Budgeting Management Control and Responsibility Accounting

Tutorial solutions Budgeting, management control and responsibility accounting What is the master budget? Solution: The master budget expresses management’s operating and financial plans for a specified period (usually a financial year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period. ‘The sales forecast is the cornerstone for budgeting.’ Why? Solution: The sales forecast is typically the cornerstone for budgeting because production (and hence manufacturing costs) and inventory levels generally depend on the forecasted level of sales. ‘Cash budgets must be prepared before the operating profit budget.’ Do you agree? Explain. Solution: No. Cash budgets and operating profit budgets must be prepared simultaneously. In preparing their operating profit budgets, companies want to avoid unnecessary idle cash and unexpected cash deficiencies. The cash budget, unlike the operating profit budget, highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost-effective ways of either using excess cash or raising cash from outside to achieve the company’s operating profit goals. Budgets for production and direct manufacturing labour Zhang Manufacturing makes and sells artistic frames for photographs of weddings, graduations and other special events. Bob Anderson, the management accountant, is responsible for preparing Zhang Manufacturing’s master budget and has accumulated the following information for 2019: 2019 Februar January Estimated sales in 12 000 April y 13 000 MAF 200116. Autumn_2018_Week 10 May March 6 000 11 000 11 000 units Selling price $52.00 $53.00 Direct manufactu ring labourhours per unit Wage per direct manufactu ring labourhour $52.00 $52.00 $52.00 2.0 3.0 3.0 2.0 2.0 $11.00 $11.00 $11.00 $11.00 $11.00 In addition to wages, direct-manufacturing-labour-related costs include pension contributions of $0.40 per hour, worker’s compensation insurance of $0.10 per hour, employee medical insurance of $0.50 per hour and compulsory superannuation contributions. Assume that as of 1 January 2019, the superannuation guarantee obligations are 9% of wages. The cost of employee benefits paid by Zhang Manufacturing on its employees is treated as a direct manufacturing labour cost. Zhang Manufacturing has a labour contract that calls for a wage increase to $12 per hour on 1 April 2019. New labour-saving machinery has been installed and will be fully operational by 1 March 2019. Zhang Manufacturing expects to have 16 000 frames on hand at 31 December 2018, and it has a policy of carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the second following month’s sales. Required Prepare a production budget and a direct manufacturing labour budget for Zhang Manufacturing by month and for the first quarter of 2019. Both budgets may be combined in one schedule. The direct manufacturing labour budget should include labour-hours and show the details for each labour cost category. Solution: (15-25 min.) Budgets for production and direct manufacturing labour Zhang Manufacturing Budget for Production and Direct Manufacturing Labour for the Quarter Ended 31/March/2019 January February March Qua Budgeted sales (units) 12 000 13 000 6 000 31 000 Add target ending finished goods inventorya (units) Total requirements (units) 16 000 11 500 28 000 24 500 16 500 16 500 22 500 47 500 Deduct beginning finished goods inventory (units) 16 000 Units to be produced 12 000 16 000 11 500 8 500 16 000 11 000 31 500 Direct manufacturing labour-hours (DMLH) per unit × 3.0 × 3.0 2.0 Total hours of direct manufacturing labour time needed 36 000 25 500 22 000 83 500 Direct manufacturing labour costs: Wages ($11.00 per DMLH) $396 000 $280 500 $242 000 $918 500 Pension contributions ($0.40 per DMLH) 14 400 10 200 8 800 33 400 Workers’ compensation insurance ($0.10 per DMLH) 3 600 2 550 2 200 8 350 Employee medical insurance ($0.50 per DMLH) 18 000 12 750 11 000 41 750 18 150 68 888 Superannuation contribution (employer’s share) ($11.00 0.075 = $0.825 per DMLH) 29 700 21 038 Total direct manufacturing labour costs$461 700 $327 038 $282 150 $1 070 888 a 100% of the first following month’s sales plus 50% of the second following month’s sales Budget schedules for a manufacturer Sierra Furniture is an elite desk manufacturer. It makes two products: • • Executive desks—small silky oak desks Chairman desks—medium Tasmanian oak desks. The budgeted direct cost inputs for each product in 2018 are: Executive line Silky oak top 2 square metres Tasmanian oak top Silky oak legs Tasmanian oak legs Direct manufacturing labour Chairman line 0 0 5 square metres 4 0 0 4 3 hours 5 hours Unit data pertaining to the direct materials for March 2018 are: Actual beginning direct materials inventory (01/03/2018) Executive line Silky oak top (square metres) 40 Chairman line 0 Tasmanian oak top (square metres) 0 Silky oak legs 100 Tasmanian oak legs 0 30 0 40 Target ending direct materials inventory (01/03/2018 Executive line Silky oak top (square metres) 24 0 Tasmanian oak top (square metres) Silky oak legs Chairman line 0 80 40 0 Tasmanian oak legs 0 44 Unit cost data for direct cost inputs pertaining to February 2018 and March 2018 are: February (actual) Silky oak top (per square metre) Tasmanian oak top (per square metre) Silky oak legs (per leg) March (budgeted) $144 $160 115 125 11 12 Tasmanian oak legs (per leg) 17 18 Manufacturing labour cost per hour 30 30 Manufacturing overhead (both variable and fixed) is allocated to each desk on the basis of budgeted direct manufacturing labour-hours per desk. The budgeted variable manufacturing overhead rate for March 2018 is $35 per direct manufacturing labour-hour. The budgeted fixed manufacturing overhead for March 2018 is $42 500. Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods. Data relating to finished goods inventory for March 2018 are: Executive line Beginning inventory in units Beginning inventory in dollars (cost) Target ending inventory in units Chairman line 5 20 $10 480 $4 850 30 15 Budgeted sales for March 2018 are 740 units of the Executive line and 390 units of the Chairman line. The budgeted selling prices per unit in March 2018 are $1020 for the Executive-line desk and $1600 for the Chairman-line desk. Assume the following in your answer: • • • Work-in-process inventories are negligible and ignored. Direct materials inventory and finished goods inventory are costed using the FIFO method. Unit costs of direct materials purchased and finished goods are constant in March 2018. Required 1. Prepare the following budgets for March 2018: a. revenues budget b. production budget in units c. direct materials usage budget and direct materials purchases budget d. direct manufacturing labour budget e. manufacturing overhead budget f. ending inventories budget (direct materials and finished goods) g. cost of goods sold budget. 2. Suppose that Sierra Furniture decides to incorporate continuous improvement into its budgeting process. Describe two areas where Sierra could incorporate continuous improvement into the budget schedules in Requirement 1. Solution: (40 min.) Budget schedules for a manufacturer 1. a. Revenues budget: Executiv e Chairman Line Total Line Units sold Selling price Budgeted revenues 740 A$ 1 020 A$754 800 390 A$ 1 600 A$624 000 A$1 378 800 b. Production budget in units: Executiv e Chairman Line Line Budgeted unit sales 740 Add budgeted ending finished goods inventory Total requirements 30 770 Deduct beginning finished goods inventory Budgeted production (cont’d…) 390 15 405 20 750 5 400 c. Direct materials usage budget (units): Silky Tas Silky Oak Tas Oak Oak Legs Legs Total Executive-line: 1. Budgeted input per f.g. unit 2. Budgeted production 2 – 750 – 4 – 750 – 3. Budgeted usage (1 × 2) 1 500 – 3 000 – Chairman-line: 4. Budgeted input per f.g. unit – 5 – 5. Budgeted production – 400 – 6. Budgeted usage (4 × 5) 7. Total direct materials usage (3 + 6) – 1 500 2 000 2 000 4 400 – 1 600 3 000 1 600 Direct Materials Cost Budget 8. Beginning inventory 9. Unit price (FIFO) 10. Cost of DM used from beginning inventory (8 × 9) 11. Materials to be used from purchases (7 – 40 A$144 A$5 760 1 460 30 100 40 A$115 A$11 A$17 A$3 450 1 970 A$1 100 2 900 A$680 1 560 A$10 990 8) 12. Cost of DM in March A$160 A$125 A$12 A$18 13. Cost of DM purchased and used in March (11 × 12) A$233 600 A$246 250 A$34 800 A$28 080 A$542 730 14. Direct materials to be used (10 + 13) A$239 360 A$249 700 A$35 900 A$28 760 A$553 720 Direct Materials Purchases Budget: Silky Tas Silky Oak Tas Oak Oak Oak Legs Legs Total Budgeted usage (from line 7) Add target ending inventory Total requirements Deduct beginning inventory Total DM purchases Purchase price (March) Total purchases 1 500 24 1 524 2 000 3 000 1 600 40 80 44 3 080 1 644 100 40 2 040 40 1 484 30 2 010 A$1 60 A$237 2 980 A$ 125 A$251 1 604 A$ 12 A$35 A$28 A$ 18 A$553 _______ 440 d. 250 760 872 Direct manufacturing labour budget: Direct Manuf. LabourOutput Units Produc ed Executive-line 750 Hours per Output Unit 3 Total Hourl y Hours Rate 2 250 A$30 Total A$ 67 500 Chairmanline 400 5 2 000 A$30 4 250 e. 60 000 A$127 500 Manufacturing overhead budget: Variable manufacturing overhead costs (4 250 × A$35) 750 Fixed manufacturing overhead costs Total manufacturing overhead costs A$148 42 500 A$191 250 Total manuf. overhead cost per hour = = A$45 per direct manufacturing labour-hour Fixed manuf. overhead cost per hour = = A$10 per direct manufacturing labour-hour 322 f. Computation of unit costs of ending inventory of finished goods: Executive Chairman Line Line Direct materials Silky oak top (A$160 × 2, 0) A$320 A$0 Tasmanian oak top (A$125 × 0, 5) 0 Silky oak legs (A$12 × 4, 0) 625 48 0 Tasmanian oak legs (A$18 × 0, 4) 0 Direct manufacturing labour (A$30 × 3, 5) 90 72 150 Manufacturing overhead Variable (A$35 × 3, 5) Fixed (A$10 × 3, 5) Total manufacturing cost 105 175 30 50 A$593 A$1 072 Ending inventories budget: Cost per Unit Units Total Direct Materials Silky oak top Tasmanian oak