Management Accounting

Fundamentals
Module 6

Absorption and variable

costing and budgeting
Lectures and handouts by:
Shirley Mauger, HB Comm, CGA

Part
1
2

3
3,4
N/A
5
6
7
8
9
10
11

Module 6 - Table of Contents

Content
6.1 Absorption and variable costing
6.2 Absorption and variable costing income statements
6.3 Advantages and disadvantages of absorptions and variable
costing
6.4 Impact of JIT inventory methods
6.5 Basic framework of budgeting
6.6 Advantages of budgets
6.7 Preparing the master budget
6.8 Computer illustration 6-1: Sales budget and cash collection
schedule
Review question: Variable and absorption costing income stmt.
Review question: Variable and absorption costing calculations
Review question: Cash collection schedule, production budget
Review question: Cost of purchases & cash budget
Review question: Cash budget
Review question: Cash disbursements
Review question: Multiple choice
2

MA1 MODULE 6

Part 1

Absorption and variable

costing

Topic 6.1
3

Part 1 Absorption and variable costing (Topic 6.1)

Explain how absorption costing differs from variable costing,
and compute the unit product cost under each method (Level 1)

Product and period costs

Direct Materials
Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH
Variable Selling and Admin Exp.
Fixed Selling and Admin Exp.

M cGraw-Hill Ryerson Limited., 2004

Part 1 Absorption and variable costing (Topic 6.1)

Explain how absorption costing differs from variable costing,
and compute the unit product cost under each method (Level 1)

Product and period costs

Absorption
Costing
Direct Materials

Product
Costs

Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH

Period
Costs

Variable Selling and Admin Exp.

Fixed Selling and Admin Exp.

M cGraw-Hill Ryerson Limited., 2004

Part 1 Absorption and variable costing (Topic 6.1)

Explain how absorption costing differs from variable costing,
and compute the unit product cost under each method (Level 1)

Product and period costs

Absorption
Costing

Variable
Costing
Direct Materials

Product
Costs

Product
Costs

Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH

Period
Costs

Variable Selling and Admin Exp.

Period
Costs

Fixed Selling and Admin Exp.

M cGraw-Hill Ryerson Limited., 2004

Part 1 Absorption and variable costing (Topic 6.1)

Exercise 7-1

Product and period costs

Absorption
Costing

Variable
Costing
Direct Materials

Product
Costs

Product
Costs

Direct Labour
Variable Manufacturing OH
Fixed Manufacturing OH

Period
Costs

Variable Selling and Admin Exp.

Period
Costs

Fixed Selling and Admin Exp.

Turn to page 305, exercise 7-1 in the textbook

M cGraw-Hill Ryerson Limited., 2004

Part 1 Absorption and variable costing (Topic 6.1)

Exercise 7-1

Maxwell Company
Absorption
Costing

Product
Costs

20,000 units produced

Direct Materials

$18

Direct Labour

$ 7

Variable Mftg. OH

$ 2

Fixed Mftg. OH

Period
Costs

Var. Sell. & Ad. Exp.

$160,000
$ 5

Variable
Costing
Product
Costs

Period
Costs

Fixed Sell. & Ad. Exp.$110,000

M cGraw-Hill Ryerson Limited., 2004

Part 1 Absorption and variable costing (Topic 6.1)

Exercise 7-1

Maxwell Company
Absorption
Costing
Product
Costs
$35
Period
Costs

20,000 units produced

Direct Materials

$18

Direct Labour

$ 7

Variable Mftg. OH

$ 2

Fixed Mftg. OH

$ 8

Var. Sell. & Ad. Exp.

$ 5

Variable
Costing
Product
Costs
$27
Period
Costs

Fixed Sell. & Ad. Exp.$110,000

M cGraw-Hill Ryerson Limited., 2004

MA1 MODULE 6

Part 2
Absorption and variable costing
income statements
Advantages and disadvantages of
absorption and variable costing
Impact of JIT inventory methods
Topics 6.2-6.4
10

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Prepare income statements using both absorption and variable

costing, and reconcile the two net income figures by observing
the effect of deferred manufacturing overhead costs. (Level 1)

Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

Absorption
costing
$XX
$XX
XX
(XX)

