Chapter Nine Profit Planning COPYRIGHT © 2012 Nelson Education Ltd.

Chapter NineProfit Planning Chapter NineProfit Planning

COPYRIGHT © 2012 Nelson Education Ltd.


Learning ObjectivesLearning 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. Define and prepare the financial budget, identify its major components, and explain the interrelationship of its various components

4. Describe the behavioural dimension of budgeting

9-2

OBJECTIVE OBJECTIVE 11

Define budgeting and discuss its role in

planning, control, and decision making


Budgeting and Planning and ControlBudgeting and Planning and Control

Planning and Control are tied together

Looking ahead to see what actions should be taken to realize particular goals

Planning —

Looking backward determining what actually happened and comparing it with the previously planned outcomes

Control —

9-4


BudgetsBudgets

• Key component of planning• Financial plans for the future• Identify objectives and actions

needed to achieve them

Before a budget is prepared, a strategic plan should be

developed

9-5


Strategic PlanStrategic Plan

Identifies strategies for future activities and operations

Long- and short-term objectives

Objectives form the basis of the budget

9-6


Advantages of BudgetingAdvantages of Budgeting

1.Forces managers to plan

2.Provides information that can be used to improve decision making

3.Provides a standard for performance evaluation

4.Improves communication and coordination

9-7


Master BudgetMaster Budget

Comprehensive financial plan for the organization as a whole

Can be broken down into quarterly and monthly budgets

9-8


Continuous BudgetContinuous Budget

A moving 12-month budget

January2011

February 2011

December 2011

January 2012…………….

9-9


Budget Committee & Director RolesBudget Committee & Director Roles

Budget Committee:• Reviews the budget• Provides policy guidelines and budgetary goals• Resolves differences that arise as the budget is prepared• Approves the final budget• Monitors actual performance as the year unfolds

Budget Director:• Responsible for directing and coordinating overall

budgeting process• Usually the controller

9-10


Major Components of the Master BudgetMajor Components of the Master Budget

• Operational budgets– Describe the income-generating

activities of a firm• Financial budgets

– Detain the inflows and outflows of cash and the overall financial position

Master budget can be divided into…

9-11

OBJECTIVE OBJECTIVE 22

Define and prepare the operating budget, identify its

major components, and explain the interrelationships

of its various components


Example: Cornerstone 9-1Example: Cornerstone 9-1

Information:

Budgeted units to be sold for each quarter:

1,000 1,200 1,500 and 2,000

Selling price is $10 per t-shirt

Required:

Prepare a sales budget for each quarter and for the year

How to Prepare a Sales Budget

9-13


Sales BudgetSales Budget

• Projection approved by budget committee – describes expected sales in units and

dollars• Basis for all other operating and most of

the financial budgets

9-14


Sales Budget Preparation StepsSales Budget Preparation Steps

1. Develop a sales forecast- responsibility of marketing department- bottom-up approach

• Salespeople submit sales projections

2. Forecast is reviewed by budget committee

3. Budget committee recommends changes prior to approval

9-15


Moose Patties Inc.Sales Budget

For the Year Ending December 31, 2011

Moose Patties Inc.Sales Budget


Unit selling price

1,000

Quarter

Units

1 Year

5,700

× $10Budgeted sales

2 3 4

1,200 1,500 2,000

× $10 × $10 × $10 × $10

$10,000 $12,000 $15,000 $20,000 $57,000

Most sales happen in summer and fall9-16


Production BudgetProduction Budget

Describes how many units must be produced in order to meet sales needs and

satisfy ending inventory requirements

Formula:

Units to be

produced=

Expected unit

sales

Units in ending

inventory+ -

Units in beginning inventory

9-17



• Sales budget:– 1st quarter = 1,000 units– 2nd quarter = 1,200 units– 3rd quarter = 1,500 units– 4th quarter = 2,000 units

• Beginning inventory is 180 t-shirts• Ending inventory:

– Desired quantity = 20% of the following quarter’s sales– Sales for the first quarter of 2008 = 1,000 units

