Management accounting

Title page

Management Accounting: Costing and Budgeting

Prepared for: Ms. Nam Giang Dao (Lecturer) Banking Academy, Hanoi BTEC HND in Business (Finance)

Word number Prepared by: 2M&L Group PhanKhanhLinh Raven Nguyen QuynhTrang Bolly Tran ThiLanAnh Jan Nguyen Thanh Ha Moon
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Executive summary
Budgetary Planning and Control are very important and this report will classify the Budgetary Planning and Control in three different cases: Task 1: Healthful food Inc. a manufacturer of breakfast cereals and snack bars, has experienced several years of steady growth in sales, profits, and dividends while maintaining a relatively low level of debts. Truong Hai Tire Companys

Task 2: Eye Care Company, a distributor of eye care products, is ready to begin its third quarter, in which peak sales occur. The company has requested a $30,000, 90-day loan from its bank to help meet cash requirements during the quarter. Task 3: Moran Labs performs steroid testing services to high schools, colleges, and universities. Because the company deals solely with educational institutions, the price of each test is strictly regulated. Therefore, the costs incurred must be carefully monitored and controlled. Branson Manufacturing, Inc., produces a single type of small motor. The bookkeeper who does not have an in-depth understanding of accounting principles prepared the following performance report with the help of the production manager.

Contents
Title page ........................................................................................................................................ 1 Executive summary......................................................................................................................... 2 Introduction ..................................................................................................................................... 4 Task 1a ............................................................................................................................................ 5 1. Budget play s important role in planning and control ............................................................. 5 2. Purposes of budgets ................................................................Error! Bookmark not defined. 3. Select appropriate budgeting methods for the organization and its needs. . Error! Bookmark not defined. Task 1b .......................................................................................................................................... 13 Task 2 ............................................................................................................................................ 18 Task 3a .......................................................................................................................................... 21 Task 3b .......................................................................................................................................... 26 Conclusion .................................................................................................................................... 27 References ..................................................................................................................................... 28

Introduction
This report was written to analyze Budgetary Planning and Controlling the operating companies based on 4company Healthful food Inc. Truong Hai Tire Company sand Eye Care Company and Branson Manufacturing, Inc. to highlight the importance of Budgetary Planning and Control in maintaining the company's activities. The scope: 1. Explain the purpose and nature of the budgeting process 2. Select appropriate budgeting methods for the organisation and its needs 3. Prepare budgets according to the chosen budgeting method 4. Prepare a cash budget 5. Calculate variances, identify possible causes and recommend corrective action 6. Prepare an operating statement reconciling budgeted and actual results 7. Report findings to management in accordance with identified responsibility centres Limitation: 1. The calculation is not really adequate 2. Limited time 3. Difficulties in finding and analyzing information

Task 1a
1. Budget play s important role in planning and control Budgets Budgeting is an integral part of the management function of planning, organizing, motivating and controlling. One of the central tools used to carry out the management function is a budget. Need for planning

All organizations attempt to use scarce resources to achieve their goals. Goals may be long term or short term. To achieve long-term goals (usually five to ten years) it is necessary to develop long term strategic plans. These plans are concerned with broad objectives and goalsfor example to expand into Asiaso they do not indulge in too much specific detail. To achieve long-term goals we need to develop short-term strategies that are incorporated into annual budgets. These short-term plans are more detailed and consider the means to attain goals. The means by which these short-term plans are converted into action is through the budgeting process. Short-term plans tend to use more quantitative data to estimate the future. These include dollar values, sales quantities, production units, inventory levels, number of personnel and financial ratios. Need for controlling

Whether planning is done formally (by the use of budgets) or informally (in the managers head) it does not in itself guarantee business success, as it needs to be monitored and adjusted. This function of monitoring and adjustments is called controlling. Keeping in mind that all plans (budgets) are best estimates of the future, management needs to monitor its progress at regular intervals. It needs feedback on achievements and shortfalls so that it can take remedial action. To facilitate this process of monitoring, yearly budgets are broken down into smaller chunks such as months or even weeks so that if remedial action needs to be
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taken it will not be too late. The promptness and accuracy of feedback reports is essential to the whole process of controlling. The reports should compare actual results against the budget. These reports are known as variance reports. They require analysis to assess the progress of budget outcomes. Minor variances are usually ignored but significant variances must be investigated so that appropriate corrective action can be undertaken. (highered, n.d)

2. Purposes of budgets The use of budgets is vital if the organization is to correctly perform necessary management functions. Budgets aid in the planning process. When employed appropriately they facilitate communication and can act as a motivational tool. They are also used as a basis for control and performance measurement. Advantages of budgeting include:

Budgeting forces management to plan for the future to develop an overall direction for the organization, foresee problems, and develop future policies. Budgeting helps convey significant information about the resource capabilities of an organization, making better decisions possible. Example: A cash budget points out potential shortfalls. Budgeting helps set standards that can control the use of a companys resources and control and motivate employees. Budgeting improves the communication of the plans of the organization to each employee. Budgets also encourage coordination because the various areas and activities of the organization must all work together to achieve the stated objectives. (annon, 2013)

3. Select appropriate budgeting methods for the organization and its needs. According scenario, long-term plans of the company to achieve profitability as well as the criteria set out in the first 4 years. With the first year of the plan will be less profit the following year (20x1 with the income statement and balance with the lowest value) to pay due debts and money purchasing equipment, machinery, etc. so will help to reduce costs for the company more profitable and achieve its objectives. Incremental VS zero-based budgets: Incremental Begin with current years core budget and make incremental changes. Review focuses on incremental changes and may ignore inefficiencies in core budget. Advantage The model operates under a stable and predictable system and any change will be gradual. Managers can operate their departments on a consistent basis. The system is relatively simple to operate and easy to understand. Conflicts should be easily avoidable if departments can be seen to be treated similarly. It is Appropriate where there is a large number of cost centres/budgets to calculate and forecasts do not change significantly from one year to the next Co-ordination between forecasts is easier to achieve. Disadvantage It assumes that activities and methods of working will continue in the same way. It allows no proper incentive for managers to develop new innovative ideas. Its normally on an upward trend, hence providing no incentive for managers to reduce costs. It encourages spending up to the budget limits so that future estimates are maintained next year. The forecast may become out of date and no longer relate to the level of activity or type of work being carried out.

The impact of change can be seen quickly.

The priority for resource allocation may have changed ever since the prior estimates were originally set.

May perpetuate past inefficiencies. In other words incremental budgeting does not cause serious challenge to the status quo of managers concerned because different methods of achieving performance objectives are not put to test

There may be budgetary slack built into the estimates, which is never reviewed. In other words Managers might have overestimated their requirements in the past in order to obtain a forecast which is easier to work towards, and which will allow them to achieve favorable results.

Advantage and disadvantage of Incremental budgeting

Zero-based Each line in item in total must be justified each year. Motivates managers to eliminate inefficient expenses. Useful when firm is changing strategic direction. Becomes less useful when same justifications are used each year

Advantage It provides a systematic approach for the evaluation of different activities and ranks them in order of preference for the allocation of scarce resources. It ensures that the various functions undertaken by the organization are critical for the achievement of its objectives and are being performed in the best possible way. It provides an opportunity to the management to allocate resources for various activities only after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and

Disadvantage The work involves in the creation of decision-making and their subsequent ranking has to be made on the basis of new data. This process is very tedious to management. The activities selected for the purpose of ZBB are on the basis of the traditional functional departments. So the consideration scheme may not be implemented properly.

enhancement are thus avoided. The areas of wasteful expenditure can be easily identified and eliminated. Departmental budgets are closely

linked with corporation objectives. The technique can also be used for the introduction and implementation of the system of management by objective. Thus, it cannot only be used for fulfillment of the objectives of

traditional budgeting but it can also be used for a variety of other purposes. Advantage and disadvantage of zero-based (Management Accounting, n.d)

 Fixed and Flexible

Fixed A fixed budget, also known as a static budget, projects static levels of known income and expenses over a set period of time. Fixed budgets are much simpler to create and to read than flexible budgets and are generally acceptable for situations where the levels of income and expense are not expected to fluctuate through the duration of the budgeting period. Advantages: No need to adjust your Budget each month. Allow you to plan ahead. Easier to track and keep your Budget Works for People on a Fixed Income

Flexible When a fixed budget is adjusted to account for variable results, it can be referred to as a flexible budget. When implemented during the budgeting process, a flexible budget helps a business account for future changes in any expense or income account. Multiple flexible budgets drawn up to forecast various levels of economic activity may be complicated but prepare a business well for any fluctuations in business levels, planned or otherwise. Advantage Uncertainty analysis Improved performance evaluation Useful variance analysis Disadvantage Makes prediction difficult Too many variables Can't estimate taxes

Advantages and disadvantages of flexible

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 Top-down and bottom- up method Bottom-up High deployment coverage in early phases Earlier return on investment High visibility of organizational changes Higher impact to organization Disadvantage The organizational structure you

Advantage Realized in the early phases Easily in implement password a large management Improve manage skill and knowledge You do not have to develop custom adapters in the early phases.

establish might have to be changed in a later rollout phase. Because of the immediate changes to repository owners and the user

population, the rollout will have a higher impact earlier and require greater

cooperation. This strategy is driven by the existing infrastructure instead of the business processes. Advantage and disadvantage of Bottom-up (IBM, n.d) Top-down Tactical, limited coverage Delayed return on investment Lower impact to overall organization Higher deployment costs Disadvantage The solution provides limited coverage in the first phases. A minimal percentage of user accounts
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Advantage Organization realizes a focused use of resources from the individual managed application.

 The first implementation becomes a showcase for the identity management solution. When the phases are completed for the managed application, you have identity

are managed in the first phases. You might have to develop custom adapters at an early stage. The support and overall business will not realize the benefit of the solution as rapidly. The implementation cost is likely to be higher.

implemented a deeper, more mature implementation of the

management solution. Operation and maintenance resources are not initially impacted as severely as with the bottom-up approach.

Advantage and disadvantage of Top-down (IBM, n.d)

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Task 1b
Sale budget Passenger Budgeted sales in units Budgeted selling price per unit Budgeted sales 116,400 65 7,566,000 Truck 27,000 200 5,400,000

Total budgeted sales = 7,566,000 + 5,400,000 = 12,966,000 Explain Budgeted sales = Budgeted sales in units x Budgeted selling price per unit

Production budget Passenger Budgeted sales in units Desired ending FG inventory Total units required Less: beginning FG inventory Required production in units 116,400 6,590 122,990 -5,000 117,990 Truck 27,000 2,360 29,360 -2,000 27,360

Total required production in units = 117,990 + 27360 = 145,350 Explain Total units required = Budgeted sales in units + Desired ending FG inventory Required production in units = Total units required - beginning FG inventory

Because there were some lost in production, required production in units = good production required in finishing department. Passenger Good production required in finishing department Good yeild in finishing department Gross production in finishing department 117,990 92% 128,250 Truck 27,360 96% 28,500
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Good production required in molding department Good yeild in molding department Gross production in molding department

128,250 95% 135,000

28,500 95% 30,000

DM budget Steel belts Required production in units DM required per units, in pounds Total DM required, in pounds Less: beginning DM inventory Plus: desired ending DM inventory Required DM purchases Budgeted DM cost per unit per pound Budgeted cost of DM Rubber Required production in units DM required per units, in pounds Total DM required, in pounds Less: beginning DM inventory Plus: desired ending DM inventory Required DM purchases Budgeted DM cost per unit per pound Budgeted cost of DM 2,700,000 1,800,000 1,350,000 900,000 604,500 Passenger 135,000 10 1,350,000 202,500 120,000 3 357,000 Truck 30,000 30 900,000 2,250,000 75,000 60,000 2,235,000 2 4,470,000 5,434,500 Explain Total DM required, in pounds = Required production in units x DM required per units, in pounds Budgeted cost of DM = Required DM purchases x Budgeted DM cost per unit per pound Passenger 135,000 1.5 202,500 Truck 30,000 4 120,000 322,500 7,000 6,000 321,500 3 964,500 Total Total

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DL budget Molding department Gross production required in units Direct labor required per unit in hours Total direct labor hours required Budgeted cost per DLH Budgeted Direct labor cost Passenger 135,000 0.1 13,500 $15 202,500 Truck 30,000 0.25 7,500 $15 112,500 315,000 Total

Finishing department Gross production required in units Direct labor required per units, in hours Total direct labor hours required Budgeted cost per DLH Budgeted Direct labor cost

Passenger 128,250 0.05 6,412.50 $13 83,362.50

Truck 28,500 0.15 4,275 $13

Total

55,575 138,937.50

Total Budgeted Direct labor cost = 315,000 + 138,937.50 = 453,937.50

Explain Total direct labor hours required = Gross production required in units x Direct labor required per units, in hours Budgeted Direct labor cost = Total direct labor hours required x Budgeted cost per DLH

Manufacturing overhead budget Molding department Total direct labor hours required OVH per direct labor hour OVH absorbed Passenger 13,500 21.841 Truck 7,500 21.841 Total

294,853.50 163,807.50 458,661.00

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Finishing department Total direct labor hours required OVH per direct labor hour OVH absorbed

Passenger 6,412.50 21.841

Truck 4,275 21.841

Total

140,055.41 93,370.28 233,425.69

Total OVH absorbed = 458,661.00 + 233,425.69 = 692,100 Explain OVH absorbed = Total direct labor hours required x OVH per direct labor hour

Ending inventory budget Passenger Budgeted cost of direct material to be used: Steel belts Rubber Budgeted Direct labor cost Budgeted manufacturing overhead Total budgeted manufacturing cost Good production in unit Budgeted cost per unit Budgeted ending FG, in unit Budgeted cost of ending FG 607,500 2,700,000 285,862.50 434,908.91 360,000 1,800,000 168,075 257,177.78 Truck Total

4,028,271.41 2,585,252.78 117,990 34.14 6,590 224,982.60 27,360 94.49 2,360 223,000 447,982.60

Explain Total budgeted manufacturing cost = Budgeted cost of direct material to be used + Budgeted Direct labor cost + Budgeted manufacturing overhead

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Budgeted cost of goods sold Passenger Beginning FG inventory Total budgeted manufacturing cost Cost of goods available for sale Less(-): Budgeted ending FG inventory Budgeted cost of goods sold Explain Cost of goods available for sale = Beginning FG inventory + Total budgeted manufacturing cost Budgeted Income Statement Sales Cost of goods sold Gross profit Operating cost Advertising expense Office rent expense Office salaries expense Office supplies expense Officers salaries expense Sales salaries expense Telephone and fax expense Travel expense Net income Explain

Truck 240,000 2,585,252.775 2,825,252.775 223,000 2,602,252.775

Total

175,000 4,028,271.41 4,203,271.41 224,982.6 3,978,288.81

6,580,541.585

12,966,000 6,580,541.585 6,385,458.415

942,000 125,000 821,000 45,500 661,000 868,000 33,500 443,000 3,939,000 2,446,458.415

Gross profit = Sales - Cost of goods sold Net income = Gross profit - Operating cost
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Task 2
Cash budget July ($) Beginning cash balance Add: Cash collections Cash collection from sales From current month 1 month ago 2 month ago Borrowing Total collection Total cash available Less cash disbursement Purchase of inventory Salaries and wages Advertising Rent payments Equipment purchased Interest payment Loan repayment Total cash disbursement Ending cash balance 318,500 11,000 338,000 15,000 30,000 380,900 3,100 157,500 29,000 78,000 7,000 47,000 900 30,000 1,037,400 3,100 210,000 30,000 91,000 7,000 246,000 30,000 67,000 7,000 253,500 87,500 156,000 10,000 30,000 283,500 329,500 342,000 353,000 369,000 384.000 342,000 102,500 227,500 12,000 369,000 85,000 266,500 17,500 30,000 994,500 1,040,500 964,500 46,000 August ($) 11,000 September ($) 15,000 Quarter ($) 46,000

Table 1: Cash budget with beginning cash balance is $46,000

Explain: To calculate Cash collection from sale, we get the sum of Cash from current month, Cash from 1 month ago and Cash from 2 month ago.
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The Total collection equal to Cash collection from sale add Borrowing cash The Total cash available equal to Total collection add Beginning cash balance

If the company needs a minimum cash balance of $10,000 to start each month, the cash budget will be like the following table: Cash budget July ($) Beginning cash balance Add: Cash collections Cash collection from sales From current month 1 month ago 2 month ago Borrowing Total collection Total cash available Less cash disbursement Purchase of inventory Salaries and wages Advertising Rent payments Equipment purchased Interest payment Loan repayment Total cash disbursement Ending cash balance 318,500 (25,000) 338,000 (11,000) 30,000 380,900 (22,900) 157,500 29,000 78,000 7,000 47,000 900 30,000 1,037,400 (48,900) 210,000 30,000 91,000 7,000 246,000 30,000 67,000 7,000 253,500 87,500 156,000 10,000 30,000 283,500 293,500 342,000 327,000 369,000 368,000 342,000 102,500 227,500 12,000 369,000 85,000 266,500 17,500 30,000 994,500 988,500 964,500 10,000 August ($) (15,000) September ($) (1,000) Quarter ($) 10,000

Table 2: Cash budget with beginning cash balance is $10,000

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Explain: As we can see from the table, if the company needs a minimum cash balance of $10,000 to start each month, the ending cash balance for each month always lower than total cash disbursement. In fact, in September have to $3,100 to repayment, but in this case, the company cannot pay on time in September. Therefore, the loan cant be repaid as planned.

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Task 3a
Operating statement Budgeted profit before sales and administrative cost Sales volume variances Budgeted profit from actual sales Selling price variance Actual sales minus standard cost of sales Cost variances: Unfavorable Material variances Price variance Efficiency variance Direct labour variances Rate variance Efficiency variance Variable MOVH variances Spending variance Efficiency variance Fixed MOVH variances Expenditure variance Volume variance $1,000 $2,733 Actual profit before sales and administrative costs Sales and administrative costs Actual profit $2,000 $8,847 $580 $2,153 U $10,847 $300 $180 $80 $1,240 $200 $253 $60 Favorable $15,600 $2,600 U $13,000 $0 $13,000

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Check Sales Materials Labour Variable overhead Fixed overhead Sales and administrative costs Profit $58,000 $5,313 $26,040 $10,100 $5,700 $2,000 $8,847

Explain Actual quantity x Actual price 2,530 dishes x $2.1 (= $5,313/2,530) =$5,313 Actual quantity x Standard price 2,530 dishes x $2 = $5,060 Standard quantity x Standard price 2,500 dishes x $2 = $5,000

Material price variance = $5,313 - $5,060 = $253 U Material quantity variance = $5,060 - $5,000 = $60 U

Actual hours x Actual rate 1,240 hours x $21 (= $26,040/1,240) = $26,040

Actual hours x Standard rate 1,240 hours x $20 = $24,800

Standard hours x Standard rate 1,250 hours x $20 = $25,000

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 Labor rate variance = $26,040 - $24,800 = $1,240 U. Labor efficiency variance = $24,800 - $25,000 = $200 F

Actual hours x Actual rate 1,240 hours x $8.145(= $10,100/1,240) = $10,100

Actual hours x Standard rate 1,240 hours x $8 = $9,920

Standard hours x Standard rate 1,250 hours x $8 = $10,000

Variable manufacturing spending variance = $10,100 - $9,920 = $180 U Variable manufacturing efficiency variance = $9,920 $10,000 = $80 F Standard Unit =

= 3,000 units

Fixed manufacturing volume variance = (Standard unit Actual unit) x Standard

absorption rate= (3,000 units 2,500 units) x $4 x 0.5 hour = $1,000 U

Fixed manufacturing expenditure variance = Actual fixed OVH Budgeted fixed

OVH = $5,700 - $6,000 = $300 F

Sales quantity variance = (Actual units Budgeted units) x Budgeted sale price =

(2,500 units 3,000 units) x ($23.2 - $18) = $2,600 U ASP = = = $23.2

Sales price variance = (Actual sale price Budgeted sale price) x Actual units sales =

($23.2 - $23.2) x 2,500 units = $0

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Variance

U/F

Possible causes

Who takes responsibility?

Recommendation

Sale Cost centre volume

Inaccurate predictions Decrease in demand

Sale manager

Use better strategies in selling

Better estimate of demand

Material

Lost in production

Maintain and check machine regularly

Increase in market price Poor estimates

Use interest rate when making budget

Production manager

Use cheaper materials instead Devise contingency plans

Direct labor Revenue centre

Unforeseen complexities Increase in market price Poor estimates

Use interest rate when making budget

Production manager

Use cheaper labor instead Increase in estimate skill

Variable MOVH

A shortage in available indirect materials Utility costs to run the machines high energy cost high

Purchasing manager

Anticipate costs that may arise

Explain: Sale volume variance: sale volume variance can be unfavorable because of many reasons. Two of them might be inaccurate predictions and decrease in demand. Inaccurate prediction is caused by poor estimation of sale manager so sale manager should take the
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responsibility. Moreover, they should improve estimation skill and strategic to increase sale volume in the future. However, if the cause is decrease in demand, nobody will take the responsibility because it depends on the market and it is very difficult to predict. Material variance: material variance is easy to be unfavorable because material can be lost a part in the production. This is unavoidable in production so the responsibility belongs to no one. To solve this problem, they should maintain and check machine regularly to avoid lost as much as possible. Another cause might be the increase in market price and it usually happens because of the inflation. Therefore, they should use interest rate when making budget to solve this issue. Direct labor variance: direct labor variance can be unfavorable because of unforeseen complexities and the increase in market price. Unforeseen complexities is often seen when fire staff, sick employees Devise contingency plans is the best way to deal wit h this problem. The increase in market price is also a main cause and we need using interest rate too. Variable MOVH variance: a shortage in available indirect materials and utility costs to run the machines high is 2 main causes which can make the unfavorable variable MOVH. A shortage in available indirect materials must be the responsibility of the purchasing manager and purchasing manager should improve estimate skill more. Utility cost to run machine should be solved by anticipate costs that may arise.

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Task 3b
Operating Statement Flexible Budget per unit 45,000 units Sales Less variable expenses: Direct materials Direct labor Variable factory OVH Variable selling and administrative expense Total variable expense Contribution margin Less fixed expense Fixed factory expense Fixed selling and administrative expense Total fixed expense Income from operation $100,000 150,000 $250,000 $95,000 160,000 $255,000 $301,000 Table 3: Operating Statement 100,000 150,000 $250,000 $335,000 (5,000) 10,000 5,000 ($34,000)(U) 4.50 3.75 2.25 1.50 $12.00 $13.00 $212,500 175,750 110,250 70,500 $569,000 $556,000 202,500 168,750 101,250 67,500 $540,000 $585,000 10,000(U) 7,000(U) 9,000(U) 3,000(U) 29,000(U) (29,000) $25.00 $1,125,000 Actual Result Flexible budget 45,000 units $1,125,000 0 Variances

As we can see from the table above, the value in Flexible budget is lower than Actual results in direct materials, Direct labor, Variable factory OVH, Variable selling and administrative expense. It means the budget is not better, or unfavorable than actual budget. Furthermore, in Income from operation, the Actual result is lower than Flexible budget ($301,000 < $335,000). Therefore, the Production Manager must have responsibility for this case because he is not estimated correctly the amount to be used in production process
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Conclusion
To sum up, all the tasks required has been completed. Budget for healthful foods Inc, cash budget for Eye Care Company, operating statement for Moran Labs, and revised performance report for Branson Manufacturing Inc. In this report, all the pros and cons of budgeting method is shown and from that, we can have an obvious scene of budgeting method and how it works in specific company Through this report, our goals are achieved with better understanding of managing accounting module and better writing skills.

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References
Csun.edu. n.d.. Untitled. [online] Available at: http://www.csun.edu/~hcbus012/acct380/guides/chapter08.docusg=AFQjCNH28tYOcTygWDH h3QHhy0QrdrM1aA&sig2=TYP6TqWxYEwdGgwCf2S [Accessed: 17 Jun 2013]. Managerial-accounting.blogspot.com. 2012. Management Accounting: Advantages and disadvantages of Zero-base budgeting. [online] Available at: http://managerialaccounting.blogspot.com/2012/11/advantages-and-disadvantages-of-zero.html [Accessed: 1 Aug 2013]. Publib.boulder.ibm.com. n.d.. Advantages and disadvantages of the top-down andbottom-up implementation approaches. [online] Available at: http://publib.boulder.ibm.com/tividd/td/ITIM/SC32-1708-00/en_US/HTML/im460_plan76.htm [Accessed: 17 Jun 2013]. Unknown. n.d.. Untitled. [online] Available at: http://highered.mcgrawhill.com/sites/dl/free/0074711717/57451/Budgeting_Ch09.pdf [Accessed: 17 Jun 2013].

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