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Operational Budgeting Managerial Accounting

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Operational Budgeting  Managerial Accounting Powered By Docstoc
					Lesson 14
Levels of Business Planning
Strategic Planning:
Decisions regarding such long-range questions as which products to make and sell, how to market the products, and how to finance the resources necessary to achieve the organization's goals.

Lesson 14
Operational Budgeting

Capital Budgeting:
Planning for the acquisition of operational or long-term assets such as property, plant, and equipment.

Operational Budgeting:
Detailed plans of immediate goals for prospective sales, production, expenses, cash flows, and financial statement results.

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Personal Budget (Cash Flow)
Jan. Budgeted Cash Inflows: Salary/Wage Income Interest Income Parental Subsidy Student Loan Proceeds Budgeted Cash Outflows: Rent Utilities Food Entertainment Tuition Books Insurance- Health Auto Payments Auto Gas & Maint. Insurance- Auto Miscellaneous Net Cash Flow Feb. Mar.

The Importance of Budgeting

. . . . . . .
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Communication Setting Goals and Objectives Problem Resolution Coordination Authorization Performance Evaluation Motivation

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The Benefits of Budgeting for a Business

. . . . . . .

Management Communication Setting Goals and Objectives Problem Resolution Coordination Authorization Performance Evaluation Motivation

Elements and Sequencing of an Operating Budget - Merchandising Business Sales Budget Inventory Purchases Budget Cash Flow Budget Pro-form a Income Statement Pro-form a Balance Sheet Selling & Admin. Expense Budget

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Elements and Sequencing of an Operating Budget -Manufacturing BusinessSales Budget Production Budget Direct Materials Budget Direct Labor Budget Cash Flow Budget Pro-forma Income Statement Pro-forma Balance Sheet Selling & Admin. Expense Budget Mfg. Overhead Budget

Example: Given the information and assumptions provided below for PowerPak, Inc., prepare the following budgets for the months noted in 20X3: A. B. C. D. E. Sales Budget (Sept., Oct., Nov.) Production Budget (Sept., Oct.) Direct Materials Budget (Sept.) Direct Labor Budget (Sept.) Cash Flow Budget (Sept.)

PowerPak, Inc. makes and sells a food supplement drink that comes in a one pint carton. One carton of PowerPak is made by mixing plain tap water with a 6 oz. powder mix purchased directly from a manufacturer of nutritional products based on a formula developed by PowerPak. The product sells for $3.00 a carton and budgeted sales for the months of September, October and November of 20X3 are 20,000, 22,000, and 25,000 units, respectively.

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SALES BUDGET
SEPT. Units to be sold Sales price/unit Total Sales Revenue 20,000 x 3.00 $60,000 OCT. 22,000 x 3.00 $66,000 NOV. 25,000 x 3.00 $75,000

Management would like to keep a balance of finished inventory on hand equal to 20% of the following month's anticipated sales volume to be able to handle unexpected sales volume. Assume that there are 4,000 units of finished goods on hand at 8/31/X3. Given this information, the Production Budget can be prepared. PRODUCTION BUDGET SEPT. 20,000 Units to be sold Desired ending inventory * 4,400 24,400 Beginning inventory Units to be produced (4,000) 20,400 OCT. 22,000 5,000 27,000 (4,400) 22,600 NOV. 25,000

* Calculated based on 20% of the subsequent month's budgeted sales.

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The product costs are budgeted to include:
Variable Costs Per UnitDirect Materials6 oz. Mix Carton Direct Labor Mfg. Overhead Fixed Mfg. OverheadPer Month

$ .90 per unit $ .20 per unit $ .10 per unit $ .30 per unit $ 7,000*

Management likes to have on hand inventory of mix and cartons equal to 30% of the following months budgeted materials usage. Assume that there are 6,120 six oz. packets of mix and 6,120 cartons in materials inventory at 8/31/X3. Given this information, the Direct Materials Purchase and the Direct Labor Budget can be prepared.
MATERIALS USAGE BUDGET

Units to be produced One 6oz. Mix and One Carton per unit produced Mix and cartons to be used

SEPT. 20,400 x 1 20,400

OCT. 22,600 x 1 22,600

* Amount includes $1,500 of equipment depreciation.

