 per gallon. However, because Graymont purchases a high volume of Solvate, ChemMaster grants the company a 10 percent discount off

the list price. Charges for shipping Solvate from ChemMaster to Graymonts factory are $100 for a shipment of twenty-five 50-gallon drums. Special storage requirements cost $0.55 per gallon. Required Calculate Graymonts standard price for a gallon of Solvate. Example: exercise 3 Interpretive Dimensions provides sign language interpreters for major business conferences. Interpreters are paid an hourly rate of $20. Fringe benefits are estimated to be 30 percent of wages, and employment taxes amount to 10 percent of wages. Required Calculate the standard hourly rate for an interpreter. Example: exercise 4 Mathis Music Stands manufactures decorative wooden music stands for discriminating musicians. Each completed music stand contains 2.5 board feet of American cherry wood. In the process of matching the wood grain and cutting decorative scrollwork, 1.5 board feet of wood are scrapped. Required Calculate the standard quantity of American cherry in Mathiss music stand. Example: exercise 6 Mama Frans Bakery makes a variety of home-style cookies for upscale restaurants in the Atlanta metropolitan area. The companys best-selling cookie is the double chocolate almond supreme. Mama Frans recipe

requires 10 ounces of a commercial cookie mix, 5 ounces of milk chocolate, and 1 ounce of almonds per pound of cookies. The standard direct materials costs are $0.80 per pound of cookie mix, $4.00 per pound of milk chocolate, and $12.00 per pound of almonds. Each pound of cookies requires 1 minute of direct labor in the mixing department and 2 minutes of direct labor in the baking department. The standard labor rates in those departments are $14.40 per direct labor hour (DLH) and $18.00 per DLH, respectively. Variable overhead is applied at a rate of $32.40 per DLH; fixed overhead is applied at a rate of $60.00 per DLH. Required Calculate the standard cost for a pound of Mama Frans double chocolate almond supreme cookies. Building the Master Budget: The Operating Budget 1. What is an operating budget? 2. List the components of the operating budget. How are the components of the operating budget related? 3. Why is an accurate sales forecast so important in budget preparation? 4. How does a budget that is prepared using interim periods, such as quarters or months, provide additional information that is not available in a budget that reports the years final results? 5. What is a master budget? What are the component parts of the master budget, and how are those components related? Master budget Whether a company uses standard costs or last years

actual costs, incremental or zero-based budgeting, topdown or bottom-up budgeting, the final product is the master budget. Exercise 8 Bates & Hill Fabricators produces commemorative bricks that organizations use for fundraising projects. Aaron Bates, the companys vice president of marketing, has prepared the following sales forecast for the first six months of the coming year. The company plans to sell the bricks for $15 each. Required Prepare Bates & Hills sales budget for the first quarter of the coming year. Exercise 8 Budgeted units sold January February 20,000 39,000 March 35,000 Budgeted sales price

$15 $15 $15 Budgeted revenue $300,000 $585,000 $525,000 Quarter 94,000 $15 $1,410,00 0 Exercise 9 Bates & Hill Fabricators marketing department has identified the following monthly expenses that will be needed to support the companys sales and administrative functions (see Exercise 5-8). In addition to these monthly expenses, the company will pay a commission to its salespeople equal to 5% of the sales revenue from each brick sold. The company expects bad debt expense to be 4% of sales revenue.

Depreciation Sales staff salaries Advertising Executive salaries Miscellaneous $10,000 $25,000 $1,000 $10,000 $500 Required Prepare Bates & Hills selling and administrative expense budget for the first quarter of the coming year. Exercise 9 Commission Bad debt expense Depreciation Sales staff salaries Advertising Executive salaries Miscellaneous Total budgeted expenses Less: non-cash expenses Depreciation Bad debt expense Total cash costs

January February $15,000 $29,250 12,000 23,400 10,000 10,000 25,000 25,000 1,000 1,000 10,000 10,000 500 500 $73,500 $99,150 10,000 12,000 $51,500 10,000 23,400 $65,750 March Quarter $26,250 $70,500 21,000 56,400 10,000

