ACCT 102 Management Accounting Lecture 14

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ACCT 102Management AccountingLecture 14
Master Budget and Responsibility Accounting
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Budgets
The planning and control cycle involves

• Planning the future activities of the
  organization.
• Providing a guide to employees and a benchmark
  against which actual results can be compared.
• Continuously analyzing variations from plans and
  taking corrective action as needed.
• Incorporating information on changing
  circumstances into future plans.

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Budgets
A budget is a formal plan of action expressed in
monetary terms.
An operational budget concerns the development of
detailed plans to guide operations throughout the
budget period.
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Reasons for Budgeting

• Budgets compel planning.
• Budgets improve communication and coordination
  among organization elements.
• Budgets provide a guide to action.
• Budgets provide a basis for performance
  evaluation.

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General Approaches to Budgeting
Approaches to developing a budget can be placed
into two broad categories.

• Budgeting with unit cost drivers, and
• Budgeting with nonunit cost drivers.

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General Approaches to Budgeting
Budgeting with unit level cost drivers

• Output/Input Approach

Budgeting with nonunit level cost drivers

• Incremental Approach
• Minimum Level Approach
• Zero-based Approach

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General Approaches to Budgeting
Budgeting with unit level and nonunit level cost
drivers

• Activity-Based Approach
• Approach uses an activity cost hierarchy to
  budget physical inputs and costs as a function of
  planned activity
• Better control over nonunit level cost drivers
• Costs are budgeted on the anticipated consumption
  of cost drivers

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Activity-Based Budgeting - Pdt
Atlantic Magnetic, Inc. Activity-Based Budget for
Compact Disks For the Year Ending December 31,
2002
Unit level costs Direct materials 180,000 Asse
mbly 245,000 Packaging 380,000 Distribution
60,000 865,000
Continued next slide
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Activity-Based Budgeting - Pdt
Batch level costs Procurement
30,000 Setup 80,000 Inspection 70,000
180,000 Product level costs Development and
design 50,000 Product advertising 120,000
170,000 Total product cots 1,215,000
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Activity-Based Budgeting - Dept
Atlantic Magnetic, Inc. Activity-Based Budget for
Purchasing Dept. For the Year Ending December 31,
2002
Budgeted activities New vendors
screened 130 Orders placed 1,200 Shipments
received and inspected 1,400
Continued next slide
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Activity-Based Budgeting - Dept
Budgeted costs Vendor screening and quality
certification (unit level per vendor)
30,000 Procurement (unit level per pur.
order) Placing orders 50,000 Verifying
orders 25,000 Receiving orders 16,000 Inspecti
ng orders 8,000 99,000 General admin.
maint. 25,000 Total purchasing department
costs 154,000
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Activity-Based Budgeting
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Continuous Improvement to Budgeting

• Continuous improvement (Kaizen) approach to
  budgeting
• Budgets include a target improvement (reduction)
  in cost
• This approach may be used in conjunction with any
  of the previously discussed approach to budgeting
• When used with activity-based approach, the focus
  is typically on redesigning products or improving
  processes rather than simply cutting costs

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Operating Cycle of a Manufacturing or
Merchandising Operation
Cash
The master budget is merely a detailed model of
the firms operating cycle that include all
internal processes.
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The Master Budget
The master budget groups all budgets and
supporting schedules together and coordinates all
financial and operational activities, placing
them into an organization-wide set of budgets for
a given time period.
A major goal of developing a master budget is to
ensure the smooth functioning of a business
throughout the budget period and the
organizations operation cycle.
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The Master Budget
2 classes of budgets in the Master Budget

• Operational budgets include the individual
  budgets for the preparation of the budgeted
  income statement
• Financial budgets include the cash budget,
  budgeted income statement and the budgeted
  balance sheet

