Managerial Accounting – In Class Notes – Chapter 1

Document Sample
Managerial Accounting – In Class Notes – Chapter 1 Powered By Docstoc
					                          Managerial Accounting – In Class Notes – Chapter 9


1. How does a budget relate to the three management functions (planning, directing/motivating, and
   control)?

       Planning – Budget is management’s plan for a specific period expressed in financial terms.
       Directing – Budget is primary way to communicate agreed-upon objectives to all parts of company
       Motivating – Budget may inspire higher levels of performance or discourage additional effort
       Control – Budget is an important basis for performance evaluation once adopted, it also assesses
        success of company’s operations

2. What are the benefits of budgeting?

   1.   Requires all levels of management to plan ahead.
   2.   Provides definite objectives for evaluating performance at each level of responsibility.
   3.   Creates an early warning system for potential problems (control).
   4.   Motivates personnel throughout the organization to meet planned objectives.
   5.   Facilities coordination of activities within the organization.
   6.   Results in greater management awareness of entity’s overall operations and their relationship to
        external factors such as the economy.

3. How does budgeting differ from long-range planning?

   Budget more detail oriented and focused on short term goals – (vs. long term goals and strategies to
   achieve)

4. What is participative budgeting? What are the advantages and disadvantages?

   Each level of management participates in budgeting process.
   Advantages:
           More accurate budget estimates since low level managers have more detailed knowledge of
              their areas
           Perceived as fair due to involvement of lower level management
   Disadvantages:
           Time consuming and costly
           May foster budgetary “gaming” through budgetary slack

5. What is a master budget?

   Set of interrelated budgets that constituting management’s plan of action.

6. What are the components of the master budget and how are they related?

   Sales budget drives production budget which drives operating budgets (DM, DL, and MOH budgets),
   selling & administrative budget, budgeted income statement, and financial budgets (capital expenditure,
   cash budget, and balance sheet).

7. How does management make its sales forecast?

        Previous market share, Anticipated advertising and promotion, General economic conditions,
        Industry trends, Market research studies, Price changes, Technological developments,
                         Managerial Accounting – In Class Notes – Chapter 9


1. How does a budget relate to the three management functions (planning, directing/motivating, and
   control)?




2. What are the benefits of budgeting?




3. How does budgeting differ from long-range planning?




4. What is participative budgeting? What are the advantages and disadvantages?




5. What is a master budget?




6. What are the components of the master budget and how are they related?




7. How does management make its sales forecast?
                       Managerial Accounting – In Class Problems – Chapter 9

1. K2 produces and sells snowboards. Its estimated quarterly sales for 2006 are as follows:

                  Quarter                       Sales in Units
                     1                           350,000
                     2                           250,000
                     3                           50,000
                     4                           400,000

     K2 expects a 12/31/05 inventory of 100,000 snowboards. Management likes to keep an ending
     inventory of 30% of next quarter’s sales and estimated 1st quarter sales in 2007 are 400,000 units).
     Prepare a quarterly production budget for 2006.

2. Zoo Doo Company produces and sells sculpted manure/fertilizer with the marketing slogan “You’re
   going to love this crap.” Zoo Doo’s quarterly production budget for 2006 shows required production
   of 25,000 bags in the 1st quarter, 50,000 bags in 2nd, 40,000 bags in the 3rd, and 30,000 bags in the
   4th. Each bag requires 50 pounds of manure (at a cost of $0.05 per pound) and direct labor time of
   45 minutes (at a cost of $10 an hour).

     Zoo Doo likes to keep a direct materials inventory of 25% of next quarter’s production needs and
     expects to produce 40,000 bags in the 1st quarter of 2007. Estimated 12/31/05 direct materials
     inventory is 350,000 pounds.

     Zoo Doo’s variable overhead costs include indirect labor of $1.50 and indirect materials of $0.25 a
     bag. Its quarterly fixed overhead costs include $10,000 rent on the factory, $15,000 supervisory
     salaries, and $5,000 depreciation of factory equipment. Selling and administrative expenses are
     estimated to be $30,000 quarterly and income taxes are 30% of pre-tax income. Zoo Doo expects to
     sell 120,000 bags at $20 each.

     Calculate a) direct materials purchases budget, b) direct labor budget, c) manufacturing overhead
     budget. Also show d) the computation for COGS per unit, and prepare e) annual budgeted income
     statement.

3. K2 has budgeted sales of $2,000,000 in April and $1,500,000 in May. K2 collects 50% in the month
   of the sale, 30% the 1st month after, and 20% the 2nd month after (February sales were $2,000,000
   and March sales $2,500,000). Calculate budgeted collections for April and May.

