CHAPTER 6. Master Budgeting and Responsibility Accounting

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1 CHAPTER 6 Master Budgeting and Responsibility Accounting 1

2 Budget Defined The quantitative expression of a proposed plan of action by management for a specified period, and An aid to coordinating what needs to be done to implement that plan May include both financial and nonfinancial data 2

3 The Ongoing Budget Process: 1. Managers and accountants plan the performance of the company, taking into account past performance and anticipated future changes. 2. Senior managers distribute a set of goals against which actual results will be compared. 3. Accountants help managers investigate deviations from budget. Corrective action occurs at this point. 4. Managers and accountants assess market feedback, changed conditions, and their own experiences as plans are laid for the next budget period. 3

4 Strategy, Planning, and Budgets, Illustrated 4

5 Advantages of Budgets Provides a framework for judging performance Motivates managers and other employees Promotes coordination and communication among subunits within the company 5

6 Components of Master Budgets Operating budget building blocks leading to the creation of the budgeted income statement Financial budget building blocks based on the operating budget that lead to the creation of the budgeted balance sheet and the budgeted statement of cash flows 6

7 Basic Operating Budget Steps 1. Prepare the revenues budget. 2. Prepare the production budget (in units). 3. Prepare the direct materials usage budget and direct materials purchases budget. 4. Prepare the direct manufacturing labor budget. 7

8 Basic Operating Budget Steps 5. Prepare the manufacturing overhead costs budget. 6. Prepare the ending inventories budget. 7. Prepare the cost of goods sold budget. 8. Prepare the operating expense (period cost) budget. 9. Prepare the budgeted income statement. 8

9 Basic Financial Budget Steps Based on the operating budgets: 1. Prepare the capital expenditures budget. 2. Prepare the cash budget. 3. Prepare the budgeted balance sheet. 4. Prepare the budgeted statement of cash flows. 9

10 Sample Master Budget, Illustrated 10

11 Example for Preparing the Operational Budget An operating budget for Stylistic Furniture for Two models of granite-top coffee tables: Casual Deluxe. Revenue unrelated to sales, such as interest income, is zero. WIP inventory is negligible and is ignored. Direct materials inventory and finished goods inventory are costed using FIFO method Unit costs of direct materials purchased and unit costs of finished goods sold remain unchanged throughout each budget year but can change from year to year. There are two types of direct materials: red oak (RO) and granite slabs (GS). 11

12 Example for Preparing the Operational Budget Direct manufacturing labor workers are hired on an hourly basis; no overtime is worked. There are two cost drivers for manufacturing overhead costs direct manufacturing labor-hours setup labor-hours. 12

13 Example for Preparing the Operational Budget For computing inventoriable costs, Stylistic allocates All (variable and fixed) manufacturing operations overhead costs using direct manufacturing labor-hours and All machine setup overhead costs using setup labor-hours. Nonmanufacturing costs consist of product design, marketing, and distribution costs. All product design costs are fixed costs for The variable component of marketing costs equals the 6.5% sales commission on revenues paid to salespeople. The variable portion of distribution costs varies with cubic feet of tables moved. 13

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20 Schedule 3A 20

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22 Schedule 3B 22

23 Schedule 4 23

24 Setup Hour Calculation Stylistic s managers forecast the following setup information for the Casual and Deluxe tables: 24

25 Schedule 5 25

26 Schedule

27 Finding the rates Manufacturing operations overhead costs are allocated to finished goods inventory at the budgeted rate of $30 per direct manufacturing labor-hour (total budgeted manufacturing operations overhead, $9,000, ,000 budgeted direct manufacturing labor-hours). Machine setup overhead costs are allocated to finished goods inventory at the budgeted rate of $200 per setup-hour (total budgeted machine setup overhead, $3,000,000 15,000 budgeted setup labor-hours 27

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29 Schedule 6-B *Given in the next slide. ** Given in the next slide ***From previous slide 29

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31 Schedule 7 31

32 Schedule 8 Product design costs are fixed costs, determined on the basis of the product design work anticipated for Marketing Cost: The variable component is the commissions paid to sales people equal to 6.5% of revenues. The fixed component equal to $1,330,000 is tied to the marketing capacity for Distribution Cost: The variable component The cost driver of the variable component of budgeted distribution costs is cubic feet of tables moved (Casual: 18 cubic feet 50,000 tables + Deluxe: 24 cubic feet 10,000 tables = 1,140,000 cubic feet). Variable distribution costs equal $2 per cubic foot. The fixed component of budgeted distribution costs equals $1,596,000 and is tied to the distribution capacity for

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34 SENSITIVITY ANALYSIS 34

Master Budget and Responsibility Accounting

Master Budget and Responsibility Accounting 1 Budgeting Cycle Performance planning Providing a frame of reference Investigating variations Corrective action Planning again 2 The Master Budget Master Budget