The Putnam Company – Balance Sheet
Supporting computations:
| a. | From Schedule 8 (cash budget). |
| b. | $100,000 (Accounts receivable, 12/31/20A) + $900,000 (Credit sales from Schedule 1) − $892,000(Collections from Schedule 1) = $108,000, or 60% of 4th quarter credit sales, from Schedule 1 ($180,000 × 60% = $108,000). |
| c. | Direct materials, ending inventory = 520 pounds × $ 5 = $2,600 (From Schedule 3) |
| d. | From Schedule 6 (ending finished goods inventory budget). |
| e. | From the 20A balance sheet and Schedule 8 (no change). |
| f. | $250,000 (Building and Equipment, 12/31/20A) + $42,000 (purchases from Schedule 8) = $292,000. |
| g. | $74,000 (Accumulated Depreciation, 12/31/20A) + $16,000 (depreciation expense from Schedule 5) = $90,000. |
| h. | Note that all accounts payable relate to material purchases. $6,275 (Accounts payable, 12/31/20A) + $61,150 (credit purchases from Schedule 3) − $60,950 (payments for purchases from Schedule 3) = $6,475, or 50% of 4th quarter purchase = 50% ($12,950) = $6,475. |
| i. | From Schedule 9. |
| j. | From the 20A balance sheet and Schedule 8 (no change). |
| k. | $77,575 (Retained earnings, 12/31/20A) + $64,375 (net income for the period, Schedule 9) − $20,000 (cash dividends from Schedule 8) = $121,950. |
How is it used and applied?
A budget is a tool for both planning and control. At the beginning of the period, the budget is a plan or standard; at the end of the period, it serves as a control device to help the business manager measure performance against the plan so that future performance may be improved.
The major objectives of a budgeted system are to:
1.Set acceptable targets for revenues and expenses.
2.Increase the likelihood that targets will be reached.
3.Provide time and opportunity to formulate and evaluate options should obstacles arise.
4.Evaluate a variety of “what-if” scenarios (especially with the aide of computer software) in an effort to find the best possible course of action.
It is important to realize that with the aide of computer technology, budgeting can be used as an effective device for evaluation of “what-if” scenarios. This way managers should be able to move toward finding the best course of action among various alternatives through simulation. If the manager does not like what he sees in analyzing the budgeted financial statements in terms of various financial ratios such as liquidity, activity (turnover), leverage, profit margin, and market value ratios, he can always alter the contemplated decision and planning set. A ratio is a relationship of one amount to another. It relates financial statement components to each other.
10. What Is The Cost Structure?
Introduction
The ratio of variable costs to fixed costs measures the relationship between costs that change with volume and costs that do not change within the short term.
How is it computed?
Examples of variable costs are direct materials and direct labor used in producing a product. Examples of fixed costs are rent, insurance and property taxes.
Example
A business reports total variable costs of $800,000 and total fixed costs of $8,000,000. The ratio is 0.10. This in unfavorable, because it is difficult to reduce the fixed costs in the short run when business falls off.
How is it used and applied?
When there is idle capacity, additional volume may be produced but total fixed costs remains constant. However, fixed cost per unit decreases because total fixed cost is spread over more units. Total variable cost increases as more units are produced, but the variable cost per unit remains the same. In a nonmanufacturing environment, service hours are substituted for units produced.
The cost structure of the business indicates what costs may be cut if needed, as in a recessionary environment (e.g., the early 1990’s). The owner can more readily control and adjust variable costs than fixed costs.
See
