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6 1 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster

Chapter6
MasterBudgetand
ResponsibilityAccounting
6 2 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Understandwhatamasterbudget
isandexplainitsbenefits.
LearningObjective1 LearningObjective1
6 3 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
BudgetingCycle BudgetingCycle
Performanceplanning
Providingaframeofreference
Investigatingvariations
Correctiveaction
Planningagain
6 4 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
TheMasterBudget TheMasterBudget
MasterBudget
Operating
Decisions
Financial
Decisions
6 5 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Describetheadvantages
ofbudgets.
LearningObjective2 LearningObjective2
6 6 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
WhataretheAdvantages
ofBudgets?
WhataretheAdvantages
ofBudgets?
Compelsstrategicplanning
Providesaframework
forjudgingperformance
#1
#2
6 7 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
WhataretheAdvantages
ofBudgets?
WhataretheAdvantages
ofBudgets?
Motivatesemployees
andmanagers
Promotescoordination
andcommunication
#3
#4
6 8 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Strategy,Planning,andBudgets Strategy,Planning,andBudgets
Strategy
Analysis
Longrun
Planning
Shortrun
Planning
Longrun
Budgets
Shortrun
Budgets
6 9 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
TimeCoverageofBudgets TimeCoverageofBudgets
Budgetstypicallyhaveasettime
period(month,quarter,year).
Thistimeperiodcanitselfbebroken
intosubperiods.
Themostfrequentlyusedbudget
periodisoneyear.
Businessesareincreasinglyusing
rollingbudgets.
6 10 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
LearningObjective3 LearningObjective3
Preparetheoperatingbudget
anditssupportingschedules.
6 11 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
OperatingBudgetExample OperatingBudgetExample
HawaiiDivingexpects1,100unitstobesold
duringthemonthofAugust2004.
Sellingpriceisexpectedtobe$240perunit.
Howmucharebudgetedrevenuesforthemonth?
1,100$240=$264,000
6 12 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
OperatingBudgetExample OperatingBudgetExample
Twopoundsofdirectmaterialsarebudgetedper
unitatacostof$2.00perpound,$4.00perunit.
Threedirectlaborhoursarebudgetedperunit
at$7.00perhour,$21.00perunit.
Variableoverheadisbudgetedat$8.00
perdirectlaborhour,$24.00perunit.
Fixedoverheadisbudgetedat$5,400permonth.
6 13 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
OperatingBudgetExample OperatingBudgetExample
Variablenonmanufacturingcostsare
expectedtobe$0.14perrevenuedollar.
Fixednonmanufacturingcostsare
$7,800permonth.
6 14 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ProductionBudgetExample ProductionBudgetExample
Budgetedsales(units)
Targetendingfinishedgoodsinventory(units)
Beginningfinishedgoodsinventory(units)
Budgetedproduction(units)
+

=
6 15 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ProductionBudgetExample ProductionBudgetExample
Assumethattargetendingfinishedgoods
inventoryis80units.
Beginningfinishedgoodsinventoryis100units.
Howmanyunitsneedtobeproduced?
6 16 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ProductionBudgetExample ProductionBudgetExample
HawaiiDivingProductionBudget
fortheMonthofAugust2004
Unitsrequiredforsales 1,100
Addendinginv.offinishedunits 80
Totalfinishedunitsrequired 1,180
Lessbeg.inv.offinishedunits 100
Unitstobeproduced 1,080
6 17 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
DirectMaterialsUsageBudget DirectMaterialsUsageBudget
Eachfinishedunitrequires2poundsofdirect
materialsatacostof$2.00perpound.
Desiredendinginventoryequals15%ofthe
materialsrequiredtoproducenextmonthssales.
Septembersalesareforecastedtobe1,600units.
WhatistheendinginventoryinAugust?
480pounds
6 18 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
DirectMaterialsUsageBudget DirectMaterialsUsageBudget
Septembersales:1,6002poundsperunit
=3,200pounds
3,20015%=480pounds
(thedesiredendinginventory)
WhatisthebeginninginventoryinAugust?
1,100units215%=330units
6 19 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
DirectMaterialsUsageBudget DirectMaterialsUsageBudget
Howmanypoundsareneededtoproduce
1,080unitsinAugust?