top Silky oak legs Tasmanian oak legs A$160 125 12 18 24 40 A$3 840 5 000 80 44 960 792 10 592 Finished Goods Executive Chairman 593 1 072 30 15 17 790 16 080 33 870 Total g. A$44 462 Cost of goods sold budget: Budgeted finished goods inventory, 1 Mar 2018 (A$10 480 + A$4 850) A$15 330 Direct materials used (From Dir. materials usage budget) 553 720 Direct manufacturing labour (Dir. manuf. labour budget) 127 500 Manufacturing overhead (Manuf. overhead budget) 191 250 872 470 Cost of goods manufactured 887 800 Cost of goods available for sale Deduct ending finished goods inventory, 31 March 2018 (Inventories budget) Cost of goods sold 33 870 A$853 93 3. Areas where continuous improvement might be incorporated into the budgeting process: (a) Direct materials. Either an improvement in usage or price could be budgeted. For example, the budgeted usage amounts could be related to the maximum improvement (current usage – minimum possible usage) for either desk: • Executive: 2 square metres – 1.5 square metres minimum = 0.5 square metre • Chairman: 5 square metres – 4.5 square metres minimum = 0.5 square metre Thus, a 1% reduction target per month could be: • Executive: 1.5 square metres + (0.99 × 0.5) = 1.995 • Chairman: 4.5 square metres + (0.99 × 0.5) = 4.995 Some students suggested the 1% be applied to the two and squaremetre amounts. This can be done as long as after several improvement cycles, the budgeted amount is not less than the minimum desk requirements. (b) Direct manufacturing labour. The budgeted usage of three hours/five hours could be continuously revised on a monthly basis. Similarly, the manufacturing labour cost per hour of A$30 could be continuously revised down. The former appears more feasible than the latter. (c) Variable manufacturing overhead. By budgeting more efficient use of the allocation base, a signal is given for continuous improvement. A second approach is to budget continuous improvement in the budgeted variable overhead cost per unit of the allocation base. (d) Fixed manufacturing overhead. The approach here is to budget for reductions in the year-to-year amounts of fixed overhead. If these costs are appropriately classified as fixed, then they are more difficult to adjust down on a monthly basis. Cash budgeting (Appendix 11.1) Tomlinson Retail is preparing its cash budget for May. The following information pertaining to sales and purchases relates to Tomlinson Retail: 1. Sales: a. Each month’s sales are billed on the last day of the month. b. Customers are allowed a 2% discount if payment is made within 10 days after the billing date. c. 60% of the billings are collected within the discount period, 20% are collected by the end of the month following the date of sale, 15% are collected by the end of the second month after the date of sale and 5% prove to be uncollectable. 2. Purchases: a. 54% of all purchases of inventory are paid in the month purchased and the remainder in the following month. b. Tomlinson requires that each month’s units of ending inventory is equal to 120% of the next month’s units of sales. c. The cost of each unit of inventory is $10. d. Total sales, general and administration (SGA) expenses are equal to 10% of the current month’s sales plus $2500 of depreciation. 60% of SGA expenses are paid in the month incurred and the remainder in the following month. Actual and projected sales are: ($) March Units 177 000 11 800 April 181 600 12 100 May 178 500 11 900 June 171 000 11 400 July 180 000 12 000 August 183 000 12 200 Required Prepare the following schedules for Tomlinson Retail for May: 1. a schedule of cash collections 2. a schedule of cash payments collections. Solution: (25 min.) Cash budgeting 1. Cash collections Schedule 1: Collections of receivables March Revenues A$177 000 April A$181 500 May A$178 500 A$171 000 Collections of Receivables From sales in: March (15% × A$177 000) A$26 550 April (60% × A$181 500) × 0.98 June 106 722 April (20% × A$181 500) 36 300 Total A$169 572 July August A$180 000 A$183 000 2. Cash payments Calculation of purchase of inventory: Tomlinson requires each month’s inventory to 120% of next month sales Sales in units Add: Ending inventory (120% of next month sales) Less: Beginning Inventory Purchase requirement in units Purchase cost @ $10/ unit March April 11 800 12 100 14 520 14 280 (12100 (11900X X120%) 120%) 14 160 14 520 (11800X 120%) 12 160 11 860 11 300 $ 121 600 $118 600 $113 000 May 11 900 13 680 (11 400X 120%) June 11 400 14 280 Schedule 2: Cash payments Total Purchase Payment April April $118 600 Many $113 000 Total purchase payment $ 64 044 (54%) for May $54 556 (46%) $61 020 (54%) $115 576 Total sales, general and administration (SGA) is 10% of current month’s sales Less depreciation = total SGA cash expenses SGS Total (Cash expenses) April ($181500X10%)-$2500 depreciation May ($ 178 500X10%)-$2 500 Total payment for SGA Total payment required for purchase and SGA in May Payment $15 650 April 9390 $15 350 - May $ 6 260 $9 210 $15 470 $131 046