XX
$XX
XX
XX
$XX
11

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Prepare income statements using both absorption and variable

costing, and reconcile the two net income figures by observing
the effect of deferred manufacturing overhead costs. (Level 1)
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable manufacturing costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. expenses
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

$XX
XX
XX
(XX)
$XX
XX

XX
$XX
XX
XX
$XX

12

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

16,000x$50

$800,000
$

No beginning
inventory

Turn to page 305, exercise 7-1 in the textbook

13

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

16,000x$50

$800,000
$

20,000x$35
4,000x$35

700,000
(140,000)

560,000

14

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sel.l & admin.
Net operating income

16,000x$50

$800,000
$

20,000x$35
4,000x$35
16,000x$5

700,000
(140,000)

560,000
$240,000
80,000
110,000
$50,000
15

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

16,000x$50

$800,000
$

No beginning
inventory

16

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

16,000x$50

$800,000

$
0
20,000x$27 540,000
4,000x$27 (108,000)
$432,000

17

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

16,000x$50

$800,000

$
0
20,000x$27 540,000
4,000x$27 (108,000)
$432,000
16,000x$5
80,000 512,000
$288,000

18

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

16,000x$50

$800,000

$
0
20,000x$27 540,000
4,000x$27 (108,000)
$432,000
16,000x$5
80,000 512,000
$288,000
160,000
110,000
$ 18,000
19

Part 2 Absorption and variable costing income

statements (Topic 6.2)
Exercise 7-1
Prepare an income statement for the year using both the absorption
and variable costing methods.
Variable costing
Sales
16,000x$50
Less variable expenses:
Beginning inventory
$
0
Add: variable mftg. costs
20,000x$27 540,000
Less: ending inventory
4,000x$27 (108,000)
Variable cost of goods sold
$432,000
Variable sell. & admin. exp.
16,000x$5
80,000
Compare this with $50,000
Contribution margin
for absorption costing
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

$800,000

512,000
$288,000
160,000
110,000
$ 18,000
20

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Exercise 7-1

Reconcile the difference

Absorption costing
operating income
Fixed mftg. costs in
ending inventory
(FMOH per unit x
#units)

Variable costing
operating income

Fixed mftg. costs in

beginning inventory
(FMOH per unit x
#units)

21

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Exercise 7-1

Reconcile the difference

Absorption costing
operating income
$50,000
Fixed mftg. costs in
ending inventory
$8X4,000=$32,000

Variable costing
operating income
$18,000

Fixed mftg. costs in

beginning inventory
$0

22

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Exercise 7-1

Reconcile the difference

Absorption costing
operating income
$50,000
Fixed mftg. costs in
ending inventory
$8X4,000=$32,000

Variable costing
operating income
$18,000

Fixed mftg. costs in

beginning inventory
$0

$50,000 - $18,000 = $32,000

In absorption costing, a portion of the
fixed cost remains in ending inventory

23

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
In the second year of operations, 20,000 units were produced and
18,000 were sold. If costs and selling price remain the same, what
was the net operating income?

Beginning inventory
Add: units produced
Units available
Units sold
Ending inventory

4,000 units
20,000 units
24,000 units
(18,000) units
6,000 units

24

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
In the second year of operations, 20,000 units were produced and
18,000 were sold. If costs and selling price remain the same, what
was the net operating income?
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

18,000x$50
4,000 x $35

$900,000
$140,000

Last periods
ending inventory

25

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
In the second year of operations, 20,000 units were produced and
18,000 were sold. If costs and selling price remain the same, what
was the net operating income?
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

18,000x$50

$900,000

4,000 x $35

$140,000

20,000x$35
6,000x$35

700,000
(210,000)

18,000x$5

630,000
$270,000
90,000
110,000
$70,000
26

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
In the second year of operations, 20,000 units were produced and
18,000 were sold. If costs and selling price remain the same, what
was the net operating income?
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

18,000x$50

$900,000

4,000 x $35

$140,000

20,000x$35
6,000x$35

700,000
(210,000)

18,000x$5

630,000
$270,000
90,000
110,000
$70,000
27

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
Prepare an income statement for the second year of operations if
20,000 units were produced, and 18,000 were sold
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

