• Chapter # 19: Sales Mix Considerations• Margin of Safety• Operating Leverage• Cost-Volume-Profit Analysis• Business Applications of CVP• Additional Considerations in CVP• CVP Analysis When a Company Sells Many
Products1
• The overall contribution margin ratio• Break-even in sales dollars• The High-Low Method• Assumptions Underlying
CVP Analysis
2
Operational BudgetingChapter
22
3
Budgeting: The Basis forPlanning and Control
Control Steps taken by
management to ensure that objectives are
attained.
Planning Developing objectives for
acquisitionand use of resources.
A budget is a comprehensive financialplan for achieving the financial and
operational goals of an organization.
A budget is a comprehensive financialplan for achieving the financial and
operational goals of an organization.
4
BenefitsCoordinationof activities
Performanceevaluation
Enhanced managerialresponsibility
Assignment of decisionmaking responsibilities
Benefits Derived from Budgeting
5
Establishing Budgeted Amounts: The “Behavioral” Approach
Budget Problems
• Perceived unfair or unrealistic goals.
• Poor management-employee communications.
Solution
• Reasonable and achievable budgets.
• Employee participation in budgeting process.
6
Flow of Budget Data
S u p ervisor S u p ervisor
M id d leM an ag em en t
S u p ervisor S u p ervisor
M id d leM an ag em en t
Top M an ag em en t
Participation in Budget Process
7
2001 2002 2003 2004
C a p i t a l B u d g e t s
A continuous budget is usually a twelve-month budget that adds one month as the current month is completed.
The annual operating budget may be divided into quarterly or monthly budgets.
The Budget Period
8
Salesforecast
Productionschedule
Budgeted financial budgets: cash income balance sheet
Capitalexpenditures
budget
Operatingexpensebudgets
Cost of goodssold and ending
inventorybudgets
The Master Budget
9
That’s enough talkingabout budgets, now
show me an example!
Preparing the Master Budget:An Illustration
10
SalesBudget
EstimatedUnit Sales
EstimatedUnit Price
Analysis of economic and market conditions
+Forecasts of customer needs from marketing personnel
Preparing the Master Budget:An Illustration
11
Preparing the Master Budget:An Illustration
Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for
the next four months are:
April 20,000 magnets @ $10 = $200,000May 50,000 magnets @ $10 = $500,000June 30,000 magnets @ $10 = $300,000July 25,000 magnets @ $10 = $250,000
The Sales Budget
July is needed for June ending inventory computations.12
Sales Budget
Complete
d
ProductionBudget
The Production Budget
13
The Production Budget
Ellis wants ending inventoryto be 20 percent of the next month’s budgeted
sales in units.
4,000 units were on hand March 31.
Let’s prepare the production budget.
14
The Production Budget
Production must be adequate to meet budgeted sales and to provide sufficient ending
inventory.
Production must be adequate to meet budgeted sales and to provide sufficient ending
inventory.
Budgeted product sales in units
+ Desired product units in ending inventory
= Total product units needed
– Product units in beginning inventory
= Product units to produce
15
April May JuneBudgeted unit sales 20,000 50,000 30,000Desired ending inventoryTotal units neededLess beginning inventoryUnits to produce
The Production Budget
16
April May JuneBudgeted unit sales 20,000 50,000 30,000Desired ending inventory 10,000 6,000 5,000 Total units needed 30,000 56,000 35,000Less beginning inventoryUnits to produce
Ending inventory = 20% of next month's production needs.June ending inventory = .20 × 25,000 July units = 5,000 units.
The Production Budget
17
April May JuneBudgeted unit sales 20,000 50,000 30,000Desired ending inventory 10,000 6,000 5,000 Total units needed 30,000 56,000 35,000Less beginning inventory 4,000 10,000 6,000 Units to produce 26,000 46,000 29,000
Ending inventory = 20% of next month's production needs.June ending inventory = .20 × 25,000 July units = 5,000 units.Beginning inventory is last month's ending inventory.
The Production Budget
18
ProductionBudgetMaterial
Purchases
Production BudgetUnits
Complete
d
The Production Budget
19
The material purchases budget is based on production quantity and desired material
inventory levels.
