Master Budget and Responsibility Accounting Chapter Cost Accounting Horngreen Datar

8/8/2019 Master Budget and Responsibility Accounting Chapter Cost Accounting Horngreen Datar

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Cost Accounting Horngreen, Datar, Foster

Chapter 6

Master Budget and

Responsibility Accounting


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Learning Objectives

Understand what a master budget is and explain its benefits

Describe the advantages of budgets Prepare the operating budget and its supporting schedules

Explain kaizen budgeting and how it is used for cost

management Prepare an activity-based budget

Describe responsibility centers and responsibility

accounting. Explain how controllability relates to responsibility

accounting.


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Budgeting Cycle

Performance planning

Providing a frame of reference Investigating variations

Corrective action

Planning again


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The Master Budget

Master BudgetMaster Budget

Operating

Decisions

Operating

Decisions

Financial

Decisions

Financial

Decisions

based on oneexpected scenario


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Why Budgets?

Conveys strategy to employees and managers

Provides a framework for judging performance

Motivates employees and managers

Promotes coordination and communication


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Strategy, Planning, and Budgets

StrategyAnalysis

Long-runPlanning

Short-runPlanning

Long-runBudgets

Short-runBudgets


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Time Coverage of Budgets

Budgets typically have a set time period(month, quarter, year).

This time period can itself be broken into sub-periods.

The most frequently used budget period is oneyear.

Businesses are increasingly using rolling

budgets.


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Operating Budget

Sales BudgetSales Budget ProductionProduction B.B.

Finished GoodsFinished Goods

InventoryInventory B.B.

Production CostProduction Cost B.B.--directdirect

-- overheadoverhead

RevenueRevenue B.B.

RequirementsRequirements

Budget:Budget:

-- MaterialsMaterials-- LaborLabor

-- CapacitiesCapacities

MaterialsMaterials

InventoryInventory B.B.ProcurementProcurement B.B.

NonNon--ProductionProduction

CostCost B.B.


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Operating Budget Example

Hawaii Diving expects 1,100 units to be sold

during the month of August 2004. Selling price is expected to be $240 per unit.

How much are budgeted revenues for themonth?

1,100 $240 = $264,000


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Operating Budget Example

Two pounds of direct materials are budgeted per unit at a

cost of $2.00 per pound, $4.00 per unit. Three direct labor-hours are budgeted per unit at $7.00 per

hour, $21.00 per unit.

Variable overhead is budgeted at $8.00 per direct labor-hour, $24.00 per unit.

Fixed overhead is budgeted at $5,400 per month.

Variable nonmanufacturing costs are expected to be $0.14per revenue dollar.

Fixed nonmanufacturing costs are $7,800 per month.


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Production Budget Example

Budgeted sales (units)

Target ending finished goods inventory (units)

Beginning finished goods inventory (units)

Budgeted production (units)

+

=


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Production Budget Example

Assume that target ending finished goods inventory is 80 units.

Beginning finished goods inventory is 100 units. How many units need to be produced?

Units required for sales 1,100

Add ending inv. of finished units 80 Total finished units required 1,180

Less beg. inv. of finished units 100

Units to be produced 1,080


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Direct Materials Usage Budget

Each finished unit requires 2 pounds of direct materials at a

cost of $2.00 per pound. Desired ending inventory equals 15% of the materials

required to produce next months sales.

September sales are forecasted to be 1,600 units. What is the ending inventory in August?

480 pounds


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Direct Materials Usage Budget

September sales: 1,600 2 pounds per unit

= 3,200 pounds 3,200 15% = 480 pounds (the desired ending inventory)

What is the beginning inventory in August?

1,100 units 2 15% = 330 units How many pounds are needed to produce 1,080 units in

August?

1,080 2 = 2,160 pounds


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Material Purchases Budget

Hawaii Diving Direct Material Purchases Budget for the

Month of August 2004

Units needed for production 2,160Target ending inventory 480

Total material to provide for 2,640Less beginning inventory 330Units to be purchased 2,310Unit purchase price $ 2.00Total purchase cost $4,620


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Direct Manufacturing Labor Budget

Each unit requires 3 direct labor-hours at $7.00 per hour.

