Annual Profit Plan and Supporting Schedules

Study Material 1

Terminology/Question Definition/Description/Answer
The direct materials usage budget (materials (Number of units to be produced × direct
purchase budget calculation) materials per unit × direct materials cost) +
desired ending direct materials inventory −
beginning direct materials inventory.

Production costs = direct materials + direct labor + manufacturing

overhead
Manufacturing overhead = (total expected overhead) / (total expected
direct labor hours)

*total expected overhead is the total of variable

overhead plus fixed overhead

(direct material) + (direct labor) + (manufacturing

overhead)
COGS for a manufacturing firm is defined as beginning finished goods inventory plus COGM
less ending finished goods inventory
Cost of sales (100% − the gross profit percentage)(sales)
Operating budgets sales budgets must precede production budgets.
Production budgets must precede direct
materials, direct labor, overhead, and cost of
goods sold budgets.

Operating, sales, production, overhead.

Sales budget, production budget, product cost

budgets (including direct materials, direct labor,
and factory overhead budgets), and cost of goods
sold budget.
Contribution margin (selling price per unit − variable cost per unit)/
(product volume)

is a measure of the ability of a company to

cover variable costs with revenue.

Contribution margin is affected by operating

leverage. Operating leverage is the degree to
which fixed costs are proportionately higher
or lower than variable costs. Proportionately
greater amounts of fixed costs provide the
increased risk of not breaking even. If fixed
 costs are adequately covered by revenues,
then more revenue is contributed to income.
The expected variable overhead consists of indirect materials, indirect labor
The variable overhead rate per unit is calculated by taking the expected variable overhead and
dividing it by the expected production in units
Selling and administrative budgets need to be detailed in order to determine the
relevant sales and administrative expense items.

The relevant detail provides for more enhanced

communication of goals and objectives,
coordination of actions, and control of activities
Capital investment refers to funds invested in a firm or enterprise for
the purpose of furthering its business objectives.
Research and development costs are period costs that must be expensed in the
period incurred and are therefore not part of a
capital budget.
capital investment budget - factory machine purchase price.
- cost of disposing of the old machine being
replaced.
- installation of the factory machine.
Pro forma statement of employee benefit costs allows a company to view the cost associated
with company-paid benefits and company-paid
payroll taxes.
the last schedule to be prepared in the normal The cash budget is the last schedule to be
budget preparation process? prepared in the normal budget preparation
process.

All of the other budgets listed are needed in

order to determine the receipts and
disbursements required to prepare the cash
budget.
The direct materials budget is often broken down a direct materials usage budget and a direct
into: materials purchase budget.
reason for creating a cash budget To identify periods of excessive cash and begin
investigating possible investments for those
funds.

To ensure that liquidity is maintained.

To identify periods of cash shortages and begin

finding sources of funds.
Operating expenses include costs that are not directly related to the
factors of production but reflect important period
costs for the organization.

Examples include selling costs, commissions,

shipping, and general and administrative
 expenses.
What would be the correct chronological order of II, III, I, IV.
preparation for the following budgets?

I. Cost of goods sold budget.

II. Production budget.
III. Purchases budget.
IV. Administrative budget.
Does the cost of goods manufactured include Yes, Cost of Goods Manufactured includes
beginning inventory? Beginning Inventory
Cost of goods sold is equal to . Beginning finished goods inventory, plus cost of
goods manufactured, less ending inventory of
finished goods.
In operating budgets, what does the cost of CGM is the cost of all goods completed or
goods manufactured (CGM) represent? finished during the current period.
capital asset planning (CAP) CAP is an unusually important decision for an
organization for several reasons:

A. Large amounts of money are involved—

These assets can be so large that they
deserve special attention.
B. Decisions often involve an unusually high
amount of risk.
C. Decisions typically are not easy to reverse
and often impact operations for years into the
future.
D. Decisions facilitate and constrain strategy.
E. Given the large amounts and longtime
commitments, the cash budget can be
severely impacted.
F. "Capital rationing"—where allocation of
funds must be efficiently achieved.
The reasons for creating a cash budget To identify periods of excessive cash and begin
investigating possible investments for those
funds.

To ensure that liquidity is maintained.

To identify periods of cash shortages and begin

finding sources of funds.
research and development costs. Research and development costs are period costs
that must be expensed in the period incurred and
are therefore not part of a capital budget.
What is EBIT, and how is it related to operating EBIT is earnings before interest and taxes. It is
income? considered equivalent to operating income.
How is depreciation related to the cash budget? Although depreciation is not a cash flow, it can
create a positive cash flow when depreciation
expense is deducted on the income tax return.
How do financing activities move with changes in Financing activities do not move with changes in
sales? sales. They are calculated independently of sales.
These independent financing activities include
both short-term and long-term debt and owners'
equity.
In what sense is the capital budget both long It's a long-term budget spanning several years,
term and short term? but typically it is updated annually.
Why is the capital budget so strongly tied to The capital budget is strategic in that it (1)
strategy? facilitates production, (2) deals with large sums of
money, and (3) affects multiple years.
How is the budget for cash flows created in The calculation is the same for the statement of
comparison to a regular cash flows calculation? cash flows and the cash budget. A company can
use either the direct method or the indirect
method to calculate cash flows.
The pro forma income statement is the result of Operating budget.
which other budget?
Which three budgets flow into the pro forma Pro forma income statement
balance sheet and the pro forma statement of Capital budget
cash flows? Cash budget