30,000 25,000 75,000 1,000 3,000 10,000 30,000 500 1,500 $93,750 $266,400 10,000 30,000 21,000 56,400 $62,750 $180,000 Exercise 11 Joshua Hill, Bates & Hill Fabricators production manager, has just received the companys sales budget for the first quarter (see Exercise 5-8). Company policy requires an ending finished goods inventory each month that will meet 20% of the following months sales volume. Joshua plans to have 5,600 finished bricks at a cost of $49,000 in inventory at the beginning of the year. Required Prepare Bates & Hills production budget for the first quarter. Exercise 11 January February March

Quarter 20,000 39,000 35,000 94,000 + Budgeted ending inventory 7,800 7,000 5,800 = Total units required 27,800 46,000 40,800 99,800 5,600 7,800 5,600

22,200 38,200 33,800 Budgeted unit sales - Beginning inventory = Budgeted production 5,800 7,000 94,200 Exercise 15 Marcy Jones, Bates & Hill Fabricators purchasing manager, has just received the companys production budget for the first quarter (see Exercise 5-11). Each brick requires 5 pounds of clay, and Marcy expects to pay $0.40 per pound of clay in the coming year. Company policy requires an ending direct materials inventory each month that will meet 10% of the following months production needs. Marcy expects to have 18,900 pounds of clay at a cost of $7,560 in inventory at the beginning of the year. Required Prepare Bates & Hills direct materials purchases budget for the first quarter.

Exercise 15 Budgeted production January February 22,200 38,200 Standard pounds per unit 5 5 = Production needs 111,000 191,000 + Budgeted ending inventory = Total DM required (lbs.) 19,100 16,900

130,100 207,900 18,900 19,100 111,200 188,800 - Beginning inventory = Budgeted purchases (lbs.) Standard cost per pound $0.40 $0.40 = Budgeted purchases cost 44,480 $ 75,520 $ March 33,800 5

Quarter April 94,200 27,800 5 5 169,000 471,000 13,900 13,900 182,900 484,900 16,900 18,900 166,000 466,000 $0.40 $0.40 $ $186,40 66,400 0 139,00 0 Exercise 17 Joshua Hill, Bates & Hill Fabricators production manager, has just completed the companys production budget for the first quarter (see Exercise 5-11). Each brick requires 15

minutes to produce, and Joshua expects to pay workers $20 per direct labor hour in the coming year. Required Prepare Bates & Hills direct labor budget for the first quarter. Exercise 17 January Februar y Budgeted production Standard DLH per unit = Total DLH required Standard wage rate = Budgeted DL cost March Quarter 22,200 38,200 33,800 94,200 25. 5,550 25.

9,550 25. 8,450 25. 23,550 $20 $20 $20 $20 $111,00 $191,00 $169,000 $471,00 0 0 0 Exercise 19 Joshua Hill, Bates & Hill Fabricators production manager, has just completed the companys production budget for the first quarter (see Exercise 5-11). He has identified the following monthly expenses that will be needed to support

the companys manufacturing process. The company applies manufacturing overhead based on direct labor hours, and the current predetermined rates are $12 per direct labor hour for fixed manufacturing overhead and $0.70 per direct labor hour for variable manufacturing overhead. Required Prepare Bates & Hills manufacturing overhead budget for the first quarter. Exercise 19 Exercise 19 January DLH worked VOH per DLH = Budgeted VOH + Budgeted FOH = Total Budgeted MOH - Noncash MOH items Depreciation = Total Cash MOH cost Februar y 5,550 9,550

$0.70 $0.70 March 8,450 $0.70 Quarter 23,550 $0.70 16,485 3,885 6,685 112,500 112,500 5,915 112,500 116,385 119,185 337,500 118,415 353,985 30,000 30,000 30,000 $86,385 $89,185

90,000 $88,415 $263,98 5 Exercise 20 Joshua Hill, Bates & Hill Fabricators production manager, has just completed the companys production budget (see Exercise 5-11) and manufacturing overhead budget (see Exercise 5-19) for the first quarter. He also has received the direct materials purchases budget (see Exercise 5-15) and direct labor budget (see Exercise 5-17). Required Prepare Bates & Hills ending inventory and cost of goods sold budget for the first quarter. Exercise 20.. Direct material Beginning DM Inventory + DM purchases - DM used in production = Ending DM Inventory $7,560 . lbs. $0.40/lb 18,900 186,40 DM purchases budget