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Overview of Master Budget of a Merchandising Firm
Sales Budget
Continued on next slide
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Overview of Master Budget of a Merchandising Firm
Cash Budget
Other Special Budgets Taxes, Dividends, Capital
Improvements, etc.
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Initial Balance Sheet
Backpacks Galore, Inc. (BGI) Balance
Sheet December 31, 2000
Continued on next slide
Assets Current assets Cash 15,000 Accounts
receivable (net) 21,600 Inventory School
backpacks 50,000 Hiking backpacks
96,000 146,000 182,600 Property and
equipment Land 60,000 Buildings and
equipment 260,000 Less accum. depreciation 124,80
0 135,200 195,200 Total assets 377,800
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Initial Balance Sheet
Liabilities and stockholders equity Current
liabilities Accounts payable
40,000 Stockholders equity Capital
stock 150,000 Retained earnings 187,800 337,80
0 Total liabilities and stockholders
equity 377,800
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Sales Budget

• The sales budget contains a forecast of unit
  sales volume and sales revenue, and it may also
  contain a forecast of sales collections.
• Because sales drive almost all activities,
  developing a sales budget is the starting point
  in the budget process.
• Managers use the best information available to
  accurately forecast future market conditions.

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Sales Budget
Backpacks Galore, Inc. Sales Budget For the Year
Ending December 31, 2001
First Second Third Four
Year Quarter Quarter Quarter Quarter
Total
Sales (units) School backpacks 4,000 3,400 3,650
3,950 15,000 Hiking backpacks 1,100 1,600 2,500
1,300 6,500 Sales (dollars) School
backpacks 80,000 68,000 73,000 79,000 300,000
Hiking backpacks 110,000 160,000 250,000 130,000
650,000 Total 190,000 228,000 323,000 209,000
950,000
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Purchases Budget

• The purchases budget indicates the merchandise
  that must be acquired to meet sales needs and
  ending inventory requirements
• It may be referred to as the merchandise budget
  if it contains only purchases of merchandise for
  sale. However, it often contains office and
  selling supplies.
• For simplicity, BGIs purchases budget includes
  only merchandise.

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Assumptions for Purchases Budget

• Management desires to have all inventory needed
  to fill the following quarters sales in stock at
  the end of the previous quarter.
• To provide for a possible delay in the receipt of
  inventory, BGI also carries a safety stock of
  1,000 school backpacks and 500 hiking backpacks.

Continued next slide
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Assumptions for Purchases Budget

• The total inventory needs are equal to current
  sales plus desired ending inventory, including
  the safety stock.
• Budgeted purchases are computed as total
  inventory needs less the beginning inventory.

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Partial Purchases Budget
Backpacks Galore, Inc. Purchases Budget For the
Year Ending December 31, 2001
First Second Third Four
Year Quarter Quarter Quarter Quarter
Total
Purchases (units) School backpacks Current
qtr. sales 4,000 3,400 3,650 3,950 Desired end.
inv. 4,400 4,650 4,950 5,100 Total
needs 8,400 8,050 8,600 9,050 Less beg.
inv. -5,000 -4,400 -4,650 -4,950 Purchases 3,400
3,650 3,950 4,100 15,100
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Other Budgets

• The selling expense budget presents the expenses
  that the organization plans to incur in
  connection with sales and distribution

• The general and administration expense budgets
  presents the expenses the organization plans to
  incur in connection with the general
  administration of the organization

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Selling Expense Budget
Backpacks Galore, Inc. Selling Expense Budget For
the Year Ending December 31, 2001
First Second Third Four
Year Quarter Quarter Quarter
Quarter Total
Budgeted sales 190,000 228,000 323,000 209,000
950,000 Variable costs Setup/Display
1,900 2,280 3,230 2,090
9,500 Commissions 3,800 4,560 6,460 4,180 19,000
Miscellaneous 1,900 2,280 3,230 2,090
9,500 Total 7,600 9,120 12,920
8,360 18,000 Fixed costs (total) 4,500
4,500 4,500 4,500 4,500 Total selling
expense 12,100 13,620 17,420 12,860 56,000

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Cash Budget

• The cash budget summarizes all cash receipts and
  disbursements expected to occur during the budget
  period.
• The cash budget shows the cash operating
  deficiencies and surpluses expected to occur.
  This information is used to plan for borrowing
  and loan repayment.
• Cash is critical to survival.

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Assumptions for Cash Budget

• Payment for purchases are made 50 in the quarter
  purchased and 50 in the next quarter
• Information on cash expenditures for selling
  expenses is based on budgets for these items.

75 collected in the current period
50 cash
24 collected in the next period
Sales
1 uncollected
50 credit
Continued next slide
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Assumptions for Cash Budget

• Tax information provided by BGIs accountant
• Dividend information provided by BGIs BOD
• The cash maintenance policy for BGI specifies a
  minimum balance of 15,000
• BGI has a line of credit with a bank, with any
  interest on borrowed funds computed at a simple
  interest of 12 per year, or 1 per month. All
  necessary borrowing is assumed to occur at the
  start of each quarter in increments of 1,000.
  Repayments are assumed to occur at the end of the
  quarter. Interest is paid when loan is repaid.

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Partial Cash Budget
Backpacks Galore, Inc. Cash Budget For the Year
Ending December 31, 2001
First Quarter
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Partial Cash Budget
Cash balance, beginning 15,000 Collection on
sales Cash sales 95,000 From credit
sales Current quarter 71,250 Prior quarter
21,600 Total 187,850 Total available from
operations 202,850
continued on next slide
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Partial Cash Budget
Total available from operations 202,850 Less
budgeted disbursements Purchasing, current
quarter 65,000 Purchasing, previous quarter
40,000 Total 105,000 Selling 12,100
General and administrative 31,000 Other
Income taxes 22,000 Dividends 20,000
Total disbursements (190,100)
continued on next slide
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Partial Cash Budget
Total disbursements (190,100) Excess cash
available for disbursements 12,750 Short-term
financing New loans 3,000 Net cash flow
from financing 3,000 Cash balance, ending
15,750
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Budgeted Financial Statements

• The preparation of the master budget culminates
  in the preparation of budgeted financial
  statements.
• Budgeted financial statements are hypothetical
  statements that reflect the as if effects of
  the budgeted activities on the financial position
  of the organization.