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MATERIALS USAGE BUDGET

DIRECT LABOR BUDGET OCT. 22,600 x 1 22,600 SEPT. 20,400 x .10 $2,040 OCT. 22,600 x .10 $2,260

Units to be produced One 6oz. Mix and One Carton per unit produced Mix and cartons to be used

SEPT. 20,400 x 1 20,400

Units to be produced Labor cost per unit Total Direct Labor

MATERIALS PURCHASE BUDGET

SEPT. OCT. 20,400 22,600 6,780 ? 27,180 ? (6,120) (6,780) Beginning Inventory 21,060 ? Mix and Cartons to purchase x 1.10 Price per Mix and Carton x 1.10 Total Material purchases ? $23,166 *Calculated based on 30% of subsequent month's budgeted usage. Units of Mix & Cartons to be used Desired ending inventory*

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Budgeted selling and administrative expenses amount to $ .40 per unit of variable costs and $5,000 per month of fixed costs which include $700 of budgeted depreciation expense. Prepare the September Cash Flow Budget given the following additional assumptions: All sales are made on account and experience shows that about 60% of sales are collected in the month of sale with 40% in the following month. No sales are anticipated to be uncollectible. The A/R balance at 8/31/X3 amounts to $21,000.

. All sales are made on account and experience shows that about 60% . Direct materials are always purchased on account with 50% paid in . Assume all direct labor, manufacturing overhead costs and selling and administrative costs are paid in the month incurred. . The cash balance at the beginning of the month is $6,000 and assume
that PowerPak operates in a world of no income taxes. the month of purchase and the remainder paid in the following month. The A/P balance at 8/31/X3 amounts to $10,500. of sales are collected in the month of sale with 40% in the following month. No sales are anticipated to be uncollectible. The A/R balance at 8/31/X3 amounts to $21,000.

.

. Direct materials are always purchased on account with 50% paid in

. Assume all direct labor, manufacturing overhead costs and selling and administrative costs are paid in the month incurred. . The cash balance at the beginning of the month is $6,000 and assume
that PowerPak operates in a world of no income taxes.

the month of purchase and the remainder paid in the following month. The A/P balance at 8/31/X3 amounts to $10,500.

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CASH FLOW BUDGET
Beginning cash Add collection of A/R: Current month* ($60,000 x 60%) Preceding month

SEPT. $6,000 36,000 21,000 63,000

SALES BUDGET
SEPT. Units to be sold Sales price/unit Total Sales Revenue 20,000 x 3.00 $60,000 OCT. 22,000 x 3.00 $66,000 NOV. 25,000 x 3.00 $75,000

Deduct disbursements: Direct materials Current month*($23,166 x 50%) 11,583 Preceding month 10,500 Direct labor 2,040 Manufacturing Overhead Variable**(20,400 x $.30) 6,120 Fixed (excluding depreciation of $1,500) 5,500 Selling & Administrative Variable***(20,000 x $.40) 8,000 Fixed (excluding depreciation of $700) 4,300 Cash balance/(deficiency) 14,957 0 Cash capitalization required $14,957 Ending cash balance * Collections of A/R are calculated at 60% in the ** Calculated at $ .30 times the # of units month of sale and 40% in the subsequent month. budgeted for production. Payments on purchases of direct materials, all on *** Calculated at $ .40 times the # of units account, are calculated at 50% in the month of budgeted for sale. purchase and 50% in the subsequent month

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Problem #59

Problem #59 - Answer

Jordan Corp. sells cakes for $10 per unit. Budgeted sales volume in # of units for the first 3 months of the year is noted below: JAN. 25,000 FEB. 30,000 MAR. 35,000

March Cash Collections:
From January Sales: 25,000 x $10 x 70% x 10% = From February Sales: 30,000 x $10 x 70% x 35% = From March Sales: Cash Sales 35,000 x $10 x 30% $17,500 $73,500

Jordan anticipates that 70% of sales will be made on account and accounts receivables are expected to be collected at the following rates: 50% 35% 10% 5% 100% in the month of sale in the first month following the month of sale in the second month following the month of sale uncollectible

= $105,000

Credit Sales 35,000 x $10 x 70% x 50% = $122,500 Total Cash Collections $318,500

Determine the amount of budgeted cash inflows for the month of March.