Information:

How to Prepare the Production Budget

Required:Prepare a production budget for each quarter and for the year

9-18


Moose Patties Inc.Production Budget




1,000

Quarter

Sales

1 Year

5,700

2 3 4

1,200 1,500 2,000

20% of second quarter’s sales 20% × 1,200 units

Desired ending inv. 240 300 400 200 200

20% of third quarter’s sales

20% × 1,500 units

20% of the next year’s first

quarter sales 20% × 1,000

units

From the sales budget

9-19






1,000

Quarter

Sales

1 Year

5,700

2 3 4

1,200 1,500 2,000

Beginning inventory as of January, 1, 2011


Total needs 1,240 1,500 1,900 2,200 5,900

(240) (300)Less: Beg. inventory (180) (400) (180)

1st quarter’s ending inventory is 2nd quarter’s beginning inventory

9-20






1,000

Quarter

Sales

1 Year

5,700

2 3 4

1,200 1,500 2,000

All four quarter’s production added together


Total needs 1,240 1,500 1,900 2,200 5,900

(240) (300)Less: Beg. inventory (180) (400) (180)

Units to be produced 1,060 1,260 1,600 1,800 5,720

1,240 needed, we already have 180, so we need to

produce 1,060 units9-21


Direct Materials Purchases BudgetDirect Materials Purchases Budget

Tells the amount and cost of raw materials to be purchased in each time period

Formula:

Direct materials needed for production

+ Desired direct materials in ending inventory

- Direct materials in beginning inventory

Direct materials to be purchased

9-22


How to Prepare a Direct Materials Purchases Budget


• Production budget– Units to be produced:

• 1st quarter = 1,060 units• 2nd quarter = 1,260 units• 3rd quarter = 1,600 units• 4th quarter = 1,800 units• Total for the year = 5,720 units

• Per-unit basis– One plain t-shirt, $3 each– 5 grams of ink, $0.20 per gram

Information:

9-23


ExampleExample

• Beginning inventory– 58 plain t-shirts and 390 grams of ink

• Ending inventory– 10% of the following quarter’s production– Desired ending inventory is 106 t-shirts and 530

grams of ink

Information continued:

Required:

Prepare a direct materials purchases budget for:

plain t-shirts and ink

9-24


Moose Patties Inc.Direct Materials Purchases Budget




1,060

Quarter

Units to be produced

1 Year

5,720

2 3 4

1,260 1,600 1,800

10% of next quarter’s production needs

Direct materials per unit ×1 × 1 × 1 × 1 × 1

Production needs 1,060 1,260 1,600 1,800 5,720

Desired ending inv. 126

Plain T-Shirts

9-25

From production budget

Each unit required 1 plain t-shirt






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800

10% of the next year’s 1st quarter production needs

Direct materials per unit × 1 × 1 × 1 × 1 × 1


160 180Desired ending inv. 126 106 106

Plain T-Shirts

9-26






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800

1st quarter’s ending inventory is the 2nd quarter’s beginning inventory




Total needs 1,186 1,420 1,780 1,906 5,826

Plain T-Shirts

Less: Beg. inventory (58) (126)

9-27






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800

Beginning of the year inventory

Direct materials per unit × 1 ×1 × 1 × 1 × 1



Total needs 1,186 1,420 1,780 1,906 5,826

Plain T-Shirts

Less: Beg. inventory (58) (126) (160) (180) (58)

9-28






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800

Turning # of t-shirts into $ amount




Total needs 1,186 1,420 1,780 1,906 5,826

Plain T-Shirts


Qty to be purchased

Cost per t-shirt

1,128 1,294 1,620 1,726 5,768

× $3

9-29






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800




Total needs 1,186 1,420 1,780 1,906 5,826

Plain T-Shirts


Qty to be purchased

Cost per t-shirt

1,128 1,294 1,620 1,726 5,768

× $3 × $3 × $3 × $3 × $3

Total cost $3,384 $3,882 $4,860 $5,178 $17,304

9-30






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800

Direct materials per unit × 5

Ink

It takes 5 grams of ink for each t-shirt

We can do the same thing for ink

9-31






1,060

Quarter


1 Year

5,720

2 3 4

1,260 1,600 1,800




Total needs 5,930 7,100 8,900 9,530 29,130

Ink


Qty to be purchased

Cost per t-shirt

5,540 6,470 8,100 8,630 28,740

× $0.20 × $0.20 × $0.20 × $0.20 × $0.20Total cost $1,108 $1,294 $1,620 $1,726 $5,748

