Welcome Back Atef Abuelaish 1 Welcome Back Time
Welcome Back Atef Abuelaish 1
Welcome Back Time for Any Question Atef Abuelaish 2
CHAPTER # 06 REVIEW Atef Abuelaish 3
Chapter 06 Variable Costing and Atef Abuelaish 4
Chapter 06 Variable Costing and Analysis Atef Abuelaish 5
Compute unit cost under both absorption and variable costing. Atef Abuelaish 6
Absorption Costing & Variable Costing Absorption costing (also called full costing), assumes that products absorb all costs incurred to produce them. • While widely used for financial reporting (GAAP), this costing method can result in misleading product cost information for managers’ business decisions. P 1 Atef Abuelaish 7
Absorption Costing & Variable Costing Under variable costing, only costs that change in total with changes in production level are included in product costs. P 1 Atef Abuelaish 8
Distinguishing between Absorption Costing and Variable Costing: Absorption Costing Direct Materials Direct Labor Variable Overhead Fixed Overhead Product Cost P 1 Atef Abuelaish 9
Distinguishing between Absorption Costing and Variable Costing: Variable Costing Direct Materials Direct Labor Product Cost P 1 Atef Abuelaish Variable Overhead Fixed Overhead Period Cost 10
Difference between Absorption Costing and Variable Costing: Computing Unit Cost P 1 Atef Abuelaish 11
Difference between Absorption Costing and Variable Costing: Computing Unit Cost Variable OH cost per $180, 000/ unit: 60, 000 units = $3/unit Fixed OH cost per $600, 000/ unit: 60, 000 units = $10/unit P 1 Atef Abuelaish 12
NEED-TO-KNOW A manufacturer reports the following data. Direct materials Direct labor Overhead costs: Variable overhead Fixed overhead Expected units produced $6. 00 per unit $14. 00 per unit $220, 000 per year $680, 000 per year 20, 000 units $220, 000 / 20, 000 units = $11 per unit $680, 000 / 20, 000 units = $34 per unit 1) Compute the total product cost per unit under absorption costing. 2) Compute the total product cost per unit under variable costing. $ 65. 00 per unit P 1 Atef Abuelaish $6. 00 $14. 00 $11. 00 $34. 00 $ 31. 00 per unit 13 13
Analysis of Income Reporting for Absorption Costing: Units Produced Equal Units Sold Notice that the net income is $580, 000 P 2 Atef Abuelaish 14
Analysis of Income Reporting for Variable Costing: Units Produced Equal Units Sold We can see that the income under variable costing is also $580, 000. This is because the number of units produced are equal to the number of units sold. P 2 A performance report that excludes fixed expenses and net income is a contribution margin report. It’s bottom line is contribution margin. Atef Abuelaish 15
Analysis of Income Reporting for Both Absorption and Variable Costing: Units Produced Equal Units Sold P 2 Atef Abuelaish 16
Analysis of Income Reporting for Absorption Costing: Units Produced Exceed Units Sold Income for 2014 is $320, 000 P 2 Atef Abuelaish 17
Analysis of Income Reporting for Variable Costing: Units Produced Exceed Units Sold Under variable costing, the net income is only $120, 000 P 2 Atef Abuelaish 18
Analysis of Income Reporting for Both Absorption and Variable Costing: Units Produced Exceed Units Sold P 2 Atef Abuelaish 19
Analysis of Income Reporting for Absorption Costing: Units Produced Are Less Than Units Sold Income is now $840, 000 P 2 Atef Abuelaish 20
Analysis of Income Reporting for Variable Costing: Units Produced Are Less Than Units Sold Income under variable costing is $1, 040, 000 P 2 Atef Abuelaish 21
Analysis of Income Reporting for Both Absorption and Variable Costing: Units Produced Are Less Than Units Sold P 2 Atef Abuelaish 22
Summarizing Income Reporting P 2 Atef Abuelaish 23