4. K2 made purchases in March of $1,200,000. In April purchases were $1,000,000, and in May
   purchases were $900,000. K2 pays 40% in the month of the purchase and 60% the month after the
   purchase. Calculate budgeted purchase disbursements for April and May.

5. Prepare a cash budget for K2 in April and May assuming the following:

a)   Disbursement and collection data from problems 3 and 4
b)   K2 wants to maintain a cash balance of at least $100,000
c)   Estimated cash paid to direct laborers in April equals $110,000 and in May $100,000
d)   Estimated cash payments for manufacturing overhead are $500,000 in April and $520,000 in May
e)   Cash payments for selling and administrative expenses are $50,000 a month
f)   In April K2 will purchase a new machine costing $350,000
g)   In May K2 will purchase land costing $450,000
                              Managerial Accounting – In Class Problems – Chapter 9


      1. K2 produces and sells snowboards. Its estimated quarterly sales for 2006 are as follows:

                       Quarter                         Sales in Units
                          5                             350,000
                          6                             250,000
                          7                             50,000
                          8                             400,000

          K2 expects a 12/31/05 inventory of 100,000 snowboards. Management likes to keep an ending
          inventory of 30% of next quarter’s sales (1st quarter 2006 sales are estimated at 400,000 units).
          Prepare a quarterly production budget for 2006.

                                   Production Budget
                                       (in units)
                                          Q1             Q2             Q3        Q4         Annual


Expected Sales                           350,000        250,000         50,000   400,000    1,050,000

                              1
                                                         15,000     120,000      120,000
Add: Desired End. Inventory               75,000

Total Required Units                     425,000        265,000     170,000      520,000

Less: Beginning Inventory                100,000         75,000         15,000   120,000

Required Production                      325,000        190,000     155,000      400,000    1,070,000


1) 30% of next quarter's sales




      2. Zoo Doo Company produces and sells sculpted compost/fertilizer with the marketing slogan “You’re
         going to love this crap.” Zoo Doo’s quarterly production budget for 2006 shows required production
         of 25,000 bags in the 1st quarter, 50,000 bags in 2nd quarter, 40,000 bags in the 3rd quarter, and
         30,000 bags in the 4th quarter. Each bag requires 50 pounds of manure (at a cost of $0.05 per pound)
         and direct labor time of 45 minutes (at a cost of $10 an hour).

          Zoo Doo likes to keep a direct materials inventory of 25% of next quarter’s production needs and
          expects a 12/31/05 direct materials inventory of 350,000 pounds. Zoo Doo also expects to produce
          40,000 bags in the first quarter of 2007.

          Zoo Doo’s variable overhead costs include indirect labor of $1.50 and indirect materials of $0.25 a
          bag. Its quarterly fixed overhead costs include $10,000 rent on the factory, $15,000 supervisory
          salaries, and $5,000 depreciation of factory equipment. Selling and administrative expenses are
          estimated to be $20,000 quarterly and income taxes are 30% of pre-tax income. Zoo Doo expects to
          sell 120,000 bags at $20 each.

          Calculate a) direct materials purchases budget, b) direct labor budget, c) manufacturing overhead
          budget. Also show d) the computation for COGS, and prepare e) budgeted income statement.
                                       Direct Materials Purchases Budget (2006)


                                                          Q1                       Q2                  Q3                 Q4            Annual
  Bags to be Produced                                    25,000                  50,000                40,000            30,000

  Direct Materials per Unit (in lbs)                           50                       50       50                             50
  Pounds Needed for Production                      1,250,000               2,500,000            2,000,000         1,500,000


  Add: Desired End. Inventory in lbs (a)              625,000                   500,000               375,000           500,000         (b)
  Total materials required (in lbs)                 1,875,000               3,000,000            2,375,000         2,000,000

  Less: Beginning Inventory (in lbs)                  350,000                   625,000               500,000           375,000
  Material Purchases Required (in lbs)              1,525,000               2,375,000            1,875,000         1,625,000

  Cost per pound                                $          0.05             $       0.05         $       0.05      $       0.05

  Cost of Direct Material Purchases             $        76,250             $ 118,750            $     93,750      $     81,250         370,000


  (a) 25% of next quarter's production needs
  (b) Q1 2007 production of 40,000 bags * 50 lbs = 2,000,000 lbs required * 25% desired end. inv.