9-32






$3,384

Quarter

Total purchase cost of t-shirts

1 Year

$17,304

2 3 4

$3,882 $4,860 $5,178

Total purchase cost of ink 1,108 1,294 1,620 1,726 5,748

Total direct materials purchase cost $4,492 $5,176 $6,480 $6,904 $23,052

9-33


Direct Labour BudgetDirect Labour Budget

Shows the total direct labour hours needed and the associated cost for the number of units

in the production budget

9-34


How to Prepare a Direct Labour Budget


• Production budget– Units to be produced:

• 1st quarter = 1,060 units• 2nd quarter = 1,260 units• 3rd quarter = 1,600 units• 4th quarter = 1,800 units• Total for the year – 5,720 units

• It takes 0.12 hour to produce one t-shirt• Average wage cost per hour is $10

Information:

Required:Prepare a direct labour budget

9-35


Moose Patties Inc.Direct Labour Budget


Moose Patties Inc.Direct Labour Budget


1,060

Quarter


1 Year5,720

2 3 41,260 1,600 1,800

Direct labour per unit × 0.12 × 0.12 × 0.12 × 0.12 × 0.12

Total hours needed 127.2 151.2 192 216 686.4

× $10 × $10Avg. wage per hour × $10 × $10 × $10

Total direct labour cost $1,272 $1,512 $1,920 $2,160 $6,864

9-36


Overhead BudgetOverhead Budget

Shows the expected cost of all production costs other than direct

materials and direct labour

Overhead costs are separated into fixed and variable costs and a

variable rate is calculated

9-37



• Direct labour budget– Budgeted direct labour hours:

• 1st quarter = 127.2 hours• 2nd quarter = 151.2 hours• 3rd quarter = 192 hours• 4th quarter = 216 hours• Total for the year = 686.4 hours

• Variable overhead rate is $5 per direct labour hour• Fixed overhead is budgeted at $1,645 per quarter

Information:

How to Prepare an Overhead Budget

Required:Prepare an overhead budget

9-38


Moose Patties Inc.Overhead Budget




127.2

Quarter

Budgeted direct labour hours

1 Year

686.4

2 3 4

151.2 192 216

Variable overhead rate x $5 x $5 x $5 x $5 x $5

Variable overhead $ 636 $ 756 $ 960 $1,080 $3,432

Budgeted fixed overhead

Add in the fixed overhead of $1,645 per quarter

Moose Patties bases its variable overhead on direct labour hours

9-39






127.2

Quarter

Budgeted direct labour hours

1 Year

686.4

2 3 4

151.2 192 216

Variable overhead rate x $5 x $5 x $5 x $5 x $5

Variable overhead $ 636 $ 756 $ 960 $1,080 $3,432

1,645 1,645Budgeted fixed overhead 1,645 1,645 6,580

Total overhead $2,281 $2,401 $2,605 $2,725 $10,012

9-40


Ending Finished Goods Inventory BudgetEnding Finished Goods Inventory Budget

• Supplies information needed for the balance sheet

• Important input for the preparation of the cost of goods sold budget

9-41


How to Prepare an Ending Finished Goods Inventory Budget


• Each shirt requires one plain t-shirt and 5 grams of ink• Each t-shirt costs $3.00 and ink costs $0.20 per gram• Takes 0.12 hours to produce one t-shirt• Employees are paid an average of $10 per hour• Variable overhead rate is $5 per direct labour hour• Fixed overhead is budgeted at $1,645 per quarter

Information:

Required:

Prepare an ending finished goods inventory budget

9-42


Direct labour

Direct materials $4.00

1.20

Unit cost computation:

0.12 hours of direct labour × $10 per hour

Moose Patties Inc.Ending Finished Goods Inventory BudgetFor the Year Ending December 31, 2011


T-shirt + Ink = $3.00 + (5 grams @ $0.20) = $4.00

9-43


Direct labour


0.60Overhead:

Variable

1.20

1.15


Fixed

Budgeted fixed overhead of $6,580 / 686.4 budgeted direct labour hours

= $9.59 per hour $9.59 × 0.12 hours



$5 per direct labour hour × 0.12 hours


Direct labour


0.60Overhead:

Variable

Total unit cost $6.95

1.20

1.15


Fixed

200 shirts × $6.95 = $1,390



9-45



• Direct materials:– T-shirts = $3 each × 5,720 shirts produced– Ink = $0.20 per gram × 5 grams per shirt × 5,720 shirts produced

• Direct labour = $10 per hour x 0.12 hours per shirt × 5,720 shirts produced

• Variable overhead = $5 per direct labour hour × 0.12 hours per shirt x 5,720 shirts

• Fixed overhead = $1,645 per quarter × 4 quarters

Information:

HOW TO Prepare a Cost of Goods Sold Budget

9-46


Direct labour used

$22,880

6,864

Direct materials used

Moose Patties Inc.Cost of Goods Sold Budget




5720 shirts × 0.12 hours per shirt × $10 per hour

(5720 × $3 per t-shirt) +(5 grams ink × $0.20 per gram × 5720)

9-47


Overhead

Direct labour used

$22,880

10,012

Budgeted manufacturing costsBeginning finished goods

6,864

1,251






$39,756

180 units @ $6.95 per unit cost

Variable + Fixed

9-48


Overhead

Direct labour used

$22,880

10,012

Budgeted manufacturing costsBeginning finished goods

Less: Ending finished goods (1,390)

6,864

1,251


Goods available for sale





$39,756

$41,007

Budgeted cost of goods sold $39,617

9-49


Selling and Administrative Expenses BudgetSelling and Administrative Expenses Budget

Outlines planned expenditures for nonmanufacturing activities

Selling and administrative expenses can be broken down into fixed and

variable components

9-50


How to Prepare a Selling and Administrative Expenses Budget


• Sales budget 1,000; 1,200; 1,500; and 2,000 units sold in quarters 1 through 4, respectively

• Variable expenses = 0.10 per unit sold• Fixed expenses:

– Salaries average $1,420 per quarter– Utilities = $50 per quarter– Depreciation = $150 per quarter– Advertising = $100; $200; $300 and $500 for quarters 1 through 4– Insurance is $500 and is paid in the third quarter

Information:

9-51


Moose Patties Inc.Selling and Administrative Expense Budget


Moose Patties Inc.Selling and Administrative Expense Budget


1,000

Quarter

Planned sales in units

1 Year5,700

2 3 41,200 1,500 2,000

Variable expenses* × $0.10 × $0.10

Total Variable exp. $ 100 $ 120 $ 150 $ 200 $ 570

Fixed expenses:

Salaries $1,420 $1,420 $1,420 $5,680

Utilities 50 50 50 50 200

Advertising

Depreciation

100 200 300 500 1,100

150 150 150 150 600

Total Selling & Admin $1,820 $1,940 $2,570 $2,320 $8,650

× $0.10 × $0.10 × $0.10

$1,420

Insurance ----- 500----- ----- 500Total fixed exp. $1,720 $1,820 $2,420 $2,120 $8,080

9-52



• Sales budget, $57,000• Cost of goods sold, $39,617• Selling and administrative expenses, $8,650 (600 is

depreciation)• Income tax rate, 40%• Interest expense, $60

Information:

How to Prepare a Budgeted Income Statement

Required:Prepare a budgeted income statement

9-53


Less: Cost of goods soldSales $57,000

(60)

Gross marginLess: Selling and admin. exp.