1,0802=2,160pounds
6 20 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
MaterialPurchasesBudget MaterialPurchasesBudget
HawaiiDivingDirectMaterialPurchases
BudgetfortheMonthofAugust2004
Unitsneededforproduction 2,160
Targetendinginventory 480
Totalmaterialtoprovidefor 2,640
Lessbeginninginventory 330
Unitstobepurchased 2,310
Unitpurchaseprice $2.00
Totalpurchasecost $4,620
6 21 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
DirectManufacturing
LaborBudget
DirectManufacturing
LaborBudget
HawaiiDivingDirectLaborBudget
fortheMonthofAugust2004
Unitsproduced: 1,080
Directlaborhours/unit 3
Totaldirectlaborhours: 3,240
Totalbudget@$7.00/hour: $22,680
Eachunitrequires3directlaborhours
at$7.00perhour.
6 22 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ManufacturingOverheadBudget ManufacturingOverheadBudget
Variableoverheadisbudgetedat$8.00
perdirectlaborhour.
Fixedoverheadisbudgetedat$5,400permonth.
6 23 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ManufacturingOverheadBudget ManufacturingOverheadBudget
HawaiiDivingManufacturingOverhead
BudgetfortheMonthofAugust2004
VariableOverhead:
(3,240$8.00) $25,920
FixedOverhead 5,400
Total $31,320
6 24 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
EndingInventoryBudget EndingInventoryBudget
Costperfinishedunit:
Materials $4
Labor 21
Variablemanufacturingoverhead 24
Fixedmanufacturingoverhead 5*
Total $54
*$5,4001,080=$5
6 25 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
EndingInventoryBudget EndingInventoryBudget
Whatisthecostofthetarget
endinginventoryformaterials?
480$2=$960
Whatisthecostofthetarget
finishedgoodsinventory?
80$54=$4,320
6 26 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CostofGoodsSoldBudget CostofGoodsSoldBudget
Directmaterialsused:
2,160$2.00 $4,320
Directlabor 22,680
Totaloverhead 31,320
Costofgoodsmanufactured $58,320
6 27 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CostofGoodsSoldBudget CostofGoodsSoldBudget
Endingfinishedgoodsinventoryis$4,320.
Whatisthecostofgoodssold?
Assumethatthebeginningfinished
goodsinventoryis$5,400.
6 28 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CostofGoodsSoldBudget CostofGoodsSoldBudget
Beginningfinishedgoodsinventory $5,400
+Costofgoodsmanufactured $58,320
=Goodsavailableforsale $63,720
Endingfinishedgoodsinventory $4,320
=Costofgoodssold $59,400
6 29 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
NonmanufacturingCostsBudget NonmanufacturingCostsBudget
HawaiiDivingOtherExpensesBudget
fortheMonthofAugust2004
VariableExpenses:
($0.14$264,000) $36,960
Fixedexpenses 7,800
Total $44,760
6 30 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CostofGoodsSoldBudget CostofGoodsSoldBudget
Costofgoodssoldarebudgetedat$59,400.
Whatisthebudgetedgrossmargin?
HawaiiDivinghasbudgetedsalesof
$264,000forthemonthofAugust.
6 31 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
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%
6 32 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
LearningObjective4 LearningObjective4
Usecomputerbasedfinancial
planningmodelsin
sensitivityanalysis.
6 33 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
FinancialPlanningModels FinancialPlanningModels
Financialplanningmodelsare
mathematicalrepresentationsofthe
interrelationshipsamongoperating
activities,financialactivities,andother
factorsthataffectthemasterbudget.
6 34 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Software Software
Softwarepackagesarenowreadily
availabletoreducethecomputational
burdenandtimerequiredtoprepare
budgets.
Thesepackagesassistmanagers
todosensitivityanalysis.
6 35 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
SensitivityAnalysis SensitivityAnalysis
ConsiderHawaiiDiving.
Whatifsomeparametersinthebudgetmodel
weretochange?
Forexample,whatifthesellingpriceis
expectedtobe$230insteadof$240?
Whatareexpectedrevenues?
1,100$230=$253,000insteadof$264,000
6 36 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
SensitivityAnalysis SensitivityAnalysis
Whatifthematerialscostisexpectedtoincrease
to$2.50perpoundinsteadof$2.00.
Whatisthecostofgoodssold?
1,100$55=$60,500insteadof$59,400
Whytheincrease?
Becausematerialscostperunitbecome
$5.00insteadof$4.00.
6 37 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CashBudget CashBudget
HawaiiDivinghasthefollowing
collectionpattern:
Inthemonthofsale: 50%
Inthemonthfollowingsale: 27%
Inthesecondmonthfollowingsale: 20%
Uncollectible: 3%
6 38 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CashBudget CashBudget
Budgetedchargesalesareasfollows:
June $200,000
July $250,000
August $264,000
September $260,000
WhataretheexpectedcashcollectionsinAugust?
