Budgets feasibility

ld better identify sustainable competitive advantages and then a strategy for Groupon survival and growth built around them. This chapter, then, focuses o

Hayes Company, sales volume is expected to be 3,000 units in the first quarter with 500-unit increments in each succeeding quarter Based on a sales price of 60 L.E per unit, the sales budget for the year, by quarters, is shown in following

HAYES COMPANY

Sales Budget For the Year Ending December 31, 2005

Quarter

Expected unit sales

Unit selling price

3,000

× 60L.E

3,500

× 60L.E

4,000

× 60L.E

4,500

× 60L.E

15,000

× 60L.E Total sales 180,000 L.E 210,000 L.E 240,000 L.E 270,000 L.E 900,000 L.E

Hayes Company believes it can meet future sales requirements by maintaining an ending inventory equal to 20 percent of the next quarter's budgeted sales volume For example, the ending finished goods inventory for the first quarter is 700 units (20% ×anticipated second-quarter sales of 3,500 units) The production budget is shown in the following Illustration

Production Budget For the Year Ending December 31, 2005

Quarter

Expected unit sales

Sales budget

Add: Desired ending finished

goods units a

3,000

700

3,500

800

4,000

900

4,500

1,000 b Total required units

Less: Beginning finished goods

units

3,700

600 c

4,300

700

4,900

800

5,500

900

Required production units 3,100 3,600 4,100 4,600 15,400

a 20% of next quarter's sales

b Expected 2006 first-quarter sales, 5,000 units ×20%

c 20% of estimated first-quarter 2005 sales units

Hayes Company has found that an ending inventory of raw materials equal to 10 percent of the next quarter's production is sufficient The manufacture of each kitchen-mate requires 2 pounds of raw materials, and the expected cost per pound

is 4 L.E The direct materials budget is show in as the following

Direct Materials Budget For the Year Ending December 31, 2005

Quarter

Units to be produced

Direct materials per unit

3,100

× 2

3,600

× 2

4,100

× 2

4,600

× 2 Total pounds needed for

production

Add: Desired ending direct

materials (pounds) a

6,200

720

7,200

820

8,200

920

9,200

1,020 b Total materials required

Less: Beginning direct materials

(pounds)

6,920

620 c

8,020

720

9,120

820

10,220

920 Direct materials purchases

Cost per pound

6,300

× 4L.E

7,300

× 4L.E

8,300

× 4L.E

9,300

× 4L.E

Total cost of direct materials

purchases 25,200L.E 29,200L.E 33,200L.E 37,200L.E 124,800L.E

a 10% of next quarter's production

b Estimated 2006 first-quarter pounds needed for production, 10,200 ×10%

c 10% of estimated first-quarter pounds needed for production

Direct Labor Budget

At Hayes Company, two hours of direct labor are required to produce each unit of finished goods The anticipated hourly wage rate is 10 L.E These data are shown in following Illustration

Direct Labor Budget For the Year Ending December 31, 2005

Quarter

Units to be produced

Direct labor time (hours) per unit

3,100

× 2

3,600

× 2

4,100

× 2

4,600

× 2 Total required direct labor hours

Direct labor cost per hour

6,200

× 10L.E

7,200

× 10L.E

8,200

× 10L.E

9,200

× 10L.E

Total direct labor cost 62,000L.E 72,000L.E 82,000L.E 92,000L.E 308,000L.E

At Hayes Company, overhead is applied to production on the basis of direct labor hours Thus, as shown in following Illustration, the annual rate is 8 L.E per hour (246,400 L.E ÷30,800)

Manufacturing Overhead Budget For the Year Ending December 31, 2005

Quarter

Variable costs

Indirect materials

Indirect labor

Utilities

Maintenance

6,200L.E 8,680 2,480 1,240

7,200L.E 10,080 2,880 1,440

8,200L.E 11,480 3,280 1,640

9,200L.E 12,880 3,680 1,840

30,800L.E 43,120 12,320 6,160

Fixed costs

Supervisory salaries

Depreciation

Property taxes and insurance

Maintenance

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

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

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

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

80,000 15,200 36,000 22,800

Total manufacturing overhead 57,100L.E 60,100L.E 63,100L.E 66,00L.E 246,400L.E

Manufacturing overhead rate

the variable expense rates per unit of sales are sales commissions 3.00 L.E and freight-out 1.00 L.E Variable expenses per quarter are based on the unit sales from the sales budget For example, sales in the first quarter are expected to be 3,000 units Thus, Sales Commissions Expense is 9,000 L.E (3,000×3 L.E), and Freight-out

is 3,000 L.E (3,000 ×1 L.E) Fixed expenses are based on assumed data The selling and administrative expense budget is shown in the following Illustration