NEED-TO-KNOW Zbest Manufacturing reports the following costing data for the current year. 20, 000 units were produced, and 14, 000 units were sold. Direct materials per unit $6 per unit Direct labor per unit $11 per unit Variable overhead per unit $3 per unit Fixed overhead for the year $680, 000 per year Sales price $80 per unit Variable selling and administrative cost per unit $2 per unit Fixed selling and administrative cost per year $112, 000 per year 1. Prepare an income statement for the year using absorption costing. Product cost per unit using Absorption Costing: Direct materials per unit Direct labor per unit Variable overhead per unit Fixed overhead per unit ($680, 000 / 20, 000 units produced) Cost per unit $6. 00 11. 00 34. 00 $54. 00 Zbest Manufacturing Absorption Costing Income Statement Sales (14, 000 units @ $80 per unit) Cost of goods sold (14, 000 units @ $54 per unit) Gross margin Selling, general and administrative expenses: Variable selling and administrative expenses (14, 000 x $2) Fixed selling and administrative expenses Total selling, general and administrative expenses Net income (loss) $1, 120, 000 756, 000 364, 000 $28, 000 112, 000 140, 000 $224, 000 24 Atef Abuelaish
NEED-TO-KNOW Zbest Manufacturing reports the following costing data for the current year. 20, 000 units were produced, and 14, 000 units were sold. Direct materials per unit $6 per unit Direct labor per unit $11 per unit Variable overhead per unit $3 per unit Fixed overhead for the year $680, 000 per year Sales price $80 per unit Variable selling and administrative cost per unit $2 per unit Fixed selling and administrative cost per year $112, 000 per year 2. Prepare an income statement for the year using variable costing. Product cost using Variable Costing: Direct materials per unit $6. 00 Direct labor per unit 11. 00 Variable overhead per unit 3. 00 Cost per unit $20. 00 P 2 Zbest Manufacturing Variable Costing Income Statement Sales (14, 000 units @ $80 per unit) Less: Variable costs Variable production costs (14, 000 x $20 per unit) Variable selling and administrative expenses (14, 000 x $2) Total variable costs Contribution margin Less: Fixed expenses Fixed overhead costs Fixed selling and administrative expenses Total fixed expenses Net income (loss) Atef Abuelaish $1, 120, 000 $280, 000 28, 000 308, 000 812, 000 680, 000 112, 000 792, 000 $20, 000 25
NEED-TO-KNOW Zbest Manufacturing Absorption Costing Income Statement Sales (14, 000 units @ $80 per unit) Cost of goods sold (14, 000 units @ $54 per unit) Gross margin Selling, general and administrative expenses: Variable selling and administrative expenses (14, 000 x $2) Fixed selling and administrative expenses Total selling, general and administrative expenses Net income (loss) Zbest Manufacturing Variable Costing Income Statement Sales (14, 000 units @ $80 per unit) Less: Variable costs Variable production costs (14, 000 x $20 per unit) Variable selling and administrative expenses (14, 000 x $2) Total variable costs Contribution margin Less: Fixed expenses Fixed overhead costs Fixed selling and administrative expenses Total fixed expenses Net income (loss) P 2 Atef Abuelaish Number of units added to inventory Fixed overhead per unit ($680, 000 / 20, 000 units) Change in income (Absorption vs. Variable) $1, 120, 000 756, 000 364, 000 28, 000 112, 000 140, 000 $224, 000 $1, 120, 000 $280, 000 28, 000 308, 000 812, 000 680, 000 112, 000 792, 000 $20, 000 6, 000 $34. 00 $204, 000 26
Convert income under variable costing to the absorption cost basis. Atef Abuelaish 27
Converting Reports under Variable Costing to Absorption Costing Income under variable costing is restated to that under absorption costing utilizing the following formula: Exhibit 6. 11 Converting Variable Costing Income to Absorption Costing Income under Absorption costing P 3 Atef Abuelaish = Income under variable costing + Fixed overhead cost in ending inventory ▬ Fixed overhead cost in beginning inventory 28
Converting Reports under Variable Costing to Absorption Costing To restate variable costing income to absorption costing income for 2014, we must add back the fixed overhead cost deferred in ending inventory. P 3 Similarly, to restate variable costing income to absorption costing income for 2015, we must deduct the fixed overhead cost recognized from beginning inventory, which was incurred in 2014, but expensed in the 2015 cost of goods sold when the inventory was sold. Atef Abuelaish 29
Describe how absorption costing can result in overproduction. Atef Abuelaish 30
Planning Production C 1 Producing too much inventory Producing too little inventory Excess inventory Lost sales Higher storage and financing costs Customer dissatisfaction Greater risk of obsolescence Atef Abuelaish 31
