ACCT 203 Chapter 8

control

gathering feedback to ensure that the plan is being properly executed or modified as circumstances change

Human factors in budgeting

- success of a budget depends on whether top management uses the budget to pressure or blame employees - blame breeds hostility, tension, and mistrust rather than cooperation and productivity - budget is too often used as a pressure device and excessive emphasis is placed on meeting the budget under all circumstances - rather than being used as a weapon, the budget should be used as a positive instrument to assist in establishing goal, measuring operating results, and isolating areas that need attention - bonuses are often based on meeting/exceeding the budget. If this is the case, the budgets should be based on highly achievable budgets

Production budget

-used to determine the direct materials, direct labor, and manufacturing overhead budgets

MOH Budget

1. Budgeted direct labor-hours 2. Multiply by variable manufacturing overhead rate 3. = Variable manu overhead 4. Add fixed manufacturing overhead 5. = total manufacturing overhead 6. Subtract less depreciation 7. = Cash disbursements for manufacturing overhead

Advantages of budgeting

1. Budgets communicate management's plans throughout the organization 2. Budgets force managers to think about and plan for the future (in the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies) 3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively 4. The budgeting process can uncover potential bottlenecks before they occur 5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Helps ensure that everyone in the org is pulling in the same direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

Key questions a master budget answers

1. How much sales will we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing cost will we incur? 5. How much cash will we pay to our suppliers and our direct laborers, and how much will we pay for Manu. overhead resources? 6. What is the total cost that will be transferred from finished goods inventory to cost of goods sold? 7. How much selling and admin. expense will we incur and how much cash will we pay related to those expenses? 8. How much money will we borrow from or repay to lenders, including interest? 9. How much net operating income will we earn? 10. What will our balance sheet look like at the end of the budget period?

Advantages to self-imposed budgets

1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.

Self-imposed budget limitations

1. Lower-level managers may make suboptimal budgeting recommendations if they lack the broad strategic perspective possessed by top managers 2. self-imposed budgeting may allow lower-level managers to create too much budgetary slack

Sales budget process

1. Multiply the budgeted sales per unit for each quarter by the selling price per unit (= total sales) 2. Create the Schedule of Expected Cash collections 3. Multiply the percent of expected cash collection for each quarter by the total sales of each quarter

DM budget process

1. Required production in cases 2. Multiply by units of raw materials needed per case 3. = Units of raw materials needed to meet production 4. Add desired units of ending raw materials inventory (% of next quarter's units of raw materials needed) 5. Add top two together = total units of raw materials needed 6. Less units of beginning raw materials inventory 7. Subtract above from total units = Units of raw materials to be purchased 8. Multiply by cost of raw materials per pound 9. = Cost of raw materials to be purchased

Cash budget sections

1. cash receipts section (all of cash inflows, except financing, expected) (most are from sales) 2. cash disbursement section 3. cash excess or deficiency section (borrowings and principle and interest repayments projected during budget period) 4. financing section

True

Cash collections in a schedule of cash collections typically consist of collections on sales made to customers in prior periods plus collections on sales made in the current budget period.

Direct Labor Budget Process

Categories on left: 1. Unit of production 2. DL time per unit (the decimal number) 3. Labor hours required (units x DL per unit) 4. Hourly wage rate 5. Total DL costs (labor hours required x hourly wage rate)

Production Budget Process

Categories: 1. Budgeted Sales (units) 2. Add: desired ending inventory 3. Total needs 4. Less: beginning inventory 5. Required Production Step 2: 1. Write out months in order at top 2. Last one is Quarter (or time stamp) 3. Add up budgeted sales 4. Latest number for desired ending inventory (DO NOT ADD) 5. Subtract 4 from 3 to get total needs 6. first beg. inventory number 7. subtract 6 from 5

DL budget beginning

The direct labor budget begins with the required production in units from the production budget.

False

The disbursements section of a cash budget consists of all cash payments for the period except cash payments for dividends.

Truth

The number of units to be produced in a period can be determined by adding the expected sales to the desired ending inventory and then deducting the beginning inventory.

It is calculated based on the sales budget and the desired ending inventory.

There are various budgets within the master budget. One of these budgets is the production budget. Which of the following BEST describes the production budget?

raw materials needed to meet the production schedule + desired ending inventory of raw materials − beginning inventory of raw materials.

When preparing a direct materials budget, the required purchases of raw materials in units equals:

continuous or perpetual budget

a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed - one month is added to the end of the budget as each month comes to a close - keeps managers focused at least one year ahead so that they do not become too narrowly focused on short-term results

Self-imposed budget (participative budget)

a budget that is prepared with the full cooperation and participation of managers at all levels - many managers believe that being empowered to create their own self-imposed budgets is the most effective method of budget preparation

Budget

a detailed plan for the future that is usually expressed in formal quantitative terms

Cash budget

a detailed plan showing how cash resources will be acquired and used - info from the sales budget, selling and admin. expense budget, and Manu. budget all influence it

responsibility accounting

a manager should be held responsible for those items - and ONLY those items - that the manger can actually control to a significant extent. - each line item (ex: revenue or cost) in the budget is the responsibility of a manager - responsibility accounting personalizes accounting information by holding individuals responsible for revenues and costs - central to any effective planning and control system - the point: an effective responsibility accounting system is to make sure that nothing "falls through the cracks" - the point is NOT to penalize individuals for missing targets

Master budget

consists of a number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals. - culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet.

Direct materials budget

details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories

planning

developing goals and preparing various budgets to achieve those goals

Manufacturing overhead budget

lists all costs of production other than direct materials and direct labor

Selling and administrative expense budget

lists the budgeted expenses for areas other than manufacturing - How to: - (Budgeted unit sales)(variable selling and admin expense per case) = variable selling and admin expense - Add fixed selling and admin expenses (advertising, salaries, insurance, etc.) - Total variable selling and admin expense + fixed - Subtract less depreciation = Cash disbursements for selling and admin expenses

Budget uses

planning and controlling

How to calculate interest

principal x rate x time

Merchandise Purchases budget

shows the amount of goods to be purchased from suppliers during the period

Ending finished goods inventory budget

the cost of unsold units - To calculate: - Find unit product cost (quantity x cost for each) - Multiply by ending finished goods inventory in cases - = ending finished goods inventory in dollars

Sales budget

the first step in the budgeting process - a detailed schedule showing the expected sales for the budget period - an accurate sales budget is the key to the entire budgeting process - all other parts of the master budget depend on the sales budget (if it's inaccurate all other parts will be too) - influences the variable portion of the selling and administrative expense budget and feeds into the productive budget, which defines how many units need to be produced during the budget period

manufacturing overhead budget

the non-cash charges (such as depreciation) are deducted from the total budgeted manufacturing overhead to determine the expected cash disbursements for manufacturing overhead.