Hawaii Diving Direct Labor Budget for the Month of August2004

Units produced: 1,080

Direct labor-hours/unit 3

Total direct labor-hours: 3,240

Total budget at $7.00/hour: $22,680


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Manufacturing Overhead Budget

Variable overhead is budgeted at $8.00 per direct labor-

hour. Fixed overhead is budgeted at $5,400 per month.

Hawaii Diving Manufacturing Overhead Budget for the

Month of August 2004:

Variable Overhead: (3,240 $8.00) $25,920

Fixed Overhead 5,400Total $31,320


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Ending Inventory Budget

Cost per finished unit:

Materials $ 4 Labor 21

Variable manufacturing overhead 24

Fixed manufacturing overhead 5*

Total $54 *$5,400 1,080 = $5

What is the cost of the target ending inventory for materials?

480 $2 = $960

What is the cost of the target finished goods inventory?

80 $54 = $4,320


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Cost of Goods Sold Budget

Direct materials used 2,160 $2.00 4,320

Direct labor 22,680 Total overhead 31,320

Cost of goods manufactured $58,320

Assume that the beginning finished goods inventory is$5,400.

Ending finished goods inventory is $4,320.

What is the cost of goods sold?


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Cost of Goods Sold Budget

Beginning finished goods inventory $ 5,400

+ Cost of goods manufactured $58,320

= Goods available for sale $63,720 Ending finished goods inventory $ 4,320

= Cost of goods sold $59,400


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Nonmanufacturing Costs Budget

Hawaii Diving Other Expenses Budget for the Month of

August 2004

Variable Expenses: ($0.14 $264,000) $36,960

Fixed expenses 7,800

Total $44,760


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Cost of Goods Sold Budget Hawaii Diving has budgeted sales of $264,000 for the month

of August.

Cost of goods sold are budgeted at $59,400.

What is the budgeted gross margin?

Hawaii Diving Budgeted Income Statement for the Month

ending August 31, 2004

Sales $264,000 100%Less cost of sales 59,400 22%

Gross margin $204,600 78% Other expenses 44,760 17%Operating income $159,840 61%


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Financial Planning Models

Financial planning models are

mathematical representations of the

interrelationships among operatingactivities, financial activities, and other

factors that affect the master budget.


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Example: Cash Budget

Depends on collection pattern:

In the month of sale: 50%

In the month following sale: 27%

In the second month following sale: 20%

Uncollectible: 3%


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Cash Budget

Budgeted charge sales are as follows:

June $200,000

July $250,000

August $264,000

September $260,000

What are the expected cash collections in August?


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Cash Budget

Budgeted Cash Receipts

for the Month Ending August 31, 2004

August sales: $264,000 50% $132,000

July sales: $250,000 27% $67,500

June sales: $200,000 20% $40,000

Total $239,500


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Cash Budget

Budgeted Cash Disbursements

for the Month Ending August 31, 2004

August purchases $ 4,620

Direct labor $22,680

Total overhead $31,320

Other expenses $9,760*

Total $68,380

*Other expenses exclude depreciation


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Cash Budget

Cash Budgetfor the Month Ending August 31, 2004

Budgeted receipts $239,500

Budgeted disbursements 68,380

Net increase in cash $171,120


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Exercise: Prepare a purchases budget in pounds for July, August, and

September, and give total purchases in both pounds and dollars for each month.

Lubriderm Corporation has the following budgeted sales for the next six-monthperiod:

There were 30,000 units of finished goods in inventory at the beginning of June.Plans are to have an inventory of finished products that equal 20% of the unitsales for the next month.

Five pounds of materials are required for each unit produced. Each pound ofmaterial costs $8. Inventory levels for materials are equal to 30% of the needsfor the next month. Materials inventory on June 1 was 15,000 pounds

Month Unit SalesJune 90,000July 120,000August 210,000September 150,000October 180,000

November 120,000


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What is Kaizen?

The Japanese use the term kaizen for continuousimprovement.

Kaizen budgeting is an approach that explicitlyincorporates continuous improvement during thebudget period into the budget numbers.


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Kaizen Budgeting

Budgeted Hours/ItemJanuary March 2004 3.00

April June 2004 2.95

July September 2004 2.90October December 2004 2.85

A kaizen budgeting approach would

incorporate future improvements.