18,000x$50

$900,000

4,000x$27 $108,000
20,000x$27 540,000
6,000x$27 (162,000)
$486,000
18,000x$5
90,000 576,000
$324,000
160,000
110,000
$ 54,000
28

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
Prepare an income statement for the second year of operations if
20,000 units were produced, and 18,000 were sold
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

18,000x$50

$900,000

4,000x$27 $108,000
20,000x$27 540,000
6,000x$27 (162,000)
$486,000
18,000x$5
90,000 576,000
$324,000
160,000
110,000
$ 54,000
29

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Reconcile the difference

Absorption costing
operating income
$70,000
Fixed mftg. costs in
ending inventory
$8X6,000=$48,000

Variable costing
operating income
$54,000

Fixed mftg. costs in

beginning inventory
$8 X 4000 = $32,000

$70,000 - $54,000 = $48,000 32,000

In absorption costing, a portion of the
fixed cost remains in ending inventory

30

Operating income

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Production of 20,000 units

31

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
In the third year of operations, 20,000 units were produced and
26,000 were sold. If costs and selling price remain the same, what
was the net operating income?

Beginning inventory
Add: units produced
Units available
Units sold
Ending inventory

6,000 units
20,000 units
26,000 units
(26,000) units
0 units

32

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
In the third year of operations, 20,000 units were produced and
26,000 were sold. If costs and selling price remain the same, what
was the net operating income?
Absorption costing
Sales
Cost of goods sold
Beginning inventory
Add: COGM (DM, DL and
variable and fixed OH)
Less: ending inventory
Gross margin
Variable sell. & admin.
Fixed sell & admin.
Net operating income

26,000x$50

$1,300,000

6,000 x $35

$210,000

20,000x$35
0x$35

700,000
(0)

26,000x$5

910,000
$390,000
130,000
110,000
$150,000
33

Part 2 Absorption and variable costing income

Exercise 7-1
statements (Topic 6.2)
Prepare an income statement for the second year of operations if
20,000 units were produced, and 18,000 were sold
Variable costing
Sales
Less variable expenses:
Beginning inventory
Add: variable mftg. costs
Less: ending inventory
Variable cost of goods sold
Variable sell. & admin. exp.
Contribution margin
Fixed manufacturing overhead
Fixed selling & admin. expenses
Net operating income

26,000x$50
6,000x$27 $162,000
20,000x$27 540,000
0x$27
(0)
$702,000
26,000x$5 130,000

$1,300,000

832,000
$468,000
160,000
110,000
$ 198,000
34

Operating income

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Production of 20,000 units

35

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Operating income

When sales < production

absorption costing
reports higher income.
WHY?
Ending inventory stores
fixed costs

Production of 20,000 units

36

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Operating income

When sales > production

absorption costing
reports lower income.
WHY?
Fixed costs stored in
ending inventory are
released to COGS

Production of 20,000 units

37

Operating income

Part 2 Absorption and variable costing income

statements (Topic 6.2)

Production of 20,000 units

38

Part 2 Advantages and disadvantages of absorption

and variable costing (Topic 6.3)
Explain the advantages and limitations of both the absorption
and variable costing methods. (Level 1)

Absorption
costing
Accepted standard for
external reporting
Focus on full costing

Variable
costing
Useful for CVP analysis
Fixed costs do not
appear to be variable
Profit is not affected by
inventory levels
Operating income is
closer to cash flows and
sales
39

Part 2 Impact of JIT inventory methods (Topic 6.4)

Explain how the use of JIT inventory methods decrease or
eliminates the difference in net income reported under the
absorption and variable costing methods. (Level 1)

The main issue with absorption costing is the

effect of fixed costs stored in ending inventory
Just in time (JIT) inventory attempts to minimize
inventory on hand
In a JIT environment absorption and variable
costing methods will show approximately the
same operating income

40

MA1 MODULE 6

Part 3

Basic framework of
budgeting
Prepare the master
budget
Topics 6.5-6.7
41

Part 3 Basic framework of budgeting (Topic 6.5)

Define budgeting and explain the difference between planning
and control (Level 2)
Formulating longand short-term
plans (Planning)
Comparing actual
to planned
performance
(Controlling)

Decision
Making

Implementing
plans (Directing
and Motivating)