The material purchases budget is based on production quantity and desired material
inventory levels.
Units to produce × Material needed per unit = Material needed for units to produce+ Desired units of material in ending
inventory= Total units of material needed– Units of material in beginning inventory= Units of material to purchase
The Production BudgetMaterial Purchases
20
The Production BudgetMaterial Purchases
Five pounds of material are needed for each unit produced.
Ellis wants to have materials on hand at the end of each month equal to 10 percent of the
following month’s production needs.
The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000
units.
Five pounds of material are needed for each unit produced.
Ellis wants to have materials on hand at the end of each month equal to 10 percent of the
following month’s production needs.
The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000
units.
21
The Production BudgetMaterial Purchases
April May JuneUnits to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000Desired ending inventoryTotal material needs (lbs.)Less beginning inventoryMaterial purchases (lbs.)
22
The Production BudgetMaterial Purchases
April May JuneUnits to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000Desired ending inventory 23,000 14,500 11,500 Total material needs (lbs.) 153,000 244,500 156,500Less beginning inventoryMaterial purchases (lbs.)
Ending inventory = 10% of next month's material needs.June ending inventory = .10 × (23,000 units × 5 lbs. per unit).June ending inventory = 11,500 lbs.
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The Production BudgetMaterial Purchases
April May JuneUnits to produce 26,000 46,000 29,000 Pounds per unit 5 5 5 Material needs (lbs.) 130,000 230,000 145,000Desired ending inventory 23,000 14,500 11,500 Total material needs (lbs.) 153,000 244,500 156,500Less beginning inventory 13,000 23,000 14,500 Material purchases (lbs.) 140,000 221,500 142,000
Ending inventory = 10% of next month's material needs.June ending inventory = .10 × (23,000 units × 5 lbs. per unit).June ending inventory = 11,500 lbs.Beginning inventory is last month's ending inventory.
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Cash Payments forMaterial Purchases
Materials used in production cost $.40per pound. One-half of a month’s purchases
are paid for in the month of purchase; the other half is paid for in the following month.
No discount terms are available.
The accounts payable balance onMarch 31 is $12,000.
Materials used in production cost $.40per pound. One-half of a month’s purchases
are paid for in the month of purchase; the other half is paid for in the following month.
No discount terms are available.
The accounts payable balance onMarch 31 is $12,000.
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April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$
Payables from March 12,000$April purchasesMay purchasesJune purchasesTotal payments in month
Cash Payments forMaterial Purchases
26
April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$
Payables from March 12,000$April purchases 28,000 28,000$May purchasesJune purchasesTotal payments in month
½ × $56,000 = $28,000
Cash Payments forMaterial Purchases
27
April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$
Payables from March 12,000$April purchases 28,000 28,000$May purchases 44,300 44,300$June purchasesTotal payments in month
½ × $56,000 = $28,000½ × $88,600 = $44,300
Cash Payments forMaterial Purchases
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April May JuneMaterial purchases (lbs.) 140,000 221,500 142,000Cost per pound 0.40$ 0.40$ 0.40$ Total cost 56,000$ 88,600$ 56,800$
Payables from March 12,000$April purchases 28,000 28,000$May purchases 44,300 44,300$June purchases 28,400 Total payments in month 40,000$ 72,300$ 72,700$
½ × $56,000 = $28,000½ × $88,600 = $44,300½ × $56,800 = $28,400
Cash Payments forMaterial Purchases
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ProductionBudgetLabor
Production BudgetUnits
Material
Complete
d
The Production Budget
30
The Production BudgetDirect Labor
Each unit produced requires 3 minutes (.05 hours) of direct labor. Ellis employs 30 persons
for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour.
31
April May JuneUnits to produce 26,000 46,000 29,000 Hours per unit 0.05 0.05 0.05 Total hours required 1,300 2,300 1,450 Wage rate per hourDirect labor cost
Cash Payments forDirect Labor
32
April May JuneUnits to produce 26,000 46,000 29,000 Hours per unit 0.05 0.05 0.05 Total hours required 1,300 2,300 1,450 Wage rate per hour 10$ 10$ 10$ Direct labor cost 13,000$ 23,000$ 14,500$
Cash Payments forDirect Labor
33
Production Budget
UnitsMaterialLabor
Complete
d
ProductionBudget
ManufacturingOverhead
The Production Budget
34
The Production BudgetManufacturing Overhead
Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is
$50,000 per month.
