1、Structure of LectureThe master budget and explain its benefitsDescribe the advantage of budgetsPrepare the operating budget and its supporting schedulesUse computer-based financial planning models in sensitivity analysisExplain kaizen budgeting and how it is used for cost managementDescribe responsi
2、bility centres and responsibility accountingExplain how controllability relates to responsibility accountingRecognize the human aspects of budgetingMaster Budget A budget is the quantitative expression of a managements plan for the future.P142(181)It also is an aid to coordinating actions that need
3、to be taken to implement the plan.Effective budgeting integrates the companys strategy into the budget process.Master Budget,conts.Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.P142(182)The path to effective
4、 strategies include asking questions such as:What are our objectives?How do we create value for the customer while distinguishing ourselves from our competitors?Master Budget,conts.The path to effective strategies include asking questions such as:P143(182)Are the markets for our products local,regio
5、nal,national,or global?What are our market trends?How are we affected by the economy,our industry,and our competitors?What organizational and financial structures serve us best?What are the risks and opportunities of alternative strategies,and what are our contingency plans if our preferred plan fai
6、ls?Master Budget,conts.Well-managed companies usually follow an annual budget cycle including the following steps:P143(182)Plan the performance of the company as a whole and of the subunits within the company.Senior managers communicate to subordinates a set of expectations against which performance
7、 will be measured.Master Budget,conts.Well-managed companies usually follow an annual budget cycle including the following steps:P143(182)Management accountants investigate variations from plans,and corrective action may be taken.Managerial accountants and managers take into account market feedback,
8、changed conditions,and their own experiences in making plans for the upcoming period.Master Budget,conts.P143(182)Strategy-plan-budgetMaster Budget,conts.The master budget expresses managements operating and financial plans for a specified period(usually a year).P144(183)The master budget is actuall
9、y a series of budgets including a set of budgeted financial statements(sometimes called pro forma statements).Advantages of Budgets Budgets are an integral part of management control systems.There are at least three advantages of budgeting.P144(183)Promote coordination and communication.Coordination
10、 is the meshing and balancing of all aspects of production in a company in the best way for the company to meet its objectives.Communication is making sure those goals are understood by all employees.Advantages of Budgets,conts.There are at least three advantages of budgeting.P144(183)Budgets serve
11、as a framework for judging performance and facilitating learning.Budgeting helps overcome two limitations of using past performance.Past results often incorporate past mistakes and substandard performance.Future conditions can be expected to differ from the past,budgets account for these changed con
12、ditions.Budgets can be used to motivate managers and other employees.Studies have shown that challenging budgets improve employee performance.Advantages of Budgets,conts.Despite the fact that budgets are advantageous,there are a number of challenges in properly administering budgets.It is a time con
13、suming process that involves all levels of management.Management at all levels should understand and support the budget.If top management support is lacking,the budget effort will be lackluster and halfhearted.Budgets should not be administered rigidly.Changing conditions may call for changes in pla
14、ns.Prepare the Operating Budget The budgeting process includes both operating budgets and financial budgets.P147(186)Operating budgets include budgets reflecting the planned operational aspects of the business,including revenues,production,manufacturing costs,and other expenses for the period.It cul
15、minates in a budgeted income statement.Financial budgets consist of a capital expenditures budget,a cash budget,a budgeted balance sheet,and a budgeted statement of cash flows.Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufactur
16、ing company.P149(188)Step 1:The first step budget to be prepared is the revenues budget.Although this budget looks simple,the company should put a great amount of time into consideration of the projected sales numbers.Prepare the Operating Budget,conts.Example P149(188)Gathering and discussions amon
17、g sales managers and sales representatives through customer response management(CRM)Based on expected demand or the maximum units that can be produced.Schedule 1:Revenues BudgetFor the Year Ending December 31,2010UnitsSelling PriceTotal RevenuesCasual 50,000$600$30,000,000 Deluxe10,000 800 8,000,000
