Task Requirements:
A. Write a report on operating and flexible budgets. The paper must include the following:
- Discuss the benefits of budgeting (see Chapter 20 PowerPoint)
- Discuss the components of the Operating budget by discussing the following (see Chapter 20 PowerPoint):
- What is the Sales Budget? What information does the Sales Budget provide?
- What is the Production budget? How is the Production budget connected to the Sales budget?
- What is the Direct Materials budget? How is the Direct Materials budget connected to the Production budget?
- What is the Direct Labor budget? How is the Direct Labor budget connected to the Production budget?
- What is the Factory Overhead budget?
- What is the Cost of Goods sold budget? How is the Cost of Goods sold budget connected to the Sales budget?
- What is the General and Administrative budget?
- Discuss the Flexible budget. What is a flexible budget? How does a flexible budget compare to a fixed budget? (see Chapter 21 PowerPoint)
B. Prepare an Operating Budget using the budget scenario and template. (Find the company information and budget template below
.)
Budget Scenario: Rob's Shoes-Scenario.docx
Download Budget Scenario: Rob's Shoes-Scenario.docx
Budget Template Updated.xlsx
Group 1-Rob’s Shoes Rob’s Shoes is a small social entrepreneurship company famous for its shoes, also known as “Robs,” and its mission to give back. For every pair of Robs purchased, Rob’s Shoes sends a pair of Robs to a child in need. Each pair of Robs sells for $50. Rob’s Shoes’ balance sheet for December 31, 2022 follows: Rob’s Shoes Balance Sheet December 31, 2022 Assets Current Assets: Cash$ 1500 Accounts Receivable 7000 Direct Materials Inventory 3000 Finished Goods Inventory 5,500 Total Current Assets$17,000 Property, Plant, and Equipment: Equipment$ 21,034 Less: Accumulated Depreciation (1,200)19,834 Total Assets$36,834 Liabilities Current Liabilities: Accounts Payable$2,000 Stockholders’ Equity Common Stock, no par$30,000 Retained Earnings 4,834 Total Stockholders’ Equity$34,834 Total Liabilities & Stockholders’ Equity$36,834 Other data for Rob’s Shoes: · Each pair of Robs is $50 · Projects to sell 500 pairs of shoes in the first quarter of 2023, with sales increasing by 100 pairs of Robs each quarter · Finished Goods inventory on December 31, 2022, consists of 275 pairs of shoes at $20 each · Desired Ending Finished Goods Inventory is equal to 10% of the next quarter’s sales, FIFO inventory method is used · The company expects to sell 900 pairs of Robs in the first quarter of 2024 · Direct Materials cost is $10 per pair of Robs · Rob’s Shoes desires for each quarter’s ending balance in Direct Materials to be 30% of the next quarter’s production needs. The desired ending direct materials balance for the 4th quarter is $2730. (Indirect materials are insignificant and not considered for budgeting purposes). · Each pair of Robs requires 2 hours of direct labor; direct labor costs average $10 per hour · Variable Manufacturing overhead rate is $3 per pair of Robs · Fixed manufacturing overhead consists of $1200 per quarter for depreciation and $500 per quarter for utilities, insurance, property taxes · Rob’s Shoes uses direct labor hours (DLHr) as the allocation base to allocate overhead costs · Selling and administrative expenses include: · Salaries Expense, fixed$1,500 per quarter · Rent Expense, fixed$1,200 per quarter · Insurance Expense, fixed$100 per quarter · Depreciation Expense, fixed$70 per quarter · Supplies Expense, variable1% of Sales Revenue per quarter Requirements 1. Using the provided Excel template prepare the following: a. Rob’s Shoes 2023 operating budget · Sales budget · Production Budget · Direct materials budget, direct labor budget, and manufacturing overhead budget · Total projected Manufacturing cost · Cost of goods sold budget · Selling and administrative expense budget b. Rob’s Shoes 2023 Budgeted Income Statement Sheet1 Name: Rob's Shoes Sales Budget For the Year Ended December 31, 2023 First QuarterSecond QuarterThird QuarterFourth QuarterTotal Budgeted (units) to be sold0 Sales price per (unit) Total sales$ - 0$ - 0$ - 0$ - 0$ - 0 Rob's Shoes Production Budget For the Year Ended December 31, 2023 First QuarterSecond QuarterThird QuarterFourth QuarterTotal Budgeted (units) to be sold00000 Plus: Desired (units) in ending inventory0 Total (units) needed00000 Less: (units) in beginning inventory0000 Budgeted (units) to be produced00000 Rob's Shoes Direct Materials Budget For the Year Ended December 31, 2023 First QuarterSecond QuarterThird QuarterFourth QuarterTotal Budgeted (units) to be produced00000 Direct materials cost per (unit) Direct materials needed for production00000 Plus: Desired direct materials in ending inventory0 Total direct materials needed00000 Less: Direct