Net income(3,469)

(39,617)

$8,673

Operating income

$17,383(8,650)

Income before taxesLess: Income taxes

$5,204

$8,733Less: Interest expense

Moose Patties Inc.Budgeted Income Statement


Moose Patties Inc.Budgeted Income Statement


Income before taxes of $8,673 × 40% tax rate9-54

OBJECTIVE OBJECTIVE 33Define and prepare the

financial budget, identify its major components, and

explain the interrelationships of its various components


Preparing the Financial BudgetPreparing the Financial Budget

• Cash budget• Budgeted balance sheet• Budget for capital expenditures

The usual financial budgets prepared are:

9-56



• 25% of total sales are cash • 75% of total are on credit

– 90% paid during the quarter of sale, 10% paid the following quarter• 2011 Sales:

(Q1 $10,000; Q2 $12,000; Q3 $15,000; Q4 $20,000)• Balance in Accounts Receivable at end of 2010: $1,350

– Collected in cash during first quarter of 2011

Information:

How to Prepare an Accounts Receivable Aging Schedule

Required:• Calculate cash sales expected in each quarter of 2011• Prepare a schedule showing cash receipts from sales

expected in each quarter of 20119-57


Moose Patties Inc.Cash Receipts from Credit Sales




$2,500

Quarter

Cash sales

1 2 3 4

Received on account from:

Quarter 4, 2010 1,350

10% of 4th quarter 2010’s credit sales will be collected in the 1st quarter of 2011

1st quarter sales × 25%$10,000 × 25%

9-58






$2,500

Quarter

Cash sales

1 2 3 4


Quarter 4, 2010 1,350

Quarter 1, 2011 6,750

90% of this quarter’s credit sales

9-59






$2,500

Quarter

Cash sales

1 2 3 4

$3,000


Quarter 4, 2010 1,350750

8,100

Quarter 1, 2011 6,750

Total cash receipts $10,600

Quarter 2, 2011Quarter 3, 2011

Quarter 4, 2011

Remainder of 1st quarter’s credit

sales are collected along with 90% of 2nd quarter’s sales

25% of 2nd quarter’s sales






$2,500

Quarter

Cash sales

1 2 3 4

$3,000 $3,750 $5,000


Quarter 4, 2010 1,350750

9001,125

8,10010,125

Quarter 1, 2011 6,750

13,500

Total cash receipts $10,600 $11,850 $14,775 $19,625

Quarter 2, 2011Quarter 3, 2011

Quarter 4, 2011

9-61


How to Determine Cash Payments on Accounts Payable


• All raw materials purchases on account– 80% paid for in quarter of purchase– 20% paid for in the quarter of purchase

• 4th quarter 2010 purchases; $5,000• Expected purchases for 2011:

– Quarter 1; $4,492– Quarter 2; $5,176– Quarter 3; $6,480– Quarter 4; $6,904

Information:

Required:Prepare a schedule showing anticipated payments for accounts payable for materials

9-62


Moose Patties Inc.Cash Payments on Accounts Payable



For the Year Ending December 31, 2011Quarter

Source 1 2 3 4

Quarter 4, 2010 1,000

Quarter 1, 2011 3,594

80% × $4,492

20% × $5,000

9-63





For the Year Ending December 31, 2011Quarter

Source 1 2 3 4

Quarter 4, 2010 1,000

898

1,035

1,296

4,141

5,184

Quarter 1, 2011 3,594

5,523

Total cash payments $4,594 $5,039 $6,219 $6,819

Quarter 2, 2011

Quarter 3, 2011

Quarter 4, 2011

9-64



Information: All previous budgets and the following specific details:

1. $1,000 minimum cash balance is required for end of each quarter. Money can be borrowed and repaid in multiples of $1,000. Interest is 12% per year. Interest payments are made only for amount of principal being repaid. All borrowing takes place at beginning of a quarter, and repayment takes place at quarter end

2. Budgeted per quarter depreciation is $540 for overhead and $150 for selling and administrative expenses (Cornerstones 9-5 and 9-8)

