Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 9 - Ronald W. Hilton, David E. Platt

Chapter 9 - Financial planning and analysis: The master budget. After completing this chapter, you should be able to: Explain the relationship between financial planning and analysis and the master budget; list and explain five purposes of budgeting; describe the similarities and differences in the operational budgets prepared by manufacturers, service-industry firms, merchandisers, and nonprofit organizations;...

Chapter Financial Planning and Analysis: The Master Budget Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Financial Planning and Analysis (FP&A) Systems A financial  planning and  financial  planning and  analysis (FP&A) system  analysis (FP&A) system  helps managers assess the company’s future and know if they are reaching their performance goals A complete FP&A system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance The planning component of the FP&A system is called the master budget It is intended to help ensure that plans are consistent and yield a result that makes sense for the organization 9­2 Purposes of Budgeting Systems Budget Budget Planning a detailed plan, expressed in Facilitating quantitative terms, that Communication and specifies how resources will be acquired and used during a Coordination specified period of time Allocating Resources Controlling Profit and Operations Evaluating Performance and Providing Incentives 9­3 Sales of Services or Goods Ending Inventory Budget Production Budget Work in Process and Finished Goods Ending Inventory Budget Direct Materials Direct Materials Budget Direct Labor Budget Overhead Budget Cash Budget Selling and Administrative Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 9­4 Activity-Based Costing versus ActivityBased Budgeting Resources Resources Resources Resources Activity-Based Activity-Based Costing Costing (ABC) (ABC) Activities Activities Cost objects: Cost objects: products and services products and services produced, and produced, and customers served customers served Activities Activities Activity-Based Activity-Based Budgeting Budgeting (ABB) (ABB) Forecast of products Forecast of products and services to be and services to be produced and produced and customers served customers served 9­5 Sales Budget Breakers, Breakers, Inc Inc is ispreparing preparingbudgets budgetsfor forthe thequarter quarterending ending June June30 30 Budgeted Budgetedsales salesfor forthe thenext nextfive fivemonths monthsare: are: April April May May June June July July August August 20,000 20,000units units 50,000 50,000units units 30,000 30,000units units 25,000 25,000units units 15,000 15,000units units The Theselling sellingprice priceis is$10 $10per perunit unit 9­6 Sales Budget April Budgeted sales (units) 20,000 Selling price per unit $ 10 Total Revenue $ 200,000 May June 50,000 $ 10 $ 500,000 Quarter 30,000 $ 10 $ 300,000 100,000 $ 10 $ 1,000,000 9­7 Production Budget The Themanagement managementof of Breakers, Breakers, Inc Inc wants wantsending ending inventory inventoryto tobe beequal equal to to20% 20%of of the thefollowing following month’s month’sbudgeted budgetedsales salesin inunits units On OnMarch March31, 31, 4,000 4,000units unitswere wereon onhand hand Let’s Let’sprepare preparethe theproduction productionbudget budget 9­8 Production Budget From sales budget Sales in units Add: desired end inventory Total needed Less: beg inventory Units to be produced April 20,000 May 50,000 June 30,000 Quarter 100,000 10,000 30,000 Ending inventory becomes 6,000beginning 5,000 5,000 inventory the next 56,000 35,000 105,000 month 4,000 10,000 6,000 4,000 26,000 46,000 29,000 101,000 March 31 ending inventory 9­9 Direct-Material Budget  At AtBreakers, Breakers,five fivepounds poundsof ofmaterial material are arerequired requiredper per unit unitof ofproduct product  Management Managementwants wantsmaterials materialson onhand handat atthe theend endof ofeach each month monthequal equal to to10% 10%of ofthe thefollowing followingmonth’s month’s production production  On OnMarch March31, 31,13,000 13,000pounds poundsof ofmaterial material are areon onhand hand Material Material cost cost$.40 $.40per perpound pound Let’s Let’sprepare preparethe thedirect directmaterials materialsbudget budget 9­10 Cash Budget From our Cash Receipts Budget (Collections and Disbursements) From our Cash Disbursements Budget From our Direct Labor Budget From our Overhead Budget From our Selling and Administrative Expense Budget To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of credit 9­23 Cash Budget (Collections and Disbursements) Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000 9­24 Cash Budget (Collections and Disbursements) At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at 12% 9­25 Cash Budget (Collections and Disbursements) 9­26 Cash Budget (Financing