18、Total$38,000,000 Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufacturing company.P150(188)Step 2:Based on the numbers included in the revenues budget,the company can then prepare the production budget.Included in this budget are
19、 projections about inventory levels.This budget is expressed only in units,not dollars.Schedule 2:Production Budget:casualdeluxeBudgeted sales50,00010000Add target ending finished goods inventory11,000500Total requirements61,00010500Deduct beginning finished goods inventory1,000500Units to be produc
20、ed60,00010000Prepare the Operating Budget,conts.P150(188)Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufacturing company.Step 3:From the production budget,the company can then move to the direct materials usage and direct materi
21、als purchases budgets.These are often prepared as one document.In addition to including projections about inventory levels for direct materials,management must also make predictions about direct material prices.Schedule 3B:Direct Material Purchases BudgetFor the Year Ending December 31,2010MaterialR
22、ed OakGraniteTotalPhysical Units BudgetTo be used in production(from Schedule 3A)840,000 b.f.440,000 s.f.Add target ending inventory 80,000 b.f.20,000 s.f.Total requirements 920,000 b.f.460,000 s.f.Deduct beginning inventory 70,000 b.f.60,000 s.f.Purchases to be made 850,000 b.f.400,000 s.f.Cash Bud
23、getRed Oak:850,000 b.f.$7 b.f.$5,950,000 Granite:400,000 s.f.$10 s.f.$4,000,000 Purchases$5,950,000$4,000,000$9,950,000 Direct materials Red Oak 7per b.f.Granite 10per s.f.P151(190)Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manuf
24、acturing company.Step 4:The direct manufacturing labor budget is prepared next.Labor standardsthe time allowed per unit of outputare used to calculate direct labor costs.Since labor is not inventoried,the process for this budget is somewhat simpler than prior budgets.Schedule 4:Direct Manufacturing
25、Labor Costs BudgetFor the Year Ending December 31,2010Output Units Produced(Schedule 2)Direct Manufacturing Labor-Hours per UnitTotal HoursHourly Wage RateTotalCasual 60,000 4 240,000$20$4,800,000 Deluxe 10,000 6 60,000 20 1,200,000 Total300,000$6,000,000 Prepare the Operating Budget,conts.P151(190)
26、Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufacturing company.Step 5:The manufacturing overhead cost budget comes next.It includes a budget for each item of manufacturing overhead.Even though the budget looks simple,keep in mi
27、nd that each line item in this budget is also its own budget.From this budget,managers can determine a predetermined overhead application rate.The used of activity-based cost drivers in preparing the manufacturing overhead cost budget gives rise to activity-based budgeting,or a focus on the activiti
28、es necessary to produce and sell products and services.Schedule 5:Manufacturing Overhead Costs BudgetFor the Year Ending December 31,2010Manufacturing Operations Overhead CostsVariable costs Supplies$1,500,000 Indirect manufacturing labor 1,680,000 Power(support department costs)2,100,000 Maintenanc
29、e(support department costs)1,200,000$6,480,000 Fixed costs(to support capacity of 300,000 direct manufacturing labor-hours)Depreciation 1,020,000 Supervision 390,000 Power(support department costs)630,000 Maintenance(support department costs)480,000 2,520,000 Total manufacturing operations overhead
30、costs$9,000,000 Machine Setup Overhead CostsVariable costs Supplies$390,000 Indirect manufacturing labor 840,000 Power(support department costs)90,000$1,320,000 Fixed costs(to support capacity of 15,000 setup labor-hours)Depreciation 603,000 Supervision 1,050,000 Power(support department costs)27,00
31、0 1,680,000 Total machine setup overhead costs$3,000,000 Total manufacturing operations overhead costs$12,000,000 P153(192)Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufacturing company.Step 6:The next budget to be prepared is
32、the ending inventories budget.This is simply a listing of the budgeted ending inventories in materials and finished goods.Units and dollar amounts are included.Work-in-process inventory is not budgeted.*Schedule 6B:Ending Inventories BudgetDecember 31,2010QuantityCost per UnitTotalDirect Materials R
33、ed Oak 80,000$7$560,000 Granite 20,000 10 200,000$760,000 Finished Goods Casual 11,000$384$4,224,000 Deluxe 500 524 262,000 4,486,000 Total ending inventory$5,246,000*Data are from p.149(188)*Data are from p.149(188).*From Schedule 6A,this is based on 2010 costs of manufacturing finished goods becau
34、se under the FIFO costing method,the units in finished goods ending inventory consists of units that are produced during 2010.P154(193)Prepare the Operating Budget,conts.Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufacturing co
