Copyright © 2008 Prentice Hall All rights reserved 10-1 The Master Budget and Responsibility Accounting Chapter 10

Copyright © 2008 Prentice Hall All rights reserved

10-1

The Master Budget andResponsibility Accounting

Chapter 10


10-2

Objective 1

Learn why managers use a budget


10-3

Benefits of Budgeting

• Budgets force managers to plan

• Budgets promote coordination and communication

• Budgets provide a benchmark that motivates employees and helps managers evaluate performance


10-4

Master Budget

Set of budgeted financial statements and supporting schedules for the entire organization


10-5

Master Budget Includes 3 Types of Budgets

1. Operating budget

2. Capital expenditures budget

3. Financial budget


10-6

Operating Budget

Sales budget

Operating expense budget

Purchases & cost of goods sold budget

Inventory budget

Budgeted income statement


10-7

Capital Expenditures and Financial Budget

Budgeted income statement

Cash budget

Budgeted balance

sheet

Budgeted statement of cash flows

Capital expenditures

budget

Financial budget


10-8

Objective 2

Prepare an operating budget


10-9

Sales Budget

• Plan for sales revenues in a future period

• Budgeted sales revenue = sale price per unit x expected number of units to be sold


10-10

S10-3 Sales Budget Example

Grippers

Sales Budget

January FebruaryTotal

Sales price/pair $185 $220

Number of pairs x 4,000 x3,500

Total sales $740,000 $770,000$1,510,000


10-11

Purchases = Cost of goods sold + Ending inventory– Beginning inventory

Inventory, Purchases, and Cost of Goods Sold Budget

Cost of goods sold =

Beginning inventory + Purchases– Ending inventory

Known

Compute ComputeUnknown


10-12

S10-4 Inventory, Purchases and COGS Budget

Grippers

Inventory, Purchases, & Cost of Goods Sold Budget

January February

Cost of goods sold (65%) $481,000 $500,500

+ Desired ending inventory($10,000 + (50% x CGS fornext month)) 260,250 345,400

Total inventory required $741,250 $845,900

- Beginning inventory (250,500) (260,250)

Purchases

Hint: Rearrange the cost of goods sold equation so that Purchases = COGS + Ending

Inventory – Beginning Inventory


10-13

Objective 3

Prepare a financial budget


10-14

Financial Budget Components

• Cash budget

• Budgeted balance sheet

• Budgeted statement of cash flows


10-15

Cash Budget Components

• Cash receipts and cash payments for a future period

• The Cash Budget has 5 major parts Collections from customers Cash payments for purchases Cash payments for operating expenses Cash payments for capital expenditures Cash Financing – borrowings, repayments

and interest


10-16

Cash Payment Components

• Cash payments For inventory purchases For operating expenses Purchase long-term assets Payment on loans Payment to owners


10-17

Cash Budget Minimum Requirement

Beginning cash balance

+ Cash receipts

= Cash available

- Cash payments (for inventory, operating expenses, purchase of long-term assets)

= Ending balance before financing

- Minimum balance

= Excess (deficiency)


10-18

Cash Budget Financing Section

Financing:

+Borrow

- Principal payments

- Interest expense

Total Effects of financing

Ending Cash Balance


10-19

Cash receipts Jan Feb Cash salesCredit sales: 30% current month 60% prior month 6% 2 months agoTotal cash collections $548,330.00 $716,671.25

$192,500.00

S10-5: Cash Collections

$770,000 x 25%$185,000.00

173,250.00166,500.00

$740,000 x 25%

179,212.50 333,000.00 17,617.50 17,921.25

$740,000 x 75% x 30%$770,000 x 75% x 30%$398,250 x 75% x 60%$740,000 x 75% x 60%

$391,500 x 75% x 6%$398,250 x 75% x 6%


10-20

S10-6: Continuation of Cash Budget

January Beginning cash balance $8,300+ Cash receipts 548,330= Cash available $556,630- Cash payments (583,200)= Ending balance before financing $(26,570)- Minimum balance (7,500)= Excess (deficiency) $(34,070)


10-21

Cost of Goods Sold ScheduleAug

SeptBeginning inventory $90,000+Purchases 121,000=Goods available for sale $211,000

-Ending inventory (91,000) =Cost of goods sold $120,000

P10-35B: Prepare a Budgeted Income Statement–Cost of Goods

Sold Section

$91,000124,000

$215,000 (94,000)

$121,000


10-22

P10-35B: Prepare a Budgeted Income Statement–Operating

Expense SectionOperating Expense Budget

Aug SeptSalary, fixed amount $15,000 $15,000Commission 12,000 12,000 Total $27,000 $27,000Rent expense 13,000 13,000Depreciation expense 4,000 4,000Insurance expense 1,000 1,000

Total $45,000 $45,000


10-23

P10-35B: Budgeted Income Statement

Go Sports

Budgeted Income Statements

August and September 2009

August September

Sales revenue $202,000 $206,000

Cost of goods sold ? ?