Planning Production What would happen if Ice. Age’s manager decided to produce 100, 000 units instead of 60, 000? The 40, 000 extra units would be stored in inventory and the total production cost PER UNIT is $4 less! C 1 When 60, 000 units are produced: When 100, 000 units are produced: Fixed overhead per unit is: $600, 000/ 60, 000 units = Atef Abuelaish $10/unit $600, 000/ 100, 000 units = $6/unit 32
Planning Production: Income under Absorption Costing for Different Production Levels Note: Income under absorption costing is $240, 000 greater if management produces 40, 000 more units than necessary Atef Abuelaish C 1 and builds This shows that a manager can report increased income merely by producing more and disregarding whether the excess 33 units can be sold or not.
Planning Production: Income under Variable Costing for Different Production Levels C 1 Under variable costing, even if I produce more units, it doesn’t effect the reported net income. Atef Abuelaish I actually have to SELL more units to increase my net income. 34
Determine product selling price based on absorption costing. Atef Abuelaish 35
How does management determine the sales price of a product? Although many factors impact pricing, cost is a crucial factor! P 4 Atef Abuelaish Absorption cost information is useful because it reflects the full costs that sales must exceed for the company to be profitable. Over the long run, price must be high enough to cover all costs 36
We can use a three-step process to determine product selling prices: • Step 1: Determine the product cost per unit using absorption costing. • Step 2: Determine the target markup on product cost per unit. • Step 3: Add the target markup to the product cost to find the target selling price P 4 Atef Abuelaish 37
Example: Ice. Age will use absorption costing to determine a target selling price. Exhibit 6. 16 Determining Selling Price with Absorption Costing Step 1 Absorption cost per unit (from Exhibit 6. 3) $25 Step 2 Target markup per unit ($25 times 60%) 15 Step 3 Target selling price per unit $40 1) Start with product cost. P 4 Atef Abuelaish 3) In this example, they chose a markup of 60% of cost. So the target selling price is $40 per unit. 2) Then, management needs to determine a target markup. 38
Controllable vs. Uncontrollable Costs? • Managers are responsible for their controllable costs. o A cost is controllable if a manager has the power to determine the amount incurred. o Examples vary depending on the manager’s level in the company. • Uncontrollable costs are not within the manager’s control or influence. o Example would be production capacity. P 4 Atef Abuelaish 39
Limitations of Reports Using Variable Costing Realities that contribute to the widespread use of absorption costing by companies: • For income tax purposes, absorption costing is the only acceptable basis for filings with the Internal Revenue Service (IRS) under the Tax Reform Act of 1986. • Absorption costing is the only acceptable basis for external reporting under both U. S. GAAP and IFRS. • Top executives are often awarded bonuses based on income computed using absorption costing. P 4 Atef Abuelaish 40
Use variable costing in pricing special orders. Atef Abuelaish 41
Setting Prices Over the Long Run: Run • Price must be high enough to cover all costs, including variable costs and fixed costs, and still provide an acceptable return to owners A 1 Atef Abuelaish 42
Setting Prices Over the Short Run: Run • Fixed production costs such as the cost to maintain plant capacity do not change with changes in production levels. • With excess capacity, increases in production level would increase variable production costs, but not fixed costs. • While managers try to maintain the long-run price on existing orders, which covers all production costs, managers should accept special orders provided the special order price exceeds variable cost. Atef Abuelaish 43
Setting Prices (Special Orders Illustration) Should the company accept a special order for 1, 000 pairs of skates at an offer price of $22 per pair? Variable production cost = $15 ($4 DM + $8 DL + $3 VOH) A 1 Atef Abuelaish Order should be accepted because the $22 order price exceeds the $15 variable cost of the product. 44
