AFM481 Final Exam Material - Chapter 10 Summary (Thorough).docx

7 Pages

Accounting & Financial Management
Course Code
AFM 481
Grant Russell

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AFM481 - Advanced Cost Accounting Professor Grant Russell Final Exam Material Chapter 10: Static and Flexible Budgets Budget: formalized financial plan for operations of an organization for a specified future period  Budgets for revenues, costs and cash flows help managers carry out short-term operating plans.  Forecast events and develop plans to determine the resources an organization needs  Compare actual results to budgets and use variance information to improve operations. Budget Cycle:  Reconsider Long-Term strategies  Develop operating plans.  Translate strategies and operating plans into master budget.  Monitor actual results compared to budget.  Investigate differences between actual and budget.  Evaluate and reward performance. Master Budget: A comprehensive plan for a year, developed using budget assumptions about next period's operating activities  Operating Budget: plan for revenues, production and operating costs 1) Revenues Budget 2) Production Budget (in units) 3) DM Costs Budget, DL Costs Budget, Indirect Manufacturing Costs Budget 4) Ending Inventory Schedules 5) COGS Budget 6) Operating Expense (Period Cost) Budget 7) Prepare the budgeted income statement  Financial Budget: plan for capital expenditures, long-term financing, cash flows and short- term financing. Based on the operating budgets above, prepare: 1) Capital expenditures budget 2) Cash budget 3) Budgeted Balance Sheet 4) Budgeted Statement of Cash Flows 5) Pro-Forma Statement of Net Income  Budgeted financial statements: forecasts of the future income statement, balance sheet, and cash flows Developing a Master Budget: 1. Revenue Budget: Sales Forecast (units) * Selling Price Plans per unit = Expected Total Sales Revenue 2. Volume of Production Budget: Sales Forecast (units) + Desired Ending Inventory Levels = Total units needed - Beginning Inventory Levels = Production required E.g. Berol Company plans to sell 200,000 Production Requirement for July units of finished product in July of this y= Sales + Ending – Beginning and anticipates a growth rate in sales of 5% per month. The target monthly ending = 200,000 + (80% * 200,000 * 1.05) – 150,000 inventory in units of finished product is = 218,000 Production Requirement for August 80% of the next month’s estimated sales. = 210,000 + (80% * 210,000 * 1.05) – 168,000 There are 150,000 finished units in = 218,400 inventory on June 30th. Production Requirement for September = 220,500 + (80% * 220,500 * 1.05) – 176,400 REQUIRED: Calculate the production requirement in units of finished product = 229,320 for the quarter ending September 30th. Quarter Production Requirement (July - September) = 665,720 3. Direct Material Budget: Determine the amount of DM that must be purchased. Production required in units + Desired Ending Inventory Levels = Total DM needed - Beginning Inventory Levels = Purchases of DM needed in units * $ cost per DM unit = Cost 4. Direct Labour Budget Assembly Costs = Assembly Hours Expected * Cost $ per Assembly Hour Testing Costs = Testing Hours Expected * Cost $ per Testing Hour 5. Manufacturing Overhead Budget Variable Overhead:  Supplies: $ Cost per unit * production required  Indirect Labour: $ Cost per unit * production required  Maintenance: $ Cost per unit * production required Fixed Overhead:  Amortization  Property Taxes  Insurance  Plant Supervision  Fringe Benefits Total Overhead Costs Fixed Overhead Allocation Rate = Budgeted Fixed Manufacturing Overhead Costs / Budgeted Volume of Production in Units 6. Budget for Ending Inventory: Forecasted costs for ending inventories Unit Costs: Direct Materials Direct Labour Variable Overhead Fixed Overhead Total Unit Cost Finished Goods in $ = Total Unit Cost * Finished Goods in Units + Raw Materials in $ = Total Ending Inventory $ 7. Budget for COGS: (using forecasted sale of 100,000 units) Beginning Finished Goods Inventory + Direct Materials Used (multiply the unit costs by the units to be produced) + Direct Labour + Variable Overhead + Fixed Overhead Total Goods Available - Less: Ending Finished Goods (Total Unit Cost * Ending FG units) = COGS 8. Support Department Budgets Administration Marketing Distribution Customer Service = Total Support Department Costs 9. Short-term Financing Budget: Expected operating cash receipts and disbursements, planned capital expenditures and long-term financing 10.Budgeted Financial Statements Cash Budget: to ensure adequate levels of cash for day-to-day operations To prepare a cash budget, 3 types of cash transactions are planned:  Expected amounts and timing of cash receipts Operating cash receipts are estimated from budgeted revenues.  Expected amounts and timing of cash disbursements Operating cash disbursements are estimated from the budgets for DM, DL, MO and support departments. (Amortization will not be paid in cash, so ignore)  Short-term borrowings or investments Cash Flows:  purchasing or selling property, plant and equipment  borrowing or repaying long-term debt  paying interest on debt  issuing or redeeming capital stock  paying dividends to shareholders Developing a Cash Budget 1. Summary of Cash Receipts and Disbursements Beginning Cash Balance + Cash Collections = Total Cash Available Less: Cash Disbursements: Direct Materials Purchases Direct Labour Variable Overhead  Supplies  Indirect Labour  Maintenance Fixed Overhead  Property taxes  Insurance  Plant supervisor  Fringe benefits Administration, Marketing, Distribution, Customer Service Purchase of Equipment Total Cash Disbursements = Excess Receipts (Disbursements) 2. Short-Term Financing Budget Excess receipts (disbursements) Line of Credit  + Borrowing  - Interest on borrowing  - Repayment = Ending Cash Balance and Short-Term Borrowing 3. Budgeted Income Statement Sales Revenue - COGS = Gross Margin - Operating Costs (Admin, Marketing, Distribution, Customer Service) = Operating Income/Loss - Interest Expense - Income Taxes = Net Income E.g. Developing a Cash Budget Month Sales Purchases pril $72,000 $42,000 May 66,000 48,000 June 60,000 36,000 July 78,000 54,000 Cash collections from customers are normally 70% in the month of sa
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