Cost Accounting Chapter 6

Front 1

Budget

Back 1

A budget is the quantitative expression of a proposed plan of action by management for a specified period and an aid to coordinate what needs to be done to implement that plan.

Front 2

Financial budget

Back 2

quantitfies management's expectations regarding income, cash flows, and financial position.

Front 3

Strategy

Back 3

specifies how an organization matches its own capabilities with the opportunites in the marketplace to accomplish its objectives. These are expressed through long run budgets. Operating budgets are expressed through short term budgets.

Front 4

Well managed companies usually cycle through the following budgeting steps during the year:

Back 4

1. Working together, managers and management accountatns plan the performance of the company as a whole and the performance of subunits.
2. senior managers give subordinate managers a frame of reference, a set of specific financial or nonfinancial expectations against which actual results will be compared.
3. Management accountants help managers investigate variations from plans, such as an unexpected decline in sales.
4. Managers and management accountants take into account market feedback, changed conditions, and their own experiences as they begin to make plans for the next period.

Front 5

Master budget

Back 5

expresses management's operating and financial plans for a specified period and it includes a set of budgeted financial statements. Master budget is the initial plan of what teh compan intends to accomplish in the budget period.

Front 6

Operating decisions

Back 6

deal with how to best use the limited resources of an organization.

Front 7

financing decisions

Back 7

deal with how to obtain the funds to acquire those resources.

Front 8

pro forma statements

Back 8

budgeted financial statements.

Front 9

Advantages of budgets

Back 9

promote coordination and communication among subunits within the company
provide a framework for judging performance and facilitating learning
motivate amangers and other employees.

Front 10

coordination

Back 10

meshing and balancing all aspects of production or service and all departments in a co in the best way for the co to meet its goals. Forces executives to think of relationships among individual departments and the co as a whole and across companies.

Front 11

communication

Back 11

making sure the goals are understood by al employees.

Front 12

budgets can overcome two limitations of using past performance as a basis for judging actual results.

Back 12

one limitation is that past result often incorporate past miscues and substandard performance. The other is that future conditions can be expected to differ from past.

Front 13

How does budgeting help managers learn?

Back 13

when actual performance falls short of budgeted or planned performance, it prompts thoughtful senior managers to ask questions about what happened and why, and how performance can be improved in the future.

Front 14

How do budgets relate to motivation?

Back 14

Challenging budgets improve employee performance because employees view falling short of budgeted numbers as a failure. Most employees are motivated to work more intensely to avoid failure than to achieve success.

Front 15

Budgeting challenges

Back 15

involves all levels of management. To gain the benefits of budgeting, management at all levels of a co should understand and support the budget and all aspects of the management control system. Budgets should not be administered rigidly. Changing conditions call for changes in plans.

Front 16

Time coverage of budgets

Back 16

Budgets typically have a set period such as a month, quarter, year, and so on. The motive for creating a budget should guide a manager in choosing the period for the budget. The most frequently is one year subdivided into months and quarters.

Front 17

Rolling budget

Back 17

a budget that is always available for a specified future period. It is created by continually adding a month, quarter, or year to the period just ended.

Front 18

Step 1 for budgeting

Back 18

Prepare a revenues budget: A revenue budget is uaually the starting point for the operating budget. This is because the production level and inventory level--and therefore manufacturing costs--as well as nonmanufacturing cost generally depend on the forecasted level of unit sales or revenues. Many factors influence the sales forecast, including the sales volume in recent periods, general economic and industry conditons, market research studies, pricing policies, advertising and sales promoritons, competition, and regulatory policies. Base revenues on expected demand. When demand exceeds production capacity then base on max units that can be produced.

Front 19

Step 2 for budgeting

Back 19

prepare the production budget in units. The total finished goods units to be produced depends on the budgeted unit sales and expected changes in units of inventory levels.

Budget production= budget sales (units) + target ending finished goods inventory - Beginning finished goods inventory

Front 20

Step 3 for budgeting

Back 20

Prepare the direct material usage budget and direct material purchases budget. The number of units to be produced, calculated in schedule 2 is the key to computing the usage of direct materials in quantities and dollars.

