Managerial accounting 5th jiambalvo ch10

Slide 10-10Developing the Budget  In a top-down approach budgets are developed at higher operational levels without substantial input from lower level managers  In a bottom-up appro

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Prepared by

Debby Bloom-Hill CMA, CFM

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Slide 10-2

CHAPTER 10

Budgetary Planning and Control

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Learning objective 1: Discuss the use of

budgets in planning and control Slide 10-3

Budgetary Planning and

Control

Budgetary Planning and

Control

 Budgets are the formal

documents that quantify a

company’s plans for achieving its goals

 For many companies, the entire

planning and control process is

built around budgets.

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their goals and objectives and to

specify means of achieving them

 Budgets become the vehicle for

communicating information about

where the company is heading

budgets in planning and control

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 Control makes sure the company is

heading in the proper direction and operating efficiently

 To control a company, it is essential to assess the performance of managers and their operations for which they are

responsible

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Slide 10-6

Use of Budgets in Control

 Often performance evaluation is

carried out by comparing actual

with planned or budgeted

performance

 Significant deviations from planned

performance associated with three

potential causes:

1 The budget was poorly conceived

2 Conditions have changed

3 Managers have done a particularly good

or poor job managing operations

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Slide 10-7

Which of the following statements

regarding budgets is false?

a They are formal documents that quantify

They are useful in planning AND in control

Test Your Knowledge 1

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Slide 10-8

Developing the Budget

 Budgets are prepared for:

 Departments

 Divisions of a company

 For the entire company

 Often the group within a

company that is responsible for

approval of the various budgets

is the budget committee

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Slide 10-9

 The budget committee consists

of senior managers

 The budget committee works with

departments to develop realistic

plans that are consistent with

overall company goals

 In some cases the budget committee may impose a budget without soliciting input from department managers

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Slide 10-10

 In a top-down approach budgets are developed at higher

operational levels without

substantial input from lower

level managers

 In a bottom-up approach, lower

level managers are the primary

source of information used in

setting the budget

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Slide 10-11

Budget Time Period

 Managers must decide on an

appropriate budget period

 Depending on needs, budgets can

be prepared for a variety of time periods

 Long run budgets are prepared for a three or even a five year period

 Short run budgets may cover a month,

a quarter, or a year

 Generally, the longer the time

period, the less detailed the

budget Learning objective 1: Discuss the use of

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Slide 10-12

Five-Year Budgets

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Slide 10-13

Zero Base Budgeting

 A common starting point in

budgeting is previous period

revenues and costs

 Zero base requires budgeted amounts

to be justified by each department at the start of each period

 This results in a fresh consideration for the validity of budgeted amounts

 It is a time consuming and expensive process

 Not widely used by business enterprises

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Learning objective 2: Prepare the budget schedules

that make up the master budget Slide 10-14

The Master Budget

 The master budget is a

comprehensive planning document

that incorporates a number of

 Also includes budgeted income

statement and balance sheet

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Slide 10-15

Master Budget

that make up the master budget

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Slide 10-16

Sales Budget

 The first step involved preparation

of sales forecasts and a sales

budget

 Prepared first because an estimate

of sales is needed for other budgets

 Companies use numerous methods

to estimate sales, including

 Economic models

 Sales trends

 Trade journals, among others

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Sales Budget

Budgeted sales revenue:

Budgeted sales (units) x budgeted sales

price

Learning objective 2: Prepare the budget

schedules that make up the master budget Slide 10-17

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Production Budget

 The production budget can be

developed once the sales budget

has been prepared

 In deciding how much to produce,

managers must take into account

how much they expect to sell, how

much is in beginning inventory, and how much they want in ending

inventory

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 The quantity that must be

produced is calculated using the

following formula

of finished goods

-Beginnin

g inventory

of finished units

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Slide 10-20

 Preston Joystick budget plan, Quarter 1

 Ending inventory of finished goods = 10%

of next quarter’s sales (25,000 X 10% =

2,500)

 Budgeted unit sales,Q1 = 21,000 units

 Budgeted unit sales, Q2 = 25,000 units

 Beginning inventory Q1 = 2,100 units

 Budget finished units to be produced

Expected sales in units 21,000

Add: Desired ending inventory of finished goods 2,500

Subtract: Beginning inventory of finished units (2,100)

Finished units to be produced 21,400

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Slide 10-21

Mason Manufacturing expects to sell 10,000 units in the first quarter and 14,000 in the second quarter

The company desires beginning inventory equal to

20% of sales for the coming quarter Finished goods

on hand at the start of the first quarter equals 2,000 units How many units should be produced in the

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Direct Material Purchases

Budget

Direct Material Purchases

Budget

 The amount of direct materials that

must be purchased depends on

 The amount needed for production,

and

 The amount needed for ending

inventory

 The amount that must be purchased

can be calculated from the following

formula

n

+

Desired ending inventory

of direct materials

-Beginning inventory

of direct materials

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Slide 10-23

Budgeted production: Q1= 50,000; Q2= 60,000

Parts per unit= 3 , cost per part= $5

Ending inventory = 20% of next month’s production

Number of parts required for Q1 production is:

Q1 production 50,000 x 3 parts per unit = 150,000

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Desired ending inventory of parts for Q1 in units is:

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Slide 10-25

Budgeted production: Q1= 50,000; Q2= 60,000

Parts/unit= 3, cost/per part= $5

Ending inventory = 20% of next month’s required

part

Beginning parts inventory, Q1= 30,000 units

Budgeted cost of purchases for Q1 is:

156,000 parts to purchase x $5 cost = $780,000

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Slide 10-26

Direct Labor Budget

 The direct labor budget presents the

direct labor cost by quarter

 Direct labor cost is calculated by

multiplying the number of units

produced each quarter by the labor

hours per unit and the rate per hour

 The direct labor budget can be used

to budget the number of employees

needed

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Slide 10-27

Direct Labor Budget

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 The manufacturing overhead

budget separates variable and

fixed costs

 The cost per unit of production of each variable cost item is multiplied by the

quantity produced each quarter

 The fixed costs are identical each

quarter except for the amount of

depreciation

 Budget information is also needed for

selling and administrative expenses

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 Much of the information

contained in the budgets already

described is utilized in the

preparation of a budgeted

income statement

 The sales figures come directly from the sales budget

 Cost of goods sold requires a

calculation of the unit cost of

production

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 The direct materials budget

indicates the materials cost per unit

 The direct labor budget indicates

the labor cost per unit

 The manufacturing overhead budget indicates the overhead cost per unit

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Slide 10-33

Capital Acquisitions Budget

 For decisions with respect to

long-lived assets such as plant

and equipment

 Incremental cash flows along with

net present value and internal rate

of return are used for evaluation

 The final list of approved projects is

documented in the capital

acquisitions budget

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 Managers must plan for the

amount and timing of cash flows

 Careful planning of receipts and

disbursements is necessary to:

 Anticipate cash shortages and

arrange to borrow funds

 Anticipate cash surpluses and seek

productive uses

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Slide 10-35

Which of the following items does

not require a cash outflow?

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Slide 10-36

Estimate Cash Collections

 To prepare an estimate of cash

collections, management must

determine the percent of credit

sales revenue that is collected in

the period of sale and the percent collected in the subsequent

period

 The percentage can be estimated

based on past collection experience

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Slide 10-37

Estimate Cash Disbursements

 To prepare an estimate of cash

disbursements, management

must determine the percent of

material purchases that is paid in the period of purchase and the

percent that is paid in the

subsequent period

 The timing of all other cash

disbursements must also be

considered

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Slide 10-38

Estimate Cash Disbursements

 In preparing a cash budget, it is

important to remember that some expenses do not require cash

outlays

 For example, depreciation is a part

of manufacturing overhead but does

not require a current outlay of cash

 Another example of a noncash

expense is the amortization of

prepaid insurance

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Slide 10-39

Mason Manufacturing expects sales of $100,000 in the first quarter and $140,000in the second

quarter The company collects 70% of sales in the

quarter sold and 30% in the subsequent quarter

What are expected cash collections in the second

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Slide 10-40

Budgeted Balance Sheet

 The last component of the

master budget is the budgeted

 Managers can use this budget to

assess the effect of their planned

decisions on the future financial

position of the firm

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 Budget committee may review a

budget and decide it is

inconsistent with company goals

 This conclusion may lead managers

to explore a variety of actions that

affect future costs and revenues

 If managers decide to make changes, they must also revise the budget

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 Most companies define the budget

relationships in a computer model

 With computerized budget

information, an item can be

changed and the computer can

recalculate that budget and any

other budget affected by the change

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Slide 10-43

Budgetary Control

 Budgets facilitate control by providing

a standard for evaluation

 The standard is the budgeted

amount, against which actual results are compared

 Differences between budgeted and

actual amounts are referred to as

budget variances

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Slide 10-44

Static and Flexible Budgets

 In evaluating performance, care

must be taken to make sure that

the level of activity used in the

budget is equal to the actual level

of activity

 A static budget is not adjusted for

the actual level of production

 A more appropriate analysis would

make use of a flexible budget

Learning objective 3: Explain why flexible budgets are

needed for performance evaluation

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Slide 10-45

Flexible Budgets

 A flexible budget is a set of

budget relationships that can be

adjusted to various activity levels

 Thus, flexible budgets take into

account the fact that when

production increases or decreases,

variable costs can change

 Fixed costs, however, stay the same

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Slide 10-46

Flexible Budget

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Slide 10-47

A budget is not adjusted for

the actual level of production.

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Slide 10-48

Spreadsheets

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 Significant deviations from the

budget, called budget variances, may have three causes

1 The budget may not have been well

conceived

2 Conditions may have changed

3 Managers may have performed

their jobs particularly well or poorly

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exception approach, only

exceptional variances are

investigated

 Generally, variances that are large

in absolute dollars or relative to

budgeted amounts are considered

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Slide 10-51

“Unfavorable” Budget Variance

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