Selling and Administrative Expense Budget For the Year Ending December 31, 2005

Quarter

Variable expenses

Sales commissions

Freight-out

9,000L.E 3,000

10,500L.E 3,500

12,000L.E 4,000

13,500L.E 4,500

45,000L.E 15,000

Fixed expenses

Advertising

Sales salaries

Office salaries

Depreciation

Property taxes and insurance

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

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

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

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

20,000 60,000 30,000 4,000 6,000

Total selling and

administrative expenses 42,000L.E 44,000L.E 46,000L.E 48,000L.E 180,000L.E

to find the cost of goods sold, it is first necessary to determine the total unit cost

of producing one Kitchen-mate, as follows

Direct materials

Direct labor

Manufacturing overhead

2 pounds

2 hours

2 hours

4.00L.E 10.00L.E 8.00L.E

8.00L.E 20.00 16.00

Cost of goods sold can then be determined by multiplying the units sold by the unit cost For Hayes Company, budgeted cost of goods sold is 660,000 L.E (15,000 ×44 L.E)

All data for the statement are obtained from the individual operating budgets except the following:

1 Interest expense is expected to be 100 L.E

2 Income taxes are estimated to be 12,000 L.E

The budgeted income statement is shown in the following Illustration

HAYES COMPANY

Budgeted Income Statement For the Year Ending December 31, 2005 Sales

Cost of goods sold (15,000 ×44 L.E)

900,000L.E 660,000 Gross profit

Selling and administrative expenses

240,000 180,000 Income from operations

Interest expense

60,000

100 Income before income taxes

Income taxes expense

59,900 12,000

Cash Budget

The cash budget shows anticipated cash flows Because cash is so vital, this

budget is considered to be the most important output in preparing financial budgets The cash budget contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances, as shown in the following Illustration

To minimize detail, we will assume that Hayes Company prepares an annual cash budget by quarters The cash budget for Hayes Company is based on the following assumptions

1 The January 1, 2005, cash balance is expected to be 38,000 L.E

2 Sales: 60 percent are collected in the quarter sold and 40 percent are collected in the following quarter Accounts receivable of 60,000 L.E at December 31, 2004, are expected to be collected in full in the first quarter of

2005

3 Short-term investments are expected to be sold for 2,000 L.E cash in the first quarter

4 Direct materials: 50 percent are paid in the quarter purchased and 50 percent are paid in the following quarter Accounts payable of 10,600 L.E at December 31, 2004, is expected to be paid in full in the first quarter of 2005

5 Direct labor: 100 percent is paid in the quarter incurred

6 Manufacturing overhead and selling and administrative expenses: All items except depreciation are paid in the quarter incurred

7 Management plans to purchase a truck in the second quarter for 10,000 L.E cash

8 Hayes makes equal quarterly payments of its estimated annual income taxes

9 Loans are repaid in the earliest quarter in which there is sufficient cash (i.e., when the cash on hand exceeds the 15,000 L.E minimum required balance)

In preparing the cash budget, it is useful to prepare schedules for collections from customers (assumption No 2, above) and cash payments for direct materials (assumption No 4, above) The schedules are shown as follow

The cash budget for Hayes Company is shown in the following Illustration The budget indicates that 3,000 L.E of financing will be needed in the second quarter to maintain a minimum cash balance of 15,000 L.E Since there is an excess

of available cash over disbursements of 22,500 L.E at the end of the third quarter, the borrowing is repaid in this quarter plus 100 L.E interest

Schedule of Expected Collections from Customers

Quarter

Accounts receivable, 12/31/04

First quarter (180,000 L.E)

Second quarter (210,000 L.E)

Third quarter (240,000 L.E)

Fourth quarter (270,000 L.E)

60,000 L.E 108,000 72,000 L.E

126,000 84,000L.E

144,000 96,000 L.E

162,000 Total collections 168,000L.E 198,000L.E 228,000L.E 258,000L.E

Schedule of Expected Payments for Direct Material

Quarter

Accounts payable, 12/31/04

First quarter (25,200 L.E)

Second quarter (29,200 L.E)

Third quarter (33,200 L.E)

Fourth quarter (37,200 L.E)

10,600 L.E

18,600

HAYES COMPANY

Cash Budget For the Year Ending December 31, 2005

Quarter Assumpti

on

Beginning cash balance

Add: Receipts

Collections from customers

Sale of securities

2

3

168,000 2,000

198,000

0

228,000

0

258,000

0

Less: Disbursements

Direct materials

Direct labor

Manufacturing overhead

Selling and administrative expenses

Purchase of truck

Income tax expense

4

5

6

6

7

8

23,200 62,000 53,300 1

41,000 2

0 3,000

27,200 72,000 56,300 43,000 10,000 3,000

31,200 82,000 59,300 45,000

0 3,000

35,200 92,000 62,300 47,000

0 3,000

Excess (deficiency) of available cash over

disbursements

Financing

Borrowings

25,500

0

0

12,000

3,000

0

22,500

0 3,100

37,900

0

0

1 57,100 L.E – 3,800 L.E depreciation

2 42,000 L.E – 1,000 L.E depreciation