Ch08 Guan Cm Aise Ppt

8/10/2019 Ch08 Guan Cm Aise Ppt

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COST MANAGEMENT

Guan Hansen Mowen

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license. 1

Chapter 8

Budgeting for Planning andControl


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1. Define budgeting, and discuss its role in planning, controlling, anddecision making.

2. Prepare the operating budget, identify its major components, andexplain the interrelationships of the various components.

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

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-congruentbehavior.

Study Objectives


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The Role of Budgetingin Planning and Control


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Types of budgets

Master budget

Operating budgets

Financial budgets

Time frame

Annual period

Multi-year rolling budget


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Gathering information

Forecasting sales

Forecasting other variables

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

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

budget.


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

Starting point for Production Budget

Starting point for Marketing Expense Budget

Schedule 1 (in thousands)

Goes to Budgeted Income Statement

Preparing the Operating Budget


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Starting point for Direct Materials Purchases Budget

Starting point for Direct Labor Budget




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Goes to Cost of Goods Sold 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 handat the end of the third and fourth quarters.


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Starting point for Overhead Budget



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


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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.





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





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Operating Budgets forMerchandising 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 incomestatement


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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 balanceExcess or deficiency of cash

Repayments+ Loans+ Minimum cash balance

Ending cash balance


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(Continued on next slide)




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(Continued from previous slide)

(Continued on next slide)




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(Continued from previous slide)




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Budgeted balance sheet

Current (actual) balance sheet

Integrate data from all other budgets


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a Ending balance from Schedule 12.b 30 percent of fourth-quarter credit

sales (0.30 $800,000); seeSchedules 1 and 12.

c From Schedule 3 (5,000,000 lbs. $0.01).

d From Schedule 6.e From the December 31, 2009,

balance sheet.f December 31, 2009, balance

($9,000,000) plus new equipmentacquisition of $600,000; see the2009 ending balance sheet andSchedule 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 incomefrom Schedule 11).


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Shortcomings of the TraditionalMaster 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

Cost-cutting accomplished by across-the-board cuts


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Flexible Budgetsfor Planning and Control

Static budget

Vital for planning

Less useful for control

Masterbudget

Developed around asingle level of activity

Budgeted activitylevel rarely equalsactual activity


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Static budgets

Masterbudget

Vital for planning

Less useful for control

Developed around asingle level of activity

Budgeted activitylevel rarely equalsactual activity

Flexible budgets

Variable budget

Provides expected

costs for a range ofactivity

Provides budgeted

costs for the actualactivity level


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Flexible budgetperformance report Compare budgeted costs

given the actual level ofactivity to the actual costs

for the same level Locate possible problem

areas by examining theflexible budget variances

Examines efficiency


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Actual

results

Flexible

budget

Units produced 3,000 3,000 -

Production costs:Direct materials 927.3$ 780.0$ 147.3$ U

Direct labor 360.0 360.0 - U

Supplies 80.0 90.0 (10.0) F

Indirect labor 220.0 210.0 10.0 U

Power 40.0 60.0 (20.0) F

Supervision 90.0 100.0 (10.0) FDepreciation 200.0 200.0 -

Rent 30.0 20.0 10.0 U

Total Costs 1,947.3$ 1,820.0$ 127.3$ U

Flexible

budget

variances

Managerial Performance Report: Quarterly Production(in thousands)



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Flexible budget

performance report

Compare budgeted costsgiven the actual level of

activity to the actual costsfor the same level

Locate possible problemareas by examining theflexible budget variances

Examines efficiency

Managerialperformance report Flexible budget variances

Actual results vs.flexible budget

Examines efficiency

Volume variances

Static budget vs.flexible budget

Examines effectiveness


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Actual

results

Flexible

budget

Static

budget

Units produced 3,000 3,000 - 2,400 600 F

Production costs:Direct materials 927.3$ 780.0$ 147.3$ U 624.0$ 156.0$ U

Direct labor 360.0 360.0 - U 288.0 72.0 U

Supplies 80.0 90.0 (10.0) F 72.0 18.0 U

Indirect labor 220.0 210.0 10.0 U 168.0 42.0 U

Power 40.0 60.0 (20.0) F 48.0 12.0 U

Supervision 90.0 100.0 (10.0) F 100.0 -Depreciation 200.0 200.0 - 200.0 -

Rent 30.0 20.0 10.0 U 20.0 -

Total Costs 1,947.3$ 1,820.0$ 127.3$ U 1,520.0$ 300.0$ U

Flexible

budget

variances

Managerial Performance Report: Quarterly Production(in thousands)

Volume

variances


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A flexible budget can be built for five overhead activities using threedrivers; each is budgeted for two activity levels.


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The activity-based performance report measures budget variances foreach of the overhead activities.


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Activity-Based Budgets

ABB begins with output and thendetermines the resources necessary tocreated that output.

ABB works backwards from activities andtheir drivers to the underlying costs Traditional budgeting relies on functional-

based line items (salaries, supplies, etc.)

Flexible budget uses cost behavior to splitfunctional-based line items into fixed andvariable


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Traditional budgeting relies on functional-basedline items.


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Flexible budgeting uses cost behavior to splitfunctional-based line items into fixed andvariable costs.


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Steps to construct an ABB

1.Determine the units 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


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The Behavioral Dimensionof Budgeting

Characteristics of a good budgetarysystem

Frequent feedback on performance

Monetary and nonmonetary incentives

Participative budgeting

Realistic standards

Controllability of costs

Multiple measures of performance


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COST MANAGEMENT

Guan Hansen Mowen

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning. 42

End Chapter 8

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Ch08 Guan Cm Aise Ppt