How to Prepare a Cash Budget

9-65


ExampleExample

Information continued:3. Capital budget for 2011 revealed plans to purchase

additional screen printing equipment. Cash outlay for equipment, $6,500, will take place in Q1. Acquisition of equipment is to be financed with operating cash, supplementing it with short-term loans as necessary

4. Corporate income taxes are $3,469 and will be paid at end of fourth quarter (Cornerstone 9-9)

5. Beginning cash balance equals $5,200

6. All amounts in budget are rounded to the nearest dollar

Required:Prepare a cash budget for Moose Patties

9-66


Cash sales and collections on account:

$ 5,200

Quarter

Beginning cash bal.1 2 3

10,600

4 Year

$15,800

Moose Patties Inc.Cash Budget




Total cash available

Less disbursements:Payments for:

Raw materials $ (4,594)

Calculated in Cornerstone 9-11



Direct labour (1,272)

9-67



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741) Budgeted selling and

administrative expenses (Cornerstone 9-8) minus $150

depreciation per quarterSelling and administrative (1,670)

Budgeted overhead (Cornerstone 9-5) minus $540

depreciation per quarterDepreciation is removed

because it does not involve a cash disbursement


Cash Budget continuedCash Budget continued

----

Quarter

Selling and administrative

1 2 3 4 Year

Income taxes

(1,670)

Equipment (6,500)

Total disbursements $(15,777)

Excess of cash available over needs $ 23

Cash available – Cash needs

Income taxes will be paid only in the 4th quarter. Equipment will be purchased only in the 1st quarter

9-69



----

Quarter


1 2 3 4 Year

Income taxes

(1,670)

Equipment (6,500)


Excess of cash available over needs $ 23Financing:

Borrowings 1,000Repayments ----

Moose Patties Inc. must borrow $1,000 to meet their

minimum ending cash balance

9-70


Cash Budget concludedCash Budget concluded

Quarter1 2 3

Borrowings 1,000

4 Year

RepaymentsInterest ----

Total financing $1,000

Ending cash balance $1,023

Financing:

----

9-71



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741)

Selling and administrative (1,670)

$ 1,023

1st quarter’s ending cash balance is the 2nd quarter’s

beginning balance

9-72



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741)


$ 1,023

11,850

$12,873

$ (5,039) (1,512)

(1,861)

(1,790)9-73



----

Quarter


1 2 3 4 Year

Income taxes

(1,670)

Equipment (6,500)




(1,790)

--------

$(10,202)

$ 2,671

----(1,000)

Excess cash is used to repay $1,000 borrowed

at end of Q1

9-74



Quarter1 2 3

Borrowings 1,000

4 Year




Financing:

----

----(1,000)

(60)

(1,060)

$1,611

9-75



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741)


$ 1,023

11,850

$12,873

$ (5,039) (1,512)

(1,861)

(1,790)

$ 1,611

14,775

$16,386

$(6,219) (1,920)

(2,065)

(2,420)9-76



----

Quarter


1 2 3 4 Year

Income taxes

(1,670)

Equipment (6,500)




(1,790)

--------

$(10,202)

$ 2,671

----(1,000)

(2,420)

--------

$(12,624)

$ 3,762

--------

There is enough cash, so none is

borrowed

9-77



Quarter1 2 3

Borrowings 1,000

4 Year




Financing:

----

----(1,000)

(60)

(1,060)

$1,611

----

----

----

----

$3,762

9-78



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741)


$ 1,023

11,850

$12,873

$ (5,039) (1,512)

(1,861)

(1,790)

$ 1,611

14,775

$16,386

$(6,219) (1,920)

(2,065)

(2,420)

$ 3,762

19,625

$23,387

$(6,819) (2,160)

(2,185)

(2,170)9-79



----

Quarter


1 2 3 4 Year

Income taxes

(1,670)

Equipment (6,500)




(1,790)

--------

$(10,202)

$ 2,671

----(1,000)

(2,420)

--------

$(12,624)

$ 3,762

--------

(2,170)

(3,469)----

$(16,803)