Gross profit $82,000 $85,000

Operating expenses 45,000 45,000

Operating income $37,000 $40,000

Income tax expense 11,000 12,000

Net income $ 26,000 $ 28,000

Hint: What is the equation to

determine gross profit for

a merchandising

company?


10-24

P10-36B: Cash Budget–Collections

Budgeted Cash Collections from CustomersAug Sept Total

Cash sales $101,000 $103,000Collection of last month’s 98,000 101,000 Total collections $199,000 $204,000

$403,000


10-25

P10-31B: Cash Budgets–Payments for Purchases

Budgeted Cash Payments for PurchasesAug Sept Total

40% last month’s $52,000 $48,48060% this month’s 72,720 74,160Total payments $124,720 $122,640

$247,360


10-26

P10-31B: Cash Payments for Operating Expenses

Budgeted Cash Payments for Operating ExpensesAug Sept Total

Salaries & commissions: 25% last month’s $6,750 $6,780

75% this month’s 20,340 20,520Rent 13,000 13,000 Total payments $40,090 $40,300 $80,390


10-27

P10-31B: Prepare a Cash Budget

Go SportsCash Budget

Aug SeptBeginning cash balance $22,000Cash collections from customers 199,000Cash available $221,000Cash payments: Purchase inventory 124,720 Operating expenses 40,090Total cash payments 164,810Ending cash balance $56,190

$56,190

204,000 $260,190

122,640

40,300

162,940$

97,250


10-28

E10-21: Budgeted Balance Sheet

Marine.comBudgeted Balance Sheet

March 31, 2009ASSETSCurrent Assets:Cash (click here for computations) $ 7,900Accounts receivable (0.25 $12,200) 3,050Inventory 15,000 $25,950Plant assets:Furniture and fixtures 34,800Accumulated depreciation (30,470) 4,330Total assets $30,280


10-29

E10-21: Budgeted Balance Sheet

Marine.comBudgeted Balance Sheet

March 31, 2009LIABILITIESCurrent liabilities:Accounts payable $ 4,300Total liabilities $ 4,300OWNERS' EQUITYOwners' equity (click here for computations) 25,980Total liabilities and owners' equity $30,280


10-32

Objective 4

Use sensitivity analysis in budgeting


10-33

Budgeting and Sensitivity Analysis

• Helps managers plan for different courses of action using “what-if” techniques

• Use of technology and budget software


10-34

Objective 5

Prepare performance reports for responsibility centers


10-35

Responsibility Accounting

• System for evaluating performance of managers and activities they supervise

• Responsibility center a part, segment or subunit of an organization whose manager is accountable for its activities


10-36

• Cost center – Reports costs only

• Revenue center – Reports revenues only

• Profit center – Reports revenues, expenses and net income or loss

• Investment center – Reports revenues, expenses, income or loss and investment used

Responsibility Center


10-37

E10-27: Types of Responsibility Centers

a.Profit center

b. Investment center (or possibly a profit center)

c. Cost center

d.Profit center

e.Cost center

f. Profit center

g. Investment center

h.Revenue center


10-38

Responsibility Accounting

• Performance reports compare budgeted and actual amounts

• Management by exception – management technique that focuses on important differences between budget and actual


10-39

E10-28: Prepare Performance Reports at Different Organizational

LevelsIn Touch

Responsibility Accounting Performance Report (Amounts in thousands)

September 2009

Manager – All handheld devices

Budget Actual Variance

Operating income:

PDAs $ 75 $ 60 $(15)

Cell Phones 474 519 45

Total operating income $549 $579 $ 30


10-40

E10-28: Continued

Assistant Manager – cell phones


Operating income:

Video Cell Phones $410 $440 $30

Digital Cell Phones 64 79 15

Total operating income $474 $519 $45


10-41

E10-28 Continued

Assistant Manager – DIGITAL CELL PHONES


Revenues and expenses:

Revenues $204 $214 $10

Expenses 140 135 5

Operating income $ 64 $ 79 $15


10-42

End of Chapter 10

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Copyright © 2008 Prentice Hall All rights reserved 10-1 The Master Budget and Responsibility Accounting Chapter 10