Cost Accounting - Chapter 6 - Master Budget And Responsibility Accounting

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A budget

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is the quantitaive 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. A budget includes both financial and nonfinancial aspects of the plan, and it serves as a bluepring for the company to follow in an upcoming period. Income Statement, Statement of Cash Flows and the balance sheet can be budgeted for future periods.

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Nonfinancial budget

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is underlying the financial budgets. These are the budgets for, say, units manufactured or sold, number of employees, and number of new products being introduced to the marketplace, etc.

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Strategy

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specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.

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Budgeting steps

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1) managers and management accountants plan the performance of the company as a whole. Taking in account past performance and anticipated changes in the future.

2) Senior managers give subordinate managers a set of fin-al and nonfin-al expectations against which the results will be compared.

3) Management accountants help managers investigate variations from plans and develop corrective actions

4) Managers and management accountants take in account the past experience and develop plans for the next period.

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The master budget

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expresses management's operating and fifnancial plans for a specific period, and it includes a set of budgeted financial statements. The master budget is the initial plan of what the company intends to accomplish in the budget period. the master budget evolves from both operating and financing decisions made by managers.

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Budgeted financial statements are sometimes called

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pro forma statements, targeting, profit plan.

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Coordination

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is meshing and balancing all aspects of production or service and all departments in a company in the best way for the company to meet its goals. Coordination forces executinves to think of relationships among individual departments withtin the company, as well as between the company and its supply chain partners.

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Communication

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is making sure those goals are understood by all employees

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Budgets enable a company's managers to

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measure actual performance against predicted performance. Budgeting helps managers gather relevant information for improving future performance.

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Rolling budget (or Continuous budget)

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is 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 that just ended.

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Steps in preparing an Operating Budget

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1) Identify the problem and uncertainties

2) Obtain information

3) Make predictions about the future

4) Make decisions by choosing among alternatives

5) Implement the decisions, evaluate performance, and learn.

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Financial budget

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is that part of the master budget made up of the capital expenditures budget, the cash budget, the budgeted balance sheet, and the bugeted statement of cash flows. It focuses on how operations and planned capital outlays affect cash.

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Operating budget

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the budgeted income statement and its supporting budget schedules.

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Step 1 - Prepare the Revenues Budget

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base revenues on expected demand.

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Step 2 - Prepare the Production budget (in Units)

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After revenues are budgeted, the manufacturing manager prepares the production budget. The total finished goods units to be produced depend on budgeted unit sales and expected changes in units of inventory level.

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Budget Production (Units) =

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(Budget sales (units)) + (Target ending finished goods inventory (units)) - (Beginning finished goods inventory (units))

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Step 3 - Prepare the Direct Material Usage Budget and Direct Material Purchases Budget

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bill of materials, stored and updated in its computer systems. This document identifies how each product is manufactured, specifying all materials (and components), the sequence in which the materials are used, the quantity of
materials in each finished unit, and the work centers where the operations are performed.
For example, the bill of materials would indicate that 12 board feet of red oak and
6 square feet of granite are needed to produce each Casual coffee table, and 12 board feet
of red oak and 8 square feet of granite to produce each Deluxe coffee table. This information is then used to calculate the amounts in Schedule 3A.

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Purchase of Direct materials =

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(Direct Materials used in production) + (Target ending inventory of direct materials) - (Beginning inventory of direct materials)

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Step 4 - Prepare the Direct Manufacturing Labor Costs Budget

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In this step, manufacturing managers use Labor Standards, the time allowed per unit of output, to calculate the direct manufacturing labor costs budget. These costs depend on wage rates, production methods, process and efficiency improvements, and hiring plans.

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Step 5 - Prepare the Manufacturing Overhead Costs Budget

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The use of activity-based cost drivers give rise to activity-based budgeting.

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Activity-based budgeting (ABB)

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

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Step 6 - Prepare the Ending Inventory Budget

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In accordance with generally accepted accounting principles, the company treats both variable and fixed manufacturing overhead as inventoriable (product) cost. Manufacturing operations overhead costs are allocated to finished goods inventory at the budgeted rate of $$$ per, for example, direct manufacturing labor hour. Machine setup overhead costs are allocated to finished goods inventory at the budgeted rate of $$$ per setup-hour.

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Step 7 - Prepare the Cost of Goods Sold budget

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The manufacturing and purchase managers, together with the management accountant, use information from the Direct Material Usage Budget and Direct Material Purchases Budget to prepare the Cost of Goods Sold budget.

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Step 8 - prepare the Nonmanufacturing Costs Budget

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Other parts of the value chain - product design, marketing, and distribution - are combined into a single schedule. Just as in the case of manufacturing costs, managers in other functions of the value chain build in process and efficiency improvements and prepare nonmanufacturing cost budgets on the basis of the quantities of cost drivers planned for the year.

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Step 8 (part 2) - prepare the Nonmanufacturing Costs Budget

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The variable component of budgeted marketing costs is the commissions paid to sales people equal to 6.5% of revenues. The fixed component of budgeted marketing costs equal to $1,330,000 is tied to the marketing capacity for 2012. 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 2012.

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Step 9 - Prepare the Budgeted Income Statement

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Revenues Budget, Cost of Goods Sold Budget and Nonmanufacturing Costs Budget are used to finalize the budgeted income statement.

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Financial Planning models are

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

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Sensitivity analysis is

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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.

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Organization Structure

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is an arrangement of lines of responsibility within the organization. Each manager, regardless of level, is in charge of a responsibility center.

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A responsibility center

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is a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. The higher the manager's level, the broader the responsibility center and the larger the number of his or her subordinates.

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Responsibility accounting

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

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Four types of responsibility centers are as follows:

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1) Cost center - the manager is accountable for the cost only

2) Revenue center - the manager is accountable for revenues only

3) Profit center - the manager is accountable for revenues and costs

4) Investment center - the manager is accountable for investments, revenues and costs.

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A responsibility center can e structured

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to promote better alignment of individual and company goals.

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Variances

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are differences between the actual results and the budgeted amounts.

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If properly used, the variances can help managers implement and evaluate strategies in three ways:

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1) Early warning - Variances alert managers early to events not easily or immediately evident.

2) Performance evaluation - Variances prompt managers to probe how well the company
has performed in implementing its strategies

3) Evaluation strategy - Variances sometimes signal to managers that their strategies are
ineffective.

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Controllability

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is the degree of influence that a specific manager has over cost, revenues, or related items for which he or she is responsible.

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A controllable cost

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

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A responsibility accounting system

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could either exclude all uncontrollable costs from a manager's performance report or segregate such costs from the controllable costs. Responsibility accounting helps managers to first focus on whom they should ask to obtain information and not on whom they should blame. Managers want to know who can tell them the most about the specific item in question, regardless of that person’s ability to exert personal control over that item.

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Budgetary slack

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describes the practice of underestimating budgeted revenues, or overestimating budgeted costs.