Chapter 9 Managerial Accounting

Service Companies Budgeting

-A critical factor is coordinating professional staff needs with anticipated services

Components of the Financial Budgets:

-Capital Expenditure Budget -Cash Budget -Budgeted Balance Sheet

Flow of budget data under participative budgeting:

-Department Managers, Plant A/B Manager, VP of Production, and the President.

Essentials of Effective Budgeting

-Depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined. -Based on research and analysis with realistic goals. -Accepted by all levels of management.

Advantages of participative budgeting:

-More accurate budget estimates because lower level managers have more detailed knowledge of their area. -Perceive process as fair due to involvement of lower level management.

Components of the master budget:

-Operating budget which includes sales, product, DM, DL, MO, selling/admin expense budgets and budgeted income statement. -Financial budget which includes capital expenditure and cash budgets, and a budgeted balance sheet.

Mast Budget consists of the following budgets: (SPDDMSBCCB)

-Sales -Production -Direct Materials -Direct Labor -Manufacturing Overhead -Selling and Administrative Expenses -Budgeted Income Satement -Capital Expenditure Budget -Cash Budget -Budgeted Balance Sheet

Operating budgets: *Sell Products Directly from David Michelle Sellick

-Sales -Production -Direct Materials -Direct Labor -Manufacturing Overhead -Selling/Admin Expenses

Budgeting for Merchandisers (nonmanufacturing):

-Sales Budget is the starting point and key factor. -Use a purchases budget instead of a production budget. -Does not use manufacturing budgets (DM, DL, MO) instead uses the merchandise purchases budget.

Participative budgeting where each level of management is invited to participate uses

-a "bottom to top" approach -may inspire higher levels of performance or discourage additional effort -depends on how the budget is developed/administered -

Disadvantage of participative budgeting:

-can be time consuming and costly -can foster budgetary "gaming" through budgetary slack

Budgeting process involves base budget goals on past performance:

-collect data from organizational units -begin several months before year end

Total unit cost consists of

-direct materials -direct labor -manufacturing overhead

The Cash Disbursement Section of a Cash Budget shows

-expected cash payments for DM, DL, MO, and Selling/Admin expenses. -includes projected payments for income taxes, dividends, investments, and plant assets

The Cash Receipts Section of the Cash Budget shows

-expected receipts from the company's principal sources of revenue -expected interest and dividends receipts, proceeds from planned sales of investments, plant assets, and the company's capital stock

Service Company Problems if overstaffed

-high labor costs -lower profits due to additional salaries -staff turnover due to lack of challenging work

The Budgeted Income Statement

-is an important end-product of operating budgets -indicates expected profitability of operations -provides a basis for evaluating company performance -is prepared from operating budgets

Not-for-Profit Organization Budgets

-just as important as for a profit-oriented company -budget process differs from profit-oriented companies -budget on basis of cash flows (expenditures and receipts), not on a revenue and expense basis. -starting point is usually expenditures, not receipts -Management tasking is to find receipts needed to support planned expenditures -budget must be followed, overspending often illegal

Service Company Problems if understaffed

-lost revenues because existing and future client needs for services cannot be met -loss of professional staff due to excessive work loads

Risks for stockpiling large amount of raw materials

-overpriced raw materials -inventory takes longer to sell -additional storage, insurance and handling costs -obsolescence can occur

A budget is

-primary method of communicating agreed upon objectives throughout the organization -promotes efficiency -control device/important basis for performance evaluation once adopted

Benefits of Budgeting:

-requires all levels of management to plan ahead -provides definite objectives for evaluating performance -creates an early warning system for problems -facilitated coordination of activities -greater management awareness of overall operations -motivates personnel to meet planned objectives

A Cash Budget

-shows anticipated cash flows -is an important output in preparing financial budgets -contains three sections (cash receipts/cash disbursements/financing) -shows beginning and ending cash balances

Develop budget within framework of a sales forecast:

-shows potential industry sales -shows company's expected share of sales

Factors considered in sales forecasting:

1. general economic conditions 2. industry trends 3. market research studies 4. anticipated advertising and promotion 5. previous market share 6. price changes 7. technological developments

There are 3 basic differences between budgeting and long-range planning:

1. time period involved 2. emphasis 3. amount of detail presented

budget

A formal written statement of management's plans for a specified future time period, expressed in financial terms.

Budgeted COGS + Desired Ending Merchandise Inventory - Beginning Merchandise Inventory =

Required Merchandise Purchases

Expected Sales Units + Desired Ending Finished Goods Units - Beginning Finished Goods Units =

Required Production Units

A sales budget is

an estimate of expected sales revenue for the budget period.