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Problem #60

Problem #60 - Answer

Jordan Corp. has budgeted sales volume in units as follows: Jan. Feb. Mar. 25,000 30,000 35,000 Jordan wishes to maintain an inventory level of finished goods equal to 30% of the following month's budgeted sales. Finished goods inventory at the start of business on Jan. 1st amounts to 7,000 units. One unit of production requires 3 lbs. of flour which costs $2/lb. Jordan plans to maintain a level of flour inventory (raw materials) constant with the current inventory balance. If Jordan plans to buy all raw materials on account paying 50% in the month of purchase and 50% in the following month, how much cash outflow for the purchase of flour should be budgeted for in February?

Jordan Corp. has budgeted sales volume in units as follows: Jan. Feb. Mar. 25,000 30,000 35,000 Jordan wishes to maintain an inventory level of finished goods equal to 30% of the following month's budgeted sales. Finished goods inventory at the start of business on Jan. 1st amounts to 7,000 units. One unit of production requires 3 lbs. of flour which costs $2/lb. Jordan plans to maintain a level of flour inventory (raw materials) constant with the current inventory balance. If Jordan plans to buy all raw materials on account paying 50% in the month of purchase and 50% in the following month, how much cash outflow for the purchase of flour should be budgeted for in February? Production Budget Jan. Budgeted Sales 25,000 Add: Desired Ending Inventory 9,000 34,000 Less: Beginning Inventory (7,000) Units to be Produced 27,000 Feb. 30,000 10,500 40,500
(9,000)

Mar. 35,000 ? ?
(10,500)

31,500

?

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Problem #60 - Answer

Problem #60 - Answer

One unit of production requires 3 lbs. of flour which costs $2/lb. Jordan plans to maintain a level of flour inventory (raw materials) constant with the current inventory balance. If Jordan plans to buy all raw materials on account paying 50% in the month of purchase and 50% in the following month, how much cash outflow for the purchase of flour should be budgeted for in February? Production Budget Jan. Budgeted Sales 25,000 Add: Desired Ending Inventory 9,000 34,000 Less: Beginning Inventory (7,000) Units to be Produced 27,000 Feb. 30,000 10,500 40,500
(9,000)

Mar. 35,000 ? ?
(10,500)

31,500

?

Materials Usage Budget Jan. Units to be produced 27,000 (x) 3 lbs. per unit x3 lbs. to be used in production 81,000 lbs.

Feb. 31,500 x3 94,500 lbs.

Production Budget Jan. Feb. Mar. 25,000 30,000 35,000 Budgeted Sales 9,000 10,500 ? Add: Desired Ending Inventory 34,000 40,500 ? Less: Beginning Inventory (7,000) (9,000) (10,500) 27,000 31,500 ? Units to be Produced Materials Usage Budget Jan. Feb. 27,000 31,500 Units to be produced x3 x3 (x) 3 lbs. per unit 81,000 lbs. 94,500 lbs. lbs. to be used in production Materials Purchases Budget Jan. Feb. 81,000 94,500 lbs. to be used in production Add: Desired Ending Inventory Less: Beginning Inventory 81,000 lbs. 94,500 lbs. Budgeted Purchases x $2 x $2 Cost per lb. $ 162,000 $189,000 Cost of Materials Purchases

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Problem #60 - Answer

Materials Purchases Budget Jan. Feb. lbs. to be used in production 81,000 94,500 Add: Desired Ending Inventory Less: Beginning Inventory 81,000 lbs. 94,500 lbs. Budgeted Purchases x $2 x $2 Cost per lb. Cost of Materials Purchases $ 162,000 $189,000 If Jordan plans to buy all raw materials on account paying 50% in the month of purchase and 50% in the following month, how much cash outflow for the purchase of flour should be budgeted for in February.
February Cash Payment on Flour Purchases:

Elements and Sequencing of an Operating Budget
Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Cash Flow Budget

Selling & Admin. Expense Budget Mfg. Overhead Budget

Payments on January Purchases: ($162,000 x .50%) Payments on February Purchases: ($189,000 x .50%)