Measuring
performance
(Controlling)
42

Garrison, Noreen, Chesley, Carroll, Managerial Accounting, 6 th Canadian edition, 2004 p. 6

Part 3 Basic framework of budgeting (Topic 6.5)

Define budgeting and explain the difference between planning
and control (Level 2)
Formulating longand short-term
plans (Planning)
Comparing actual
to planned
performance
(Controlling)

The budget is
the planned
performance

Budget
created

A detailed plan for the

acquisition and use of financial
and other resources over a
specified time period.
Usually set by a budget
committee
43

Garrison, Noreen, Chesley, Carroll, Managerial Accounting, 6 th Canadian edition, 2004 p. 6 & 383

Part 3 Advantages of budgets (Topic 6.6)

List the principal advantages of budgeting (Level 2)

Advantages of budgeting
Force managers to plan for the future
Communicates managements plan
Assists with allocating resources
Can foresee problems
Translates goals and objectives into benchmarks

44

Part 3 Advantages of budgets (Topic 6.6)

List the principal advantages of budgeting (Level 2)

Budget periods
Operating budget usually 1 year
Often divided into quarters and months
Continuous or perpetual budgets roll forward
one month at a time.

Participative (self imposed) budgets.

Person directly responsible estimates the budget
Must be reviewed by superiors

45

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)
Sales budget
Ending
inventory
budget
Direct
materials
budget

Sell & admin.

expense
budget

Production
budget
Direct labour
budget

Mftg.
overhead
budget

Cash budget
Budgeted
income
statement

Budgeted
balance
sheet

46

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Sales budget
First Quarter
Jan.

Feb.

Mar.

Qtr.

Budgeted sales in units

XX

XX

XX

XXX

Selling price per unit

$XX

$XX

$XX

$XX

Total sales $X,XXX

$X,XXX $X,XXX $X,XXX

forecasted units sold X selling price = total sales

Turn to page 1 in ma1_mod6_handout1.pdf and

pages 394-402 in the textbook

47

Part 3 Preparing the master budget (Topic 6.7)

the budget
master budget (Level 1)
Used for thePrepare
production
Sales
(purchases
budget
budget in retail)
and to calculate variable expenses
First Quarter
Jan.

Feb.

Mar.

Qtr.

Budgeted sales in units

XX

XX

XX

XXX

Selling price per unit

$XX

$XX

$XX

$XX

Total sales $X,XXX

$X,XXX $X,XXX $X,XXX

Used to calculate cash

receipts from customers for
theprice
cash=budget
forecasted units sold X selling
total sales

48

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Production budget
From the
sales budget

Budgeted sales in units

Add: desired ending inventory
Total needs
Less: beginning inventory
Required production

First Quarter
Jan. Feb. Mar.
400 500
700
200 260
155
600 760
855
(170) (200) (260)
430 560
595

Qtr.
1,600
155
1,755
(170)
1,585

Budgeted sales + desired ending inventory

beginning inventory= required production
49

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level
1)
Desired
ending
inventory at the end
of the quarter
First Quarter
Jan. Feb. Mar.
Qtr.
Budgeted sales in units 400 500
700 1,600
Add: desired ending inventory 200 260
155
155
Total needs 600 760
855 1,755
Less: beginning inventory (170) (200) (260) (170)
Required production 430 560
595 1,585

Production budget

Beginning inventory is
desired ending inventory
of the previous period

Budgeted sales + desired ending inventory

beginning inventory= required production
50

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Production budget
Budgeted sales in units
Add: desired ending inventory
Total needs
Less: beginning inventory
Required production

First Quarter
Jan. Feb. Mar.
400 500
700
200 260
155
600 760
855
(170) (200) (260)
430 560
595

Qtr.
1,600
155
1,755
(170)
1,585

Budgeted sales + desired ending inventory

beginning inventory= required production
51

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Production budget
Budgeted sales in units
Add: desired ending inventory
Total needs
Less: beginning inventory
Required production

First Quarter
Jan. Feb. Mar.
400 500
700
200 260
155
600 760
855
(170) (200) (260)
430 560
595

Qtr.
1,600
155
1,755
(170)
1,585

Finished goods

52

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Production budget
Budgeted sales in units
Add: desired ending inventory

Jan.
400
200

First Quarter
Feb. Mar.
Qtr.
500
700 1,600
260
155
155

Total needs 600 760

Less: beginning inventory (170) (200)
Required production 430 560
Finished goods
Beg. Bal. 170
430

400 from sales bud.)

