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CHAPTER
14
Cost Planning
CHAPTER OUTLINE:
I. Introduction
A. Why Budgets are Useful
B. Definition of Performance Reporting
II. Cost Classifications
A. Relationship of Cost to Volume of Activity
2. Fixed cost
3. Mixed cost
B. According to a Time-Frame Perspective
1. Committed cost
2. Discretionary cost
III. Budgeting
A. The Budgeting Process in General
1. Usefulness of budgets-A function of management philosophy
2. Starting point for budget
a. Actual performance of current period
b. Zero-based budgeting approach
B. The Budget Time Frame
2. Multi-period, rolling budget
3. Different periods for different budgets
C. The Budgeting Process
1. Broad assumptions about the economy, industry, and company
2. Operating budget
a. Sales/revenue forecast
b. Purchases/production budget
Chapter 14 Cost Planning
CHAPTER OUTLINE (continued)
e. Cash budget and the timing of cash receipts and cash payments
f. Balance sheet budget
3. Sales forecast is the key
D. Illustration of the Purchases/Production Budget
1. Using the cost of goods sold model
2. Based on gross profit ratio
E. Cost of Goods Sold Budget Discussion
F. Operating Expense Budget Challenges
G. Budgeted Income Statement Discussion
IV. Standard Costs
A. Standards Defined - A Unit Budget Allowance
B. Using Standard Costs
2. Focus may be on dollar amounts and/or quantities
C. Developing Standards
2. Attainable standards
3. Past experience standards
D. Costing Products with Standard Costs
1. A budget for each component
2. Illustration of product cost development
E. Other Uses of Standards
V. Budgeting for Other Analytical Purposes
A. Other Important Resources
2. Utilization of productive capacity
B. Other Functional Areas
Instructor’s Manual / Solutions Manual
TEACHING/LEARNING OBJECTIVES:
Primary: To have the student understand:
1. That the sales/activity forecast is the starting point – and the key – to the entire budgeting
process.
3. That standard costs are unit budgets, and in turn, to appreciate how standards can be used in
the planning and control process.
Supporting: To have the student understand:
4. The significance of top management's attitude toward the budgeting process, and the
5. That different time periods may be appropriate for different budgets.
6. How individual budgets interrelate to make up the overall operating budget.
TEACHING OBSERVATIONS:
1. The reasons for and advantages of budgeting for an entity can be related to the personal
budgeting that students may have done.
3. Be careful not to get caught up in the “how to” aspects of preparing budgets, or students
4. Emphasize that standards are unit budgets, and can be used to accomplish all of the
objectives associated with budgets.
5. Call attention to the behavioral implications that result from the standard setting process and
emphasize the importance of the perception that standards are attainable by those whose
Chapter 14 Cost Planning
ASSIGNMENT OVERVIEW:
NO.
LEARNING
OBJECTIVES
DIFFICULTY &
TIME ESTIMATE
OTHER COMMENTS
M14.2
4,5
Med., 10-12 min.
Purchases budget requires analysis of beginning inventory.
M14.4
8
Easy, 7-10 min.
Straight-forward analysis of cash receipts.
M14.6
10
Easy, 7-10 min.
Basic introduction to standard cost per unit determination.
E14.7
4,5
Easy, 7-10 min.
Stress that the Finished Goods account must be analyzed to
E14.9
5
Easy, 7-10 min.
Emphasize the importance of management planning in the
development of appropriate ending inventory policies.
E14.11
4,8
Easy, 5-8 min.
Straight-forward cash receipts budget.
E14.13
9,10
Easy, 5-8 min.
Emphasize that standards must be appropriate and fair if they
are to be useful for managerial planning and control purposes.
E14.15
10,11
Easy, 5-8 min.
Emphasize the importance of management planning and data
gathering in the development of appropriate standards.
P14.17
4,5
Med., 10-12 min.
The key is to calculate budgeted cost of sales for each month,
using: Sales * (1 - Gross profit ratio).
P14.18
4,5
Hard, 15-20 min.
Group learning problem. Students have difficulty converting
P14.20
4,8
Hard, 25-35 min.
Group learning problem. Students should review the answers
P14.21
8
Med.-Hard,
Explain to students that the purpose of this problem is to help
P14.22
8
Hard, 45-60 min.
Excel problem. Group learning problem. Good homework
assignment.
P14.24
4,5,8
Hard, 45-60 min.
Excel problem. Group learning problem. Emphasize the
inter-relationships among the budgets.
C14.26
Med., 30-40 min.
Internet case. This case is intended to introduce the student to
C14.27
Med., 30-45 min.
