11 CH 06

6 1 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Chapter6
MasterBudgetand
ResponsibilityAccounting
Understandwhatamasterbudget
isandexplainitsbenefits.
LearningObjective1 LearningObjective1
BudgetingCycle BudgetingCycle
Performanceplanning
Providingaframeofreference
Investigatingvariations
Correctiveaction
Planningagain
TheMasterBudget TheMasterBudget
MasterBudget
Operating
Decisions
Financial
Decisions
Describetheadvantages
ofbudgets.
WhataretheAdvantages
ofBudgets?
ofBudgets?
Compelsstrategicplanning
Providesaframework
forjudgingperformance
#1
#2
ofBudgets?
ofBudgets?
Motivatesemployees
andmanagers
Promotescoordination
andcommunication
#3
#4
Strategy,Planning,andBudgets Strategy,Planning,andBudgets
Strategy
Analysis
Longrun
Planning
Shortrun
Planning
Longrun
Budgets
Shortrun
Budgets
TimeCoverageofBudgets TimeCoverageofBudgets
Budgetstypicallyhaveasettime
period(month,quarter,year).
Thistimeperiodcanitselfbebroken
intosubperiods.
Themostfrequentlyusedbudget
periodisoneyear.
Businessesareincreasinglyusing
rollingbudgets.
Preparetheoperatingbudget
anditssupportingschedules.
OperatingBudgetExample OperatingBudgetExample
HawaiiDivingexpects1,100unitstobesold
duringthemonthofAugust2004.
Sellingpriceisexpectedtobe$240perunit.
Howmucharebudgetedrevenuesforthemonth?
1,100$240=$264,000
Twopoundsofdirectmaterialsarebudgetedper
unitatacostof$2.00perpound,$4.00perunit.
Threedirectlaborhoursarebudgetedperunit
at$7.00perhour,$21.00perunit.
Variableoverheadisbudgetedat$8.00
perdirectlaborhour,$24.00perunit.
Fixedoverheadisbudgetedat$5,400permonth.
Variablenonmanufacturingcostsare
expectedtobe$0.14perrevenuedollar.
Fixednonmanufacturingcostsare
$7,800permonth.
ProductionBudgetExample ProductionBudgetExample
Budgetedsales(units)
Targetendingfinishedgoodsinventory(units)
Beginningfinishedgoodsinventory(units)
Budgetedproduction(units)
+
=
Assumethattargetendingfinishedgoods
inventoryis80units.
Beginningfinishedgoodsinventoryis100units.
Howmanyunitsneedtobeproduced?
HawaiiDivingProductionBudget
fortheMonthofAugust2004
Unitsrequiredforsales 1,100
Addendinginv.offinishedunits 80
Totalfinishedunitsrequired 1,180
Lessbeg.inv.offinishedunits 100
Unitstobeproduced 1,080
DirectMaterialsUsageBudget DirectMaterialsUsageBudget
Eachfinishedunitrequires2poundsofdirect
materialsatacostof$2.00perpound.
Desiredendinginventoryequals15%ofthe
materialsrequiredtoproducenextmonthssales.
Septembersalesareforecastedtobe1,600units.
WhatistheendinginventoryinAugust?
480pounds
Septembersales:1,6002poundsperunit
=3,200pounds
3,20015%=480pounds
(thedesiredendinginventory)
WhatisthebeginninginventoryinAugust?
1,100units215%=330units
Howmanypoundsareneededtoproduce
1,080unitsinAugust?
1,0802=2,160pounds
MaterialPurchasesBudget MaterialPurchasesBudget
HawaiiDivingDirectMaterialPurchases
BudgetfortheMonthofAugust2004
Unitsneededforproduction 2,160
Targetendinginventory 480
Totalmaterialtoprovidefor 2,640
Lessbeginninginventory 330
Unitstobepurchased 2,310
Unitpurchaseprice $2.00
Totalpurchasecost $4,620
DirectManufacturing
LaborBudget
DirectManufacturing
LaborBudget
HawaiiDivingDirectLaborBudget
Unitsproduced: 1,080
Directlaborhours/unit 3
Totaldirectlaborhours: 3,240
Totalbudget@$7.00/hour: $22,680
Eachunitrequires3directlaborhours
at$7.00perhour.