0 188,40 0 .lbs. $0.40/lb 471,000 $ . lbs. $0.40/lb 13,900 5,560 Exercise 20.. Finished goods inventory Unit Costs Direct material 2.00 $ + Direct labor + Overhead = Total std. cost per unit

$10.175 Ending FG inventory (units) 5,800 = ($)Ending FG inventory .lbs. $0.40/lb 5 5.00 DLH $20/DLH 25. 3.175 DLH 25 .$12.70 $59,015 Exercise 20.. Cost of goods sold Beginning WIP 0 $

+ Direct materials used 188,400 See above + Direct labor 471,000 See 5-17 + Overhead = Total Mfg. Cost - Ending WIP =

COGM + Beginning FG inventory - Ending FG inventory = Budgeted COGS 353,985 See 5-19 1,013,385 0 1,013,385 49,000 59,015 $1,003,370 See 5-11 See above Exercise 23 Laura Falk, Bates & Hill Fabricators accounts receivable manager, has just received the companys sales budget for

the first quarter (see Exercise 5-8). The company makes all sales on credit. Laura recently reviewed the companys collection history and found that 70% of the sales are collected in the month of the sale, 26% of sales are collected in the month following the sale, and 4% of sales are uncollectible. The company expects to have an accounts receivable balance of $58,500 on January 1, and this amount represents the remaining receivables from Decembers sales. Required Prepare Bates & Hills cash receipts budget for the first quarter. Exercise 23 January December credit sales January salesa $300,000 70% $300,000 26% $300,000 4% February sales $585,000 70% $585,000 26% $585,000 4% March sales $525,000 70% $525,000 26% $525,000 4% Totals February

March Total Cash Receipts $ 58,500 $ 58,500 210,000 210,000 78,000 $78,000 Uncollectible Accounts Receivable $12,000 409,500 $152,100 409,500 152,100 23,400 367,500

367,500 136,500 $268,500 $487,500 $519,600 $1,275,600 21,000 $56,400 $136,500 Exercise 25 Maria Bockman, Bates & Hill Fabricators accounts payable manager, has just received the companys direct materials purchases budget for the first quarter (see Exercise 5-15). The company makes all of its direct materials purchases on account. Marias recent review of the companys payment history revealed that the company pays for 50% of its direct materials purchases in the month of purchase and 50% in the month following purchase. The company expects to have an accounts payable balance of $18,000 on January 1, and this amount represents the remaining payables from Decembers direct materials purchases. Required Prepare Bates & Hills cash payments budget for the fi rst quarter.

Exercise 25.. January December A/P February March Total Cash Payments $18,000 $18,000 22,240 22,240 Accounts Payable January purchases 50% $44,480 50% $44,480 $22,240 22,240 37,760

37,760 February purchases 50% $75,520 50% $75,520 $37,760 37,760 33,200 33,200 March purchases 50% $66,400 50% $66,400 Total cash payments $33,200 $40,240 $60,000 $70,960 $171,200 $33,200

Exercise 28 John Wills, Bates & Hill Fabricators budget director, has received budget information from several managers (see Exercises 5-8, 9, 11, 15, 17, 19, 20, 23, and 25) and is preparing the companys cash budget. In addition to the information he received from these managers, John knows the following: .Bates & Hill plans to have $60,000 in its cash account on January 1 Bates & Hill plans to declare and pay dividends totaling $49,000 in .January Bates & Hill plans to purchase and pay cash for a piece of land in February .at a cost of $72,000 .Bates & Hill plans to purchase equipment in March at a cost of $60,000 Bates & Hills income taxes from last quarter totaling $75,260 will be paid in .January Bates & Hill is required to maintain a minimum cash balance of $30,000 in . its account at First National Bank Exercise 28 Bates & Hill has negotiated with the First National Bank to provide a $175,000 line of credit that can be borrowed against in $1,000 increments on the fi rst day of the month. Any repayments on the line of credit must also be made in $1,000 increments and are made on the last day of the month when cash is available. The annual interest rate on this line of credit is 12%. Any time a principal payment is made, all accrued interest to date is repaid. Required Prepare Bates & Hills cash budget for the first quarter. Exercise 28