200
Desired ending
balance

855 1,755
(260) (170)
595 1,585

Merchandising firm is
similar except cost
of inventory is used
instead of units and
the result is required
purchases.
53

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Production budget
Budgeted sales in units
Add: desired ending inventory

Jan.
400
200

First Quarter
Feb. Mar.
Qtr.
500
700 1,600
260
155
155

Total needs 600 760

Less: beginning inventory (170) (200)
Required production 430 560

855 1,755
(260) (170)
595 1,585

Used for the direct

materials and direct
labour budgets

54

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Direct materials budget

From the production

budget

Units to be produced
Raw materials per unit
Production needs
Add: desired ending inventory
Total needs
Less: beginning inventory
Raw materials to purchase
Cost per unit of raw materials
Total cost for units purchased

Jan.
XX
X
XX
XX
XXX
(XX)
XX
$X
$XXX

First Quarter
Feb.
Mar.
Qtr.
XX
XX
XXX
X
X
X
XX
XX
XXX
XX
XX
XX
XXX
XXX
XXX
(XX)
(XX)
(XX)
XX
XX
XX
$X
$X
$X
$XXX $XXX $XXX

(Units to produce x raw materials per unit) +

desired ending inventory beginning
inventory = raw materials to purchase

55

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Direct materials budget

Units to be produced
Raw materials per unit
Production needs
Add: desired ending inventory
Total needs
Less: beginning inventory
Raw materials to purchase
Cost per unit of raw materials
Total cost for units purchased

Jan.
XX
X
XX
XX
XXX
(XX)
XX
$X
$XXX

First Quarter
Feb.
Mar.
Qtr.
XX
XX
XXX
X
X
X
XX
XX
XXX
XX
XX
XX
XXX
XXX
XXX
(XX)
(XX)
(XX)
XX
XX
XX
$X
$X
$X
$XXX $XXX $XXX

Used for the cash

budget

56

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Direct labour budget

From the production

budget

Units to be produced
Direct labour time per unit
Total hours of direct labour
required
Direct labour cost per hour
Total direct labour cost

Jan.
XX
X
XX
$XX
$XXX

First Quarter
Feb.
Mar.
XX
XX
X
X
XX
XX
$XX
$XXX

Qtr.
XXX
X
XXX

$XX
$XX
$XXX $XXX

Units to produce x DL time per unit x DL cost per

hour = total DL cost
57

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Direct labour budget

Units to be produced
Direct labour time per unit
Total hours of direct labour
required
Direct labour cost per hour
Total direct labour cost

Used for the

manufacturing
overhead budget

Jan.
XX
X
XX
$XX
$XXX

First Quarter
Feb.
Mar.
XX
XX
X
X
XX
XX
$XX
$XXX

Qtr.
XXX
X
XXX

$XX
$XX
$XXX $XXX

Used for the cash

budget

Units to produce x DL time per unit x DL cost per

hour = total DL cost
58

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Manufacturing overhead budget

From the direct
labour budget

Budgeted direct labour hours

Variable overhead rate
Variable mftg. overhead
Fixed mftg. overhead
Total mftg. overhead
Less depreciation
Cash disbursements for
overhead

First Quarter
Jan.
Feb.
Mar.
Qtr.
XX
XX
XX
XXX
$X
$X
$X
$X
$XXX
$XXX $XXX $XXX
$XXX
$XXX $XXX $XXX
$XXX
$XXX $XXX $XXX
$(XXX) $(XXX) $(XXX) $(XXX)
$XXX

$XXX

$XXX

$XXX

Used for the cash budget

(DL hours x variable overhead rate) + FMOH

depreciation = cash disbursements for overhead

59

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Ending finished goods inventory budget

Ending finished goods inventory (units)
Unit product cost

XXX
$X

Ending finished goods inventory in dollars

$X,XXX

To the balance sheet

and income statement

(Direct materials per unit + Direct labour per unit +

manufacturing overhead) x ending finished
goods inventory in units
60

Part 3 Preparing the master budget (Topic 6.7)

