bg management accounting chapter 7 3956

Preparing master budgetSales Budget Production Budget Direct Labor Budget Manufacturing Overhead Budget Cash Budget Direct Materials Budget Selling and Administrative Budget Budgeted Fin

CHAPTER 7

BUDGETING PROCESS

7.1 Master budget

A Budget is a detailed plan for acquiring and using financial

and other resources over a specified time period It presents a plan for the future expressed in formal quantitative terms

The master budget is a summary of a company’s plans that

sets specific target for sales, production, distribution and financing activities

7.1.1 Definition and characteristic of master budget

Characteristic of master budget

Objectives

Advantages/disadvantages

Characteristics

Meanings

Methods

Components

7.2 Preparing master budget

Sales Budget

Production Budget

Direct Labor Budget

Manufacturing Overhead Budget

Cash Budget

Direct

Materials

Budget

Selling and Administrative Budget

Budgeted Financial Statements

Manufacturing Overhead Budget

Ending

Finished Goods

Budget

The Sales Budget

This budget displays the projected/expected sales in units for each budget period and then multiplies the unit selling price to

determine sales revenue

The Production Budget

The production budget list the number of units that must be

produced during each budget period to meet anticipated sales demand and satisfy ending inventory

requirements

The Direct Materials Budget

The Direct Materials Budget

The direct materials budget shows the amount and cost of raw materials that must be purchased and used during a budget period

Format of the Cash Budget

The cash budget is divided into four sections:

1 Cash receipts listing all cash inflows excluding

borrowing

2 Cash disbursements listing all payments excluding

repayments of principal and interest

3 Cash excess or deficiency

4 The financing section listing all borrowings, repayments

and interest

7.2 Flexible budget

7.2.1 Definition and characteristic of flexible budget

Definition : A flexible budget provides estimates of what costs

should be for any level of activity within a specified range

Characteristics: When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget

7.2.2 Flexible budget variance

All of the variances are solely due to the difference between the actual level of activity and the level of activity in the planning budget

from the beginning of the period, they are called activity variances

The most important activity variance appears at the very bottom

of the report; namely, the favorable variance for net operating income

7.3 Standard costs

7.3.1 Definition and setting standard cost

Standards are benchmarks or “norms”

for measuring performance Two types

of standards are commonly used

Quantity standards

specify how much of an

input should be used to

make a product or

provide a service.

Cost (price) standards specify how much should be paid for each unit

of the input.

Variance Analysis Cycle

Identify

questions

Receive explanations

Take corrective actions

Analyze

variances

Prepare standard cost performance

report

Conduct next period’s operations

Begin

7.3.2 Using standard cost to analysis variance

Variance Analysis

Materials price variance

Labor rate variance

VOH spending variance

Materials quantity variance Labor efficiency variance

VOH efficiency variance

7.3.2 Using standard cost to analysis variance

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

7.3.3 Evaluation of controls based on standard

costs

- Direct- materials price variance

- Direct- materials quantity variance

- Direct- labor rate variance

- Direct- labor efficiency variance