Chapter 07 Master Budgets and Atef Abuelaish 45
Chapter 07 Master Budgets and Performance Planning Atef Abuelaish 46
Budget Process and Administration Atef Abuelaish 47
Enhances coordination so that activities of all units contribute to meeting the company’s overall goals. 4) Provides a benchmark for evaluating performance. Benefits of Budgeting 2) Promotes analysis and a focus on the future. 3) Converts long-term 5) Communicates strategic plans into management plans short-term financial throughout the plans. 1) Motivates employees through organization. participation in the budgeting process and the establishment of attainable goals. C 1 a negative e v a h n a c ts e g d pplied, bu a ly r e p o r p t o e realistic! n r If a ts e g d u b t a WARNING: th ake sure m o s … y n a p m o c Atef Abuelaish 48 effect on a
Budget Reporting and Timing Annual Budget 2015 2016 2017 2018 The annual budget may be divided into quarterly or monthly budgets. A continuous or rolling budget is a twelve-month budget that rolls forward one month as the current month is completed. C 1 Atef Abuelaish 49
Budget Committee Flow of budget data is a bottom-up process. C 1 Atef Abuelaish 50
Budget Committee The budget committee is responsible for budgeting policies and for coordinating the efforts of all participants in the budgeting process. Consists of managers from all departments of the organization. Provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated. C 1 Atef Abuelaish 51
Master Budget Components Atef Abuelaish 52
Master Budget Process for a Manufacturer C 2 Atef Abuelaish 53
I - Operating Budgets Atef Abuelaish 54
1) Sales Budget The first step in preparing the master budget is the sales budget, which shows the planned sales units and the expected dollars from these sales. Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel P 1 Atef Abuelaish 55
Sales Budget Example: In September 2015, Toronto Sticks Company sold 700 hockey sticks at $60 each. Toronto Sticks prepared the following sales budget for the next three months: P 1 Atef Abuelaish 56
Sales Budget Example: TSC sold 700 hockey sticks at $60 per unit. After considering sales predictions and market conditions, TSC prepares its sales budget for the next three months. P 1 Atef Abuelaish 57
2) Production Budget A manufacturer prepares a production budget, which shows the number of units to be produced in a period. The production budget is based on the unit sales projected in the sales budget, along with inventory considerations. Note: A production budget does not show costs; it is always expressed in units of product. P 1 Atef Abuelaish 58
Production Budget The production budget is based on the unit sales projected in the sales budget, along with inventory considerations. P 1 Atef Abuelaish 59
NEED-TO-KNOW 7 -1 A manufacturing company predicts sales of 220 units for May and 250 units for June. The company wants each month’s ending inventory to equal 30% of next month’s predicted unit sales. Beginning inventory for May is 66 units. Compute the company’s budgeted production in units for May. Budgeted ending inventory for May Plus: Budgeted sales for May Required units of available production Less: Beginning inventory (units) Total units to be produced P 1 Atef Abuelaish 75 30% of 250 (June’s expected sales) 220 295 (66) 229 60
A - Direct Materials Budget The direct materials budget shows the budgeted costs for the direct materials that will need to be purchased to satisfy the estimated production for the period P 1 Atef Abuelaish 61
B - Direct Labor Budget The direct labor budget shows the budgeted costs for the direct labor that will be needed to satisfy the estimated production for the period. P 1 Atef Abuelaish 62