Prepare the master budget (Level 1)

Selling and administrative expense budget

From the sales budget
Jan.
XX
X

First Quarter
Feb.
Mar.
XX
XX
X
X

Qtr.
Unit sales
XXX
Variable selling & administrative
X
expense per unit
Variable expense
XX
XX
XX
XXX
Fixed selling and administrative $XX $XX
$XX
$XX
expenses
Total budgeted selling & $XXX $XXX $XXX $XXX
administrative expenses
To the income statement
and the cash budget

(Unit sales x variable sell.& admin. expense per

unit) + fixed selling and admin. expenses

61

MA1 MODULE 6

Part 4

Prepare the master

budget
(the cash budget)

Topic 6.7
(continued)
62

Part 4 Preparing the master budget (Topic 6.7 continued)

Prepare the master budget (Level 1)

Cash budget
Receipts section
Disbursements section
Cash excess or deficiency section
Financing section

63

Part 4 Preparing the master budget (Topic 6.7 continued)

Cash budget:
April
May
June
Qtr.
Cash balance, beginning
$2,600 $2,700 $2,020 $2,600
Add receipts: Customer collect.
Cash available
Less disbursements
Direct materials purchases
Payroll
Manufacturing overhead
Selling and administrative
Total disbursements
Cash avail. over disbursements
Financing
Borrowings (at beginning)
Repayments (at ending)
Interest
Total financing
Cash balance, ending

64

Part 4 Preparing the master budget (Topic 6.7 continued)

Cash budget:
Cash balance, beginning
Add receipts: Customer collect.
Cash available
Less disbursements
Direct materials purchases
Payroll
Manufacturing overhead
Selling and administrative
Total disbursements
Cash avail. over disbursements
Financing
Borrowings (at beginning)
Repayments (at ending)
Interest
Total financing
Cash balance, ending

April
May
June
Qtr.
$2,600 $2,700 $2,020 $2,600
18,100 21,720 28,300 68,120
20,700 24,420 30,320 70,720
Customer collections are
calculated from a schedule of
expected cash collections
(see p.394 schedule 1)

65

Part 4 Preparing the master budget (Topic 6.7 continued)

Cash budget:
Cash balance, beginning
Add receipts: Customer collect.
Cash available
Less disbursements
Direct materials purchases
Payroll
Manufacturing overhead
Selling and administrative
Total disbursements
Cash avail. over disbursements
Financing
Borrowings (at beginning)
Repayments (at ending)
Interest
Total financing
Cash balance, ending

April
May
June
Qtr.
$2,600 $2,700 $2,020 $2,600
18,100 21,720 28,300 68,120
20,700 24,420 30,320 70,720
10,800 12,000 18,000 40,800
2,400
2,400
800 5,600
7,000
7,000 7,000 21,000
800
1,000
500 2,300
21,000 22,400 26,300 69,700
Disbursement figures
are taken from
separate budgets

66

Part 4 Preparing the master budget (Topic 6.7 continued)

Cash budget:
April
May
June
Qtr.
Cash balance, beginning
$2,600 $2,700 $2,020 $2,600
Add receipts: Customer collect. 18,100 21,720 28,300 68,120
Cash available
20,700 24,420 30,320 70,720
Less disbursements
Direct materials purchases
10,800 12,000 18,000 40,800
Payroll
2,400
2,400
800 5,600
Manufacturing overhead
7,000
7,000 7,000 21,000
Selling and administrative
800
1,000
500 2,300
Total disbursements
21,000 22,400 26,300 69,700
Cash avail. over disbursements
(300)
2,020 4,020 1,020
Financing
Cash available minus
Borrowings (at beginning)
disbursements. A negative
Repayments (at ending)
result means $$ may have
Interest
to be borrowed.
Total financing
Cash balance, ending

67

Part 4 Preparing the master budget (Topic 6.7 continued)

Cash budget:
Cash balance, beginning
Add receipts: Customer collect.
Cash available
Less disbursements
Direct materials purchases
Payroll
Manufacturing overhead
Selling and administrative
Total disbursements
Cash avail. over disbursements
Financing
Borrowings (at beginning)
Repayments (at ending)
Interest
Total financing
Cash balance, ending

