Chapter 9

Profit Planning
and
Activity-Based
Budgeting

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

 Learning
Objective
1

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

Purposes of Budgeting Systems
Budget
1. Planning
a detailed plan, 2. Facilitating
expressed in Communication and
quantitative terms, Coordination
that specifies how 3. Allocating Resources
resources will be 4. Controlling Profit and
acquired and used Operations
during a specified 5. Evaluating
period of time. Performance and
Providing Incentives

9-3
 Types of Budgets
Detail
Budget
Detail

Materials
Budget
Detail

Production
Budget
Master
Budget
Covering all Sales
phases of
a company’s
operations.

9-4
 Types of Budgets
Income
Statement

Budgeted
Financial
Statements

Balance Statement of
Sheet Cash Flows

9-5
 Learning
Objective
2

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

 Sales of Services or Goods

Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods

Ending Direct Direct Selling and

Overhead
Inventory Materials Labor Administrative
Budget Budget Budget Budget
Budget
Direct Materials

Cash Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-7
 Learning
Objective
3

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

 Activity-Based Costing versus
Activity-Based Budgeting
Resources
Resources Resources
Resources
Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
Activities
Activities Activities
Activities

Activity-Based
Activity-Based
Cost Budgeting
Budgeting (ABB)
(ABB)
Cost objects:
objects: Forecast
Forecast of
of products
products
products
products and
and services
services and
and services
services to
to be
be
produced,
produced, and
and produced
produced andand
customers
customers served.
served. customers
customers served.
served.
9-9
 Learning
Objective
4

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

 Sales Budget
➊ Breakers,
➊ Breakers, Inc.
Inc. is
is preparing
preparing budgets
budgets for
for the
the quarter
quarter
ending
ending June
June 30.
30.
➋ Budgeted
➋ Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
April
April 20,000
20,000 units
units
May
May 50,000
50,000 units
units
June
June 30,000
30,000 units
units
July
July 25,000
25,000 units
units
August
August 15,000
15,000 units.
units.
➌ The
➌ The selling
selling price
price isis $10
$10 per
per unit.
unit.

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 Sales Budget
April May June Quarter

Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling price
per unit $ 10 $ 10 $ 10 $ 10
Total
Revenue $ 200,000 $ 500,000 $ 300,000 $ 1,000,000

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 Production Budget

The
The management
management of of Breakers,
Breakers, Inc.
Inc. wants
wants ending
ending
inventory
inventory to
to be
be equal
equal to
to 20%
20% ofof the
the following
following
month’s
month’s budgeted
budgeted sales
sales in
in units.
units.

On
On March
March 31,
31, 4,000
4,000 units
units were
were on
on hand.
hand.

Let’s
Let’s prepare
prepare the
the production
production budget.
budget.

9-13
 From
sales
Production Budget
budget
April May June Quarter
Sales in units 20,000 50,000 30,000 100,000
Add: desired
end. inventory 10,000 6,000 5,000 inventory
Ending 5,000
becomes
Total needed 30,000 56,000 35,000
beginning 105,000 the next
inventory
Less: beg. month
inventory 4,000 10,000 6,000 4,000
Units to be
produced 26,000 46,000 29,000 101,000

March 31
ending inventory

9-14
 Direct-Material Budget
•• At
At Breakers,
Breakers, five
five pounds
pounds of of material
material areare required
required
per
per unit
unit of
of product.
product.
•• Management
Management wants wants materials
materials onon hand
hand at at the
the end
end
of
of each
each month
month equal
equal to
to 10%
10% ofof the
the following
following
month’s
month’s production.
production.
•• On
On March
March 31,
31, 13,000
13,000 pounds
pounds ofof material
material areare on
on
hand.
hand. Material
Material cost
cost $.40
$.40 per
per pound.
pound.

Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.

9-15
 From our
production
Direct-Material Budget
budget

10% of the following March 31

month’s production inventory
9-16
 Direct-Material Budget
July Production
Sales in units 25,000
Add: desired ending inventory 3,000
Total units needed 28,000
Less: beginning inventory 5,000
Production in units 23,000

June Ending Inventory

July production in units 23,000
Materials per unit 5
Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500

9-17
 Direct-Labor Budget
• At Breakers, each unit of product requires 0.1 hours
of direct labor.
• The Company has a “no layoff” policy so all
employees will be paid for 40 hours of work each
week.
• In exchange for the “no layoff” policy, workers agreed
to a wage rate of $8 per hour regardless of the hours
worked (No overtime pay).
• For the next three months, the direct labor workforce
will be paid for a minimum of 3,000 hours per month.
Let’s prepare the direct labor budget.

9-18
 Direct-Labor Budget

From our This is the greater of

production labor hours required or
budget labor hours guaranteed.

9-19
 Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.

9-20
 For the
remaining
budgets and
Learning
Objectives
5 – 8 see the
Text Book

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

End of Chapter 9

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