ManufacturingOverheadBudget ManufacturingOverheadBudget
Variableoverheadisbudgetedat$8.00
perdirectlaborhour.
Fixedoverheadisbudgetedat$5,400permonth.
ManufacturingOverheadBudget ManufacturingOverheadBudget
HawaiiDivingManufacturingOverhead
BudgetfortheMonthofAugust2004
VariableOverhead:
(3,240$8.00) $25,920
FixedOverhead 5,400
Total $31,320
EndingInventoryBudget EndingInventoryBudget
Costperfinishedunit:
Materials $4
Labor 21
Variablemanufacturingoverhead 24
Fixedmanufacturingoverhead 5*
Total $54
*$5,4001,080=$5
EndingInventoryBudget EndingInventoryBudget
Whatisthecostofthetarget
endinginventoryformaterials?
480$2=$960
Whatisthecostofthetarget
finishedgoodsinventory?
80$54=$4,320
CostofGoodsSoldBudget CostofGoodsSoldBudget
Directmaterialsused:
2,160$2.00 $4,320
Directlabor 22,680
Totaloverhead 31,320
Costofgoodsmanufactured $58,320
Endingfinishedgoodsinventoryis$4,320.
Whatisthecostofgoodssold?
Assumethatthebeginningfinished
goodsinventoryis$5,400.
Beginningfinishedgoodsinventory $5,400
+Costofgoodsmanufactured $58,320
=Goodsavailableforsale $63,720
Endingfinishedgoodsinventory $4,320
=Costofgoodssold $59,400
NonmanufacturingCostsBudget NonmanufacturingCostsBudget
HawaiiDivingOtherExpensesBudget
VariableExpenses:
($0.14$264,000) $36,960
Fixedexpenses 7,800
Total $44,760
Costofgoodssoldarebudgetedat$59,400.
Whatisthebudgetedgrossmargin?
HawaiiDivinghasbudgetedsalesof
$264,000forthemonthofAugust.
BudgetedStatementofIncome BudgetedStatementofIncome
HawaiiDivingBudgetedIncomeStatement
fortheMonthendingAugust31,2004
Sales $264,000 100%
Lesscostofsales 59,400 22%
Grossmargin $204,600 78%
Otherexpenses 44,760 17%
Operatingincome $159,840 61%
Usecomputerbasedfinancial
planningmodelsin
sensitivityanalysis.
FinancialPlanningModels FinancialPlanningModels
Financialplanningmodelsare
mathematicalrepresentationsofthe
interrelationshipsamongoperating
activities,financialactivities,andother
factorsthataffectthemasterbudget.
Software Software
Softwarepackagesarenowreadily
availabletoreducethecomputational
burdenandtimerequiredtoprepare
budgets.
Thesepackagesassistmanagers
todosensitivityanalysis.
SensitivityAnalysis SensitivityAnalysis
ConsiderHawaiiDiving.
Whatifsomeparametersinthebudgetmodel
weretochange?
Forexample,whatifthesellingpriceis
expectedtobe$230insteadof$240?
Whatareexpectedrevenues?
1,100$230=$253,000insteadof$264,000
SensitivityAnalysis SensitivityAnalysis
Whatifthematerialscostisexpectedtoincrease
to$2.50perpoundinsteadof$2.00.
Whatisthecostofgoodssold?
1,100$55=$60,500insteadof$59,400
Whytheincrease?
Becausematerialscostperunitbecome
$5.00insteadof$4.00.
