Chapter 6 The Master Budget and Responsibility accounting

Chapter 6 The Master Budget and Responsibility accounting Dr. Mohamed Mousa 1 -1

Direct Labor budget (salaries and wages): The cost of labor is prepared on the basis of the needs of workers according to the workforce plan. Labor costs (salaries, allowances and incentives) can be obtained from the payroll section. In the absence of a specific rate of remuneration, it can be estimated on the basis of the costs of a similar category. The following table shows the budget of labor costs. Dr. Mohamed Mousa 1 -2

Direct Labor budget (salaries and wages): Des. Jan. Feb. March Total Basic salaries XX XX Transportation allowance XX XX Additional salaries XX XX incentives XX XX Medical allowance XX XX insurance XX XX Other incentives XX XX Total labor costs XX XX Dr. Mohamed Mousa 1 -3

It should also be noted that the cost of labor can be determined by the number of hours spent by the worker in accordance with the operating policies related to the nature of the work in terms of: number of shifts, number of hours per shift, number of weekly working days, overtime policy. . . etc. In addition to the average hourly wage for each category of workers. The cost of labor can therefore be estimated by the following equation: Labor cost = Total hours × hourly wage rate Total number of hours = number of hours required per unit x number of units produced. Dr. Mohamed Mousa 1 -4

Budget of administrative and general expenses: This budget includes all expenses, where the rest of the other expenditures are included in a single budget called the balance of administrative and general expenses Dr. Mohamed Mousa as in the following table: 1 -5

Budget of administrative and general expenses : Des. Jan. Feb. March Total Rent XX XX Utilities XX XX Communications XX XX Transportation incentives XX XX Maintenance XX XX Other administrative expenses XX XX Total administrative expenses XX XX Dr. Mohamed Mousa 1 -6

Example 1: An industrial company produces and sells a product at a price of $10 per unit. The following are the data extracted from the company's records and some estimates necessary to prepare the planning budget for the first quarter of 2017: Ø Estimated sales volume: Dr. Mohamed Mousa Des. 2016 4000 units Jan. 2017 5000 units Feb. 2017 8000 units March 2017 6000 units April 2017 7000 units May 2017 8000 units 1 -7

Example 1 § The company's policy is to sell 60% of its sales in cash, the rest to the account and the sales of the futures are collected in the month immediately following the sale, and the company's policy is to maintain a stock of finished products equivalent to half the amount of sales for the following month. § The unit's needs of the product are estimated at 2 kg raw materials and the price of kilograms of raw materials is estimated at 1. 5 $. The company's policy is to store 50% of the raw materials required for production in the following month. § It takes 2 hours to operate the complete product unit and the hourly rate is 2 $. Dr. Mohamed Mousa 1 -8

Example 1 Required: Prepare the following budget for the first quarter of 2017: 1. Sales budget (explaining cash and forward sales). 2. Production budget. 3. The budget of the estimated raw materials used in production. 4. Purchases budget of raw materials. 5. Direct labor budget. Dr. Mohamed Mousa 1 -9

Solution: 1 - sales budget: Description. Jan. Feb. March Total Sales ( Q X S. P ) 50, 000 80, 000 60, 000 190, 000 60% cash 30, 000 48, 000 36, 000 114, 000 40% next month 16, 000 20, 000 32, 000 68, 000 Collected from sales 46, 000 68, 000 182, 000 40% of December 2016 sales are collected in January 2017 = 40% × (4000 × 10) = 16000 Dr. Mohamed Mousa 1 -10

Solution: 2 - Production budget: Description. Jan. Feb. March Total Sales Quantity 5, 000 8, 000 6, 000 19, 000 + Ending balance 4, 000 3, 500 (2, 500) (4, 000) (3, 000) (2, 500) 6, 500 7, 000 6, 500 20, 000 - Beginning balance Projected production Dr. Mohamed Mousa 1 -11

Solution: 3 - Direct material budget: Description. Jan. Feb. March Total Budgeted production 6, 500 7, 000 6, 500 20, 000 X unit's needs of raw m / unit 2 K. G Total unit's needs of raw m 13, 000 14, 000 13, 000 40, 000 Materials costs(Units X 1. 5 $) 19, 500 21, 000 19, 500 60, 000 Dr. Mohamed Mousa 1 -12

Solution: 4 - Direct labor budget: Description. Budgeted production X unit's needs of hours / unit Total unit's hours labor costs(hours X 2 $) Dr. Mohamed Mousa Jan. Feb. March Total 6, 500 7, 000 6, 500 20, 000 2 hours 13, 000 14, 000 13, 000 40, 000 26000 28000 26000 80000 1 -13

Cash Budget: Is a detailed statement that reflects the movement of cash by comparing expected cash receipts (cash inflows) and expected cash payments (outflows) in order to determine the cash surplus or deficit over short periods of time. Dr. Mohamed Mousa 1 -14

The importance of cash balance: Provides detailed information on the cash receipts flow pattern, the expeditious collection of receivables by the debtors, and the impact of long-term policies on the liquidity of the company. Provides information on the volume and timing of purchases and the impact of purchase conditions on the liquidity of the entity. Study the impact of each component of cash revenues and expenses on the liquidity of the company. You can find out the size and timing of the facility's cash needs before they are secured before they occur. It was able to know the amount of surplus and the timing of its occurrence to secure its employment to provide an adequate return. Helps to schedule repayment of loans without these payments being a heavy burden on the liquidity of the company. Dr. Mohamed Mousa 1 -15

cash budget: Desc. Partially Beginning cash balance Total xx + cash receipts: cash receipts & revenues x Receipts from customers x Cash sales of fixed assets x Credit interest x loans x other x Total cash receipts xx Total cash available xx - Cash payments: Cash purchases (x) Cash fixed assets purchases (x) Dr. Mohamed Mousa 1 -16

cash budget: Description. Partially Loan payments & interest (x) Administrative expenses (x) Total of cash payments Total (xx) Net cash balance xx Target cash balance (ending) (x) Cash surplus / shortage xx Dr. Mohamed Mousa 1 -17

Example 2 : The Kuwaiti company in Sadat City produces and markets a product. The following are the data for some estimates for 2017: 1 - Estimating the quantity of sales: (Estimated selling price of unit 10 $). Ø The last quarter of 2015 is 15, 000 units Ø The first quarter of 2016 14000 units Ø The second quarter of 2016 14000 units Ø The third quarter of 2016 11000 units Ø Fourth quarter of 2016 15, 000 units Ø The first quarter of 2017 14000 units Dr. Mohamed Mousa 1 -18

Example 2 : 2. Inventory at the end of each quarter is estimated at 40% of sales for the following quarter. 3. The Company's policy is to sell 60% of its sales in cash and collect the balance during the quarter following thequarter in which the sale was made. 4. Cash payments to suppliers during the budget period are estimated at 86, 500 during the first quarter of the year, second quarter 93500, third quarter 120, 000, 135, 000 during the fourth quarter. 5. The marketing and administrative costs during the budget period are estimated at 148, 000 $ of which 40000 $ fixed costs (fixed costs include 8000 $ consumption) and the rest variable costs to be distributed by estimated sales per quarter. Dr. Mohamed Mousa 1 -19

Example 2 : 6. In May 2016, the company will purchase office equipment for 4500 $. 7. The minimum cash to be maintained is 12, 000 $ at the end of each quarter. If necessary, the bank may borrow from the bank, provided that cash is available with thecompany. The bank borrows 500 $ or multiplies it at a rate of 12%. Required: Prepare the following budgets for each quarter of 2016 and for the year in total: Ø Sales Balance. Ø Estimated cash balance (note that the cash balance in the first year 2016 estimated at 18500 $). Dr. Mohamed Mousa 1 -20

Solution: 1 - sales budget ( 2016 ): Description. Q 1 Q 2 Q 3 Q 4 Total Sales ( Q X S. P ) 140000 110000 150000 540000 60% cash 84000 66000 90000 324000 40% next month 60000 56000 44000 216000 Collected from sales 144000 140000 122000 134000 540000 40% of December 2015 sales are collected in January 2016 = 40% × (15000 × 10) = 60000 Dr. Mohamed Mousa 1 -21

2 - cash budget: Desc. Q 1 Q 2 Q 3 Q 4 Total Beginning cash balance 18500 40000 46000 18000 122500 + cash receipts: 144000 140000 122000 134000 540000 Total cash available 162500 180000 168000 152000 662500 - Cash payments: Cash payments to suppliers (86500) (93500) (120000) (135000) (435000) marketing and administrative ( v. C ) (28000) (22000) (30000) (108000) marketing and administrative( F. C – Dep. ) (8000) (32000) Dr. Mohamed Mousa 1 -22

Cash budget: Description. purchase office equipment Total of cash payments Net cash balance Target cash balance (ending) Cash surplus / shortage Loans Dr. Mohamed Mousa Q 1 Q 2 Q 3 Q 4 Total - (4500) - - (4500) (122500) (134000) 40000 46000 18000 (21000) 83000 (12000) ( 12000) 28000 34000 6000 (33000) 71000 - - - 33000 (150000) (173000) (579500) 1 -23

NOTES: marketing and administrative ( V. C ) = 108000 Ø They are distributed according to the sales value: Description. Sales Q 1 Q 2 Q 3 Q 4 Total 140000 110000 150000 540000 Q 1 = 108000× (140000 / 540000) = 28000 Q 2 = 108000× (140000 / 540000) = 28000 Q 3 = 108000× (110000 / 540000) = 22000 Q 4 = 108000× (150000 / 540000) = 30000 Dr. Mohamed Mousa 1 -24

Notes: marketing and administrative ( V. C ) = 108000 Dr. Mohamed Mousa 1 -25

The Next Lecture Chapter 15 The Financial Statement Analysis…… Dr. Mohamed Mousa 1 -26