35、mpany.Step 7:The cost of goods sold budget is then prepared.Most of the information for this budget has already been generated.It is simply a matter of pulling the numbers already available into a cost of goods sold format for this budget.Schedule 7:Cost of Goods Sold BudgetFor the Year Ending Decem
36、ber 31,2010From ScheduleTotalBeginning finished goods inventory,$646,000 January 1,2010Given*Direct materials used3A$10,280,000 Direct manufacturing labor4 6,000,000 Manufacturing overhead5 12,000,000 Cost of goods manufactured 28,280,000 Cost of goods available for sale 28,926,000 Deduct ending fin
37、ished goods inventory,December 31,20106B 4,486,000 Cost of Goods Sold$24,440,000*Given in the description of basic data and requirements(Casual,$384,000,Deluxe$262,000).P154(193)Prepare the Operating Budget,conts.Prepare the Operating Budget,conts.the following basic steps are common for developing
38、the operating budget for a manufacturing company.Step 8:The nonmanufacturing cost budget closely resembles the manufacturing overhead cost budget in form.It includes the budgeted amount for all nonmanufacturing costs the company expects to incur for the period.As with the overhead budget,each line i
39、tem represents its own budget and follows a fixed/variable separation.Schedule 8:Nonmanufacturing Costs BudgetFor the Year Ending December 31,2010Business FunctionVariable CostsFixed CostsTotal CostsProduct Design -$1,024,000$1,024,000 Marketing (Variable cost:$38,000,000 0.065)$2,470,000 1,330,000
40、3,800,000 Distribution (Variable cost:$2 1,140,000 cu.ft.)$2,280,000 1,596,000 3,876,000$4,750,000$3,950,000$8,700,000 P154(193)Prepare the Operating Budget,conts.Prepare the Operating Budget,conts.the following basic steps are common for developing the operating budget for a manufacturing company.S
41、tep 9:The budgeted,or pro forma,income statement is prepared next.It simply follows the format of an income statement.As with the cost of goods sold budget,many of the items for this budget have already been generated during the budget process.Stylistic FurnitureBudgeted Income StatementFor the Year
42、 Ending December 31,2010RevenuesSchedule 1$38,000,000 Cost of goods soldSchedule 7 24,440,000 Gross margin 13,560,000 Operating costs Product design costsSchedule 8$1,024,000 Marketing costsSchedule 8 3,800,000 Distribution costsSchedule 8 3,876,000 8,700,000 Operating income 4,860,000 P155(194)Prep
43、are the Operating Budget,conts.Stylistic Furniture Balance SheetDecemeber 31,2009AssetsCurrent Assets Cash$300,000 Accounts receivable 1,711,000 Direct materials inventory 1,090,000 Finished goods inventory 646,000$3,747,000 Property,plant,and equipment:Land 2,000,000 Building and equipment$22,000,0
44、00 Accumulated depreciation (6,900,000)15,100,000 17,100,000 Total$20,847,000 Liabilities and Stockholders EquityCurrent Liabilities Accounts payable$904,000 Income taxes payable 325,000$1,229,000 Stockholders equity Common stock,no-par,25,000 shares outstanding 3,500,000 Retained earnings 16,118,00
45、0 19,618,000 Total$20,847,000 Stylistic Furniture Cash BudgetFor Year Ending December 31,2010QuartersYear as aWhole1234Cash balance,beginning$300,000$350,715$350,657$350,070$300,000 Add receipts Collections from customers 9,136,600 10,122,000 10,263,200 8,561,200 38,083,000 Total cash available for
46、needs(x)9,436,600 10,472,715 10,613,857 8,911,270 38,383,000 Deduct disbursements Direct materials 2,947,605 2,714,612 2,157,963 2,155,356 9,975,536 Payroll 3,604,512 2,671,742 2,320,946 2,562,800 11,160,000 Manufactoring overhead costs 2,109,018 1,530,964 1,313,568 1,463,450 6,417,000 Nonmanufactur
47、ing costs 1,847,750 1,979,000 1,968,250 1,705,000 7,500,000 Machinery purchase 758,000 758,000 Income taxes 725,000 400,000 400,000 400,000 1,925,000 Total disbursements(y)11,233,885 9,296,318 8,918,727 8,286,606 37,735,536 Minimum cash balance desired 350,000 350,000 350,000 350,000 350,000 Total c
48、ash needed 11,583,885 9,646,318 9,268,727 8,636,606 38,085,536 Cash excess(deficiency)*$(2,147,285)$826,397$1,345,130$274,664 297,464 Financing Borrowing(at beginning)$2,148,000$0$0$0$2,148,000 Repayment(at end)0 (779,000)(1,234,000)(135,000)(2,148,000)Interest(at 12%per year)*0 (46,740)(111,060)(16
49、,200)(174,000)Total effects of financing(z)$2,148,000$(825,740)$(1,345,060)$(151,200)$(174,000)Cash balance,ending*$350,715$350,657$350,070$473,464$473,464*Excess of total cash available for needs Total cash needed before financing.*Note that the short-term interest payments pertain only to the amou
50、nt of principal being repaid at the end of a quarter.The specific computations regarding interest are$779,000 0.12 0.5=$46,740;$1,234,000 x 0.12 x 0.75=$111,060;$135,000 0.12=$16,200.Also note that depreciation does not require a cash outlay.*Ending cash balance=Total cash available for needs(x)Tota
