ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 11 Professor Jeff Yu

Budgeted Sales $ = budgeted sales in Units * unit price Expected cash collections (inflow) Budgeted Account Receivable Balance Budgeted Production units = budgeted Sales in Units + desired ending F.G. Inventory – beginning F.G. Inventory Review:

Nina Inc.’s sales budget shows quarterly sales projection for the next year as follows: Qtr1 Qtr2 Qtr3 Qtr4 Sales in units 12,000 15,000 10,000 11,000 Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter’s sales. Q: what is the budgeted production in units for the second quarter of the next year? Practice Problem

Direct Materials Budget What is the purpose of the D.M. budget? To determine the quantity and cost of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. The calculation is similar to production budget. Like credit sales, firms may not immediately pay the suppliers. So a schedule of expected cash disbursement for materials are often prepared, similar to the schedule of expected cash collections.

Calculation: Raw Material to be Purchased Raw material needed for production Desired ending R.M. inventory + - Expected Beginning R.M. inventory = Quantity of R.M. to be purchased Required production in units * R.M. needed for each unit Cost of R.M. to be purchased = Quantity of R.M to be purchased * unit price of R.M.

Example: Direct Materials Budget At Royal Co., 5 pounds of raw material are required per unit of product. The production budget shows the required production is 26,000 units for April, 46,000 units for May and 29,000 for June. Management wants ending R.M. inventory equal to 10% of the following month’s production needs. On March 31, 13,000 pounds are in R.M. inventory. The desired ending inventory for the second quarter is 11,500 pounds. Royal pays $0.40 per pound for its raw material. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid in the following month. The March 31 accounts payable balance is $12,000. Q: (1) What are the budgeted raw material purchases for April, May and June respectively? (2) What are the budgeted cash disbursements for raw material in April and May, respectively?

Direct Labor Budget Total DL hours needed = Budgeted production units × the number of DL hours needed to produce each unit Total Direct Labor Costs = total DL hours needed * DL hourly rate The calculation of budgeted direct labor hours may involve a comparison to a “Guaranteed Hours” amount. If a firm’s labor policy is that employees cannot be laid off or have their hours reduced, then the direct labor budget uses the greater of the calculated total DL hours needed OR the “Guaranteed Hours” amount.

Practice Problem At Royal Inc., each unit of product requires 0.05 DL hours. It has a “no layoff” policy so all employees will be paid for a minimum of 1,500 hours per month. In exchange, workers agree to a wage rate of $10 per hour regardless of the hours worked. The production budget for the 2nd Quarter is as follows: April May June Quarter Units of production 26,000 46,000 29, ,000 Q: (1) calculate total direct labor cost for April and May. (2) If Royal pays $15 instead of $10 for every hour worked in excess of 1500 hours in a month, what would be the total direct labor cost for May?

Manufacturing Overhead Budget A schedule of all costs of production other than direct materials and direct labor. Budgeted MOH = Variable MOH + Fixed MOH Assume MOH is applied on the basis of direct labor hours: Variable MOH = variable MOH rate * Budgeted DL hours Non-cash charges (e.g., depreciation) are separately stated in order to help budget for cash disbursements.

Practice Problem At Royal Inc., manufacturing overhead is applied to units of product on the basis of direct labor hours. The variable manufacturing overhead rate is $20 per direct labor hour. Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (depreciation of plant assets). The direct labor budget shows the budgeted direct labor hours are 1,300 for April, 2,300 for May and 1,450 for June. Q: prepare a MOH budget for the 2nd quarter, calculate POHR for the quarter and expected cash disbursement for MOH in May.

Selling and Administrative Expense Budget Similar to the manufacturing overhead budget, except the starting point is budgeted sales units rather than budgeted DL hours. Non-cash charges (depreciation) are separately stated so that cash disbursements for selling and administrative expenses are clearly visible.

Practice Problem At Royal Inc., the variable S&A expenses are $0.50 per unit sold. Fixed S&A expenses are $70,000 per month, which include $10,000 in depreciation expenses (non-cash charges). April May June Quarter Budgeted Sales Units 20,000 50,000 30, ,000 Q: What is the expected cash disbursements for S&A expenses in May?

From Production Budget POHR from MOH budget Ending Finished Goods Inventory Budget From DM & DL budget

For Next Class  Continue covering chapter 9.  Starting chapter 10: flexible budgets  Attempt the assigned HW problems.

Yost Co.’s production budget for next year is as follows: Qtr1 Qtr2 Qtr3 Qtr4 Unit to be produced 40,000 30,000 35,000 45,000 Each unit of product requires 2 pounds of raw material. Desired beginning R.M. inventory is equal to 30% of that quarter’s R.M. requirements. The R.M. costs $1 per pound. Purchases of R.M. are 60% paid in the quarter of purchase, and 40% paid in the following quarter. On January 1, the balance sheet showed $10,000 in accounts payable for R.M. purchases, all of which will be paid for in Qtr1. The desired ending inventory for Qtr4 is 17,000 pounds of R.M. Q: (1) what is the budgeted R.M. purchases for Qtr3 of next year? (2) what is the budgeted cash disbursement for R.M in Qtr 3? Homework Question 1

Harv Co. requires 0.8 DL hours to produce each unit, and workers are paid $11.5 per DL hour. Variable MOH rate is $2.5 per DL hour. Fixed MOH is $90,000 per quarter. The only non-cash element of MOH is depreciation of $34,000 per quarter. Qtr.1 Qtr.2 Qtr.3 Qtr.4 Budgeted production units 16,000 15,000 14,000 15,000 Q: (1) what is the budgeted total DL cost for the year? (2) for this question only, assume guaranteed hours are 12,000 DL hours per quarter, and over-time pay is $15 per DL hour, what will be the total DL cost? (3) What is POHR for the year? (4) what is budgeted cash disbursement for MOH in Qtr.2? Homework Question 2