materials in beginning inventory0000 Budgeted purchases of direct materials$ - 0$ - 0$ - 0$ - 0$ - 0 Rob's Shoes Direct Labor Budget For the Year Ended December 31, 2023 First QuarterSecond QuarterThird QuarterFourth QuarterTotal Budgeted (units) to be produced00000 Direct labor hours per (unit) Direct labor hours needed for production00000 Direct labor cost per hour Budgeted direct labor cost$ - 0$ - 0$ - 0$ - 0$ - 0 Rob's Shoes Manufacturing Overhead Budget**VOH = Variable Overhead For the Year Ended December 31, 2023**FOH = Fixed Overhead First QuarterSecond QuarterThird QuarterFourth QuarterTotal Budgeted VOH: Budgeted (units) to be produced00000 VOH cost per (units) Total Budgeted VOH$ - 0$ - 0$ - 0$ - 0$ - 0 Budgeted FOH: Depreciation0 Utilities,insurance, property taxes0 Total budgeted FOH$ - 0$ - 0$ - 0$ - 0$ - 0 Budgeted manufacturing overhead costs$ - 0$ - 0$ - 0$ - 0$ - 0 Direct labor hours (DLHr)00000 Budgeted manufactuing overhead costs$ - 0 Predetermined overhead allocation rateERROR:#DIV/0! (Total Budgeted manufacturing overhead costs/DLHr)*ERROR:#DIV/0! *Rounded to nearest whole number Total Projected Manufacturing Cost Per (unit) Direct materials cost per (unit) Direct labor cost per (unit) Manufacturing overhead cost per (unit) 6 Total budgeted cost per unit$ 6 Rob's Shoes Cost of Goods Sold Budget For the Year Ended December 31, 2023 First QuarterSecond QuarterThird QuarterFourth QuarterTotal Budgeted (units) to be sold$ - 0$ - 0$ - 0$ - 0$ - 0 Budgeted cost per unit Total budgeted cost of goods sold$ - 0$ - 0$ - 0$ - 0$ - 0 Rob's Shoes Selling and Administrative Expense Budget For the Year Ended December 31, 2023 First QuarterSecond QuarterThird QuarterFourth QuarterTotal Salaries Expense$ - 0 Rent Expense$ - 0 Insurance Expense$ - 0 Depreciation Expense$ - 0 Supplies Expense$ - 0 Total Budgeted S & A expense$ - 0$ - 0$ - 0$ - 0$ - 0 Rob's Shoes Budgeted Income Statement For the Year Ended December 31, 2023 Budgeted Sales Revenue Budgeted Cost of Goods Sold Budgeted Gross Profit$ - 0 Budgeted Selling and Administrative Expenses Budgeted Net Income$ - 0 Slide 1 Master Budgets and Planning Chapter 20 Wild and Shaw Financial and Managerial Accounting 9th Edition Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. ‹#› Chapter 20 Learning Objectives CONCEPTUAL C1 Describe the benefits of budgeting. ANALYTICAL A1 Prepare a direct labor budget for a service firm and analyze revenue per employee. PROCEDURAL P1 Prepare the operating budgets of a master budget for a manufacturing company. P2 Prepare a cash budget for a manufacturing company. P3 Prepare budgeted financial statements. P4 Prepare each component of a master budget for a merchandising company. (Appendix 20A) © McGraw-Hill Education 20-2 ‹#› Describe the benefits of budgeting. Learning Objective C1 © McGraw-Hill Education 20-3 ‹#› Budgeting – process of planning future business actions and expressing them as formal plans. Budget – formal statement of a company’s plans in dollars. Budgetary control process – management’s use of budgets to see that planned objectives are met. Budgeting Process Learning Objective C1: Describe the benefits of budgeting. © McGraw-Hill Education Exhibit 20.1 20-4 Managers must ensure that activities of employees and departments contribute to meeting the company’s overall goals. Budgeting is the process of planning future business actions and expressing them as formal plans. A budget is a formal statement of a company’s plans, expressed in dollars. Unlike long-term strategic plans, budgets typically cover shorter periods such as a month, quarter, or year. The budgetary control process involves four steps: (1) develop the budget from planned objectives, (2) compare actual results to budgeted amounts and analyze differences, (3) take corrective and strategic actions, and (4) establish new objectives and a new budget. ‹#› Communicate: management specific action plans to all employees. Control: provides benchmark for evaluating performance. Plan: focuses on future opportunities and threats. Motivate: budgeting performance levels provide goals for employees to attain or exceed. Coordinate: activities of all employees and departments to work toward the company’s overall goals. Benefits of Budgeting Learning Objective C1: Describe the benefits of budgeting. © McGraw-Hill Education 20-5 Budgets benefit the key managerial functions of planning and controlling. Plan: A budget focuses on future opportunities and threats to the organization. This focus on the future is important because the daily pressures of operating an organization can divert management’s attention from planning. Budgeting forces managers to plan for the future. Control: The control function requires management to evaluate (benchmark) operations against some norm. Because