NEED-TO-KNOW 7 -2 A manufacturing company budgets production of 800 units during June and 900 units during July. Each unit of finished goods requires 2 pounds of direct materials, at a cost of $8 per pound. The company maintains an inventory of direct materials equal to 10% of next month’s budgeted production. Beginning direct materials inventory for June is 160 pounds. Each finished unit requires 1 hour of direct labor at the rate of $14 per hour. Compute the budgeted (a) cost of direct materials purchases for June and (b) direct labor cost for June. P 1 Budgeted production (units) Materials requirements per unit (lbs. ) Materials needed for production (lbs. ) Add: Budgeted ending inventory (lbs. ) Total materials requirements (lbs. ) Less: Beginning inventory (lbs. ) Materials to be purchased (lbs. ) Material price per pound Total cost of direct materials purchases 800 2 1, 600 180 (July production of 900 units x 2 lbs. per unit x 10%) 1, 780 (160) 1, 620 $8 $12, 960 Budgeted production (units) Labor requirements per unit (hrs. ) Total direct labor hours needed Labor rate (per hour) Total cost of direct labor 800 1 800 $14 $11, 200 Atef Abuelaish 63
C - Factory Overhead Budget The factory overhead budget shows the budgeted costs for factory overhead that will be needed to complete the estimated production for the period. P 1 The variable portion of factory overhead is assigned at the rate of $2. 50 per unit of production. The fixed 64 Atef Abuelaish
Product Cost Per Unit With the information from the three manufacturing budgets (direct materials, direct labor, and factory overhead), we can compute TSC’s product cost per unit. For budgeting purposes, TSC assumes it will normally produce 3, 000 units of product each quarter, yielding fixed overhead of $1. 50 per unit. TSC’s other product costs are all variable. P 1 Atef Abuelaish 65
3) Selling Expense Budget The selling expense budget is an estimate of the types and amounts of selling expenses expected during the budget period. § TSC pays sales commissions equal to 10 percent of total sales. § TSC pays a monthly salary of $2, 000 to its sales manager. Let’s prepare the selling expense budget for Toronto Sticks Company. P 1 Atef Abuelaish 66
Selling Expense Budget From TSC’s sales budget § TSC pays sales commissions equal to 10 percent of total sales. § Atef TSC pays a monthly salary of $2, 000 to its sales Abuelaish P 1 67
4) General and Administrative Expense Budget The general and administrative expense budget plans the predicted operating expenses not included in the selling expenses or manufacturing budgets. § Toronto Sticks Company has general and administrative salaries of $54, 000 per year or $4, 500 per month. Let’s prepare the general and administrative expense budget for TSC. P 1 Atef Abuelaish 68
General and Administrative Expense Budget Toronto Sticks Company has general and administrative salaries of $54, 000 per year or $4, 500 per month. P 1 Atef Abuelaish 69
NEED-TO-KNOW 7 -3 A manufacturing company budgets sales of $70, 000 during July. It pays sales commissions of 5% of sales and also pays a sales manager a salary of $3, 000 per month. Other monthly costs include depreciation on office equipment ($500), insurance expense ($200), advertising ($1, 000), and office manager salary of $2, 500 per month. For the month of July, compute the total (a) budgeted selling expense and (b) budgeted general and administrative expense. P 1 Atef Abuelaish Budgeted selling expense Sales commissions ($70, 000 x 5%) Sales manager's salary Advertising expense Total budgeted selling expense Total $3, 500 3, 000 1, 000 $7, 500 Budgeted general and administrative expense Depreciation on office equipment Insurance expense Office manager's salary Total budgeted and administrative expense Total $500 2, 500 $3, 200 70
II - CAPITAL EXPENDITURES Budgets Atef Abuelaish 71
Capital Expenditures Budget The capital expenditures budget shows dollar amounts estimated to be spent to purchase additional plant assets the company will use to carry out its budgeted business activities. TSC does not anticipate disposal of any plant assets through December 2015, but management is planning to acquire additional equipment for $25, 000 cash in December 2015. *Since this is the only budgeted capital expenditure for the quarter, no. P 1 separate budget is shown. Atef Abuelaish It also shows any amounts expected to be received from plant asset disposals, as companies replace old assets with new ones. 72
III - Cash Budget Atef Abuelaish 73
