master budget and responsibility accounting
TRANSCRIPT
6 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Chapter 6
Master Budget andResponsibility
Accounting
Master Budget andResponsibility
Accounting
6 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Understand what a master budgetis and explain its benefits.
Learning Objective 1Learning Objective 1
6 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Budgeting CycleBudgeting Cycle
Performance planning
Providing a frame of reference
Investigating variations
Corrective action
Planning again
6 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
The Master BudgetThe Master Budget
Master BudgetMaster Budget
Operating DecisionsOperating Decisions
Financial DecisionsFinancial Decisions
6 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Describe the advantagesof budgets.
Learning Objective 2Learning Objective 2
6 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
What are the Advantagesof Budgets?
What are the Advantagesof Budgets?
Compels strategic planning
Provides a frameworkfor judging performance
#1
#2
6 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
What are the Advantagesof Budgets?
What are the Advantagesof Budgets?
Motivates employeesand managers
Promotes coordinationand communication
#3
#4
6 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Strategy, Planning, and BudgetsStrategy, Planning, and Budgets
StrategyAnalysis
Long-runPlanning
Short-runPlanning
Long-runBudgets
Short-runBudgets
6 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Time Coverage of BudgetsTime Coverage of Budgets
Budgets typically have a set timeperiod (month, quarter, year).
This time period can itself be brokeninto subperiods.
The most frequently used budgetperiod is one year.
Businesses are increasingly usingrolling budgets.
6 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3Learning Objective 3
Prepare the operating budgetand its supporting schedules.
6 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Budget ExampleOperating Budget Example
Hawaii Diving expects 1,100 units to be soldduring 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
6 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Budget ExampleOperating Budget Example
Two pounds of direct materials are budgeted perunit at a cost of $2.00 per pound, $4.00 per unit.
Three direct labor-hours are budgeted per unitat $7.00 per hour, $21.00 per unit.
Variable overhead is budgeted at $8.00per direct labor-hour, $24.00 per unit.
Fixed overhead is budgeted at $5,400 per month.
6 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Operating Budget ExampleOperating Budget Example
Variable nonmanufacturing costs areexpected to be $0.14 per revenue dollar.
Fixed nonmanufacturing costs are$7,800 per month.
6 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Production Budget ExampleProduction Budget Example
Budgeted sales (units)
Target ending finished goods inventory (units)
Beginning finished goods inventory (units)
Budgeted production (units)
+–=
6 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Production Budget ExampleProduction Budget Example
Assume that target ending finished goodsinventory is 80 units.
Beginning finished goods inventory is 100 units.
How many units need to be produced?
6 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Production Budget ExampleProduction Budget Example
Hawaii Diving Production Budgetfor the Month of August 2004
Units required for sales 1,100Add ending inv. of finished units 80Total finished units required1,180Less beg. inv. of finished units 100Units to be produced 1,080
6 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Direct Materials Usage BudgetDirect Materials Usage Budget
Each finished unit requires 2 pounds of directmaterials at a cost of $2.00 per pound.
Desired ending inventory equals 15% of thematerials 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
6 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Direct Materials Usage BudgetDirect 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
6 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Direct Materials Usage BudgetDirect Materials Usage Budget
How many pounds are needed to produce1,080 units in August?
1,080 × 2 = 2,160 pounds
6 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Material Purchases BudgetMaterial Purchases Budget
Hawaii Diving Direct Material Purchases Budget for the Month of August 2004
Units needed for production 2,160Target ending inventory 480
Total material to provide for 2,640
Less beginning inventory 330Units to be purchased 2,310Unit purchase price $ 2.00Total purchase cost $4,620
6 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Direct ManufacturingLabor Budget
Direct ManufacturingLabor Budget
Hawaii Diving Direct Labor Budgetfor the Month of August 2004
Units produced: 1,080Direct labor-hours/unit 3Total direct labor-hours: 3,240Total budget @ $7.00/hour: $22,680
Each unit requires 3 direct labor-hoursat $7.00 per hour.
6 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Manufacturing Overhead BudgetManufacturing Overhead Budget
Variable overhead is budgeted at $8.00per direct labor-hour.
Fixed overhead is budgeted at $5,400 per month.
6 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Manufacturing Overhead BudgetManufacturing Overhead Budget
Hawaii Diving Manufacturing OverheadBudget for the Month of August 2004
Variable Overhead:(3,240 × $8.00) $25,920Fixed Overhead 5,400Total $31,320
6 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Ending Inventory BudgetEnding Inventory Budget
Cost per finished unit:Materials $ 4Labor 21Variable manufacturing overhead 24
Fixed manufacturing overhead 5*Total $54
*$5,400 ÷ 1,080 = $5
6 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Ending Inventory BudgetEnding Inventory Budget
What is the cost of the targetending inventory for materials?
480 × $2 = $960
What is the cost of the targetfinished goods inventory?
80 × $54 = $4,320
6 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Goods Sold BudgetCost of Goods Sold Budget
Direct materials used:2,160 × $2.00 $ 4,320Direct labor 22,680Total overhead 31,320Cost of goods manufactured $58,320
6 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Goods Sold BudgetCost of Goods Sold Budget
Ending finished goods inventory is $4,320.
What is the cost of goods sold?
Assume that the beginning finishedgoods inventory is $5,400.