+
=

April
May
June
Qtr.
$2,600 $2,700 $2,020 $2,600
18,100 21,720 28,300 68,120
20,700 24,420 30,320 70,720
10,800 12,000 18,000 40,800
2,400
2,400
800 5,600
7,000
7,000 7,000 21,000
800
1,000
500 2,300
21,000 22,400 26,300 69,700
(300)
2,020 4,020 1,020
3,000
-3,000
--- (3,000) (3,000)
--(120) (120)
3,000
-- (3,120) (120)
$2,700 $2,020
$900 $900

68

Part 4 Preparing the master budget (Topic 6.7 continued)

Cash budget:
Cash balance, beginning
Add receipts: Customer collect.
Cash available
Less disbursements
Direct materials purchases
Payroll
Manufacturing overhead
Selling and administrative
Total disbursements
Cash avail. over disbursements
Financing
Borrowings (at beginning)
Repayments (at ending)
Interest
Total financing
Cash balance, ending

April
May
June
Qtr.
$2,600 $2,700 $2,020 $2,600
18,100 21,720 28,300 68,120
20,700 24,420 30,320 70,720
10,800 12,000 18,000 40,800
2,400
2,400
800 5,600
7,000
7,000 7,000 21,000
800
1,000
500 2,300
21,000 22,400 26,300 69,700
(300)
2,020 4,020 1,020
3,000
-3,000
--- (3,000) (3,000)
--(120) (120)
3,000
-- (3,120) (120)
$2,700 $2,020
$900 $900

69

Part 4 Preparing the master budget (Topic 6.7 continued)

Budgeted income statement and

balance sheet
Same format as actual statements
Income statement is based on the operating
budgets
Balance sheet is based on the current balance
sheet data and then adjusted with the data from
the other operating budgets.

70

MA1 MODULE 6

Part 5
Review question:

Variable and absorption costing

income statements
(download the additional questions handout:
ma1_mod6_handout1.pdf)
71

Part 5 Review question: Variable and absorption

costing income statements

Question 4 March, 2005

Handout pages 2 thru 3
a)
b)
c)

Prepare in good form a variable costing income

statement
Prepare in good form an absorption costing format
income statement
Prepare a schedule reconciling the net incomes

Stop the audio, read and attempt the

question in the handout then come back to
listen to the solution.

72

Part 5 Review question: Variable and absorption

costing income statements

Question 4 March, 2005

Handout pages 2 thru 3
a)
b)
c)

Prepare in good form a variable costing income

statement
Prepare in good form an absorption costing format
income statement
Prepare a schedule reconciling the net incomes

73

Part 5 Review question: Variable and absorption

costing income statements

Question 4 March, 2005

Handout pages 2 thru 3
a)
b)
c)

Prepare in good form a variable costing income

statement
Prepare in good form an absorption costing format
income statement
Prepare a schedule reconciling the net incomes

74

MA1 MODULE 6

Part 6
Review question:

Variable and absorption costing

calculations
(download the additional questions handout:
ma1_mod6_handout1.pdf)
75

Part 6 Review question: Variable and absorption

costing calculations

Question 2 June, 2003

Handout pages 4 thru 5
a)
b)
c)
d)
e)

Calculate the units sold in fiscal 2002

Calculate the total contribution margin under
variable costing
Calculate the gross margin under absorption
costing
Calculate the cost per unit sold under variable
costing
Calculate the cost per unit sold under absorption
costing
Stop the audio, read and attempt the
question in the handout then come back to
76
listen to the solution.

Part 6 Review question: Variable and absorption

costing calculations

Question 2 June, 2003

Handout pages 4 thru 5
a)
b)
c)
d)
e)

Calculate the units sold in fiscal 2002

Calculate the total contribution margin under
variable costing
Calculate the gross margin under absorption
costing
Calculate the cost per unit sold under variable
costing
Calculate the cost per unit sold under absorption
costing

77

Part 6 Review question: Variable and absorption

costing calculations

Question 2 June, 2003

Handout pages 4 thru 5
a)
b)
c)
d)
e)

Calculate the units sold in fiscal 2002

Calculate the total contribution margin under
variable costing
Calculate the gross margin under absorption
costing
Calculate the cost per unit sold under variable
costing
Calculate the cost per unit sold under absorption
costing