Cash Budgets After developing budgets for sales, manufacturing costs, expenses, and capital expenditures, the next step is to prepare the cash budget, which shows expected cash inflows and outflows during the budget period. The general formula for a cash budget is: P 2 The cash budget is especially important because it helps the company maintain a cash balance necessary to meet ongoing obligations. Atef Abuelaish 74
Budgeted Cash Receipts (from Sales) § 40% of TSC’s sales are for cash. § The remaining 60% are credit sales that are collected in full in the month following the sale. Let’s prepare the cash receipts budget for TSC. P 2 Atef Abuelaish 75
Budgeted Cash Receipts from Sales From TSC’ sales budget P 2 Cash sales are 40% of each month’s sales Accounts receivable balance at the end of each month is 60% of that month’s budgeted Atef Abuelaish sales. 76
Cash Payments for Materials Managers use the beginning balance sheet and the direct materials budget prepared earlier, to help prepare a schedule of cash disbursements for materials. § TSC’s purchases of materials are entirely on account. § Full payment is made in the month following the purchase. Let’s look at the schedule of cash payments for materials for TSC. P 2 Atef Abuelaish 77
Cash Payments for Direct Materials From direct materials budget P 2 Atef Abuelaish § TSC’s purchases of materials are entirely on account. § Full payment is made in 78 the month following the
Preparing the Cash Budget Beginning Cash Balance + Budgeted Cash Receipts – Budgeted Cash Disbursements Preliminary Cash Balance = § If adequate, repay loans or buy securities. § If inadequate, increase short-term loans. Additional information for TSC’s cash budget: o Has a September 30 cash balance of $20, 000. Continue o Will pay a cash dividend of $3, 000 in November. P 2 Atef Abuelaish 79
Cash Budget Toronto Sticks Company: o Has an income tax liability of $20, 000 from the previous quarter that will be paid in October. o Will purchase $25, 000 of equipment in December. o Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20, 000. o Pays interest each month equal to one percent of the prior month’s ending loan balance. o Repays loans when the ending cash balance exceeds $20, 000. o Owes $10, 000 on this loan arrangement on September 30. o Has 40 percent income tax rate. o Will pay taxes for current quarter next year. P 2 Atef Abuelaish 80
From Cash Receipts Budget TSC’s cash balance at the beginning of October is $20, 000. Budgeted cash receipts for October are $49, 200, resulting in a total of $69, 200 available for the month. Now we are ready to look at TSC’s cash disbursements P 2 Atef Abuelaish 81
Income taxes of $20, 000 were due as of the end of September 30, 2015, and payable in October. P 2 Atef Abuelaish We next subtract expected cash payments for direct materials, direct labor, overhead, selling expenses, and general and administrative expenses. 82
P 2 TSC has a $10, 000 loan and pays interest at the rate of one percent per month. October’s Atef Abuelaish interest is $100. TSC has a dividend payment of $3, 000 that it plans to pay in November. 83
TSC has an agreement with its bank for loans at the end of each month to provide a minimum cash balance of $20, 000. If the cash balance exceeds $20, 000 at a month-end, as it does here, TSC uses the excess to repay loans. P 2 Atef Abuelaish 84
Ending cash balance for October is the beginning November balance. P 2 Atef Abuelaish TSC interest on it’s outstanding loan amount in November is $44. 85
One last item, before our cash budget is complete…TSC plans to pay $25, 000 in December to purchase new equipment. P 2 Atef Abuelaish 86
Budgeted Financial Statements Atef Abuelaish 87
Budgeted Income Statement The budgeted income statement is a managerial accounting report showing predicted amounts of sales and expenses for the budget period. Cash Budget d te e pl om Budgeted Income Statement C Let’s prepare the budgeted income statement for Toronto Sticks Company. P 3 Atef Abuelaish 88
Budgeted Income Statement All information in this budgeted income statement is taken from the component budgets we’ve examined on previous slides. P 3 Atef Abuelaish The predicted amount of income tax expense for the quarter, computed as 40% of the budgeted pretax income, is included. 89
