Cost management accounting and control 6e by hansen mowen guan chapter 08

The Role of Budgetingin Planning and Control • Gathering information – Forecasting sales – Forecasting other variables The master budget starts with the sales forecast, which is basis f

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 8 Budgeting for Planning

and Control

1 Define budgeting, and discuss its role in planning, controlling, and

decision making

2 Prepare the operating budget, identify its major components, and

explain the interrelationships of the various components

3 Identify the components of the financial budget, and prepare a

cash budget

4 Define flexible budgeting, and discuss its role in planning, control,

and decision making

5 Define activity-based budgeting, and discuss its role in planning,

control, and decision making

6 Identify and discuss the key features that a budgetary system

should have to encourage managers to engage in goal-congruent behavior

Study Objectives

The Role of Budgeting

in Planning and Control

The Role of Budgeting

in Planning and Control

The Role of Budgeting

in Planning and Control

• Gathering information

– Forecasting sales

– Forecasting other variables

The master budget starts with the sales

forecast, which is basis for the sales

budget.

All other operating and most financial

The Role of Budgeting

in Planning and Control

The first budget is the sales budget which is based on the

sales forecast

Starting point for Production Budget

Starting point for Marketing Expense Budget

Schedule 1 (in thousands)

Preparing the Operating Budget

Starting point for Direct Materials Purchases Budget

Starting point for Direct Labor Budget

Schedule 2 (in thousands)

Preparing the Operating Budget

Goes to Cost of Goods Sold Budget

Schedule 3 (in thousands)

Preparing the Operating Budget

* Follows the inventory policy of having 8 million pounds of materials on hand at the end of the first and second quarters and 5 million pounds on

hand at the end of the third and fourth quarters.

Goes to Cost of Goods Sold Budget

Schedule 4 (in thousands)

Starting point for Overhead Budget

Preparing the Operating Budget

Goes to Cost of Goods Sold Budget

Schedule 5 (in thousands)

Preparing the Operating Budget

*Includes $200,000 of depreciation in each quarter.

a Amounts taken from Schedule 3.

b Amounts taken from Schedule 4.

c Amounts taken from Schedule 5.

d Budgeted fixed overhead (Schedule 5)/Budgeted direct labor hours (Schedule 4) = $1,280/240 = $5.33.

Goes to Cost of Goods Sold Budget

Schedule 6 (in thousands)

Preparing the Operating Budget

*Production needs × $0.01 = 416,000 × $0.01.

Goes to Budgeted Income Statement

Schedule 7 (in thousands)

Preparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 8 (in thousands)

Preparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 9 (in thousands)

Preparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 10 (in thousands)

Preparing the Operating Budget

Schedule 11 (in thousands)

Preparing the Operating Budget

Operating Budgets for Merchandising and Service Firms

• Merchandising

– Merchandise purchases replaces production

– Direct materials and direct labor are not required

• For-profit service:

– Sales budget is the production budget

– Inventories are nonexistent

• Not-for-profit service:

– Budget for level and types of services provided

– Statement of sources and uses replaces income

statement

Preparing the Financial Budget

Cash budget

– Break down into short time periods

– Forecast need for short-term borrowing

– Forecast periods of high cash balances

Beginning cash balance + Cash receipts

Cash available – Cash disbursements – Minimum cash balance Excess or deficiency of cash – Repayments

(Continued on next slide)

Schedule 12 (in thousands)

Preparing the Financial Budget

(Continued from previous slide)

Schedule 12 (in thousands)

Preparing the Financial Budget

(Continued from previous slide)

Schedule 12 (in thousands)

Preparing the Financial Budget

Preparing the Financial Budget

• Budgeted balance sheet

– Current (actual) balance sheet

– Integrate data from all other budgets

Schedule 13 (in thousands)

Preparing the Financial Budget

a Ending balance from Schedule 12.

b 30 percent of fourth-quarter credit sales (0.30 × $800,000); see Schedules 1 and 12.

2009 ending balance sheet and Schedule 12.

g From the December 31, 2009, balance sheet and Schedules 5,

8, and 10 ($4,500,000 + $800,000 + $20,000 + $40,000).

h 20% of fourth-quarter purchases; see Schedules 3 and 12.

i From the December 31, 2009, balance sheet.

j $6,825,000 + $894,000 (December

31, 2009, balance plus net income

Shortcomings of the Traditional

Master Budget Process

• Departmental orientation

– Plan from resources to outputs

– Does not recognize interdependencies among

departments

• Static budgets

– Developed for a single level of activity

– Based on incremental adjustments

• Results orientation

– Disconnects the process from its output

Flexible Budgets for Planning and Control

Static budget

• Vital for planning

• Less useful for control

Flexible Budgets for Planning and Control

Flexible Budgets for Planning and Control

Static budgets

• Master budget

• Vital for planning

• Less useful for control

Flexible Budgets for Planning and Control

Flexible Budgets for Planning and Control

• Flexible budget

performance report

– Compare budgeted costs

given the actual level of

activity to the actual costs

for the same level

– Locate possible problem

areas by examining the

flexible budget variances

– Examines efficiency

Flexible Budgets for Planning and Control

Flexible Budgets for Planning and Control

• Flexible budget

performance report

– Compare budgeted costs

given the actual level of

activity to the actual costs

for the same level

– Locate possible problem

areas by examining the

flexible budget variances

– Volume variances

– Static budget vs

flexible budget– Examines effectiveness

Flexible Budgets for Planning and Control

Flexible Budgets for Planning and Control

A flexible budget can be built for five overhead activities using three

drivers; each is budgeted for two activity levels.

Flexible Budgets for Planning and Control

The activity-based performance report measures budget variances for

each of the overhead activities.

– Traditional budgeting relies on functional-based line items

(salaries, supplies, etc.)

– Flexible budget uses cost behavior to split functional-based line

items into fixed and variable

Activity-Based Budgets

Traditional budgeting relies on functional-based line items.

Activity-Based Budgets

Flexible budgeting uses cost behavior to split

functional-based line items into fixed and

variable costs.

Activity-Based Budgets

Steps to construct an ABB

1 Determine the unit’s output

2 Identify the activities (and related drivers) needed to deliver the output

3 Estimate the demand for each activity

4 Determine the cost of resources required to produce the

relevant activities

Activity-Based Budgets

The Behavioral Dimension

of Budgeting

• Characteristics of a good budgetary system

– Frequent feedback on performance

– Monetary and nonmonetary incentives

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan