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The Master Budget and

Responsibility Accounting

Chapter 23

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Identify the benefits of budgeting.

Objective

1

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Benefits of

Budgeting

requires managers to plan promotes coordinationand communication

helps managersevaluate performance

motivates employees toachieve company goals

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Components of the Master

Budget

PurchasesBudget____ ________ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ____

____ ________ ____

Operating Budget

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Components of the Master

Budget

Budgeted

BalanceSheet_____ __________ __________ __________ __________ _____

BudgetedStatementof Cash Flows_____ __________ __________ __________ __________ _____

BudgetedIncomeStatement_____ __________ __________ __________ __________ _____

CapitalExpendituresBudget_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

Financial Budget

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Preparing the Master

Budget

Suppose that J.J. manages Plantation

Sporting Store No. 13.

Selected parts of the master budget will beprepared for Store No. 13 for April, May,

June, and July.

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Budget

Sales are 60% cash and 40% on credit.

Credit sales are collected in the month

following the sale.

Accounts receivable on March 31 amounted

to $19,200.

How much were total sales in March?

$19,200 .40 = $48,000

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Projected Sales

April $50,000May $80,000

June $60,000

July $50,000


Budget

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Budget

Plantation maintains inventory equal to

$10,000 plus 40% of the budgeted cost of

goods sold for the following month. Cost of goods sold averages 70% of sales.

Target ending inventory on July 31 is

$32,000.

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Budget

What is the ending inventory on March 31?

$10,000 + (0.40 0.70 April sales of $50,000)

What is the beginning inventory?

$10,000 + (0.40 0.70 $48,000) = $23,440

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Budget

Plantation pays for inventory as follows:

50% during the month of purchase and 50%

during the next month. March purchases were $34,160.

How much was paid in March for Marchs

purchases?

$34,160 50% = $17,080

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Prepare an operating budget.

Objective

2

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Sales Budget (Schedule

A)

Sales revenue is the key measure of

business activity.

The budgeted total sales revenue for eachproduct is the sales price multiplied by the

expected number of units sold.

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April May June July

Cash sales 60% $30,000 $48,000 $36,000 $30,000Credit sales 40% 20,000 32,000 24,000 20,000

Total $50,000 $80,000 $60,000 $50,000

Total sales April through July = $240,000

Sales Budget (Schedule

A)

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urc ases, os o oo sSold,

and Inventory Budget Cost of goods sold = 70% sales

How much are the cost of goods sold for May?

70% $80,000 = $56,000

What is the desired ending inventory for April?

$10,000 + (40% $56,000) = $32,400

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Beginning inventory + Purchases

Ending inventory = Cost of goods sold

Cost of goods sold + Ending inventory

Beginning inventory = Purchases

urc ases, os o oo sSold,

and Inventory Budget

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April May June July

Cost of goods sold

(70% sales) $35,000 $56,000 $42,000 $35,000

Desired ending

inventory 32,400 26,800 24,000 32,000

Total required $67,400 $82,800 $66,000 $67,000

Beginning inventory 24,000 32,400 26,800 24,000Purchases $43,400 $50,400 $39,200 $43,000

Schedule

B

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Schedule

B

April $ 35,000

May. 56,000

June. 42,000

July. 35,000

Total $168,000

How much is the cost of goods

sold for the four-month period?

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Operating Expenses

Budget

Assume that Plantation Sporting Goods

incurs $4,000 of fixed expenses every

month and that commissions and othervariable expenses equal 20% of sales.

What is the operating expenses budget

(Schedule C)?

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April May June July

Variable expenses

(From Schedule A)20% of sales $10,000 $16,000 $12,000 $10,000

Fixed expenses 4,000 4,000 4,000 4,000

Total $14,000 $20,000 $16,000 $14,000

Total operating expenses: $64,000

pera ng xpensesBudget

(Schedule C)

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Budgeted Income

Statement

Plantation Sporting Goods Store No. 13

Budgeted Income Statement

Four Months Ending July 31, 20xx

Amount Source

Sales $240,000 Schedule A

Cost of goods sold 168,000 Schedule B

Gross margin $ 72,000

Operating expense 64,000 Schedule C

Net income $ 8,000

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Prepare the components

of a financial budget.