6 39 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CashBudget CashBudget
BudgetedCashReceipts
fortheMonthEndingAugust31,2004
Augustsales: $264,00050% $132,000
Julysales: $250,00027% 67,500
Junesales: $200,00020% 40,000
Total $239,500
6 40 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CashBudget CashBudget
BudgetedCashDisbursements
fortheMonthEndingAugust31,2004
Augustpurchases $4,620
Directlabor 22,680
Totaloverhead 31,320
Otherexpenses 9,760*
Total $68,380
*Otherexpensesexcludedepreciation
6 41 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
CashBudget CashBudget
CashBudget
fortheMonthEndingAugust31,2004
Budgetedreceipts $239,500
Budgeteddisbursements 68,380
Netincreaseincash $171,120
6 42 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
LearningObjective5 LearningObjective5
Explainkaizenbudgeting
andhowitisusedfor
costmanagement.
6 43 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
WhatisKaizen? WhatisKaizen?
TheJapaneseusethetermkaizen
forcontinuousimprovement.
Kaizenbudgetingisanapproachthat
explicitlyincorporatescontinuous
improvementduringthebudget
periodintothebudgetnumbers.
6 44 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
KaizenBudgeting KaizenBudgeting
Itwaspreviouslyestimatedthatitshould
take3laborhoursforHawaiiDivingto
manufactureitsproduct.
Akaizenbudgetingapproachwould
incorporatefutureimprovements.
6 45 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
KaizenBudgeting KaizenBudgeting
BudgetedHours/Item
JanuaryMarch2004 3.00
AprilJune2004 2.95
JulySeptember2004 2.90
OctoberDecember2004 2.85
6 46 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
LearningObjective6 LearningObjective6
Prepareanactivitybased
budget.
6 47 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ActivityBasedBudgeting ActivityBasedBudgeting
Activitybasedcostingreportsandanalyzes
pastandcurrentcosts.
Activitybasedbudgeting(ABB)focuses
onthebudgetedcostofactivitiesnecessary
toproduceandsellproductsandservices.
6 48 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ActivityBasedBudgeting ActivityBasedBudgeting
ProductA ProductB
Unitsproduced: 880 200
Laborhoursperunit: 3 3
Budgetedsetuphours: 5 5
Totalbudgetedmachinesetuprelatedcostis
$25,920permonth.
6 49 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ActivityBasedBudgeting ActivityBasedBudgeting
Totalbudgetedlaborhoursare:
ProductA:8803 2,640
ProductB:2003 600
Total 3,240
Whatistheallocationrateperlaborhour?
$25,9203,240=$8.00
6 50 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ActivityBasedBudgeting ActivityBasedBudgeting
ProductA:$8.002,640 = $21,120
Totalcostallocatedtoeachproductline:
ProductB:$8.00 600 = $4,800
6 51 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ActivityBasedBudgeting ActivityBasedBudgeting
$25,920budgetedmachinesetupcost
10budgetedmachinesetuphours
=$2,592allocationratepermachinesetuphour.
UnderABB,thenumberofsetupsisthecostdriver.
Howmuchmachinesetuprelatedcostsare
allocatedtoeachproductline?
6 52 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
ActivityBasedBudgeting ActivityBasedBudgeting
ProductA ProductB
$2,5925 $12,960
$2,5925 $12,960
Setuprelatedcostperunit:
ProductA:$12,960880 $14.73
ProductB:$12,960200 $64.80
6 53 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
LearningObjective7 LearningObjective7
Describeresponsibilitycenters
andresponsibilityaccounting.
6 54 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
WhatisaResponsibilityCenter? WhatisaResponsibilityCenter?
Itisanypart,segment,orsubunit
ofabusinessthatneedscontrol.
production
service
6 55 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Investmentcenter
Costcenter
Profitcenter
TypesofResponsibilityCenters TypesofResponsibilityCenters
6 56 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
LearningObjective8 LearningObjective8
Explainhowcontrollability
relatestoresponsibility
accounting.
6 57 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
WhatisControllability? WhatisControllability?
Itisthedegreeofinfluencethataspecific
managerhasovercosts,revenues,
orotheritemsinquestion.
Acontrollablecostisanycostthatis
primarilysubjecttotheinfluenceofa
givenresponsibilitycentermanager
foragiventimeperiod.
6 58 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
Controllability Controllability
Responsibilityaccountingfocuseson
informationandknowledge,notcontrol.
Aresponsibilityaccountingsystemcould
excludealluncontrollablecostsfrom
amanagersperformancereport.
Inpractice,controllabilityisdifficulttopinpoint.
6 59 2003PrenticeHallBusinessPublishing, CostAccounting 11/e, Horngren/Datar/Foster
EndofChapter6