1. Profit Planning Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

2. Learning Objectives 1.Define budgeting and discuss its role in planning, control, and decision making. 2.Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components.

3. Learning Objectives 3.Define and prepare the financial budget, identify its major components, and explain the interrelationships of its various components. 4.Describe the behavioral dimension of budgeting.

4. Describe Planning and Budgeting

5. Illustrate Goalsetting

6. List Four Advantages of Budgeting 1.It forces managers to plan. 2.It provides information that can be used to improve decision making. 3.It provides a standard for performance evaluation. 4.It improves communication and coordination.

7. Match Definitions Master Budget Budget Committee Operating Budget Describes the income generating activities of the firm Details inflows and outflows of cash and the overall financial position Looking backward, determining what actually happened & comparing it with previous planned outcomes Control Financial Budget Comprehensive financial plan for the organization as a whole Reviews the budget, provides guidelines and budgetary goals

8. How to prepare a sales budget. 8-1 Buttons Company Sales Budget For the Year Ended December 31, 2008 1234Year Units 1,200 1,500 2,000 2,400 7,100 Selling Price $ 10 Budget Sales $12,000 $15,000 $20,000 $24,000 $71,000 Budgeted units to be sold each quarter 1,200, 1,500, 2,000, and 2,400. Selling price is $10. REQUIRED: Prepare a sales budget for each quarter and the year. Calculation:

9. The sales budget in Cornerstone 8-1. Further, assume that company policy requires 20% of next quarter’s sales in ending inventory and that beginning inventory for the first quart of the year was 200. Assume that sales for the first quarter of 2009 are estimated at 1,200 units. REQUIRED: Prepare a production budget for each quarter and the year. How to prepare the production budget. 8-2

10. How to prepare the production budget. 8-2 Production Budget Budgeted sales 1,200 1,500 2,000 2,400 7,100 Desired End Inv. 300 400 480 240 Total needs 1,500 1,900 2,480 2,640 7,340 Less: Beg. Inv. 200 300 400 480 200 Units to be prod. 1,300 1,600 2,080 2,160 7,140 Calculation:

11. The production budget in Cornerstone 8-2. Plain t- shirts cost $3 each and the ink (for the screening process) costs $0.20 per ounce. On a per-unit basis, the factory needs one plain t-shirt and 5 ounces of ink for each logo t-shirt that it produces. Button’s policy is to have 10% of the following quarter’s production needs in ending inventory. The factory has 12 plain t-shirts and 60 ounces of ink on hand on January At the end of December the desired ending inventory is 22 t-shirts and 110 ounces of ink. REQUIRED: Prepare a direct materials (DM) purchases budget for t-shirts and ink. How to prepare a direct materials purchases budget. 8-3

12. How to prepare a direct materials purchases budget. Calculation: 8-3 Direct Materials Purchases Budget - Plain T-Shirts Units to be prod. 1,300 1,600 2,080 2,160 7,140 DM / unit 1 1 1 1 1 Product. needs 1,300 1,600 2,080 2,160 7,140 Desired end. inv. 160 208 216 220 Total needs 1,460 1,808 2,296 2,380 7,360 Less: beg. inv. 120 160 208 216 120 DM to be purch. 1,340 1,648 2,088 2,164 7,240 Cost per t-shirt $ 3 Total purch. cost $ 4,020 $ 4,944 $ 6,264 $ 6,494 $ 21,720

13. How to prepare a direct materials purchases budget. Calculation: 8-3 Direct Materials Purchases Budget - Ink Units to be prod. 1,300 1,600 2,080 2,160 7,140 DM / unit 5 5 5 5 5 Product. needs 6,500 8,000 10,400 10,80035,700 Desired end. inv. 1,600 2,080 2,160 2,200 Total needs 8,100 10,080 12,560 13,000 37,900 Less: beg. inv. 1,200 1,600 2,080 2,160 1,200 DM to be purch. 6,900 8,480 10,480 10,840 36,700 Cost per t-shirt $ 0.20 Total purch. cost $ 1,380 $ 1,696 $ 2,096 $ 2,168 $ 7,340

14. How to prepare a direct labor budget. The production budget in Cornerstone 8-2. It takes.15 hour to produce one t-shirt. The average wage rate is $10 per hour. REQUIRED: Prepare a direct labor budget. Calculation: On the following slide. 8-4

15. Direct Labor Budget Quarter 1234Year Units to be prod.1,300 1,600 2,080 2,160 7,140 DL per unit 0.15 Total hrs need.2852403123241,071 Ave. wage / hour $10.00 Total DL cost $2,850 $2,400 $3,120 $3,240 $10,710 How to prepare a direct labor budget. 8-4