January February March Beginning cash balance 60,000 $ 30,115 $ 30,380 $ Collections from sales 268,500 487,500 519,600 Quarter $ 60,000 1,275,600 Total cash available to spend 328,500

517,615 549,980 1,335,600 Less disbursements 40,240 60,000 70,960 171,200 111,000 191,000 169,000 471,000 Manufacturing overhead 86,385 89,185 88,415 263,985

Selling & administrative expenses 51,500 65,750 62,750 180,000 Income taxes 75,260 Payments for direct materials Direct labor 72,000 Equipment purchases Dividends 75,260 60,000 132,000 49,000 49,000

Exercise 28 Total cash disbursements Cash excess (deficiency) Minimum cash balance 413,385 477,935 )84,885( 39,680 )30,000( )30,000( 451,125 98,855 1,342,445 )6,845( )30,000( )30,000( Cash excess (needed) )114,885(

9,680 68,855 )36,845( :Financing Borrowings 115,000 115,000 )7,000( Repayments Interest f Total financing 115,000 Ending cash balance 30,115 $ (2,300 ) )9,300(

30,380 $ )67,000( )74,000( )1,080( )68,080( 30,775 $ )3,380( 37,620 30,775 $ Problem 35 GrowMaster Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year. Carol Jones, the fi rms marketing director, has completed the following sales forecast. Month Sales Month Sales July $1,500,000 January $ 900,000 August $1,500,000February $1,000,000 September $1,600,000 March $ 900,000 October $1,600,000 April $1,150,000 November $1,500,000 May $1,250,000 December $1,700,000 June $1,400,000 Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. He has gathered the following information. All sales are made on credit. GrowMasters excellent record in accounts receivable collection is expected to

continue, with 60 percent of billings collected in the month after sale and the remaining 40 percent collected two months after the sale. Problem 35 Cost of goods sold, GrowMasters largest expense, is estimated to equal 40 percent of sales dollars. Seventy percent of inventory is purchased one month prior to sale and 30 percent during the month of sale. For example, in April, 30 percent of April cost of goods sold is purchased and 70 percent of May cost of goods sold is purchased. All purchases are made on account. Historically, 75 percent of accounts payable have been paid during the month of purchase, and the remaining 25 percent in the month following purchase. Hourly wages and fringe benefits, estimated at 30 percent of the current months sales, are paid in the month incurred. General and administrative expenses are projected to be $1,550,000 for the year. A breakdown of the expenses follows. All expenditures are paid monthly throughout the year, with the exception of property taxes, which are paid in four equal installments at the end of each quarter. Salaries and fringe benefits Advertising 372,000 Property taxes 136,000 Insurance 192,000 Utilities 180,000 Depreciation 346,000 Total $1,550,000 $ 324,000 Problem 35 Operating income for the fi rst quarter of the coming year is projected to be $320,000. Grow- Master is subject to a 40 percent tax rate. The company pays 100 percent of its estimated taxes in the month following the end of each quarter.

GrowMaster maintains a minimum cash balance of $50,000. If the cash balance is less than $50,000 at the end of the month, the company borrows against its 12 percent line of credit in order to maintain the balance. All borrowings are made at the beginning of the month, and all repayments are made at the end of the month (in increments of $1,000). Accrued interest is paid in full with each principal repayment. The projected cash balance on April 1 is $50,000. Problem 35 a. Prepare the cash receipts budget for the second quarter. b. Prepare the purchases budget for the second quarter. c. Prepare the cash payments budget for the second quarter. d. Prepare the cash budget for the second quarter. A April May June Total Cash Receipts Accounts Receivable

February sales 40% $1,000,000 $400,000 $400,000 540,000 540,000 March sales 60% $900,000 40% $900,000 $360,000 360,000 690,000 690,000 April sales 60% $1,150,000 40% $1,150,000 $460,000 460,000

750,000 750,000 May sales 60% $1,250,000 40% $1,250,000 Totals $500,000 $940,000 $1,050,000 $1,210,000 $3,200,000 $500,000 B April May June Total Purchases April COGS

40% 30% $1,150,000 $138,000 $138,000 350,000 350,000 May COGS 40% 70% $1,250,000 40% 30% $1,250,000 $150,000 150,000 392,000 392,000 June COGS 40% 70% $1,400,000 40% 30% $1,400,000 $168,000 168,000 $420,000