$81,000 $94,500 $175,500

Pro-forma Income Statement

Pro-forma Balance Sheet

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Problem #61

Problem #61

Business Feasibility Study for HEAVENLY MOLDS, INC. As noted in the prior lesson, Heber Smith is seriously investigating what he believes is a promising business opportunity. His idea is to manufacture and sell plastic jello molds in the form of famous LDS religious symbols such as the Salt Lake Temple. Based on Heber's personal research and preliminary marketing efforts, he believes that the following is a reasonable estimate of total sales volume at a price of $2.50 per unit for the first quarter of operations beginning September 1, 20X1: Oct. Sept. Nov. Projected sales in # of units 2,000 3,000 4,000 Heber currently plans to manufacture the jello molds rather than contract out their production. The raw materials required for production of a single jello mold, regardless of design, is 1 lb. of polypropylene which can be purchased from a local supplier for $ .30 per lb. Direct manufacturing labor costs are projected on a piece rate basis at $ .20 per unit produced.

BUDGETING ADDITIONAL BUDGETARY INFORMATION: Following November, 20X1, Heber projects that sales volume will increase at a rate of 100 units per month. Inventory levels for finished goods are to be budgeted at a level of 25% of the following month's anticipated sales volume. Inventory levels for raw materials are budgeted at a level of 10% of the following month's budgeted materials usage. Required: (Round all calculations to the nearest whole unit or dollar, as the case may be.) Given the information above, prepare the following budgets for Heavenly Molds for the months of September through November, 20X1: A. Sales Budget (using $ 2.50 sales price per unit) B. Production Budget C. Materials Usage and Purchases Budget D. Direct Labor Budget

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Problem #61 - Answer

Problem #61 - Answer

SALES BUDGET Units to be sold Sales price/unit Total Sales Revenue SEPT. 2,000 x 2.50 $ 5,000 OCT. 3,000 x 2.50 $7,500 NOV. 4,000 x 2.50 $ 10,000 DEC. 4,100 x 2.50 $10,250 JAN. 4,200 x 2.50 $10,500 Units to be produced

MATERIALS USAGE BUDGET SEPT. 2,750 x 1 lb. 2,750 OCT. 3,250 x 1 lb. 3,250 NOV. 4,025 x 1 lb. 4,025 NOV. 4,025 413 4,438 (403) 4,035 x .30 $ 1,211

Polypropylene per unit produced lbs. to be used

PRODUCTION BUDGET Units to be sold Add: Desired ending inventory* Less: Beginning inventory Units to be produced SEPT. 2,000 750 2,750 ( 0) 2,750 OCT. 3,000 1,000 4,000 (750) 3,250 NOV. 4,000 1,025 5,025 (1,000) 4,025 DEC. 4,100 1,050 5,150 (1,025) 4,125 lbs. to be used

MATERIALS PURCHASE BUDGET OCT. SEPT. 3,250 2,750 325 3,075 ( 0) 3,075 x .30 $ 923 403 3,653 (325) 3,328 x .30 $ 998

Add: Desired ending inventory* Less: Beginning inventory lbs. to purchase Price per lb. Total purchases

*Calculated based on 25% of the subsequent month's budgeted sales.

*Calculated based on 10% of the subsequent month's budgeted usage.

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Problem #61 - Answer

Problem #62

DIRECT LABOR BUDGET SEPT. 2,750 x .20 $ 550

Given the budgets prepared in the previous problem and the information provided below, prepare a Cash Flow Budget for Heavenly Molds for the months of September through November, 20X1.

Units to be produced (X) Labor cost per unit Total direct labor

OCT. 3,250
x .20 $ 650

NOV. 4,025
x .20 $ 805

Additional Cash Flow Budgeting Information: For cash flow budgeting purposes assume that all sales are expected to be made on account with 30% budgeted for collection in the month of sale and 70% budgeted for collection in the subsequent month (no uncollectible receivables are anticipated). All purchases of raw materials will be made on account with 25% budgeted for payment in the month of purchase with the remainder to be paid in the subsequent month. On September 1, 20X1, Heavenly Molds will have to make an initial refundable deposit on the building and the injection molding machine leases of $ 3,000 and $ 2,000, respectively. In addition, the $ 20,000 cost of the original production molds will be due upon delivery at September 1, 20X1.