78

Part 6 Review question: Variable and absorption

costing calculations

Question 2 June, 2003

Handout pages 4 thru 5
a)
b)
c)
d)
e)

Calculate the units sold in fiscal 2002

Calculate the total contribution margin under
variable costing
Calculate the gross margin under absorption
costing
Calculate the cost per unit sold under variable
costing
Calculate the cost per unit sold under absorption
costing

79

MA1 MODULE 6

Part 7
Review questions:

Cash collection schedule

Production budget
(download the additional questions handout:
ma1_mod6_handout1.pdf)
80

Part 7 Review question: Cash collection schedule,

production budget

Exercise 9-1 p. 410

Handout page 6
1.
2.

Prepare a schedule of expected cash collections

from sales by month and in total for the third
quarter
Assume that the company will prepare a budgeted
balance sheet as of September 30. Compute the
accounts receivable as of that date.

Stop the audio, read and attempt the

question in the textbook then come back to
listen to the solution.

81

Part 7 Review question: Cash collection schedule,

production budget

Exercise 9-2 p. 410

Handout page 6
1.

Prepare a production budget for the third quarter

showing the number of units to be produced each
month and for the quarter in total

82

MA1 MODULE 6

Part 8
Review question:

Cost of purchases and cash

budget
(download the additional questions handout:
ma1_mod6_handout1.pdf)
83

Part 8 Review question: Cost of purchases and cash

budget

Question 5 March, 2004

Handout pages 7 thru 8
a.
b.

Prepare a cost of purchases schedule for October

and November
Prepare the cash budgets for October and
November including the effects of financing

Stop the audio, read and attempt the

question in the handout then come back to
listen to the solution.

84

Part 8 Review question: Cost of purchases and cash

budget

Question 5 March, 2004

Handout pages 7 thru 8
a.
b.

Prepare a cost of purchases schedule for October

and November
Prepare the cash budgets for October and
November including the effects of financing

85

Part 8 Review question: Cost of purchases and cash

budget

Question 5 March, 2004

Handout pages 7 thru 8
a.
b.

Prepare a cost of purchases schedule for October

and November
Prepare the cash budgets for October and
November including the effects of financing

86

MA1 MODULE 6

Part 9
Review question:

Cash budget

(download the additional questions handout:

ma1_mod6_handout1.pdf)
87

Part 9 Review question: Cash budget

Question 4 June, 1991

Handout pages 9 thru 10
Prepare a cash budget for the month of April

Stop the audio, read and attempt the

question in the handout then come back to
listen to the solution.

88

MA1 MODULE 6

Part 10
Review question:

Cash disbursements

(download the additional questions handout:

ma1_mod6_handout1.pdf)
89

Part 10 Review question: Cash disbursements

Question 3 December, 1992

Handout page 11
Compute the April cash disbursements for payment of
accounts payable regarding direct materials
purchased

Stop the audio, read and attempt the

question in the handout then come back to
listen to the solution.

90

MA1 MODULE 6

Part 11
Review questions:

Multiple Choice Questions

(download the additional questions handout:

ma1_mod6_handout1.pdf)
91

Part 11 Review questions: Multiple choice

Multiple choice questions

Handout pages 12 thru 14
Now working on page 12
Q1
a. Cost of the ending finished goods inventory
under variable costing
b.Cost of the ending finished goods inventory
under absorption costing
c. Operating profit for the year under absorption
costing
d.Operating profit for the year under variable
costing
Stop the audio, read and attempt the
question in the handout then come back to
listen to the solution.

92

Part 11 Review questions: Multiple choice

Multiple choice questions

Handout pages 12 thru 14
Now working on page 13
Q2 May variance from the master budget operating
income
Q3 Expected production in February

93

Part 11 Review questions: Multiple choice

Multiple choice questions

Handout pages 12 thru 14
Now working on page 14
Q4 Which statement regarding variable vs absorption
costing is true?
Q5 How does the accounting treatment of selling and
administration costs differ between absorption and
variable costing if more units are produced than
sold?
Q6 a. What would be inventoriable costs be if Ventor
uses variable costing?
b.What would be the inventoriable cost if Ventor
uses absorption costing?
94