CashBudget CashBudget
HawaiiDivinghasthefollowing
collectionpattern:
Inthemonthofsale: 50%
Inthemonthfollowingsale: 27%
Inthesecondmonthfollowingsale: 20%
Uncollectible: 3%
Budgetedchargesalesareasfollows:
June $200,000
July $250,000
August $264,000
September $260,000
WhataretheexpectedcashcollectionsinAugust?
BudgetedCashReceipts
fortheMonthEndingAugust31,2004
Augustsales: $264,00050% $132,000
Julysales: $250,00027% 67,500
Junesales: $200,00020% 40,000
Total $239,500
BudgetedCashDisbursements
Augustpurchases $4,620
Directlabor 22,680
Totaloverhead 31,320
Otherexpenses 9,760*
Total $68,380
*Otherexpensesexcludedepreciation
CashBudget
Budgetedreceipts $239,500
Budgeteddisbursements 68,380
Netincreaseincash $171,120
Explainkaizenbudgeting
andhowitisusedfor
costmanagement.
WhatisKaizen? WhatisKaizen?
TheJapaneseusethetermkaizen
forcontinuousimprovement.
Kaizenbudgetingisanapproachthat
explicitlyincorporatescontinuous
improvementduringthebudget
periodintothebudgetnumbers.
KaizenBudgeting KaizenBudgeting
Itwaspreviouslyestimatedthatitshould
take3laborhoursforHawaiiDivingto
manufactureitsproduct.
Akaizenbudgetingapproachwould
incorporatefutureimprovements.
KaizenBudgeting KaizenBudgeting
BudgetedHours/Item
JanuaryMarch2004 3.00
AprilJune2004 2.95
JulySeptember2004 2.90
OctoberDecember2004 2.85
Prepareanactivitybased
budget.
ActivityBasedBudgeting ActivityBasedBudgeting
Activitybasedcostingreportsandanalyzes
pastandcurrentcosts.
Activitybasedbudgeting(ABB)focuses
onthebudgetedcostofactivitiesnecessary
toproduceandsellproductsandservices.
ProductA ProductB
Unitsproduced: 880 200
Laborhoursperunit: 3 3
Budgetedsetuphours: 5 5
Totalbudgetedmachinesetuprelatedcostis
$25,920permonth.
Totalbudgetedlaborhoursare:
ProductA:8803 2,640
ProductB:2003 600
Total 3,240
Whatistheallocationrateperlaborhour?
$25,9203,240=$8.00
ProductA:$8.002,640 = $21,120
Totalcostallocatedtoeachproductline:
ProductB:$8.00 600 = $4,800
$25,920budgetedmachinesetupcost
10budgetedmachinesetuphours
=$2,592allocationratepermachinesetuphour.
UnderABB,thenumberofsetupsisthecostdriver.
Howmuchmachinesetuprelatedcostsare
allocatedtoeachproductline?
ProductA ProductB
$2,5925 $12,960
$2,5925 $12,960
Setuprelatedcostperunit:
ProductA:$12,960880 $14.73
ProductB:$12,960200 $64.80
Describeresponsibilitycenters
andresponsibilityaccounting.
WhatisaResponsibilityCenter? WhatisaResponsibilityCenter?
Itisanypart,segment,orsubunit
ofabusinessthatneedscontrol.
production
service
Investmentcenter
Costcenter
Profitcenter
TypesofResponsibilityCenters TypesofResponsibilityCenters
Explainhowcontrollability
relatestoresponsibility
accounting.
WhatisControllability? WhatisControllability?
Itisthedegreeofinfluencethataspecific
managerhasovercosts,revenues,
orotheritemsinquestion.
Acontrollablecostisanycostthatis
primarilysubjecttotheinfluenceofa
givenresponsibilitycentermanager
foragiventimeperiod.
Controllability Controllability
Responsibilityaccountingfocuseson
informationandknowledge,notcontrol.
Aresponsibilityaccountingsystemcould
excludealluncontrollablecostsfrom
amanagersperformancereport.
Inpractice,controllabilityisdifficulttopinpoint.
EndofChapter6

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