The budgeted income statement is

an estimate of the expected profitability of operations for the budget period.

A Direct Labor Budget shows

both quantity of hours and cost of DL necessary to meet production requirements. It is critical in maintaining a labor force that can meet expected production.

The equation for the production budget is

budgeted sales in units plus desired ending finished good units less beginning finished goods units.

Financial budgets primarily focus on the

cash resources needed to fund expected operations and planned capital expenditures.

The master budget is a set of interrelated budgets that

constitutes a plan of action for a specified time period. It contains 2 classes of budgets - operating and financial.

A sales budget is the first budget prepared and is

derived from sales forecast (management's best estimate of sales revenue). Every other budget depends on it. It is prepared by multiplying expected unit sales volume for each product times anticipated selling price.

Direct Materials Units to be Purchased =

direct materials units required for production + desired ending direct materials units - beginning direct materials units

Cost of Direct Materials Purchases =

direct materials units to be purchased x cost per direct materials unit

The Financing Section of a Cash Budget shows

expected borrowings and repayments of borrowed funds plus interest

Manufacturing Overhead budget shows

expected manufacturing OH costs for budget period and distinguishes between fixed and variable OH costs.

Required Production units =

expected sales units + desired ending finished goods units - beginning finished goods units

Historical accounting data on revenues, costs, and expenses

help in formulating future budgets.

The master budget is a set of

interrelated budgets that constitutes a plan of action for a specified time period.

Long-range planning identifies

long term goals, selects strategies to achieve these goals, and develops policies and plans to implement the strategies.

Budget administration is the responsibility of

management.

The equation for computing the direct labor budget is to

multiply the direct labor cost per hour by the total required direct labor hours.

Lower-level manager are more likely to perceive results as fair and achievable under a

participated budgeting approach.

A sales forecast shows

potential sales for the industry and a company's expected share of such sales.

The overall goal of participative budgeting is to

produce fair and achievable budget while still meeting corporate goals.

The budget for a merchandiser uses a merchandise purchases budget in place of a

production budget - no other mx budgets are used.

The Selling/Administrative Expense Budget is a

projection of anticipated operating expenses and distinguishes between fixed and variable costs.

A Direct Materials Budget

shows quantity and cost of DM to be purchased.

A production budget

shows the units that must be produced to meet anticipated sales and is derived from sales budget plus the desired change in ending finished goods inventory. It is essential to have a realistic estimate of ending inventory.

Accuracy of government revenue estimates is especially important during economic downturns

since most governments must balance their budgets. If anticipated revenues in one period to not match expectations, then the shortfall must be made up in the next period.

The budgeted balance sheet is developed from the

the budgeted balance sheet for the preceding year and the budgets for the current year

The capital expenditure budget is not used in preparing

the budgeted income statement.

The merchandise purchases budget is

the estimated cost of goods to be purchased by a merchandiser to meet expected sales.

An operating budget results in

the preparation of budgeted income statement.

The essentials of effective budgeting DO NOT include

top-down budgeting.

Total Direct Labor Cost =

units to be produced x direct labor time per unit x direct labor cost per hour

Direct Materials Units Required for Production =

units to be produced x direct materials units per unit of unit produced

Operating budgets are

used as the basis for the preparation of the budgeted income statement.

Cash Budget Concepts:

- Must prepare in sequence - Ending cash balance of one period is beginning cash balance for next - Data obtained from other budgets and from management - Often prepared for the year on a monthly basis - Contributes to more effective cash management - Shows managers the need for additional financing before actual need arises - Indicates when excess cash will be available

Length of Budget Period

- May be prepared for any period of time. -Most common - one year. -Supplement with monthly and quarterly budgets. -Different budgets may cover different time periods. - Long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations. - Short enough for reliable estimates.

The format of a cash budget is

Beginning cash balance + Cash receipts - Cash disbursements +/- Financing = Ending cash balance.

DM Units to be Purchased x Cost per DM Unit =

Cost of DM Purchases

Units to be Produced x DM Units Per Unit of Unit Produced =

DM Units Required for Production

DM Units Required for Production + Desired Ending DM Units - Beginning DM Units =

DM Units to be Purchased

Equation for Direct Labor Cost is

Units to be Produced x DL Hours per Unit x DL Cost per Hour = Total Direct Labor Cost

A financial budget provides

a capital expenditures budget, cash budget, and budgeted balance sheets.

The Budgeted Balance Sheet is

a projection of financial position at the end of the budget period -developed from budgeted balance sheet for preceding year and budgets for current year.

The budgeted balance sheet is

a projection of financial position at the end of the budget period.