Objective

3

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Cash budget

Budgeted

balance sheet

Preparing the Financial

Budget

The financial budget includes:

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Preparing the Cash

Budget

The cash budget has the following major parts:

cash collections from customers (Schedule D)

cash disbursements for purchases (Schedule E)

cash disbursements for operating expenses

(Schedule F)

capital expenditures (not illustrated in this

chapter)

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as o ec ons romCustomers

(Schedule D)

April May June July

Cash sales $30,000 $48,000 $36,000 $30,000Collections of last

months credit sales 19,200* 20,000 32,000 24,000

Total $49,200 $68,000 $68,000 $54,000

Total collections: $239,200

*19,200 = March 31 accounts receivable

From Schedule A

as s rsemen s or

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as s ursemen s orPurchases

(Schedule E)

April May June July

Payment of lastmonths purchases $17,080 $21,700 $25,400 $19,600

Payment of this

months purchases 21,700 25,200 19,600 21,500

Total $38,780 $46,900 $45,000 $41,100

Total disbursements: $171,780

From Schedule B

as s ursemen s or

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April May June July

Payment of lastmonths expenses $ 6,800 $ 7,000 $10,000 $ 8,000

Payment of this

months expenses 7,000 10,000 8,000 7,000

Total $13,800 $17,000 $18,000 $15,000

Total disbursements: $63,800

as s ursemen s orOperating Expenses (Schedule

F)From Schedule C

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Cash Budget

Four Months Ending July 31, 20xx

Budgeted cash receipts $239,200

Budgeted cash disbursements

Purchases $171,780

Operating expenses 63,800 235,580Budgeted cash increase $ 3,620

Cash

Budget

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Preparing the Budgeted Balance

Sheet

Assets, liabilities, and owners equity are

projected based upon the previous schedules.

Assume that the cash balance on March 31was $15,000.

What is the budgeted cash balance on July 31?

$15,000 + $3,620 expected increase = $18,620

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Use sensitivity analysis in budgeting.

Objective

4

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Budgeting and Sensitivity

Analysis

Sensitivity analysis helps managers plan for

different courses of action.

This type of what if analysis shows theresult of changing an underlying assumption

in the budgeting process.

Sensitivity analysis may affect very specificplans.

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Distinguish among different

types of responsibility centers.

Objective

5

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Responsibility

Accounting...

is a system for evaluating the performance of

managers and the activities they supervise.

A responsibility center is a part, segment, orsubunit of an organization whose manager is

accountable for specific activities.

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Investment center

Cost center Revenue center

Profit center

Responsibility

Center

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Prepare a performance report

for management by exception.

Objective

6

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Management by

Exception

Northern California District Manager

San FranciscoBranch

Manager

San JoseBranch

Manager

OaklandBranch

Manager

SacramentoBranch

Manager

GearyStore

Manager

BealeStore

Manager

WharfStore

Manager

OtherManagers

b

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Management by

Exception

Performance reports show differences

between budgeted and actual amounts.

Management by exception is the practiceof focusing on important variances so that

managers can direct their attention to areas

that need improvement.

M b

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Management by

Exception


Monthly Responsibility Report (Budget)

Month YTDRevenues $50,000 $388,000

Cost of goods sold 35,000 271,600

Wages 6,700 51,992

Repairs 2,000 15,520General 1,300 10,088

Fixed costs 4,000 28,000

Operating income $ 1,000 $ 10,800

M b

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Management by

Exception


Monthly Responsibility Report (Actual)

Month YTDRevenues $55,000 $408,000

Cost of goods sold 37,400 277,440

Wages 7,370 54,672

Repairs 550 8,160General 900 8,160

Fixed costs 4,000 28,000

Operating income $ 4,780 $ 31,568

M b

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Management by

Exception


July 20xx, Responsibility Report

Budget Actual Variance (F/U)Revenues $50,000 $55,000 $5,000 (F)

Cost of goods sold 35,000 37,400 2,400 (U)

Wages 6,700 7,370 670 (U)

Repairs 2,000 550 1,450 (F)General 1,300 900 400 (F)

Fixed costs 4,000 4,000 ---

Operating income $ 1,000 $ 4,780 $3,780 (F)

M b

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Management by

Exception

J.J., manager of Plantation Sporting Goods

Store No. 13, will investigate why cost of

goods sold and wages were more thanbudgeted.