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Problem #62

Problem #62 - Answer

For simplicity's sake, all direct labor, manufacturing overhead and selling and administrative costs are budgeted to be paid in the month incurred. Based on the work done in the prior lesson, the following budgeted amounts are also available: Variable Manufacturing Overhead Costs, Includes $ .10/unit depreciation Fixed Manufacturing Overhead Costs Variable Selling and Administrative Costs Fixed Selling and Administrative Costs $ .30/unit $ 3,830 $ .10/unit $ 1,570

Beginning cash Add collection of A/R: Current month a. Preceding month a.

(

CASH FLOW BUDGET SEPT. Run over the
letters to see the footnotes

)

OCT.
$10,000 2, 250 3,500 15,750 250 692 650 650 3,830 300 1,570

NOV.
$10,000 3,000 5,250 18,250 303 749 805 805 3,830 400 1,570

$

0

1,500 1,500 231 550 550 3,830 200 1,570 2,000 3,000 20,000 (30,431) 40,431 $10,000

Hint: In the cash flow budget, variable costs of manufacturing should be based on the # of units to be produced while the variable selling and administrative costs would be based on the # of units budgeted for sale in any particular month. Remember that depreciation expense included in the variable manufacturing overhead costs are non-cash costs and should be excluded from the cash flow budget. Assume that any cash flow deficiency will be reflected as "Cash Capitalization Required" and Heber wishes the cash budget to reflect a minimum cash balance of $10,000 to insure adequate cash capitalization throughout the period.

Deduct disbursements: Direct materials Current month b. Preceding month b. Direct labor Manufacturing Overhead Variable c. Fixed Selling & Administrative Variable d. Fixed Deposit onMachine lease Building Original mold cost Cash balance/(deficiency) Cash capitalization required Ending cash balance

7,808 2,192 $10,000

9,788 212 $10,000

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Problem #63

Problem #63

Provided below are the pro-forma income statements for the first three months of budgeted operations and the pro-forma balance sheet as of 11/30/X1, prepared from the previously provided budgetary information. Included with these statements are certain footnotes and calculations explaining the source of the amounts. Review these statements to understand how the various elements were determined and then respond to questions which follow. PRO-FORMA INCOME STATEMENTS SEPT. $5,000 Sales Revenues a. (4,380) Less: Cost of Goods Sold $620 Gross Margin Less: Selling and Administration b. (1,770) Net Income / (Loss) ($1,150) * a and b see next two pages OCT. $7,500 (6,098) $1,402 (1,870) ($468) NOV. $10,000 (7,230) $2,770 (1,970) $800

a. Cost of Goods Sold calculation: First, the average budgeted manufacturing cost per unit of production is calculated for each month separately. OCT. NOV. SEPT. Manufacturing costs: Variable @ $.80 per unit $2,200 $2,600 $3,220 3,830 3,830 3,830 Fixed Total Manufacturing cost $6,030 $6,430 $7,050 . 2,750 3,250 4,025 . Units Produced Per unit cost $2.19 $1.98 $1.75 # units cost/ Next, calculate Cost of Goods Sold: sold unit Sept. 2,000 x $2.19 = $4,380 Oct. 750 x $2.19 = $1,643 2,250 x $1.98 = $4,455 $6,098 3,000 1,000 x $1.98 = $1,980 Nov. 3,000 x $1.75 = $5,250 $7,230 4,000

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Problem #63

Problem #63

PRO-FORMA BALANCE SHEET November 30, 20X1
ASSETS Current Assets: Cash Accounts Receivable ($10,000 x 70%) Inventory Raw Materials (413 lbs. x $.30) Finished Goods (1,025 x $1.75) Mold Development costs Less Accumulated Depreciation Deposits: Machine Lease Building Lease Total Assets LIABILITIES AND OWNER'S EQUITY Liabilities: Accounts Payable Owner's Equity: Contributed Capital Retained Deficit Total Liabilities and Owner's Equity * $10 difference with total assets due to rounding $10,000 7,000 124 1,794 $18,918 20,000 (1,003) $18,997 2,000 3,000 $42,915

