Transcript Master Budget and Responsibility Accounting Chapter 6 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 6-1

Master Budget and
Responsibility Accounting
Chapter 6
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Learning Objective 1
Understand what a master budget
is and explain its benefits.
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Budgeting Cycle
Performance planning
Providing a frame of reference
Investigating variations
Corrective action
Planning again
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The Master Budget
Master Budget
Operating
Decisions
Financial
Decisions
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Learning Objective 2
Describe the advantages
of budgets.
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What are the Advantages
of Budgets?
#1
Compels strategic planning
#2
Provides a framework
for judging performance
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What are the Advantages
of Budgets?
#3
Motivates employees
and managers
#4
Promotes coordination
and communication
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Strategy, Planning, and Budgets
Long-run
Planning
Long-run
Budgets
Short-run
Planning
Short-run
Budgets
Strategy
Analysis
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Time Coverage of Budgets
Budgets typically have a set time
period (month, quarter, year).
This time period can itself be broken
into subperiods.
The most frequently used budget
period is one year.
Businesses are increasingly using
rolling budgets.
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Learning Objective 3
Prepare the operating budget
and its supporting schedules.
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Operating Budget Example
Hawaii Diving expects 1,100 units to be sold
during the month of August 2004.
Selling price is expected to be $240 per unit.
How much are budgeted revenues for the month?
1,100 × $240 = $264,000
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Operating Budget Example
Two pounds of direct materials are budgeted per
unit at a cost of $2.00 per pound, $4.00 per unit.
Three direct labor-hours are budgeted per unit
at $7.00 per hour, $21.00 per unit.
Variable overhead is budgeted at $8.00
per direct labor-hour, $24.00 per unit.
Fixed overhead is budgeted at $5,400 per month.
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Operating Budget Example
Variable nonmanufacturing costs are
expected to be $0.14 per revenue dollar.
Fixed nonmanufacturing costs are
$7,800 per month.
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Production Budget Example
Budgeted sales (units)
+
–
=
Target ending finished goods inventory (units)
Beginning finished goods inventory (units)
Budgeted production (units)
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Production Budget Example
Assume that target ending finished goods
inventory is 80 units.
Beginning finished goods inventory is 100 units.
How many units need to be produced?
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Production Budget Example
Hawaii Diving Production Budget
for the Month of August 2004
Units required for sales
1,100
Add ending inv. of finished units
80
Total finished units required
1,180
Less beg. inv. of finished units
100
Units to be produced
1,080
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Direct Materials Usage Budget
Each finished unit requires 2 pounds of direct
materials at a cost of $2.00 per pound.
Desired ending inventory equals 15% of the
materials required to produce next month’s sales.
September sales are forecasted to be 1,600 units.
What is the ending inventory in August?
480 pounds
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Direct Materials Usage Budget
September sales: 1,600 × 2 pounds per unit
= 3,200 pounds
3,200 × 15% = 480 pounds
(the desired ending inventory)
What is the beginning inventory in August?
1,100 units × 2 × 15% = 330 units
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Direct Materials Usage Budget
How many pounds are needed to produce
1,080 units in August?
1,080 × 2 = 2,160 pounds
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Material Purchases Budget
Hawaii Diving Direct Material Purchases
Budget for the Month of August 2004
Units needed for production
2,160
Target ending inventory
480
Total material to provide for
2,640
Less beginning inventory
330
Units to be purchased
2,310
Unit purchase price
$ 2.00
Total purchase cost
$4,620
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Direct Manufacturing
Labor Budget
Each unit requires 3 direct labor-hours
at $7.00 per hour.
Hawaii Diving Direct Labor Budget
for the Month of August 2004
Units produced:
1,080
Direct labor-hours/unit
3
Total direct labor-hours:
3,240
Total budget @ $7.00/hour:
$22,680
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Manufacturing Overhead Budget
Variable overhead is budgeted at $8.00
per direct labor-hour.
Fixed overhead is budgeted at $5,400 per month.
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Manufacturing Overhead Budget
Hawaii Diving Manufacturing Overhead
Budget for the Month of August 2004
Variable Overhead:
(3,240 × $8.00)
$25,920
Fixed Overhead
5,400
Total
$31,320
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Ending Inventory Budget
Cost per finished unit:
Materials
Labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
*$5,400 ÷ 1,080 = $5
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$ 4
21
24
5*
$54
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Ending Inventory Budget
What is the cost of the target
ending inventory for materials?
480 × $2 = $960
What is the cost of the target
finished goods inventory?
80 × $54 = $4,320
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Cost of Goods Sold Budget
Direct materials used:
2,160 × $2.00
$ 4,320
Direct labor
22,680
Total overhead
31,320
Cost of goods manufactured
$58,320
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Cost of Goods Sold Budget
Assume that the beginning finished
goods inventory is $5,400.
Ending finished goods inventory is $4,320.
What is the cost of goods sold?
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Cost of Goods Sold Budget
Beginning finished goods inventory
+ Cost of goods manufactured
= Goods available for sale
– Ending finished goods inventory
= Cost of goods sold
$ 5,400
$58,320
$63,720
$ 4,320
$59,400
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Nonmanufacturing Costs Budget
Hawaii Diving Other Expenses Budget
for the Month of August 2004
Variable Expenses:
($0.14 × $264,000)
$36,960
Fixed expenses
7,800
Total
$44,760
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Cost of Goods Sold Budget
Hawaii Diving has budgeted sales of
$264,000 for the month of August.
