A306 Exam 3

Questions to ask when preparing each budget:

ØWhat should the starting point be? What other inputs are needed?

ØIs a beginning balance (or inventory) relevant?

For budgets that include inventory:: ØWhen calculating quarterly values for beginning and ending inventory, you cannot sum the____– beginning inventory reflects the value at the ____and ending inventory reflects the value at the ___

individual monthly values, beginning of the quarter , end of the quarter

For budgets that focus on cash:

ØBe careful to differentiate between

cash sales/purchases (that occur immediately) and credit sales/purchases (that occur later)

For budgets that focus on cash:ØBe careful to exclude

non-cash items (e.g., depreciation)

Operating Budgets

Sales Budget, Purchases Budget

Financial Budgets

Cash Receipts Budget, Cash Budget, Cash Payments Budget

Sales revenue =Sales budget

budgeted sales unit times selling price

ØDesired ending inventory =Purchases budget

20% of next month’s sales

Budgeted sales (units) is from the - Purchases budget

sales budget

Budgeted sales (Q1) =Purchases budget

SUM

total units needed=Purchases budget

budgeted sales (units) + ending inventory

total cost of purchases =Purchases budget

budgeted purchases (units) times cost per unit

budgeted purchases (units)=Purchases budget

total units needed-beginning inventory

Beginning inventory in January

= Ending inventory in

= 20% of ___ budgeted sales, Purchases budget

December, January’s

Beginning inventory

Purchases budget=

previous month’s ending inventory

Beginning inventory (Jan)

=

Beginning inventory (Q1)

Ending inventory (Mar)

• =Purchases budget

Ending inventory (Q1)

Cash receipts
(collections) budget: Note: Add down the columns to determine the amount of

cash collected each month

Cash receipts
(collections) budget

Sales from the Sales Budget

ØCollected in the…Cash receipts
(collections) budget

cash/sum of cash

The total cash collections for Q1 is the sum of all cash collections in___ Cash receipts
(collections) budget

Jan, Feb, and Mar

Cash payments
(disbursements) budget

Purchases from the Purchases Budget: Note: Add down the columns to determine the

amount of cash paid in each month

Purchases from the Purchases Budget

month of cash payment =Cash payments
(disbursements) budget

paid in the same month (or second month) % times purchases

The total cash payments for Q1 is the sum of all- Cash payments
(disbursements) budget

cash payments in Jan, Feb, and Mar

cash collections is from - Cash budget

From the Cash Receipts (Collections) Budget

cash payments is from - Cash budget

From the Cash Payments (Disbursements) Budget

A line of credit is available:Cash budget

borrowing, repayment

A line of credit is available: borrowing occurs ____;- Cash budget

at the beginning of the month

A line of credit is available: repayment occurs at the ___ (as soon as ____ is available)- Cash budget

end of the month, sufficient excess cash

Borrowing- Cash budget

= Minimum cash balance – excess (deficiency)

Beginning cash balance (Feb)

  =Cash budget

Ending cash balance (Jan)

Interest=Cash budget

repayment of principal times interest rate

Beginning cash balance (Mar)

  =Cash budget

Ending cash balance (Feb)

Beginning Q1 cash =Cash budget

Beginning Jan cash

Ending Q1 cash =Cash budget

Ending Mar cash

Sales revenue: Budgeted income statement

From the Sales Budget

COGS: Budgeted income statement

Number of units × cost per unit

sales revenue - cogs- Budgeted income statement

gross margin

gross margin- S&A expenses =Budgeted income statement

net operating income

net operating income- interest expense =Budgeted income statement

net income

S&A:Budgeted income statement

(Number of units × variable $ per unit) + fixed $

Interest is From the; Budgeted income statement

Cash Budget

Q1 = SUM( ____ )- Budgeted income statement

Jan, Feb, Mar

Operating Budgets

Sales Budget, Materials Purchases Budget, Production Budget, OH Budget, Direct Labor Budget, S&A Expense Budget, COGS Budget, Budgeted Income Statement

Financial Budgets

Cash Receipts Budget, Cash Payments Budget, Investing and Financing Budgets, Cash Budget, Budgeted Balance Sheet

Budgeted Income Statement, what adds into here

everything in operating budget

Cash Receipts Budget- what adds into here

sales budget

Cash Budget- what adds into here

Cash Receipts Budget, Cash Payments Budget, Investing and Financing Budgets

Budgeted Balance Sheet- what adds into here

everything in financial budget

Cash Payments Budget- what adds into here

Expense

what adds into here- COGS Budget

Materials Purchases Budget, Direct Labor Budget, OH Budget,

NOT S&A expense budget

what adds into here- Production Budget

Sales Budget

Cash budget question

What is the expected timing of cash inflows and outflows?

How much cash needs to be borrowed/repaid (including interest)?

Selling & administrative expenses budget question

How much are expected S&A costs?

Manufacturing overhead budget question

How much are expected OH costs?

rect labor budget question

How many DL hours are needed to meet production needs?

Materials purchases budget question

How much material do we need to purchase to meet production needs?, How much material do we need as ending inventory?

Production budget question

How many units do we expect to make?

How many units do we expect to need as ending inventory?

Sales budget question

What are expected sales (units & selling price)?

How much revenue do we expect to generate?

Starting point: for Sales budget

Sales forecasts

Sales forecasts

ØManagers use a variety of information to determine the sales forecast including

Sales forecasts- ØManagers use a variety of information to determine the sales forecast including

ØActual sales for the preceding period

ØResearch on overall industry trends

ØInput from top management about target sales objectives

ØInput from R&D about new product introductions, new features of existing products

ØPlanned marketing activities

Sales forecasts- ØManagers use a variety of information to determine the sales forecast including- Ø___for the preceding period

Actual sales

Sales forecasts- ØManagers use a variety of information to determine the sales forecast including- Research on

overall industry trends

Sales forecasts- ØManagers use a variety of information to determine the sales forecast including- Input from ____about target sales objectives

top management

Sales forecasts- ØManagers use a variety of information to determine the sales forecast including-ØInput from ___ about new ___, new features of ___

R&D, product introductions, existing products

Sales forecasts- ØManagers use a variety of information to determine the sales forecast including-ØPlanned ___

marketing activities

Example:- Starting point: Sales forecasts

ØBagel Bros makes and sells bagels, where each package (unit) has a dozen bagels. Based on market research and sales trends, the company expects to sell:

ØJan – 5,600 units

ØFeb – 6,000 units

ØMar – 6,600 units

ØApr – 7,600 units

ØMay – 7,600 units

ØThe expected selling price is

$25 per unit.

budgeted sales times selling price =

sales revenue

apr and may are

Needed for subsequent budgets

Questions addressed by the Production Budget:

ØHow many units do we expect to make?

ØHow many units are needed as ending FG inventory?

Starting point: ___(from the Sales Budget)

Budgeted unit sales

ØBeginning and ending ___need to be considered in Budgeted unit sales (from the Sales Budget)

FG inventory

Example (continued):- Budgeted unit sales (from the Sales Budget)- ØBeginning and ending FG inventory need to be considered

ØBagel Bros’ inventory policy is to have ending FG inventory equal to 5% of next month’s sales.

budgeted production =Production budget

budgeted sales +ending inventory -beginning inventory

Ending inventory = ___ of next month’s budgeted sales in Production budget

%

Beginning inventory in January

= Ending inventory in December

=__of January’s budgeted sales in Production budget

%

Beginning inventory = in Production budget

previous month’s ending inventory

in Production budget Beginning inventory (Jan)

=

Beginning inventory (Q1)

in Production budget Ending inventory (Mar)

=

Ending inventory (Q1)

Questions addressed by the Materials Purchases Budget:

ØHow much material do we need to purchase to meet production needs?

ØHow much material do we need as ending inventory?

Starting point___(in units) from the Production Budget

: Budgeted production

Starting point: Budgeted production (in units) from the Production Budget

ØBeginning and ending RM inventory need to be considered

Example (continued):Starting point: Budgeted production (in units) from the Production Budget

ØBeginning and ending RM inventory need to be considered

ØAt Bagel Bros, each unit (dozen bagels) is expected to require 2 pounds of raw material (flour), and the price per pound is expected to be $1.00 per pound throughout the year.

ØManagement wants raw materials on hand at the end of each month to be 10% of the following month’s production needs, and the expected inventory of raw material (flour) on January 1 is 1,124 pounds.

Production Budget, budgeted production units →

material purchases budgeted production (units)

Ending inventory = ___of next month’s materials needed for _ in Materials purchases budget

%,production

materials for production = in Materials purchases budget

budgeted production (units) times materials per unit

materials to purchase = in Materials purchases budget

budgeted production (units) times materials per unit + ending inventory - beginning inventory

total cost of materials = in Materials purchases budget

materials to purchase times cost per pound

Beginning inventory = ___ in Materials purchases budget

previous month’s ending inventory

Beginning inventory in January

= Ending inventory in December

= _____ In Materials purchases budget

% of January’s budgeted sales

Materials purchases budget- Beginning inventory (Jan)

=

Beginning inventory (Q1)

Materials purchases budget-Ending inventory (Mar)

=

Ending inventory (Q1

Questions addressed by the Direct Labor Budget:

ØHow many DL hours are needed to meet production needs?

Starting point: ___ from the Production Budget- Direct labor budget

Budgeted production (in units)

Starting point: Budgeted production (in units) from the Production Budget- Example (continued):

ØAt Bagel Bros, 0.25 hours of direct labor is budgeted per unit, and the average labor rate is expected to be $16.00 per hour.

Budgeted DL time= Direct labor budget

Budgeted production (units) times Labor hours per unit

Budgeted DL cost = Direct labor budget

Budgeted DL time times Budgeted DL cost/DLH