ACCT 2302

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• ACCT 2302
• Fundamentals of Accounting II
• Spring 2011
• Lecture 12
• Professor Jeff Yu

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Review
Budgeted R.M. Purchase in units budgeted
Production in Units R.M. needed for each unit
desired ending R.M. inventory beginning R.M.
Inventory Expected cash
disbursements for R.M. (or Accounts
Payable) Budgeted DL cost budgeted DL hours
hourly rate (Adjust for guaranteed hours
higher hourly rate for overtime) Budgeted MOH
cost (Important calculation of POHR) Budgeted
SA expense Budgeted ending F.G. Inventory
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Review Ending F.G. Inventory Budget
From DM DL budget
From Production Budget
POHR from MOH budget
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Practice Problem
Tonga toys makes Playclay. The desired ending
F.G. inventory is 30 of the next months sales.
Each unit of Playclay sells for 10, requires 2
pounds of raw materials at 0.2 per pound, and
consumes 0.25 direct labor hour at 10 per hour.
POHR is 0.4 per direct labor hour. Based on
historical data, Tonga estimated a cost function
for total SA expenses as Y60,0002X.
July August Sept. Oct. Budgeted
sales in units 40,000 50,000 70,000
35,000   Q (1) what is the budgeted cost of
ending F.G. inventory in August? (2) what
is the budgeted cost of goods sold in August?
(3) what is the budgeted total SA expenses in
August? (4) what is the budgeted net
operating income in August?
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The Cash Budget

• The cash budget is a simplified cash flow
  statement
• To understand it, break it down into 4 sections
• Cash receipts lists all cash inflows excluding
  financing
• Cash disbursements lists all cash payments
  excluding repayment of principle
  and interest.
• Cash excess or deficiency
• Financing lists all financing and repayments of
  principle and interest.

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Example Cash Budget

• Royal Inc.
• Has an April 1 cash balance of 40,000
• Pays a cash dividend of 49,000 in April
• Maintains a minimum cash balance of 30,000
• Maintains a 16 open line of credit for 75,000
• Borrows on the first day of the month and repays
  loans on the last day of the quarter (assume
  interest is not compounded for simplicity).
• Purchases 143,700 of equipment in May and
  48,300 in June (both purchases paid in cash)

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The Cash Budget
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The Cash Budget
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Practice Problem
Garden Depot prepared the following budgeted cash
flows for 2011   The beginning cash
balance for 2011 is 20,000. Garden Depot
requires a minimum cash balance of 10,000. It
may borrow any amount needed at the beginning of
each quarter from a bank at annual rate of 12,
and may repay its loans, or any part of its
loans, at the end of any quarter. Interest
payments are due on any principal at the time is
repaid. For simplicity, assume interest is not
compounded. Q Prepare the companys cash
budget for each quarter year 2011.
Qtr1 Qtr2 Qtr3 Qtr4
Total Cash Receipts 180,000 330,000 210,000 230,000
Total Cash Disbursements 260,000 230,000 220,000 240,000
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Practice Problem
Shilow Co. maintains a minimum cash balance of
at least 4,000 at the end of each month and can
draw down a credit line of 20,000 at annual
interest rate of 12 (assume interest is not
compounded for simplicity). The budgeted cash
balance on August 1, 2011 is 8,000. The cash
budget for 2011 shows expected cash receipts of
56,000 and expected cash disbursements of
65,000 for August.   Q (1) Will
Shilow Co. have a cash excess or deficiency in
August? (2) Assume Shilow Co. expects the
cash shortage in August and plans to draw down
the minimum required fund on August 1, 2011 from
the credit line and pay back the principle and
interest on December 31, 2011. What is the
budgeted interest expense?
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Example Budgeted Balance Sheet
Cash Budget
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Example Budgeted Income Statement
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Practice Problem

• Minden Co. is a chocolate retailer with the
  following budget data
• Budgeted sales are 200,000 for May, among which
  60,000 is cash sale and the remainder is credit
  sales. 50 of the credit sales are collected in
  the month of sale and another 50 in the next
  month. Accounts receivable on April 30 are
  54,000.
• Budgeted merchandise inventory purchases are
  120,000 in May. 40 of purchases are paid in the
  month of purchase and the remainder in the next
  month. Accounts payable on April 30 are 63,000.
• Budgeted merchandise inventory balance is 30,000
  on April 30, 40,000 on May 31.
• SA expenses are 74,000 for May, including
  2,000 in depreciation. New equipment costing
  6,500 will be purchased for cash in May.
• Mindens note payable of 14,500 is to be paid in
  full in May, with 100 in interest. Minden
  maintains a cash balance of 9,000 each month and
  can borrow any amount from local bank with a new
  note payable.
• On April 30, PPE net of depreciation is 207,000,
  capital stock is 180,000 and retained earnings
  is 42,500.
• Q (1) Prepare a cash budget for May (2)
  Prepare a budgeted income statement for May
• (3) Prepare a budgeted balance sheet as of
  May 31.
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Chapter 10 Flexible Budget
The master budgets discussed in Chapter 9 could
also be called STATIC budgets because they are
prepared based on a fixed level of future
activity. A static budget is suitable for
planning, but is inadequate for evaluating cost
control.
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Static Budget and Performance Analysis

• Static budgets are prepared fora single,
  planned level of activity.

Performance evaluation is difficult when
actual activity level differs from the planned
activity level.
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Example Inference using Static Budget
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Example Inference using Static Budget
Did the firm do a good job in cost control?
I do know thatactual activity is belowbudgeted
activity which is unfavorable. But shouldnt
variable costsbe lower if actual activityis
below budgeted activity?
I dont think I can answer this question using
a static budget.
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The relevant question?
How much of the favorable cost variance in the
example is due to lower activity level and how
much is due to good cost control? To answer the
question, we must thebudget
to the actual level of activity.
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Flexible Budgets
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For Next Class

• Finish chapter 10.
• Attempt the assigned HW problem.

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Homework Problem
FR Co.s May 1 cash balance is 6,000 and
requires May 31 cash balance to be 5,000. Its
cash budget for May is as follows
  Q (1) Will FR have a cash excess or
deficiency? By how much? (2) If needed, how
much will FR need to borrow? (3) If FR
borrows the required fund on May 1 at the 6
annual interest rate and pay back the principle
and interest on June 30, what is the budgeted
interest expense (assume interest is not
compounded for simplicity)?