Cost accounting chapter 06

All rights reserved.The Ongoing Budget Process: 3.. Managers and accountants assess market feedback, changed conditions, and their own experiences as plans are laid for the next budget p

Master Budgeting

and Responsibility Accounting

© 2009 Pearson Prentice Hall All rights reserved.

Budget defined

The quantitative expression of a proposed

plan of action by management for a specified period, and

An aid to coordinating what needs to be done

to implement that plan

May include both financial and non-financial data

The Ongoing Budget Process:

1. Managers and accountants plan the

performance of the company, taking into account past performance and anticipated future changes

2. Senior managers distribute a set of goals

against which actual results will be

compared

© 2009 Pearson Prentice Hall All rights reserved.

The Ongoing Budget Process:

3. Accountants help managers investigate

deviations from budget Corrective action occurs at this point

4. Managers and accountants assess market

feedback, changed conditions, and their own experiences as plans are laid for the next budget period

Strategy, Planning and Budgets, Illustrated

© 2009 Pearson Prentice Hall All rights reserved.

Advantages of Budgets

Provides a framework for judging performance

Motivates managers and other employees

Promotes coordination and communication

among subunits within the company

Components of Master Budgets

Operating Budget – building blocks leading to the creation of the Budgeted Income

Statement

Financial Budget – building blocks based on

the Operating Budget that lead to the creation

of the Budgeted Balance Sheet and the

Budgeted Statement of Cash Flows

© 2009 Pearson Prentice Hall All rights reserved.

Basic Operating Budget Steps

1. Prepare the Revenues Budget

2. Prepare the Production Budget (in Units)

3. Prepare the Direct Materials Usage Budget

and Direct Materials Purchases Budget

4. Prepare the Direct Manufacturing Labor

Budget

Basic Operating Budget Steps

5. Prepare the Manufacturing Overhead Costs

Budget

6. Prepare the Ending Inventories Budget

7. Prepare the Cost of Goods Sold Budget

8. Prepare the Operating Expense (Period Cost)

Budget

9. Prepare the Budgeted Income Statement

© 2009 Pearson Prentice Hall All rights reserved.

Basic Financial Budget Steps

Based on the Operating Budgets:

1. Prepare the Capital Expenditures Budget

2. Prepare the Cash Budget

3. Prepare the Budgeted Balance Sheet

4. Prepare the Budgeted Statement of Cash

Flows

Master

Budget,

Illustrated

© 2009 Pearson Prentice Hall All rights reserved.

Other Budgeting Issues

employed to conduct sensitivity (“what-if”) analysis to assist in the budgetary process

continuous improvement factors in the

budgeting process

Activity-Based Costing in the budgetary

process

Kaizen Budgeting, Illustrated

© 2009 Pearson Prentice Hall All rights reserved.

Budgeting and the Organization:

Responsibility Accounting

Responsibility Center – a part, segment, or subunit of a organization whose manager is accountable for a specified set of activities

Responsibility Accounting – a system that measures the plans, budgets, actions and actual results of each Responsibility Center

Types of Responsibility Centers

1. Cost – accountable for costs only

2. Revenue – accountable for revenues only

3. Profit – accountable for revenues & costs

4. Investment – accountable for investments,

revenues, and costs

© 2009 Pearson Prentice Hall All rights reserved.

Budgets and Feedback

Budgets offer feedback in the form of variances: actual results deviate from budgeted targets

Variances provide managers with

 Early warning of problems

 A basis for performance evaluation

 A basis for strategy evaluation

Controllability is the degree of influence that a manager has over costs, revenues, or related items for which he is being held responsible

Responsibility Accounting focuses on

information sharing, not in laying blame on a particular manager

© 2009 Pearson Prentice Hall All rights reserved.

Budgeting and Human Behavior

The budgeting process may be abused both

by superiors and subordinates, leading to

negative outcomes

Superiors may dominate the budget process

or hold subordinates accountable for events they have no control over

Subordinates may build “budgetary slack” into their budgets

Budgetary Slack

The practice of underestimating budgeted revenues, or overestimating budgeted

expenses, in an effort to make the resulting budgeted goals (profits) more easily

attainable

© 2009 Pearson Prentice Hall All rights reserved.