16. How to prepare an overhead budget. Direct labor budget in Cornerstone 8-4. The variable overhead rate is $5 per direct labor hour, fixed overhead is budgeted at $1,700 per quarter. REQUIRED: Prepare an overhead budget for each quarter and the year. Calculation: Appears on the following slide. 8-5

17. Overhead Budget Quarter 1234Year Budgeted DL hrs 285 240 312 324 1,071 Var. Ovhd Rate $ 5 Bud. Var. Ovhd$1,425$1,200$1,560$1,620$5,355 Bud. Fixed Ovhd $1,700 $6,800 Total Overhead $3,125 $2,900 $3,260 $3,320 $12,155 How to prepare an overhead budget. 8-5

18. Direct materials, direct labor and overhead budgets. REQUIRED: Prepare an ending finished goods inventory budget. Calculation: Ending Finished Goods Inventory Budget Unit Cost Computation: Direct materials ($3 + $1)$4.00 Direct labor (0.15 x $10) 1.50 Overhead Variable (0.15 x $5).75 Fixed (0.15 x $6.36).95 Total unit costs $7.20 Finished goods 240 t-shirts @ $7.20 = $1,728 How to prepare the ending finished goods inventory budget. 8-6

19. Direct materials, direct labor, overhead, and ending finished goods budgets (Cornerstones 8-3, 8-4, 8-5, 8-6). REQUIRED: Prepare a cost of goods sold budget. Calculation: Appears on the following slide. How to prepare a cost of goods sold budget. 8-7

20. How to prepare a cost of goods sold budget. 8-7 Cost of Goods Sold Budget Direct materials used $ 29,660 Direct labor used 10,710 Overhead) 12,155 Budgeted manuf. cost $ 52,525 Begin. finished goods ($7.20 x 200) 1,440 Goods avail. for sale $ 53,965 Less: End. finish goods 1,728 Bud. cost of goods sold $ 52,237

21. How to prepare a selling and administrative expenses budget. Sales budget on Cornerstone 8-1. Variable expenses are $0.10 per unit sold. Salaries average $1,500 per quarter; utilities, $50 per quarter; and depreciation, $150 per quarter. Advertising for quarters 1 through 4 is $100, $200, $300, and $500, respectively. Insurance is $500 and is paid in the second quarter. REQUIRED: Prepare a selling and administrative expenses budget. 8-8

22. How to prepare a selling and administrative expenses budget. 8-8 Selling and Administrative Expenses Budget Quarter 1234Year Planned sales 1,200 1,500 2,000 2,400 7,100 Var. S&A Exp. per unit $ 0.10 Total var. exp. $ 120 $ 150 $ 200 $ 240 $ 710

23. How to prepare a selling and administrative expenses budget. 8-8 Fix. S&A exp. Salaries $1,500 $ 6,000 Utilites 50 200 Advertising 100 200 300 500 1,100 Depreciation 150 600 Insurance - 500 - - Total fix. exp. $1,800 $ 2,400 $ 2,000 $ 2,200 $ 8,400 Total S&A Exp. $1,920 $ 2,550 $ 2,200 $ 2,440 $ 9,110

24. The sales budget, the cost of goods sold budget, and the selling and administrative expense budget (Cornerstone 8-1, 8-7, 8-8). Assume interest expense is $100 and the tax rate is 40%. REQUIRED: Prepare a budgeted income statement. Calculation: Appears on the following slide. How to prepare a budgeted income statement. 8-9

25. How to prepare a budgeted income statement. 8-9 Budgeted Income Statement Sales$71,000 Cost of goods sold 52,237 Gross margin $ 18,763 Less: S & A exp. 9,110 Operating income $ 9,653 Less: Interest expense 100 Income before taxes $ 9,553 Income taxes (40%) 3,821 Net income $ 5,732

26. Explain How Budgets Are Used for Performance Evaluation ◙ Bonuses, salary increase and promotions are often determined by a managers ability to achieve or exceed budget goals. ◙ Aligning with budget goals is viewed as positive behavior and is called goal congruence. ◙ Subverting the organization’s goals by improperly administering the budget is regarded as dysfunctional behavior.

27. Define Participative Budgeting ◙ Subordinate managers have considerable voice in how the budgets are established. ◙ This helps establish a sense of responsibility to accomplish the budget. What are three potential problems? 1.Standards set too high or too low 2.Building slack (padding) into the budget 3.Pseudoparticipation