Fixed manufacturing overhead includes $20,000 in depreciation which does not require a cash
outflow.
35
April May JuneUnits to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$Fixed overheadTotal mfg. overhead costDeduct depreciationManufacturing overhead - cash
Cash Payments forManufacturing Overhead
36
April May JuneUnits to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 76,000$ 96,000$ 79,000$Deduct depreciationManufacturing overhead - cash
Cash Payments forManufacturing Overhead
37
April May JuneUnits to produce 26,000 46,000 29,000 Variable overhead rate 1.00$ 1.00$ 1.00$ Variable overhead cost 26,000$ 46,000$ 29,000$Fixed overhead 50,000 50,000 50,000 Total mfg. overhead cost 76,000$ 96,000$ 79,000$Deduct depreciation 20,000 20,000 20,000 Manufacturing overhead - cash 56,000$ 76,000$ 59,000$
Cash Payments forManufacturing Overhead
38
Production Budget
Complete
d
Sellingand
AdministrativeExpenseBudget
Selling and Administrative(S&A) Expense Budget
39
Selling and Administrative(S&A) Expense Budget
• Selling expense budgets contain both variable and fixed items.– Variable items: shipping costs and sales
commissions.
– Fixed items: advertising and sales salaries.
• Administrative expense budgets contain mostly fixed items.– Executive salaries and depreciation on company
offices.40
Cash Payments for(S&A) Expenses
Variable selling and administrative expenses are $.50 per unit sold and fixed selling and
administrative expenses are $70,000 per month.
Fixed selling and administrative expenses include $10,000 in depreciation which does not
require a cash outflow.
41
April May JuneBudgeted unit sales 20,000 50,000 30,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 10,000$ 25,000$ 15,000$Fixed S&A expense 70,000 70,000 70,000 Total S&A expense 80,000$ 95,000$ 85,000$Deduct depreciationS&A expense - cash
Cash Payments for(S&A) Expenses
42
April May JuneBudgeted unit sales 20,000 50,000 30,000 Variable S&A per unit 0.50$ 0.50$ 0.50$ Variable S&A expense 10,000$ 25,000$ 15,000$Fixed S&A expense 70,000 70,000 70,000 Total S&A expense 80,000$ 95,000$ 85,000$Deduct depreciation 10,000 10,000 10,000 S&A expense - cash 70,000$ 85,000$ 75,000$
Cash Payments for(S&A) Expenses
43
I have seen a lot of cashpayments but no cash
receipts. Show me somecash receipts!
Cash Receipts Budget
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Cash Receipts Budget
All sales are on account.
Ellis’s collection pattern is:
70 percent collected in month of sale
25 percent collected in month after sale
5 percent will be uncollectible
Accounts receivable on March 31 is $30,000, all of which is collectible.
All sales are on account.
Ellis’s collection pattern is:
70 percent collected in month of sale
25 percent collected in month after sale
5 percent will be uncollectible
Accounts receivable on March 31 is $30,000, all of which is collectible.
45
April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$
Receipts from March sales 30,000$ Receipts from April salesReceipts from May salesReceipts from June salesTotal cash receipts
Cash Receipts Budget
46
April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$
Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May salesReceipts from June salesTotal cash receipts 170,000$
April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000
Cash Receipts Budget
47
April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$
Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales 350,000 125,000$Receipts from June salesTotal cash receipts 170,000$ 400,000$
April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000
Cash Receipts Budget
48
April May JuneBudgeted unit sales 20,000 50,000 30,000 Price per unit 10$ 10$ 10$ Budgeted sales revenue 200,000$ 500,000$ 300,000$
Receipts from March sales 30,000$ Receipts from April sales 140,000 50,000$ Receipts from May sales 350,000 125,000$Receipts from June sales 210,000 Total cash receipts 170,000$ 400,000$ 335,000$
April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000 May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000 June: .70 × $300,000 = $210,000
Cash Receipts Budget
49
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