                                                         Direct Labor Budget (2006)


                                                    Q1                     Q2                    Q3                Q4                Annual
  Bags to be produced                               25,000              50,000                   40,000            30,000

  Direct Labor Time per Bag (in hrs)                  0.75                  0.75                      0.75              0.75
  Required Direct Labor Hours                       18,750              37,500                   30,000            22,500

  Direct Labor Cost per Hour               $         10.00        $        10.00             $    10.00      $         10.00
  Total Direct Labor Cost                  $ 187,500              $ 375,000                  $ 300,000       $ 225,000               1,087,500



                                               Manufacturing Overhead Budget (2006)


                                               Q1                     Q2                 Q3                  Q4                Annual
Variable Costs
  Indirect Labor ($1.5 bag)                37,500                     75,000             60,000              45,000

  Indirect Materials ($0.25 bag)               6,250                  12,500             10,000                 7,500
  Total Variable                           43,750                     87,500             70,000              52,500
Fixed Costs
  Factory Rent                             10,000                     10,000             10,000              10,000
  Supervisory Salaries                     15,000                     15,000             15,000              15,000

  Factory Depreciation                         5,000                   5,000                 5,000              5,000
  Total Fixed                              30,000                     30,000             30,000              30,000
  Total Manufacturing Overhead         $   73,750            $ 117,500              $ 100,000           $    82,500            $ 373,750
Bags Produced                                25,000         50,000       40,000       30,000        145,000


PDOH                                                                                            $        2.58




COGS (per bag)
Direct Labor (.75 * $10)              $       7.50
Direct Materials (50 lbs * $0.05)     $       2.50

MOH                                   $       2.58
Total COGS per Bag                    $      12.58


Budgeted Income Statement
Sales (120,000 * $20)                 2,400,000

COGS (120,000 * 12.58)                (1,509,600)
Gross Profit                               890,400

SG&A ($30,000*4 Q)                         (120,000)
Pretax Income                              770,400

Taxes (30% of pretax income)              (231,120)
Net Income                                 539,280




   3. K2 has budgeted sales in April of $2,000,000, May of $1,500,000, June of $1,500,000. K2 collects
      50% in the month of the sale, 30% the 1st month after, and 20% the 2nd month after (February sales
      were $2,000,000 and March sales $2,500,000). Calculate budgeted collections for April and May.

       Expected Collections - In Class Problem

                           Sales by       % Collected
                                                        Collected in     % Collected in   Collected in
                            Month           in April
                                                           April             May              May
       February         $ 2,000,000           20%       $      400,000                    $          -
       March            $ 2,500,000           30%       $      750,000        20%         $ 500,000
       April            $ 2,000,000           50%       $ 1,000,000           30%         $ 600,000
       May              $ 1,500,000                     $            -        50%         $ 750,000
       Total                                            $ 2,150,000                       $1,850,000
       collections

       50% collected month of
       sale
       30% collected 1st month after sale
       20% collected 2nd month after sale



   4. K2 made purchases of $1,200,000 in March, $1,000,000 in April, $900,000 in May and $800,000 in
      June. K2 pays 40% in the month of the purchase and 60% the month after the purchase. Calculate
      budgeted disbursements by month.
         Expected Direct Materials Disbursements (Payments) - In Class Problem

                          Purchases      % Paid in
                          by Month         April          Paid in April         % Paid in May   Paid in May

         March            $ 1,200,000      60%            $    720,000                          $           -
         April            $ 1,000,000      40%            $    400,000              60%         $ 600,000
         May              $   900,000                     $             -           40%         $ 360,000

         Total                                            $ 1,120,000                            $960,000
         payments

         40% paid month of
         purchase
         60% paid month after purchase




      5. Prepare a cash budget for K2 in April and May assuming that K2 must maintain a cash balance of
         $100,000. Also assume it will purchase a new machine,


Practice Problem


                                              April               May
Beg. Cash Balance                             100,000            120,000
Add: Receipts
  Customer Collections                      2,150,000          1,850,000
  Total Receipts                            2,150,000          1,850,000
Total Available Cash                        2,250,000          1,970,000
Less: Disbursements (payments)
  Direct Materials                          (1,120,000)         (960,000)
  Direct Labor                                (110,000)         (100,000)
  Man. Overhead                               (500,000)         (520,000)
  Selling & Admin. Exp.                        (50,000)          (50,000)
  Purchase Machine                            (350,000)                     -
  Purchase Land                                       -         (450,000)
  Total Disbursements                       (2,130,000)       (2,080,000)
Available Cash less Disburs.                  120,000           (110,000)
Financing
  Borrowings                                                     210,000
  Repayments
Ending Cash Balance                           120,000            100,000


  Minimum Cash Balance = $100,000