budgeted performance considers important company, industry, and economic factors, a comparison of actual to budgeted performance provides an effective monitoring and control system. This comparison assists management in identifying problems and take corrective actions if necessary. Coordinate: Budgeting helps to coordinate activities so that all employees and departments understand and work toward the company’s overall goals. Communicate: Written budgets effectively communicate management’s specific action plans to all employees. When plans are not written down, conversations can lead to uncertainty and confusion among employees. Motivate: Budgets can be used to motivate employees. Budgeted performance levels can provide goals for employees to attain or even exceed. Many companies provide incentives, like cash bonuses, for employee performance that meets or exceeds budget goals. ‹#› Budgets can be a positive motivating force when: Goals reflected in budget are challenging but attainable. Employees affected by budget help prepare it. Evaluations offer opportunities to explain differences between actual and budgeted amounts. Potential negative outcomes include: Pressure to meet results can employees to engage in unethical behavior or commit fraud. Employees might understate sales budgets and overstate expense budgets to allow a cushion. Employees might spend budgets on unnecessary items to ensure budget is not reduced next period. Budgeting and Human Behavior Learning Objective C1: Describe the benefits of budgeting. © McGraw-Hill Education 20-6 Budgeting process has three important guidelines: Goals reflected in a budget should be challenging but attainable. Employees affected by a budget should help prepare it (participatory budgeting). Evaluations offer opportunities to explain differences between actual and budgeted amounts. Under participatory budgeting, potential negative outcomes of budgeted include: 1. Pressure to meet results can cause employees to engage in unethical behavior or commit fraud. 2. Employees may understate sales budgets and overstate expense budgets to allow cushion called budgetary slack. 3. Employees might spend their budgeted amounts, even on unnecessary items, to ensure their budget is not reduced next period. ‹#› Budget Reporting and Timing Continuous budgeting applied by preparing rolling budgets. Continually revise budgets as time passes. Rolling budget – company revises entire set of budgets by adding new quarterly budget to replace the quarter just elapsed. Learning Objective C1: Describe the benefits of budgeting. © McGraw-Hill Education 20-7 The budget period usually is tied to the company’s fiscal year. To help control operations the annual budget can be separated into quarterly or monthly budgets. These short-term budgets allow management to periodically evaluate performance and take timely corrective action. Many companies apply continuous budgeting by preparing rolling budgets. In continuous budgeting, a company continually revises its budgets as time passes. In a rolling budget, a company revises its entire set of budgets by adding a new quarterly budget to replace the quarter that just elapsed. Thus, at any point in time, monthly or quarterly budgets are available for the next 12 months or four quarters. ‹#› Prepare the operating budgets of a master budget for a manufacturing company. Learning Objective P1 © McGraw-Hill Education 20-8 ‹#› Master Budget Components Exhibit 20.2 © McGraw-Hill Education Learning Objective P1: Prepare the operating budgets of a master budget for a manufacturing company. 20-9 A master budget is a formal, comprehensive plan that contains several interconnected budgets. Exhibit 20.2 summarizes the master budgeting process. The master budgeting process begins with the sales budget. The master budget includes individual budgets for sales, production (or merchandise purchases), expenses, capital expenditures, and cash. The process ends with preparation of budgeted financial statements. ‹#› Master Budget Balance Sheet Exhibit 20.3 © McGraw-Hill Education 20-10 Learning Objective P1: Prepare the operating budgets of a master budget for a manufacturing company. This chapter explains how Toronto Sticks Company (TSC), a manufacturer of hockey sticks, prepares its budgets. Its master budget includes operating, capital expenditures, and cash budgets for each month in each quarter. It also includes a budgeted income statement for each quarter and a budgeted balance sheet as of the last day of each quarter. We show how TSC prepares budgets for October, November, and December. Exhibit 20.3 presents TSC’s balance sheet at the start of this budgeting period, which we refer to in preparing the component budgets. ‹#› In September, Toronto Sticks Company sold 700 hockey sticks at $60 each