Internet case. Group learning case. Good information
M14.1.
Use the cost of goods sold model, and work from the bottom up and then top down to
calculate production:
June
July
Beginning inventory…………………………..………………
3,600
4,800
Add: Production……………………………..………………..
?
?
M14.2.
Use the same approach as M14.1, but notice that raw material used is a function of
quantity produced from the production budget. Each unit requires 3 pounds of raw
material.
June
Beginning inventory (13,200 * 3 pounds * 25%) …….……….……
9,900
M14.3.
Variable
Rate
June
July
August
Budgeted sales (units)…..…………….
12,000
16,000
14,000
Variable operating expenses:
Sales commissions…….…………..
$2.00/unit
$24,000
$32,000
$28,000
Marketing promotions……………..
$1.00/unit
12,000
16,000
14,000
M14.3.
(continued)
June
July
August
Fixed operating expenses:
Salaries……………………………..
$ 2,000
$ 2,000
$ 2,000
M14.4.
June
July
August
Budgeted sales units...…..……………………….
12,000
16,000
14,000
M14.5.
August
Beginning cash balance....……………………...……….…….
$ 25,000
Cash Receipts:
M14.6.
Cost per unit
E14.7.
a.
Use the cost of goods sold model, and work from the bottom
up and then top down to calculate production:
medallions
Beginning inventory…………………………………………
1,000
Goods available for sale..……………………………………
?
b.
Use the same approach, but notice that quantity used is a
function of quantity produced from the production budget.
Each medallion requires 2/3 of a yard of ribbon.
E14.8.
a.
Use the "Cost of Goods Sold" model:
Beginning inventory, Finished Goods………………………..
5,900
Add: Production……………………………………………...
64,400
Steps:
(1) Units sold based on sales forecast.
(3) Goods available for sale = units sold (based on sales
forecast) + ending inventory.
(5) Production = goods available - beginning inventory.
Chapter 14 Cost Planning
E14.8.
(continued)
b.
Beginning inventory, Raw Materials …………………..……
74,700
Add: Purchases………………………………………………
315,500
Steps:
(2) Ending inventory is given
(4) Beginning inventory is given
E14.9.
a.
Use the raw material inventory/usage model:
Quarter I
Quarter II
Beginning inventory …………………………………………
5,000
9,000
Add: Purchases ………………………………………………
?
?
b.
Inventory provides a "cushion" for delivery delays or production needs in excess of the
E14.10.
a.
July
August
September
Sales forecast (units)
6,000
6,800
5,600
Production forecast (analysis of finished goods inventory):
Beginning inv. (70% of current month’s sales)…..
4,000 a
4,760
3,920
Add: Production…………………...……………..
? .
? .
? .
E14.10.
(continued)
Working backwards (up the model):
July
August
September
Goods available for sale......………...……………
10,760
10,720
9,310
b.
For raw materials purchases, the model is similar, but keys on the production forecast
and raw materials inventory instead of the sales forecast and finished goods inventory.
July
August
September
Production forecast (units)...…………….....……
6,360
5,960
5,390
Raw materials used (6.5 pounds per unit)….....…
41,340
38,740
35,035
Purchases forecast (analysis of raw materials inventory):
Beginning inv. (60% of current month’s usage)...
26,000 b
23,244
Purchases (in pounds)….………………………...
? .
? .
Raw materials available for use...……………..…
?
?
E14.11.
May
June
July
August
Sales forecast…………………………
$240,000
$280,000
$300,000
$350,000
Cash collections:
30% of current month’s sales …………………………………
$ 90,000
$105,000
E14.12.
July
August
September
October
November
Actual sales
$98,000
$105,000
Sales forecast
$114,000
$94,000
$122,000
Cash collections:
30% of sales made in the current month...…
$ 34,200
$ 28,200
$36,600
E14.13.
a.
Worktype 1 (0.15 hours @ $12.30 per hour)
$ 1.845
E14.14.
a.
Costs for a "batch" of 10 quarts:
Triphate solution (11 quarts @ $0.30 per quart) ………………………
$ 3.30
Sobase granules (4 pounds @ $0.74 per pound) ………………………
2.96
b.
Other factors to be considered:
1. Possible cost increases during coming year.
2. Spillage / spoilage / waste in the manufacturing process.
E14.15.
a.
Raw material cost………………………………………………
$2.83 per bushel
Direct labor and variable overhead ……………………………
0.42 per bushel
b.
This cost per pound is not very useful for management planning and control because it
includes unitized fixed expenses, which do not behave on a per unit basis.
E14.16.
a.
Raw materials:
