Managerial Accounting and controlDr. Mohamed Youssef

Lecture 7

Example:

P 24-1 Delta farm supply company manufactures and sells a fertilizer called Basic II the following data are developed for preparing budgets for Basic II for the first 2 quarters of 1996.

1. Sales quarter 1 (40,000) bags, quarter 2 (60,000) bags. Selling price is $50 per bag.

2. Direct materials: Each bag of Basic II required 6 Pound of Crup at cost of $2 per pound and 10 pound of Dert at $1.50 per pound.

3. Desired inventory levels

4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $10 per hour.

5. Selling and administrative expected to be 10 % of sales plus $150,000 per quarter.

6. Income taxes are expected to be 30 % of income from operations.

Your assistant has prepared two budgets: the manufacturing overhead budget that shows expected costs to be 100% of direct labor cost and the direct materials budget for Dert which shows the cost of Dert to be $682,500 in quarter 1 and $982,500 in quarter 2

Instructions

Prepare the budgeted income statement for first 6 months of 1996 and all required supporting budgets by quarters (note: use variable and fixed in the selling and administrative expense budget)

We must create the following budgets

Sales budget Production budget. (Begin Inv. +Production = Sales +End Inv.) Direct material budget Direct labor budget Selling administrative expense budget Budget income statement

Chapter 7 1

Type of Inventory

January 1

April 1 July 1

Basic II (bags) 10,000 15,000 20,000Crup (pounds) 9,000 12,000 15,000Dert (pounds) 15,000 20,000 25,000

Managerial Accounting and controlDr. Mohamed Youssef

Lecture 7

Income statement

SalesLess: cost of goods soldGross profitLess: selling administrativeOperating income

Sales Budget

Quarter Six Months1 2

Expected unit sales 40,000 60,000 100,000Unit selling price $ 50 $ 50 $50Total sales 2,000,000 3,000,000 5,000,000

Production Budget

Begin Inv. +Production = Sales +End Inv.

For quarter 1 the end inventory is 15,000 Begin inventory is 10,000Productions unit =sales + end. Inv. – begin inv.

=40,000 + 15,000-10,000 = 45,000

Quarter Six Months1 2

Expected unit sales 40,000 60,000Add. Desired ending finished goods units

15,000 20,000

Total required units 55,000 80,000Less: beginning finished goods units

10,000 15,000

Required production units

45,000 65,000 110,000

Direct Material Budget

Begin Inv. +Purchases = Material used +End Inv.We will calculated for Crup and for Dert is already given

For quarter 1 the end inventory is 12,000 Begin inventory is 9,000Purchases = 45000 x 6 + 12,000 –9000 = 273,000

Chapter 7 2

Managerial Accounting and controlDr. Mohamed Youssef

Lecture 7So the cost will be 273,000 x 2 $ = 546

Quarter Six Months1 2

Units to be produced 45,000 60,000Direct materials per unit $6 $6

Total pounds needed for production

270,000 390,000

Add: Desired ending direct materials pounds

12,000 15,000

Total material required 282,000 405,000Less: beginning direct materials pounds

9000 12,000

Direct materials purchases

273,000 393,000

Cost per pound 2 $ 2 $Total cost of direct materials purchases

546,000 786,000 1,332,000

For Dert Total cost 682,500 982,500 1,665,000

Direct Labor BudgetQuarter Six

Months1 2Unit to per produced 45,000 65,000 110,000Direct labor time hours per unit

0.25 0.25 0.25

Total required labor hours

11250 16250 27500

Direct labor cost per hour

10 $ 10 $ 10 $

Total Direct labor cost

112,500 162,500 75,000

Selling and administrative expense budgetFixed cost = 150,000Variable cost = 10 % of salesIn quarter 1 sales =2,000,000 so variable = 200,000

Quarter Six Months1 2

Variable 200,000 300,000 500,000Fixed 150,000 150,000 300,000Total 350,000 450,000 800,000

Chapter 7 3

Managerial Accounting and controlDr. Mohamed Youssef

Lecture 7

Standard cost per budget

First we calculate the standard cost but in the exam it will given

Cost Element Quantity Unit cost TotalDirect materialCrup 6 pounds 2 12Dert 10 pounds 1,5 15Direct Labor 0.25 hours 10 2.5Manufacturing overhead

2,5

Total 32

Budget Income statement

Sales 5,000,000Cost of goods sold (100,000) (3,200,000)Gross profit 1,800,000Selling and administrative (800,000)Income from operations 1,000,000Income tax expense ( 30%) (300,000)Net income 700,000

Chapter 7 4

Managerial Accounting and controlDr. Mohamed Youssef

Lecture 7

Notes of Master Budget presentation

Type of Budgets

Strategic plan The most forward-looking budget is the strategic plan, which sets the overall goals and objectives of the organization.Depend on the mission and vision

Long range planWhich produce forecasted financial statements for five to ten years period.Using the existing facilities without having mission or vision.

Capital BudgetWhen we produce one production line

Continuous BudgetsContinuous improvingROI : 12%, 12,2%, 12,3%,12,7:

Master plan consists of two budgets:1. Operating budgets.2. Financial budgets

For the merchandizing firm We use the following equationBegin Inv. +Purchases = cost of goods sold + end. Inv.

For the manufacturing companyBegin Inv. +Production = sales + end. Inv.

Cash Collections

It is easiest to prepare budgeted cash collections at the same time as the sales budget.

Chapter 7 5

Cash

Row material

Sales

Acc. receive

Cash

Acc Payment

3 months

Managerial Accounting and controlDr. Mohamed Youssef

Lecture 7Example

Sales budget

Jan.40 %

Feb.30%

March20%

April10%

Jun

Jan. 5000 2000 1500 1000 500 0Feb. 6000 0 2400 1800 1200 600March. 10000 0 0 4000 3000 2000April

If min level of cash balance in Jan. 3000 and the cash collection as this example is 2000 so we must get 1000

Disbursements for purchases

For example 50% of the current month’s purchases and 50% of the previous month’s purchases may be include

Jan Feb MarchJan. 3000 1500 1500 0Feb 9000 0 4500 4500

Operating Expenses Budgets

Example

Beg. Inv. 10000In 3900Out (6000)Total 7900 (difference borrowing or

drawing )

Chapter 7 6