1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Profit Planning and Activity-Based Budgeting

2. 9-2 Purposes of Budgeting Systems Budget a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.Budget 1.Planning 2.Facilitating Communication and Coordination 3.Allocating Resources 4.Controlling Profit and Operations 5.Evaluating Performance and Providing Incentives

3. 9-3 Types of Budgets DetailBudget DetailBudget DetailBudget MasterBudget Covering all phases of a company’s operations. Sales Production Materials

4. 9-4 Budgeted Income Statement Cash Budget Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget Production Budget Direct Materials Budget Direct Materials Budget Selling and Administrative Budget Selling and Administrative Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Ending Inventory Budget Direct Materials Ending Inventory Budget Direct Materials Budgeted Balance Sheet Budgeted Statement of Cash Flows

5. 9-5 Activity-Based Costing versus Activity-Based Budgeting Resources Cost objects: products and services produced, and customers served. Activities Resources Forecast of products and services to be produced and customers served. Activities Activity-Based Costing (ABC) Activity-Based Budgeting (ABB)

6. 9-6 Sales Budget ÊBreakers, Inc. is preparing budgets for the quarter ending June 30. ËBudgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units. ÌThe selling price is $10 per unit. ÊBreakers, Inc. is preparing budgets for the quarter ending June 30. ËBudgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units. ÌThe selling price is $10 per unit.

7. 9-7 Sales Budget

8. 9-8 Production Budget The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4,000 units were on hand. Let’s prepare the production budget. The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4,000 units were on hand. Let’s prepare the production budget.

9. 9-9 Production Budget From sales budget March 31 ending inventory Ending inventory becomes beginning inventory the next month

10. 9-10 Direct-Material Budget At Breakers, five pounds of material are required per unit of product. Management wants materials on hand at the end of each month equal to 10% of the following month’s production. On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. Let’s prepare the direct materials budget. At Breakers, five pounds of material are required per unit of product. Management wants materials on hand at the end of each month equal to 10% of the following month’s production. On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. Let’s prepare the direct materials budget.

11. 9-11 Direct-Material Budget From our production budget 10% of the following month’s production March 31 inventory

12. 9-12 Direct-Material Budget

13. 9-13 Direct-Labor Budget At Breakers, each unit of product requires 0.1 hours of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. Let’s prepare the direct labor budget. At Breakers, each unit of product requires 0.1 hours of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. Let’s prepare the direct labor budget.

14. 9-14 Direct-Labor Budget From our production budget This is the greater of labor hours required or labor hours guaranteed.

15. 9-15 Overhead Budget Here is Breakers’ Overhead Budget for the quarter.