Cost of goods sold was originally budgeted to

be 70% of sales. Wages was budgeted to be 67% of total

operating variable expenses or 13.4% of sales.

M b

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Management by

Exception

Management will determine that cost of

goods sold were 68% of sales instead of

the 70% originally budgeted. $37,400 $55,000 = 68%

Pleasant news!

M t b

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Management by

Exception

Management may investigate why wages

were 84% of total variable operating expenses

instead of the 67% originally budgeted,although in total they remained 13.4% of

sales.

$7,370 $8,820 = 84% It will be determined that other variable

operating expenses were less than anticipated.

M t b

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Management by

Exception

Broward County Branch Manager

Plantation Sporting Stores


Budget Actual Variance (F/U)

Branch manager

office expense $20,000 $25,000 $ 5,000 (U)

Income:Store 13 1,000 4,780 3,780 (F)

Others 80,000 95,220 15,220 (F)

Operating income $61,000 $75,000 $14,000 (F)

M t b

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Management by

Exception

South Florida District Manager

Plantation Sporting Stores


Budget Actual Variance (F/U)

District manager

office expense $ 95,000 $ 99,000 $ 4,000 (U)

Income:Broward county 61,000 75,000 14,000 (F)

Other counties 280,000 325,000 45,000 (F)

Operating income $246,000 $301,000 $55,000 (F)

Obj ti

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Allocate indirect costs

to departments.

Objective

7

All ti f I di t

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Allocation of Indirect

Costs

Indirect costs are allocated to departments or

responsibility centers using the following steps:

1 Choose an allocation base for the indirect cost.2 Compute an indirect cost allocation rate.

3 Allocate the indirect cost.

Ch All ti

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Choose an Allocation

Base

Cost or Expense Basis

Indirect labor Time spent

Building depreciation Square feetHeat, lights, etc. Square feet

Janitorial services Square feet

Payroll and personnel # of employees

Purchasing # of purchase orders placed

Ch All ti

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Choose an Allocation

Base

Lets consider the Healthy Clinic, a provider

of Ear, Nose, and Throat (ENT) plus

Audiology services. Rent for the year is $120,000.

Total square footage occupied by the clinic

is 12,000. What is the rent per square foot?

$120,000 12,000 = $10

C t C t All ti

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Compute a Cost Allocation

Rate

Other expenses amounted to $100,000 and

are allocated on the basis of professional

services expenses. Total professional services expenses

amounted to $250,000.

ENT accounted for $175,000 of theseexpenses and Audiology for $75,000.

Comp te a Cost Allocation

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Compute a Cost Allocation

Rate

What is the allocation rate?

$100,000 $250,000 = 40%

40% of what?

40% of professional services expenses.

Allocate the Indirect

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Cost

ENT occupies 9,000 square feet.

How much rent is allocated to ENT?

9,000 $10 = $90,000

How much rent is allocated to Audiology?

12,0009,000 = 3,000 square feet

3,000 $10 = $30,000


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Cost

How much of the other expenses are

allocated to ENT?

$175,000 40% = $70,000 How much to Audiology?

$75,000 40% = $30,000

Evaluate

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Evaluate

Performance

Healthy Clinic

Departmental Partial Income Statement

For the Year Ended December 31, 20xx (in thousands)

Total ENT Audiology

Service revenue $500 $350 $150

Professional services 250 175 75

Margin $250 $175 $ 75Rent expense 120 90 30

Other 100 70 30

Operating income $ 30 $ 15 $ 15

Evaluate

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Evaluate

Performance

ENT generates a professional margin of

$175,000 compared to $75,000 by

Audiology. However, the margin per square foot is

$175,000 9,000 = $19.44 for ENT and

$75,000 3,000 = $25.00 for Audiology.

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End of Chapter 23

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