Purchases of direct materials = direct materials used in production + target ending inventory of direct materials - beginning inventory of direct materials.

Front 21

Bill of materials

Back 21

identified how each product is manufactured, specifying all materials in each finished unit, and the work centers where the operations are performed.

Front 22

Step 4 of budgeting

Back 22

Prepare the direct manufacturing labor costs budget. This is done by using the time allowed per unit of output to calculate the direct manufacturing labor costs.

Front 23

Step 5 of budgeting

Back 23

Prepare the manufacturing overhead costs budget.

Front 24

Activity based budgeting

Back 24

focuses on the budgeted cost of the activities necessary to produce and sell products and services.

Front 25

Step 6 for budgeting

Back 25

Prepare the ending inventories budget

Front 26

Step 7 for budgeting

Back 26

Prepare the cost of goods sold budget.

Front 27

Step 8 for budgeting

Back 27

prepare the nonmanufacturing costs budget. This includes other parts of the value chain--product design, marketing and distribution--all combined into a single schedule.

Front 28

STep 9 for budgeting

Back 28

Prepare the budgeted income statement.

Front 29

What type of activity is budgeting?

Back 29

Budgeting is a cross functional activity. Top management's strategies for achiveing revenue and operating income goals influence the costs planned for the different functions of the value chain.

Front 30

Financial planning models

Back 30

mathematical representations of the relationships among operating activities, financing activities, and other factors that affect the master budget.

Front 31

Sensitivity analysis

Back 31

is a what if technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes.

Front 32

Kaizen budgeting

Back 32

explicitly encorporates continuous improvement anticipated during the budget period into the budget numbers. Much of the cost reduction assoc with kaizen budgeting arises from many small improvements rather than quantum leaps. Significant aspect of it is employee suggestions.

Front 33

Organization strucutre

Back 33

An arragement of lines of responsibility within the organization

Front 34

Responsibility center

Back 34

A part, segment, or subunit of an organization whose manager is accountable for a specified set of activities.

Front 35

Responsibility accounting

Back 35

a system that measures the plans, budgets, actions, and actual results of each responsibility center.

Front 36

Four types of responsibility centers and what each is accountable for:

Back 36

1. Cost center--manager is responsible for costs only.
2. REvenue center--manager is accountable for revenues only
3. Profit center--manager is accountable for revenues and costs.
4. Investment center--manager is responsible for investments, revenues, and costs.

Front 37

Feedback

Back 37

Differences between actual results and budgeted amounts called variances if properly used can help managers implement and evaluate strategies

Front 38

What ways can feedback help managers with performance evaluations?

Back 38

1. early warning--variances alert managers early to events not easily nor immediately evident. Managers can then take corrective action.
2. Performance evalustion--Variances prompt managers to probe how well the company has performed in implementing its strategies.
3. Evaluating strategy--VAariances sometimes signal to managers that their strategies are ineffective.

Front 39

Controllability

Back 39

the degree of influence a specific manager has over costs, revenue or related items for which he is responsible.

Front 40

Controllable cost

Back 40

Any cost that is primarily subject to the influence of a given responsibility center manager for a given time period.

Front 41

Controllability is difficult to pinpoint for 2 reasons:

Back 41

1. Few costs are clearly under the sole influence of one manager.
2. With a long enough time span, all costs will come under somebody's control.

Front 42

Responsbility accounting

Back 42

helps managers to first focus on whom they should ask to obtain info and not on whom they should blame.

Front 43

human factors in budgeting

Back 43

administration of budgeting requres education, persuasion, and intelligent interpretation.

Front 44

Budgetary slack

Back 44

describes the practice of underestimating budgeted revenues, or overstateing budgeted costs to make the budgeted targets more achievable. provides manager with a hedge.

Front 45

Ways to reduce budgetary slack

Back 45

using external benchmarks.

Front 46

multinational companies purpose of budgeting

Back 46

Not to evaluate performance, relative to budgets, instead the goal is to help managers learn and adapt their plan to changing conditions and communicate and coordinate the actions that need to be taken throughout the company.