and Repayment) Ending cash balance for April is the beginning May balance 9­27 Cost of Goods Manufactured April May June Direct material: Beg.material inventory $ 5,200 $ 9,200 $ 5,800 Add: Materials purchases 56,000 88,600 56,800 Material available for use 61,200 97,800 62,600 Deduct: End material inventory 9,200 5,800 4,600 Direct material used 52,000 92,000 58,000 Direct labor 24,000 36,800 24,000 Manufacturing overhead 56,000 76,000 59,000 Total manufacturing costs 132,000 204,800 141,000 Add: Beg Work-in-process inventory 3,800 16,200 9,400 Subtotal 135,800 221,000 150,400 Deduct: End.Work-in-process inventory 16,200 9,400 17,000 Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 Quarter $ 5,200 201,400 206,600 4,600 202,000 84,800 191,000 477,800 3,800 481,600 17,000 $ 464,600 9­28 Cost of Goods Sold Cost of goods manufactured Add: Beg finished-goods inventory Cost of goods available for sale Deduct: End finished-goods inventory Cost of goods sold April May $ 119,600 $ 211,600 $ 18,400 46,000 138,000 257,600 46,000 27,600 $ 92,000 $ 230,000 $ June Quarter 133,400 $ 464,600 27,600 18,400 161,000 483,000 23,000 23,000 138,000 $ 460,000 9­29 Budgeted Income Statement Breakers, Inc Budgeted Income Statement For the Three Months Ended June 30 Revenue (100,000 × $10) Cost of goods sold Gross margin Operating expenses: Selling and admin expenses Interest expense Total operating expenses Net income $ 1,000,000 460,000 540,000 $ 260,000 838 $ 260,838 279,162 9­30 Budgeted Statement of Cash Flows April May Cash flows from operating activities: Cash receipts from customers $ 170,000 $ Cash payments: To suppliers of raw material (40,000) For direct labor (24,000) For manufacturing-overhead expenditures (56,000) For selling and administrative expenses (70,000) For interest Total cash payments (190,000) Net cash flow from operating activities Cash flows from investing activities: Purchase of equipment $ Net cash used by investing activities Cash flows from financing activities: Payment of dividends Principle of bank loan Repayment of bank loan $ Net cash provided by financing activities $ Net increase in cash Balance in cash, beginning Balance in cash end of month (20,000) $ - Quarter 400,000 $ 335,000 $ (72,300) (36,800) (76,000) (85,000) - (72,700) (24,000) (59,000) (75,000) (838) (185,000) (84,800) (191,000) (230,000) (838) (270,100) (231,538) (691,638) 129,900 $ (143,700) - $ (143,700) $ (25,000) 35,000 - June 103,462 $ 905,000 213,362 (48,300) (192,000) (48,300) $ (192,000) 13,800 - (48,800) (25,000) 48,800 (48,800) 10,000 $ 13,800 $ (48,800) $ (25,000) $ (10,000) $ 40,000 - $ 30,000 6,362 $ 30,000 (3,638) 40,000 $ 30,000 $ 30,000 $ 36,362 $ 36,362 9­31 Budgeted Balance Sheet Breakers Breakersreports reportsthe thefollowing followingaccount accountbalances balanceson on March March31 31prior priorto topreparing preparingits itsbudgeted budgetedfinancial financial statements statementsfor forJune June30: 30: ••Land Land $50,000 $50,000 ••Building Building(net) (net) $148,000 $148,000 ••Common Commonstock stock $217,000 $217,000 ••Retained Retainedearnings earnings $46,400 $46,400 9­32 25%of June sales of $300,000 11,500 lbs at $.40 per lb 5,000 units at $4.60 per unit 50% of June purchases of $56,800 9­33 Sales of Services or Goods Ending Inventory Budget Production Budget Work in Process and Finished Goods When the interactions of the elements Ending Direct budget Directare expressedSelling of the master as and Overhead Inventory Materials Labor Administrative Budget a set of mathematical relations, it Budget Budget Budget Budget Direct Materials becomes a financial planning model that can be used to answer “what if” Cash Budget questions about unknown variables Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 9­34 Budget Administration The Budget Committee is a standing  committee responsible for . .  overall overall policy policy matters mattersrelating relatingto to the thebudget budget coordinating coordinatingthe thepreparation preparationof of the thebudget budget 9­35 Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.” 9­36 Participative Budgeting Top M anagem ent M id d le M anagem ent S u p e rv is o r S u p e rv is o r M id d le M anagem ent S u p e rv is o r S u p e rv is o r Flow of Budget Data 9­37 ...Financial Planning and Analysis (FP &A) Systems A financial  planning and  financial  planning and  analysis (FP &A)  system  analysis (FP &A)  system  helps managers assess the company’s future and... 12%open openline lineof ofcredit creditfor for$75,000 $75,000  Maintains Maintainsaaminimum minimumcash cashbalance balanceof of$30,000 $30,000  Borrows Borrowsand andrepays repaysloans loanson... guaranteed 9? ?14 Overhead Budget Here is Breakers’ Overhead Budget for the quarter 9? ?15 Selling and Administrative Expense Budget  At AtBreakers, Breakers,variable variableselling sellingand andadministrative