$ 6,584

--------

9-80



Quarter1 2 3

Borrowings 1,000

4 Year

RepaymentsInterest

----

Total financing $1,000Ending cash balance $1,023

Financing:

----

----(1,000)

(60)

(1,060)

$1,611

----

----

----

----

$3,762

----

----

----

----

$6,584

9-81



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741)


$ 1,023

11,850

$12,873

$ (5,039) (1,512)

(1,861)

(1,790)

$ 1,611

14,775

$16,386

$(6,219) (1,920)

(2,065)

(2,420)

$ 3,762

19,625

$23,387

$(6,819) (2,160)

(2,185)

(2,170)

$ 5,200

The year

began with

$5,200 in cash

9-82



$ 5,200

Quarter


10,600

4 Year

$15,800









Overhead (1,741)


$ 1,023

11,850

$12,873

$ (5,039) (1,512)

(1,861)

(1,790)

$ 1,611

14,775

$16,386

$(6,219) (1,920)

(2,065)

(2,420)

$ 3,762

19,625

$23,387

$(6,819) (2,160)

(2,185)

(2,170)

$ 5,200

56,850

$62,050

$(22,671) (6,864) (7,852)

(8,050)9-83



----

Quarter


1 2 3 4 Year

Income taxes

(1,670)

Equipment (6,500)

Total disbursements (15,777)



(1,790)

--------

(10,202)

$ 2,671

----(1,000)

(2,420)

--------

(12,624)

$ 3,762

--------

(2,170)

(3,469)----

(16,803)

$ 6,584

--------

(8,050)

(3,469)

(6,500)(55,406)

$ 6,644

1,000(1,000)

During the year $1,000 is borrowed and repaid



Quarter1 2 3

Borrowings 1,000

4 Year




Financing:

----

----(1,000)

(60)

(1,060)

$1,611

----

----

----

----

$3,762

----

----

----

----

$6,584

1,000(1,000)

(60)

(60)

$6,584

9-85


Budgeted Balance SheetBudgeted Balance Sheet

Information: Last year’s balance sheet:

Balance SheetMoose Patties Inc.

December 31, 2010

AssetsCurrent assets:

$ 5,200Accounts receivable 1,350Raw materials inventory 252Finished goods inventory 1,251

Total current assets $ 8,053

Cash

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ExampleExample

Property, plant and equipment (PP&E):

Building and equipmentLand $ 1,100

Total PP&E

$1,000

Liabilities and Owner’s Equity:

33,153Total owner’s equity 33,153

Total liabilities and owner’s equity $34,153

30,000Accumulated depreciation (5,000)

26,100Total assets $34,153

Current liabilities:Accounts payable

Owner’s equity:Retained earnings

Using this balance sheet and the budgets, we can prepare the December 31, 2011 balance sheet

9-87


Cash $ 6,584Current assets:

Moose Patties Inc.Balance Sheet

December 31, 2011

Moose Patties Inc.Balance Sheet

December 31, 2011Assets

Accounts receivable 1,500

Raw materials inventory 424

Finished goods inventory 1,390

Total current assets $ 9,898Property, plant and equipment (PP&E):

Land $ 1,100

Building and equipment 36,500

Accumulated depreciation (7,760)Total PP&E 29,840

2010 balance$5,000 + $2,760

2011 depreciation

Ending cash balance from cash

budget

9-88


Balance Sheet continuedBalance Sheet continued

Total PP&E



Current liabilities:Accounts payable $1,381

38,357Owner’s equity:

Retained earnings

2010 balance $33,153 + $5,204 2011’s projected net income

9-89


Balance Sheet continuedBalance Sheet continued

Total PP&E



Current liabilities:Accounts payable $1,381

38,557Owner’s equity:

Retained earningsTotal liabilities and owner’s equity $39,738

9-90

Chapter Nine Profit Planning COPYRIGHT © 2012 Nelson Education Ltd.

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Transcript of Chapter Nine Profit Planning COPYRIGHT © 2012 Nelson Education Ltd.