$420,000 $588,000 $1,618,000 July COGS 40% 70% $1,500,000 Totals $488,000 $542,000 C April May June Total Cash Payments Accounts Payable March purchases $430,000 25%

$107,500 $107,500 366,000 366,000 April purchases $488,000 75% $488,000 25% $122,000 122,000 406,500 406,500 May purchases $542,000 75% $542,000 25% $135,500 135,500 441,000 441,000

June purchases $588,000 75% $588,000 25% Totals $147,000 $473,500 $528,500 $576,500 $1,578,500 $147,000 D April Beginning cash balance Collections from sales (from Part a) Total cash available to spend Less disbursements Payments for inventory (from Part c) Wages (30% of sales) Salaries Advertising Property taxes Insurance Utilities Income taxes

Total cash disbursements Cash excess (deficiency) Minimum cash balance Cash excess (needed) :Financing Borrowings Repayments Interest Total financing Ending cash balance May June Quarter $50,000 940,000 990,000 $50,500 1,050,000 1,100,500 $50,080 1,210,000 1,260,080 $50,000 3,200,000

3,250,000 473,500 345,000 27,000 31,000 528,500 375,000 27,000 31,000 16,000 15,000 128,000 1,035,500 )45,500( 50,000 )95,500( 16,000 15,000 576,500 420,000 27,000 31,000 34,000 16,000 15,000

992,500 108,000 50,000 58,000 1,119,500 140,580 50,000 90,580 1,578,500 1,140,000 81,000 93,000 34,000 48,000 45,000 128,000 3,147,500 102,500 50,000 52,500 )40,000( )400( )40,400( $100,180 96,000 )96,000( )2,320(

)2,320( $100,180 96,000 96,000 $50,500 )56,000( )1,920( )57,920( $50,080

Recently Viewed Presentations

  • A parent's guide to Math in the common core

    A parent's guide to Math in the common core

    As adults, it may seem like just common sense, but this is the math strategy of COMPENSATION. ... Most basic level (preK and Kinder) Addition Strategies. Counting On - able to start at first number and count up from there....
  • Chapter 3

    Chapter 3

    Chapter 4 Life in the Marine Environment Energy The ability to do work All living things require energy Metabolism The sum total of all the chemical reaction that take place in an organism Anabolism Reactions that build up Reactions that...
  • Structural Systems - CM FACULTY DIRECTORY

    Structural Systems - CM FACULTY DIRECTORY

    Precast Concrete Framing. Offer exceptional strength and resistance to . seismic stresses. and high degree of . fire safety. Concrete framing plans can be divided into: column, beam, wall, floor and roof plans. Walls. are located to their . edges,...
  • Main objectives of our research at the University of Hyderabad

    Main objectives of our research at the University of Hyderabad

    Recent Advances in Green Catalysis Chun-Chen Liao Department of Chemistry, Chung Yuan Christian University Chungli 32023, TAIWAN 主辦單位 中國化學會環境與化學委員會
  • Everything You Need to Know about SMTP Transport for Office 365

    Everything You Need to Know about SMTP Transport for Office 365

    Everything You Need To Know about SMTP Transport for Microsoft Office 365. Brian Reid - C7 Solutions Ltd. ... Office 365 mailbox > Exchange Online Protection > MX for target domain ... Everything You Need to Know about SMTP Transport...
  • GOING TO UNIVERSITY QUESTIONS Why go? What will

    GOING TO UNIVERSITY QUESTIONS Why go? What will

    GOING TO UNIVERSITY * For a student living at home the financial support is made up of £2835 grant, £895 of the means tested loan, £2685 of the non means tested loan minus the £1260 loan reduction, giving a total...
  • Modelling eye tracking dynamics with quantum theory

    Modelling eye tracking dynamics with quantum theory

    Do eye tracking dynamics allow insight into decisions? Two examples of this: In the Attentional Drift-Diffusion Model (aDDM; Krajbich et al., 2012) diffusion rates are affected by fixations, longer fixations for an option increase preference for this option, last fixation...
  • IRIS Project

    IRIS Project

    Computer Networks 15-744 Spring 2007 January 17, 2006 www.cs.cmu.edu/~dga/15-744/S07