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Activity-Based Budgeting

Activity-based costing reports and analyzes

past and current costs.

Activity-based budgeting (ABB) focuses

on the budgeted cost of activities necessary

to produce and sell products and services.


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Activity-Based BudgetingProduct A Product B

Units produced: 880 200

Labor-hours per unit: 3 3

Budgeted setup-hours: 5 5

Total budgeted machine setup related cost is $25,920 per month.

Total budgeted labor-hours are:

Product A: 880 3 2,640

Product B: 200 3 600

Total 3,240

What is the allocation rate per labor-hour? $25,920 3,240 = $8.00


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Total cost allocated to each product line:

Product A: $8.00 2,640 = $21,120 Product B: $8.00 600 = $ 4,800

Under ABB, the number of setups is the cost driver. $25,920 budgeted machine setup cost

10 budgeted machine setup-hours

= $2,592 allocation rate per machine setup-hour. How much machine setup related costs are allocated to

each product line?


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Product A Product B$12,960 $12,960

$2,592 5 $2,592 5

Setup-related cost per unit:

Product A: $12,960 880 $14.73

Product B: $12,960 200 $64.80


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What is a Responsibility Center?

It is any part, segment, or subunit

of a business that needs control.

production service


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Types of Responsibility Centers

Cost Center

Profit Center Investment Center


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What is Controllability?

It is the degree of influence that a specificmanager has over costs, revenues,

or other items in question.

A controllable cost is any cost that is

primarily subject to the influence of a

given responsibility center managerfor a given time period.


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Controllability

Responsibility accounting focuses oninformation and knowledge, not control.

A responsibility accounting system couldexclude all uncontrollable costs from

a managers performance report.

In practice, controllability is difficult to pinpoint.


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Human aspects of Budgeting

Budgeting should not be considered as a mechanical tool

Quality of the budget depends on the information that is fedinto the process

There are incentives for dishonest reports

Budgetary slack

Empire building

Management aims to ensure honest reporting by lower levelmanagement

Via appropriate performance measures Monitoring


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True or False ???

A budget that covers the financial aspects is a qualitative expression ofa proposed plan of action by management for a specified period.

The master budget reflects the impact of only operating decisions.

Feedback in the budgeting process may cause a firm to alter itsstrategies and plans.

Statistical analysis should be the only input used to forecast sales.

Sensitivity analysis allows managers to see how results will change ifpredicted data are not achieved or an underlying assumption changes.


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Pick your Choice I:

When a budget is administered wisely, it will

discourage strategic planning.

provide a framework for performance evaluation.

discourage managers and employees.

eliminate coordination and communication between subunits.

If a firm is using activity-based budgeting, the firm would use this inplace of which of the following budgets?

Direct materials budget

Revenue budget

Direct labor budget

Manufacturing overhead budget


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Who Gets the Money?


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Who Gets the Money?New York Post, April 29, 2001

In the above-cited article, ABC and its parent company, Walt Disney Company,say that the show "Who Wants to be a Millionaire," is the most profitable

television show ever - generating almost $1 billion in revenue in a little less thantwo years on the air.

Each individual show costs about $700,000 to produce, including prize moneyand host Regis Philbin's salary. Each show earns $2 million in advertisingrevenue. The rights to air Millionaire are also sold to Canada for $250,000 per

episode.The Millionaire show also sells a CD-ROM game for $20. About 4 million ofthese games have been sold.

There is also an on-line version of the game that Millionaire fans can play. Usersof the game don't pay, but each "hit" is noted when advertising space is sold for

the site.The article also points out that Disney also sells hats and t-shirts of the game,and markets a special version of "Millionaire" to corporations that can be playedat conventions by employees and clients.


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Who Gets the Money? - Questions

1. The Millionaire show itself generates about $1.3 million per episode innet income ($2 million in revenue, $700,000 in expenses.) Give a

reason why this should be considered a profit center for evaluating amanager's performance.

2. Do you think that one manager has responsibility for the Millionaire

show, as a profit center, or is it divided as a cost center and as arevenue center?

3. Should the ancillaries of the show (the t-shirts, CD-ROM, etc.) be

evaluated as a profit center, cost center or revenue center? Why?

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Master Budget and Responsibility Accounting Chapter Cost Accounting Horngreen Datar