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4. The fourth step is to calculate the materials
to be purchased for May (221,500 pounds).
Notice:
a. April’s desired ending inventory
becomes May’s beginning inventory.
5. The fifth step is to calculate the materials to
Helpful Hint: Tell the students that the inventory
purchases budget or the raw materials purchase budget
ii. Assume the information as shown regarding
Royal’s expected cash disbursements for materials.
1. The first step in calculating Royal’s cash
disbursements is to insert the beginning
accounts payable balance ($12,000) into
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(1). The $56,000 is derived by
Quick Check – cash disbursements calculations
3. The remaining steps include:
a. Calculating the May and June credit
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Learning Objective 7-5: Prepare a direct labor budget.
D. The direct labor budget
i. Assume the information as shown to enable the
preparation of Royal’s direct labor budget which
enables the company to match its direct labor hours
provided with its production needs.
1. The first step in preparing the direct labor
budget is to insert the production in units
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a. In this example, there are
guaranteed labor hours that will be
Quick Check – direct labor cost calculations
Learning Objective 7-6: Prepare a manufacturing
overhead budget.
E. The manufacturing overhead budget
i. Assume the information as shown to enable the
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1. The first step in preparing the
manufacturing overhead budget is to
calculate the variable manufacturing
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2. The second step is to add the fixed
manufacturing overhead costs ($50,000 per
month) to the variable overhead costs to
arrive at total manufacturing overhead costs
3. The third step is to calculate the cash
disbursements for manufacturing overhead
by subtracting noncash expenses from the
Helpful Hint: Have the students trace the amounts from
the raw materials purchase, direct labor, and
manufacturing overhead budgets to the cash budget.
require the information from these budgets.
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F. The ending finished goods inventory budget
i. Now Royal can complete the ending finished goods
inventory budget.
1. The first step in preparing this budget is to
2. The second step is to compute the direct
labor cost per unit ($0.50).
a. The information needed can be
derived by referring back to the direct
labor budget.
3. The third step is to compute the
manufacturing overhead cost per unit
($2.49) and the total inventoriable cost per
unit ($4.99). Notice:
a. Royal is using an absorption costing
approach to valuing its inventory.
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G. The selling and administrative expense budget
i. Assume the information as shown to enable the
preparation of Royal’s selling and administrative
1. The first step in preparing this budget is to
multiply the variable S & A rate by the
Quick Check – S & A expense calculations
4. The same steps are followed for the months
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Learning Objective 7-8: Prepare a cash budget.
H. The cash budget
i. The format of the cash budget
1. This budget should be broken down into
time periods that are as short as feasible. It
consists of four major sections:
a. The receipts section lists all cash
inflows excluding cash received from
financing.
Helpful Hint: The idea that the cash budget should
cover time periods as a short as possible should be
ii. Assume the information as shown to enable the
preparation of Royal’s cash budget.
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1. The first step in preparing this budget is to
calculate the total cash available ($210,000).
2. The second step is to calculate the total cash
disbursements ($230,000). Notice:
a. Each cash disbursement, except
disbursements ($20,000).
4. The fourth step is to determine the
financing requirements and the ending cash
balance. Notice:
a. Because Royal maintains a $30,000
cash balance, it must borrow
5. These four steps are repeated for the month
of May. The result is a $30,000 excess of
cash available over disbursements for May.
Quick Check – cash budgeting calculations
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6. The same four steps are repeated for June.
The result is an excess of cash available of
$95,000.
7. Once the cash budget has been completed,
the budgeted income statement can be
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Learning Objective 7-9: Prepare a budgeted income
statement.
I. The budgeted income statement
i. The numbers for the budgeted income statement
come from other budgets that have already been
prepared. More specifically:
1. The sale revenue comes from the sales
budget.
2. The cost of goods sold, on a per unit basis,
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J. The budgeted balance sheet
i. Assume the information as shown to enable the
preparation of the budgeted balance sheet.
1. The budgeted balance sheet is prepared as
follows:
a. Cash ($43,000) is taken from the
ending cash balance of the cash
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d. The finished goods inventory
($24,950) is taken from the ending
finished goods inventory budget.
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