(A) As of November 30, 20X1, how much total capital does Heber plan to have invested in the business? How was this amount determined? (B) Why is the total amount of projected owner's equity at 11/30/X1, less than the planned capital contributions? If the budget were extended an additional three months to 2/28/X2, what would you expect owner's equity to increase or decrease and why? (Do not do the actual budget through 2/28/X2, simple identify the relevant trends. (C) What is the primary cause of improved budgeted profitability from September to November? Calculate Cost of Goods Sold as a % of sales revenues in each month and generally explain the cause of the change. (D) Based on your review, is the company using the Fifo or Lifo inventory cost flow assumption? Show how "Accumulated Depreciation" amounting to $1,003 was determined on the 11/30/X1 pro-forma balance sheet. Explain how "Accounts Payable" of $908 was calculated on the same balance sheet. (E) Given the CVP analysis previously performed and the results of the budgetary process, what is your opinion of Heber's business opportunity and why? How much investment capital do you think is actually at risk? What do you think is the most significant factor in determining heavenly Mold's ultimate success?

$

908

42,835 (818) $42,925 *

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Problem #63

Problem #63 - Answer

b. Total selling and administrative costs are calculated based on the # of units budgeted for sale. Variable ($.10/unit) Fixed SEPT. $ 200 1,570 $1,770 OCT. $ 300 1,570 $1,870 NOV. $ 400 1,570 $1,970

(A) As of November 30, 20X1, how much total capital does Heber plan to have invested in the business? How was this amount determined? $42,835. This number is reflected on the balance sheet as "Contributed Capital." The amount comes from the combined amount of "Cash Capitalization Required" from the cash flow budget for the first three months of operations.

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Problem #63 - Answer

Problem #63 - Answer

(B) Why is the total amount of projected owner's equity at 11/30/X1 less than the planned capital contributions? If the budget were extended an additional three months to 2/28/X2, would you expect owner's equity to increase or decrease and why? (Do not do the actual budget through 2/28/X2, simply identify the relevant trends. Total owner's equity at 11/30/X1 is $818 less than the contributed capital due to retained deficits or the cumulative losses from operations. Over the next three months, owner's equity will increase due to a budgeted trend of profitable operations and cash flows.

(C) What is the primary cause of improved budgeted profitability from September to November? Calculate Cost of Goods Sold as a % of sales revenues in each month and generally explain the cause of the change. Improved profitability results from increased volume and the resulting lower Cost of Goods Sold per unit. Cost of Goods Sold, as a % of sales revenues, declines as follows: Sept. Oct. Nov. 87.6% 81.3% 72.3% This reduction is due to the fixed manufacturing costs which are spread out over more units through increased volume, thus reducing the cost per unit of production and cost of goods sold per unit.

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Problem #63 - Answer

Problem #63 - Answer

(D) Based on your review, is the company using the Fifo or Lifo inventory cost flow assumption? Show how "Accumulated Depreciation" amounting to $1,003 was determined on the 11/30/X1 pro-forma balance sheet. Explain how "Accounts Payable" of $908 was calculated on the same balance sheet. Fifo. Accumulated Depreciation: $.10 x # of units produced .10 x 10,025 = $1,003 rounded Accounts Payable: Raw material purchases in November amount to $1,211, of which 75% are budgeted for payment in the following month and are therefore payable as of 11/30/X1.

(E)

Given the CVP analysis previously performed and the results of the budgetary process, what is your opinion of Heber's business opportunity and why? How much investment capital do you think is actually at risk? What do you think is the most significant factor in determining Heavenly Mold's ultimate success? Answer to Part E - Listen to Walk Through for answer

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Business Planning
1. Strategic Planning 2. Capital Budgeting 3. Operational Budgeting

The Benefits of Budgeting

. . . . . . .
45

Communication Setting Goals and Objectives Problem Resolution Coordination Authorization Performance Evaluation Motivation

46

Elements and Sequencing of an Operating Budget -Manufacturing BusinessSales Budget Production Budget Materials Purchase Budget Direct Labor Budget Cash Flow Budget Pro-forma Income Statement Pro-forma Balance Sheet Selling & Admin. Expense Budget Mfg. Overhead Budget

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