8-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL

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HANSEN & MOWENHANSEN & MOWEN

Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL

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Budgeting for Planning and ControlBudgeting for Planning and Control

8

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The Role of Budgeting in Planning and The Role of Budgeting in Planning and ControlControl 1

The Master Budget and Its

Interrelationships

The Master Budget and Its

Interrelationships

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The Role of Budgeting in Planning and The Role of Budgeting in Planning and ControlControl 1

Purposes of Budgeting:

1. Forces managers to plan.

2. Provides information to improve decision making.

3. Sets benchmarks for performance evaluation.

4. Improves communication and coordination.

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The Role of Budgeting in Planning and The Role of Budgeting in Planning and ControlControl 1

Components of the Master Budget

Components of the Master Budget

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The Role of Budgeting in Planning and The Role of Budgeting in Planning and ControlControl 1

The master budget starts with the sales forecast, which is basis for the sales budget.

All other operating and most financial budgets are generated from the sales budget.

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2Preparing the Operating BudgetPreparing the Operating Budget

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

Starting point for Production Budget

Schedule 1 (in thousands)

Starting point for Marketing Expense Budget

Goes to Budgeted Income Statement

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2Preparing the Operating BudgetPreparing the Operating Budget

Starting point for Direct Materials Purchases Budget

Schedule 2 (in thousands)

Starting point for Direct Labor Budget

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2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Cost of Goods Sold Budget

Schedule 3 (in thousands)

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2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Cost of Goods Sold Budget

Schedule 4 (in thousands)

Starting point for Overhead Budget

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2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Cost of Goods Sold Budget

Schedule 5 (in thousands)

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aAmounts taken from Schedule 3.

bAmounts taken from Schedule 4.

cAmounts taken from Schedule 5.

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

2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Cost of Goods Sold Budget

Schedule 6 (in thousands)

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

2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 7 (in thousands)

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2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 8 (in thousands)

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2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 9 (in thousands)

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2Preparing the Operating BudgetPreparing the Operating Budget

Goes to Budgeted Income Statement

Schedule 10 (in thousands)

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2Preparing the Operating BudgetPreparing the Operating Budget

Schedule 11 (in thousands)

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3Preparing the Financial BudgetPreparing the Financial Budget

Cash flows are critical to managing a business and the lifeblood of an organization. Therefore, the cash budget is one of the most important budgets in the master budget.

The Cash BudgetThe Cash BudgetThe Cash BudgetThe Cash Budget

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3Preparing the Financial BudgetPreparing the Financial Budget

(Continued on next slide)

Schedule 12 (in thousands)

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3Preparing the Financial BudgetPreparing the Financial Budget

(Continued from previous slide)

(Continued on next slide)

Schedule 12 (in thousands)

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3Preparing the Financial BudgetPreparing the Financial Budget

(Continued from previous slide)

Schedule 12 (in thousands)

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3Preparing the Financial BudgetPreparing the Financial Budget

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3Preparing the Financial BudgetPreparing the Financial Budget

Schedule 13 (in thousands)

aEnding balance from Schedule 12.

b30 percent of fourth-quarter credit sales (0.30 $800,000)—see Schedules 1 and 12.

cFrom Schedule 3 (5,000,000 lbs. $0.01).

dFrom Schedule 6.

eFrom the December 31, 2006, balance sheet.

fDecember 31, 2006, balance ($9,000,000) plus new equipment acquisition of $600,000 (see the 2006 ending balance sheet and Schedule 12).

gFrom the December 31, 2006, balance sheet and Schedules 5, 8, and 10 ($4,500,000 + $800,000 +$20,000 + $40,000).

h20 percent of fourth-quarter purchases (0.20 $520,000)—see Schedules 3 and 12.

iFrom the December 31, 2006, balance sheet.

j$6,825,000 + $894,000 (December 31, 2006, balance plus net income from Schedule 11).

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Static budgets are master budgets that are developed around a particular level of activity.

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Performance Report: Quarterly Production Costs Performance Report: Quarterly Production Costs (in thousands) (in thousands)

Performance Report: Quarterly Production Costs Performance Report: Quarterly Production Costs (in thousands) (in thousands)

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Flexible budgets provide expected costs for a range of activity or the actual level of activity.

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Flexible Production Budget (in thousands)Flexible Production Budget (in thousands)Flexible Production Budget (in thousands)Flexible Production Budget (in thousands)

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Managers can locate possible problem areas by examining the variances revealed on a performance report that compares budgeted costs for the actual level of activity to the actual costs for the same level.

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Actual versus Flexible Performance Report: Actual versus Flexible Performance Report: Quarterly Production Costs (in thousands)Quarterly Production Costs (in thousands)

Actual versus Flexible Performance Report: Actual versus Flexible Performance Report: Quarterly Production Costs (in thousands)Quarterly Production Costs (in thousands)

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Managerial Performance Report: Managerial Performance Report: Quarterly Production (in thousands) Quarterly Production (in thousands)

Managerial Performance Report: Managerial Performance Report: Quarterly Production (in thousands) Quarterly Production (in thousands)

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Managerial Performance Report: Managerial Performance Report: Quarterly Production (in thousands) Quarterly Production (in thousands)

Managerial Performance Report: Managerial Performance Report: Quarterly Production (in thousands) Quarterly Production (in thousands)

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Managerial Performance Report: Managerial Performance Report: Quarterly Production (in thousands) Quarterly Production (in thousands)

Managerial Performance Report: Managerial Performance Report: Quarterly Production (in thousands) Quarterly Production (in thousands)

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Activity Flexible BudgetActivity Flexible BudgetActivity Flexible BudgetActivity Flexible Budget

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4Flexible Budgets for Planning and Flexible Budgets for Planning and ControlControl

Activity-Based Performance ReportActivity-Based Performance ReportActivity-Based Performance ReportActivity-Based Performance Report

The activity-based performance report compares the budgeted costs for actual activity usage with the actual costs.

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Activity-Based BudgetsActivity-Based Budgets 5

The activity-based budget begins with output and then determines the resources necessary to created that output. It works backwards from activities and their drivers to the underlying costs.

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5Activity-Based BudgetsActivity-Based Budgets

Traditional Budget for the Secure-Care DepartmentTraditional Budget for the Secure-Care DepartmentTraditional Budget for the Secure-Care DepartmentTraditional Budget for the Secure-Care Department

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5Activity-Based BudgetsActivity-Based Budgets

Flexible Budget for the Secure-Care DepartmentFlexible Budget for the Secure-Care DepartmentFlexible Budget for the Secure-Care DepartmentFlexible Budget for the Secure-Care Department

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5Activity-Based BudgetsActivity-Based Budgets

Activity-Based Budget for the Secure-Care DepartmentActivity-Based Budget for the Secure-Care DepartmentActivity-Based Budget for the Secure-Care DepartmentActivity-Based Budget for the Secure-Care Department

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The Behavioral Dimension of The Behavioral Dimension of BudgetingBudgeting 6

Characteristics of a Good Budgetary System

Frequent feedback on performance

Monetary and nonmonetary incentives

Participative budgeting

Realistic standards

Controllability of costs

Multiple measures of performance

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End of End of Chapter 8Chapter 8