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ACCT 102 (10)
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Chapter 6

# ACCT 102 Chapter 6: Chapter 6 Notes Premium

4 Pages
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Department
Accounting
Course Code
ACCT 102
Professor
Heinle

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CHAPTER 6: BUDGETING FOR PROFIT PLANNING 6.1 Budgeting Defined  Master (comprehensive) budget – formal statement of management’s expectations regarding sales, costs, output, and other financial transactions of the firm for the coming period  Budget – set of projected or planned financial statements; pro-forma income statement + pro-forma balance sheet + cash budget o Tool used for planning and control o Beginning: the plan o End: the control device to help management measure its performance against the plan for future performance planning 6.2 The Structure of the Master Budget  2 categories of master budget: o Operational budget – reflects the results of operating decisions  Sales budget (including a computation of expected cash receipts)  Production budget  DM budget (including a computation of expected cash disbursements for materials)  Direct labor budget  Factory overhead budget  Ending inventory budget  Selling and administrative expense budget  Budgeted income statement, which can be prepared in a traditional or contribution format o Financial budget – reflects financial decisions of the firm  Cash budget  Budgeted balance sheet  How to prepare the master budget: o Prepare a sales forecast o Determine production volume o Estimate manufacturing costs and operating expenses o Determine cash flow and other financial effects o Formulate projected financial statements 6.3 Illustration The Sales Budget  The sales budget is the starting point, because estimated sales volume influences nearly all other items  Tells you the quantity of each product expected to be sold  3 ways to estimate the sales budget: o Make a statistical forecast on the basis of an analysis of general business conditions, market conditions, and product growth curves o Make an internal estimate by collecting the opinions of executives and salespersons o Analyze the several factors that affect sales revenue and then predict the future behavior of each of these factors  Steps: o Estimate sales volume o Estimate unit sales price o Sales budget = product of the 2 (discount as needed) The Production Budget  Need to know number of units expected to be manufactured to meet budgeted sales and inventory requirements  To calculate expected volume of production = sum(units expected to be sold) + desired inv at end – est inv at beg The Direct Material Budget  Purchase in units = usage + desired end material inv units – beg inv units  How to calc DM: o Materials needed for production = units to be produced*materials needs per unit o Total needs = materials needed for production*desired end inv of materials o Materials to be purchased (Q) = total needs – beg inv of materials o Purchase cost = materials to be purchased*unit price o Total cash disbursements = half of purchase cost is in that quarter; other half is in previous quarter The Direct Labor Budget  DLH required = expected prod vol each pd*# DLH required to produce a unit  Total DL cost = DLH required*DL cost/hr The Factory Overhead Budget  Provides a schedule of all manufacturing costs other than DM and DL  You need to create a predetermined OH rate for VC portion of Factory OH  Depreciation does not entail cash outlay and must therefore be deducted from total factory OH when calculating cash disbursements  How to: o Variab
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