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Budgeted Income Statement
Backpacks Galore, Inc. Budgeted Income Statement
(Functional Format) For the Year Ending December
31, 2001
Sales 950,000 Expenses Cost of goods
sold Beginning inventory 146,000 Purchases 5
47,000 Cost of merchandise avail. 693,000 End
ing inventory -153,000 540,000 Selling 56,000
General and administrative 132,000 Bad debt
expense 4,750 -732,750 Income from
operations 217,250
continued on next slide
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Budgeted Income Statement
Income from operations 217,250 Other
expenses Interest expense - 1,590 Net
income before taxes 215,660 Allowance for
income taxes - 77,200 Net income 138,460
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Budgeted Balance Sheet
Backpacks Galore, Inc. Budgeted Balance
Sheet December 31, 2001
Assets Current assets Cash
77,480 Accounts receivable (net) 25,080 Merch
andise inventory 153,000 255,560 Property and
equipment Land 60,000 Building and
equipment 260,000 Less accumulated
depreciation - 132,800 127,200 187,200 Total
assets 442,760
continued on next slide
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Budgeted Balance Sheet
Liabilities and stockholders equity Current
liabilities Accounts payable
56,500 Stockholders equity Capital
stock 150,000 Retained earnings 236,260 386,2
60 Total liabilities and stockholders
equity 442,760
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Finalizing the Budget
Before finalizing the budget, two questions must
be addressed.
Is the proposed budget feasible?
Is the proposed budget acceptable?
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
Production Budget
Selling/Admin. Expense Budget
Direct Labor Budget
Manufacturing Overhead Budget
Direct Materials Budget
Cash Budget
Budgeted Income Statement
Budgeted Balance Sheet
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
A schedule of projected sales over the budget
period.
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
Production Budget
A schedule of production requirements for the
budget period.
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
Production Budget
A schedule of direct materials to be used and
purchased during the budget period.
Direct Materials Budget
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
Production Budget
A schedule of direct labor requirements for the
budget period.
Direct Materials Budget
Direct Labor Budget
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
A schedule of other production costs during a
budget period.
Production Budget
Direct Materials Budget
Direct Labor Budget
Manufacturing Overhead Budget
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
A schedule of all nonproduction spending expected
to occur during the budget period.
Production Budget
Selling and Administrative Expense Budget
Direct Materials Budget
Direct Labor Budget
Manufacturing Overhead Budget
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Overview of Master Budget of a Manufacturing Firm
Sales Budget
A schedule of expected cash receipts and
disbursements during the budget period.
Production Budget
Selling and Administrative Expense Budget
Direct Materials Budget
Direct Labor Budget
Manufacturing Overhead Budget
Cash Budget
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Production Budget
Expected sales. . . . . . . . . . . . . .
.110 Add desired ending inventory. . . .105
Total number of X needed . . . . 215 Less
beginning inventory . . . . . . . 80 X to be
produced . . . . . . . . . . . .135
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Direct Materials Budget
Direct materials usage Direct Per
Amount Unit Materials Unit Required
Cost Metal 20lbs 2,700 lbs
2.00/lb Plastic 3lbs 405 lbs
1.00/lb
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Direct Materials Budget
Direct materials purchases
Metal Plastic Desired
ending inventory. . . . . 2,100 315 Needed for
production. . . . . . . 2,700 405 Total
needed . . . . . . . . . . . . . . 4,800 720 Less
beginning inventory. . . . . 2,800
210 Materials to be purchased . . .
. 2,000 510 Unit cost. . . . . . . . . . . . . .
. . . . x 2 x 1 Total direct material
cost . . 4,000 510
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Direct Labor Budget
Number of X to produce. . . . . . . 135 Direct
labor hours per X. . . . . x 3 Total
hours required. . . . . . . . . 405 Rate per
hour. . . . . . . . . . . . . . . x 5
Total direct labor cost. . . . . . . 2,025
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MOH Budget
Variable costs Indirect materials costs. . . . .
. . . . 220 Indirect labor costs . . . . . .
. . . . . . 600 Total variable costs. . .
. . . . . . . . 820 Fixed costs Insurance
expense. . . . . . . . . . . . 200 Depreciation
expense. . . . . . . . . . 600 Total fixed
costs . . . . . . . . . . . . . 800 Total
manufacturing overhead . 1,620 Var OH per DLH
820/405 2.02 Fixed OH per DLH 800/405
1.98
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Cost Per Unit
Product cost Input Required
Cost Cost Inputs per
X Metal 2.00/lb. 20 40.00 Plastic
1.00/lb. 3 3.00 Direct labor
5.00/hr. 3 15.00 Fixed MOH
1.98/hr. 3 5.94 Variable MOH 2.02/hr.
3 6.06 Total unit cost. . . . . . . . .
. . . . . . . 70.00
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Selling and Administration Budget
Variable expenses Sales commissions . . . . . .
. . . . . . . . 400 Total variable
expenses. . . . . . . . . . 400 Fixed
expenses Salaries expense . . . . . . . . . . .
. . . . 1,000 Depreciation . . . . . . . . . . .
. . . . . . . . 100 Advertising expense. . .
. . . . . . . . . . 200 Total fixed
expenses. . . . . . . . . . . . 1,300 Total
selling and administrative expenses. . . . . .
. 1,700
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Cash Budget

• Cash balance, beginning . . . . . . . . .
  6,500
• Add collections from customers . . . . 10,100
• Total cash available. . . . . . . . . . 16,600
• Less disbursements for
• Direct materials . . . . . . . . . . . . .
  3,000
• Direct labor. . . . . . . . . . . . . . . . .
  2,025
• Factory Overhead . . . . . . . . . . . 1,020
• Equipment purchase . . . . . . . . . 980
• Selling and administration , , , , 1,600
• Total disbursements. . . . . . . . . . 8,625
• Cash balance . . . . . . . . . . . . . . . . .
  7,975
• Financing needed . . . . . . . . . . . .
  0
• Ending cash balance 7,975
• excludes depreciation
• minimum cash balance policy 6,000

