164
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
43
2. The second step is to calculate the April
credit purchases that will be paid during
each month of the quarter.
Quick Check – cash disbursements calculations
3. The remaining steps include:
a. Calculating the May and June credit
purchases that are paid during each
month of the quarter.
42
45–46
47
165
Learning Objective 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
from the production budget.
3. The third step, in this particular example, is
to compute the direct labor hours paid.
Notice:
52
4. The fourth step is to compute the total
direct labor cost. Notice:
53
Quick Check – direct labor cost calculations
49
50
54–55
48
51
166
Learning Objective 6: Prepare a manufacturing
overhead budget.
E. The manufacturing overhead budget
1. The first step in preparing the
manufacturing overhead budget is to
calculate the variable manufacturing
overhead costs for each month and in total.
Notice:
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
for each month and in total. Notice:
a. We can determine the predetermined
overhead rate for the quarter
($49.70).
60
59
58
56
167
Helpful Hint: Have the students trace the amounts from
the raw materials purchase, direct labor, and
manufacturing overhead budgets to the cash budget.
Information from some of the budgets is needed by
more than one individual—in this case the
manufacturing department—and the controller would
require the information from these budgets.
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
compute the direct materials cost per unit
($2.00).
61
168
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.
4. The fourth step is to calculate the value of
the ending finished goods inventory
($24,950). Notice:
a. The ending inventory in units (5,000)
is derived from the production
budget.
65
G. The selling and administrative expense budget
64
169
1. The first step in preparing this budget is to
multiply the variable S, G & A rate by the
number of units sold.
Quick Check – S, G & A expense calculations
4. The same steps are followed for the months
of May and June to arrive at total cash
disbursements for S, G & A expenses for the
quarter of $230,000.
71
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.
68–69
70
72
67
170
d. The financing section details the
borrowings and repayments projected
to take place during the budget
period.
ii. Assume the information as shown to enable the
preparation of Royal’s cash budget.
1. The first step in preparing this budget is to
calculate the total cash available ($210,000).
74
2. The second step is to calculate the total cash
disbursements ($230,000). Notice:
a. Each cash disbursement, except
dividends, comes from a schedule or
budget that had already been
prepared.
73
75
171
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
$50,000 on its line-of-credit.
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.
78
Quick Check – cash budgeting calculations
6. The same four steps are repeated for June.
The result is an excess of cash available of
$95,000.
a. This excess enables Royal to repay
the $50,000 in principal that was
81
7. Once the cash budget has been completed,
the budgeted income statement can be
prepared. The cash budget must be prepared
first so that the interest expense can be
79–80
82
77
172
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.
Helpful Hint: Indicate that, for simplicity, income taxes
were not included in these budgets, but taxes must be
considered in a company’s budgeting process.
Learning Objective 10: Prepare a budgeted balance
sheet.
J. The budgeted balance sheet
85
83
173
1. The budgeted balance sheet is prepared as
follows:
a. Cash ($43,000) is taken from the
ending cash balance of the cash
budget.
($0.40).
d. The finished goods inventory
($24,950) is taken from the ending
finished goods inventory budget.
e. Land, equipment, and common stock
are all given.