Budgeted Balance Sheet The budgeted balance sheet shows predicted amounts for the company’s assets, liabilities, and equity as of the end of the budget period. Budgeted Income Statement d e pl om te Budgeted Balance Sheet C Let’s prepare the budgeted balance sheet for Toronto Sticks Company. P 3 Atef Abuelaish 90
Budgeted Balance Sheet The budgeted balance sheet for TSC is prepared using information from the other budgets. P 3 Atef Abuelaish 91
Global View Royal Phillips Electronics of the Netherlands is a diversified company. Preparing budgets and evaluating progress helps the company achieve its goals. In a recent annual report, the company reports that it budgets sales to grow at a faster pace than overall economic growth. Based on this sales target, company managers prepare detailed operating, capital expenditures, and financial budgets. Budgeted and actual results of companies that do business globally are impacted by changes in foreign currency exchange rates as well as global and political uncertainties. Forecasting in that environment is difficult. Atef Abuelaish 92
Activity- Based Budgeting Atef Abuelaish 93
Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. Accounting Department Comparison of Activity-Based Budget with Traditional Budget An understanding of the resources required to perform the activities, the costs associated with these resources, and the way resource use changes with changes in activity levels allows management to better assess how expenses will change A 1 Atef Abuelaish 94 to accommodate changes in activity levels.
7 A-P 4 (Appendix): Merchandise Purchases Budget Atef Abuelaish 95
Merchandise Purchases Budget Unlike a manufacturing company, a merchandiser must prepare a merchandise purchases budget rather than a production budget. P 4 Example: Let’s look at the merchandise purchases budget for Hockey Den (HD), a retailer of hockey sticks… Atef Abuelaish 96
Merchandise Purchases Budget Example: Hockey Den buys hockey sticks for $60 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. On September 30, 1, 010 hockey sticks are on hand. The general layout for the purchases budget in equation form is: Let’s prepare the purchases budget for Hockey Den. P 4 Atef Abuelaish 97
Merchandise Purchases Budget From the sales budget. Ending inventory for a month in units, should equal 90% of next month’s unit sales. P 4 Atef Abuelaish Next we add the unit sales for each month to the desired ending inventory to get the total needs for each month. 98 98
Merchandise Purchases Budget Required units of available merchandise. P 4 Subtract beginning inventory to determine the budgeted Atef Abuelaish number of units to be purchased. Budgeted cost of the purchases, computed by: number of units X cost per unit. 99
NEED-TO-KNOW 7 -4 In preparing monthly budgets for the third quarter, a company budgeted sales of 120 units for July and 140 units for August. Management wants each month’s ending inventory to be 60% of next month’s sales. The June 30 inventory consists of 50 units, which does not comply with the company's inventory policy. How many units should be purchased in July? Next month's budgeted sales (units) Ratio of inventory to future sales Budgeted ending inventory (units) Add: Budgeted sales (units) Required units of available merchandise Deduct: Beginning inventory (units) Units to be purchased P 4 Atef Abuelaish 140 60% 84 120 204 (72) 132 54
5 RATIOS FOR 10 POINTS 1) Raw materials Inventory turnover = Raw Material Used / Average Material Inventory 2) Cost of Goods Manufactured = Direct Material + Direct Labor + Factory Overhead 3) Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Activity Base 4) Income Under Absorption Costing = Income under variable costing + Fixed overhead cost in ending inventory - Fixed overhead cost in beginning inventory 5) Break-Even Point in Units = Fixed Costs / Contribution Atef Abuelaish margin per Unit 101
Homework assignment Ø Using Connect – 7 Questions for 60 Points; Chapter 7. 7 Ø Prepare chapter 8 “Flexible Budgets and Standard Costs. ” Happiness is having all homework up to date Atef Abuelaish 102
Thank you and See You Next Week at the Same Time, Take Care Atef Abuelaish 103
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