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Budgeted Income Statement
Sales revenue . . .(110 x 90.90 ) . . . . . . .
. . . . . . . . 10,000 Cost of goods
sold Beginning finished goods inventory. . . . .
. . . 4,900 Costs of Goods Manufactured
Direct materials used. . . . . . . . . . . . . .
. . . . 5,805 Direct labor . . . . . . . . .
. . . . . . . . . . . . . . . . 2,025
Manufacturing overhead . . . . . . . . . . . . .
. . 1,620 9,450 Total cost of goods
available for sale . . . . . . 14,350 Less
ending finished goods inventory. (105 x 70). . .
. (7,350) Cost of goods sold. . . . . . . . .
. 4,900 (30 x 70). . (7,000) Gross
margin. . . . . . . . . . . . . . . . . . . . . .
. . . 3,000 Selling and administrative
expenses. . . . . . . 1,700 Net Operating
profit . . . . . . . . . . . . . . . . . . . .
. 1,300 Interest expense . . . . . . . . .
. . . . . . . . . . . . . 0 Net
Profit before taxes . . . . . . . . . . . . . . .
. . . . 1,300 80 units _at_ 61.25 which is
the cost per unit of the beginning inventory
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Budgeted Balance Sheet
ASSETS Current assets Cash. . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 7,975
Trade Debtors . . . . . . . . . . . . . . . . .
. . . . 1,000 Finished goods . . . . . .
. . . . . . . . . . . . . . . 7,350 Raw
Material . .(2100 x 2 315 x 1) . .
4,515 20,840 Fixed assets Plant
Equipment. . . . . . . . . . . . . . . . . . .
12,000 Less accumulated depreciation. . . . .
. .. . . (3,300) 8,700 Total assets. . .
. . . . . . . . . . . . . . . . . . . . . .
29,540
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Budgeted Balance Sheet
LIABILITIES AND STOCKHOLDERS EQUITY Current
liabilities Trade Creditors . . . . . . . . .
. . . . . . . . . . . . 2,000 Notes
payable . . . . . . . . . . . . . . . . . . . .
. . - 2,000 Stockholders
equity Share Capital . . . . . . . . . . .
. . . . . . . . . 20,340 Retained
earnings . . . . . . . . . . . . . . . . . .
7,200 27,540 Total liabilities and
stockholders equity. . . . . . . 29,540
Assuming no taxes and no dividends, retained
earnings of 7,200 retained earnings at the
start of the period of 5,900 profits of 1,300
for the year.
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Budget Development and Human Behavior

• Budgeting should be used to promote productive
  employee behavior directed toward meeting the
  organizational goals
• Participation in budgeting is viewed as a process
  in which individuals (in organisations) are
  involved in, and have influence on, the setting
  of the budget

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Budget Development and Human Behavior

• 2 approaches to employee participation in
  budgeting that represent possible ends on a
  continuum
• Top-down or imposed budget Top management
  decides on the budget and communicates them to
  lower management levels
• Bottom-up or participative budget Managers at
  all levels, and in some cases, even non-managers,
  are involved in the budgeting process

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Budget Development and Human Behavior

• Advantages of participative budgeting
• Setting of realistic goals through a better
  understanding of how goals can be achieved
• Ensure that important issues are considered and
  employees understand the importance of their
  roles in meeting organizational goals
• Provides opportunities for problem solving and
  fosters commitment to agreed-upon goals

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Budget Development and Human Behavior

• Disadvantages of participative budgeting
• Time-consuming
• Competition occurs between units for a given
  quantity of resource commitments
• Political behaviour and dysfunctional reactions
• Pad budget estimates - Slack

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Developing Budgets that Work

• Emphasize the importance of budgeting as a
  planning device.
• Encourage wide participation in budget
  preparation at all levels of the organization.
• Demonstrate that the budget has the complete
  support of top management.
• Recognize that the budget is not unalterable.

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Developing Budgets that Work

• Use budget performance reports not just to
  identify poor performance, but also to recognize
  good performance.
• Conduct programs in budget education to provide
  new managers with information about the purposes
  of budgets and to dispel erroneous misconceptions
  that may exist.

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Limitations of Budgets

• Conflicting uses Planning and Evaluation
• Attainment of budget is just one financial
  performance criterion
• A budget that is not overspent does not mean it
  was well-spent
• Budgeting can lead to negative behaviour, e.g.
  manipulation of figures
• Too tight a budget is a pressure device (stress)
• When you are controlled by a budget, you are not
  controlling the business