6 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Goods Sold BudgetCost of Goods Sold Budget
Beginning finished goods inventory $ 5,400+ Cost of goods manufactured $58,320= Goods available for sale $63,720– Ending finished goods inventory $ 4,320= Cost of goods sold $59,400
6 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Nonmanufacturing Costs BudgetNonmanufacturing Costs Budget
Hawaii Diving Other Expenses Budgetfor the Month of August 2004
Variable Expenses:($0.14 × $264,000) $36,960Fixed expenses 7,800Total $44,760
6 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost of Goods Sold BudgetCost of Goods Sold Budget
Cost of goods sold are budgeted at $59,400.
What is the budgeted gross margin?
Hawaii Diving has budgeted sales of$264,000 for the month of August.
6 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Budgeted Statement of IncomeBudgeted Statement of Income
Hawaii Diving Budgeted Income Statement
for the Month ending August 31, 2004Sales $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%
6 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4Learning Objective 4
Use computer-based financialplanning models insensitivity analysis.
6 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Financial Planning ModelsFinancial Planning Models
Financial planning models are mathematical representations of the interrelationships among operating
activities, financial activities, and other factors that affect the master budget.
6 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
SoftwareSoftware
Software packages are now readily available to reduce the computational burden and time required to prepare
budgets.
These packages assist managersto do sensitivity analysis.
6 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sensitivity AnalysisSensitivity Analysis
Consider Hawaii Diving.
What if some parameters in the budget modelwere to change?
For example, what if the selling price isexpected to be $230 instead of $240?
What are expected revenues?
1,100 × $230 = $253,000 instead of $264,000
6 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sensitivity AnalysisSensitivity 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.
6 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cash BudgetCash Budget
Hawaii Diving has the followingcollection pattern:
In the month of sale: 50%
In the month following sale: 27%
In the second month following sale: 20%
Uncollectible: 3%
6 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cash BudgetCash Budget
Budgeted charge sales are as follows:
June $200,000July $250,000August $264,000September $260,000
What are the expected cash collections in August?
6 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cash BudgetCash Budget
Budgeted Cash Receiptsfor the Month Ending August 31, 2004
August sales: $264,000 × 50% $132,000July sales: $250,000 × 27% 67,500June sales: $200,000 × 20% 40,000Total $239,500
6 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cash BudgetCash Budget
Budgeted Cash Disbursementsfor the Month Ending August 31, 2004
August purchases $ 4,620Direct labor 22,680Total overhead 31,320
Other expenses 9,760*Total $68,380
*Other expenses exclude depreciation
6 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cash BudgetCash Budget
Cash Budgetfor the Month Ending August 31, 2004
Budgeted receipts $239,500Budgeted disbursements 68,380Net increase in cash $171,120
6 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5Learning Objective 5
Explain kaizen budgetingand how it is used for
cost management.
6 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
What is Kaizen?What is Kaizen?
The Japanese use the term “kaizen”for continuous improvement.
Kaizen budgeting is an approach thatexplicitly incorporates continuousimprovement during the budgetperiod into the budget numbers.
6 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Kaizen BudgetingKaizen Budgeting
It was previously estimated that it should take 3 labor-hours for Hawaii Diving to
manufacture its product.
A kaizen budgeting approach wouldincorporate future improvements.
6 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Kaizen BudgetingKaizen Budgeting
Budgeted Hours/ItemJanuary – March 2004 3.00April – June 2004 2.95July – September 2004 2.90October – December 2004 2.85
6 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6Learning Objective 6
Prepare an activity-basedbudget.
6 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based BudgetingActivity-Based Budgeting
Activity-based costing reports and analyzes past and current costs.
Activity-based budgeting (ABB) focuseson the budgeted cost of activities necessaryto produce and sell products and services.
6 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based BudgetingActivity-Based Budgeting
Product A Product BUnits produced: 880 200Labor-hours per unit: 3 3Budgeted setup-hours: 5 5Total budgeted machine setup related cost is$25,920 per month.
6 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based BudgetingActivity-Based Budgeting
Total budgeted labor-hours are:
Product A: 880 × 3 2,640Product B: 200 × 3 600Total 3,240
What is the allocation rate per labor-hour?
$25,920 ÷ 3,240 = $8.00
6 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based BudgetingActivity-Based Budgeting
Product A: $8.00 × 2,640 = $21,120
Total cost allocated to each product line:
Product B: $8.00 × 600 = $ 4,800
6 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based BudgetingActivity-Based Budgeting
$25,920 budgeted machine setup cost÷ 10 budgeted machine setup-hours
= $2,592 allocation rate per machine setup-hour.
Under ABB, the number of setups is the cost driver.
How much machine setup related costs areallocated to each product line?
6 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Activity-Based BudgetingActivity-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 $14.73Product B: $12,960 ÷ 200 $64.80
6 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7Learning Objective 7
Describe responsibility centersand responsibility accounting.
6 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
What is a Responsibility Center?What is a Responsibility Center?
It is any part, segment, or subunitof a business that needs control.
– production– service
6 - 55©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Investment centerInvestment center
Cost centerCost center
Profit centerProfit center
Types of Responsibility CentersTypes of Responsibility Centers
6 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 8Learning Objective 8
Explain how controllabilityrelates to responsibility
accounting.
6 - 57©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
What is Controllability?What is Controllability?
It is the degree of influence that a specificmanager has over costs, revenues,
or other items in question.
A controllable cost is any cost that isprimarily subject to the influence of agiven responsibility center manager
for a given time period.
6 - 58©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
ControllabilityControllability
Responsibility accounting focuses oninformation and knowledge, not control.
A responsibility accounting system couldexclude all uncontrollable costs from
a manager’s performance report.
In practice, controllability is difficult to pinpoint.
6 - 59©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 6End of Chapter 6