Cost of goods sold are budgeted at $59,400.
What is the budgeted gross margin?
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Budgeted Statement of Income
Hawaii Diving Budgeted Income Statement
for the Month ending August 31, 2004
Sales
$264,000 100%
Less cost of sales
59,400
22%
Gross margin
$204,600
78%
Other expenses
44,760
17%
Operating income
$159,840
61%
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Learning Objective 4
Use computer-based financial
planning models in
sensitivity analysis.
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Financial Planning Models
Financial planning models are
mathematical representations of the
interrelationships among operating
activities, financial activities, and other
factors that affect the master budget.
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Software
Software packages are now readily
available to reduce the computational
burden and time required to prepare
budgets.
These packages assist managers
to do sensitivity analysis.
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Sensitivity Analysis
Consider Hawaii Diving.
What if some parameters in the budget model
were to change?
For example, what if the selling price is
expected to be $230 instead of $240?
What are expected revenues?
1,100 × $230 = $253,000 instead of $264,000
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Sensitivity Analysis
What if the materials cost is expected to increase
to $2.50 per pound instead of $2.00.
What is the cost of goods sold?
1,100 × $55 = $60,500 instead of $59,400
Why the increase?
Because materials cost per unit become
$5.00 instead of $4.00.
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Cash Budget
Hawaii Diving has the following
collection pattern:
In the month of sale:
50%
In the month following sale:
27%
In the second month following sale: 20%
Uncollectible:
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3%
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Cash Budget
Budgeted charge sales are as follows:
June
July
August
September
$200,000
$250,000
$264,000
$260,000
What are the expected cash collections in August?
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Cash Budget
Budgeted Cash Receipts
for the Month Ending August 31, 2004
August sales: $264,000 × 50% $132,000
July sales:
$250,000 × 27%
67,500
June sales:
$200,000 × 20%
40,000
Total
$239,500
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Cash Budget
Budgeted Cash Disbursements
for the Month Ending August 31, 2004
August purchases
$ 4,620
Direct labor
22,680
Total overhead
31,320
Other expenses
9,760*
Total
$68,380
*Other expenses exclude depreciation
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Cash Budget
Cash Budget
for the Month Ending August 31, 2004
Budgeted receipts
$239,500
Budgeted disbursements
68,380
Net increase in cash
$171,120
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Learning Objective 5
Explain kaizen budgeting
and how it is used for
cost management.
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What is Kaizen?
The Japanese use the term “kaizen”
for continuous improvement.
Kaizen budgeting is an approach that
explicitly incorporates continuous
improvement during the budget
period into the budget numbers.
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Kaizen Budgeting
It was previously estimated that it should
take 3 labor-hours for Hawaii Diving to
manufacture its product.
A kaizen budgeting approach would
incorporate future improvements.
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Kaizen Budgeting
Budgeted Hours/Item
January – March 2004
April – June 2004
July – September 2004
October – December 2004
3.00
2.95
2.90
2.85
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Learning Objective 6
Prepare an activity-based
budget.
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Activity-Based Budgeting
Activity-based costing reports and analyzes
past and current costs.
Activity-based budgeting (ABB) focuses
on the budgeted cost of activities necessary
to produce and sell products and services.
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Activity-Based Budgeting
Product A Product B
Units produced:
880
200
Labor-hours per unit:
3
3
Budgeted setup-hours:
5
5
Total budgeted machine setup related cost is
$25,920 per month.
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Activity-Based Budgeting
Total budgeted labor-hours are:
Product A: 880 × 3
2,640
Product B: 200 × 3
600
Total
3,240
What is the allocation rate per labor-hour?
$25,920 ÷ 3,240 = $8.00
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Activity-Based Budgeting
Total cost allocated to each product line:
Product A: $8.00 × 2,640
=
$21,120
Product B: $8.00 × 600
=
$ 4,800
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Activity-Based Budgeting
Under ABB, the number of setups is the cost driver.
$25,920 budgeted machine setup cost
÷ 10 budgeted machine setup-hours
= $2,592 allocation rate per machine setup-hour.
How much machine setup related costs are
allocated to each product line?
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Activity-Based Budgeting
Product A
Product B
$2,592 × 5
$12,960
$2,592 × 5
$12,960
Setup-related cost per unit:
Product A: $12,960 ÷ 880 $14.73
Product B: $12,960 ÷ 200 $64.80
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Learning Objective 7
Describe responsibility centers
and responsibility accounting.
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What is a Responsibility Center?
It is any part, segment, or subunit
of a business that needs control.
– production
– service
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Types of Responsibility Centers
Cost center
Investment center
Profit center
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Learning Objective 8
Explain how controllability
relates to responsibility
accounting.
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What is Controllability?
It is the degree of influence that a specific
manager has over costs, revenues,
or other items in question.
A controllable cost is any cost that is
primarily subject to the influence of a
given responsibility center manager
for a given time period.
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Controllability
Responsibility accounting focuses on
information and knowledge, not control.
A responsibility accounting system could
exclude all uncontrollable costs from
a manager’s performance report.
In practice, controllability is difficult to pinpoint.
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End of Chapter 6
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