Presentation on theme: "Introduction to Management Accounting: The Master Budget"— Presentation transcript:
1Introduction to Management Accounting: The Master Budget Chapter 20HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
2Objectives1. Distinguish between financial accounting and management accounting, and use management accounting information for decision making.2. Describe the value chain and classify costs by value-chain function3. Distinguish direct costs from indirect costs4. Distinguish among full product costs, inventoriable product costs and period costs
3Objectives5. Prepare the financial statements of a manufacturing company6. Identify the benefits of budgeting7. Prepare an operating budget for a company8. Prepare the components of a financial budget9. Use sensitivity analysis in budgeting.
4The Functions of Management PlanningActingControllingFeedback
5Objective 1 Distinguish between financial accounting and management accounting, and usemanagement accountinginformation for decision-making
6Management Accounting and Financial Accounting Primary UsersInternal managers of the businessInvestors, Creditors,Government authorities (ATO, ASIC etc.)
7Management Accounting and Financial Accounting Purpose of InformationHelp managers plan andcontrol business operationsHelp investors, creditors, and others makeinvestment, credit, and other decisions
8Management Accounting and Financial Accounting Focus and Time DimensionRelevanceReliability, objectivity, and focus on the past
9Management Accounting and Financial Accounting Type of ReportInternal reports not restricted by GAAPFinancial statements restricted by GAAP
10Management Accounting and Financial Accounting VerificationNo independent auditAnnual independent audit
11Management Accounting and Financial Accounting Scope of InformationDetailed reports onparts of the companySummary reports primarilyon the company as a whole
12Management Accounting and Financial Accounting Behavioral ImplicationsConcern about how reportswill affect employees behaviorConcern about adequacy of disclosure
13Service, Retail, and Manufacturing Companies Service Company:provides intangible services,rather than tangible productsRetail Company:resells products previouslybought from suppliers
14Service, Retail, and Manufacturing Companies Manufacturing Company:uses labour, plant, and equipment to convertraw materials into finished productsMaterials inventoryWork in process inventoryFinished goods inventory
15Describe the value chain value-chain functions. Objective 2Describe the value chainand classify costs byvalue-chain functions.
16Value Chain Research and Development Design Production or Purchases MarketingDistributionCustomerServices
17Distinguish direct costs Objective 3Distinguish direct costsfrom indirect costs.
18Cost Objects, Direct Costs, and Indirect Costs Cost objects are anything for which a separate measurement of costs is desired.Cost drivers are any factors that affect cost.
19Cost Objects, Direct Costs, and Indirect Costs What are examples of cost objects?individual productsalternative marketing strategiesgeographic segments of the businessdepartments
20Cost Objects, Direct Costs, and Indirect Costs What are direct costs?Direct costs are those costs that can be specifically traced to the cost object.What are indirect costs?Indirect costs are costs that cannot be specifically traced to the cost object.
21Distinguish among full product costs, inventoriable product Objective 4Distinguish among full productcosts, inventoriable productcosts, and period costs.
22Product Costs What are product costs? They are the costs to produce (or purchase) tangible products intended for sale.There are two types of product costs:FullproductcostsInventoriableproductcosts
24Inventoriable Product Costs For external reporting, a retailers’ inventoriable product costs includes only costs that are incurred in the purchase of goods.Inventoriable costs are an asset.Period costs flow as expenses directly to the statement of financial performance.
25Inventoriable Product Costs For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.Inventoriable product costs are incurred only in the third element of the value chain.Costs incurred in other elements of the value chain are period costs.
27Inventoriable Product Costs DirectMaterialsDirectLabourPrime Costs = Direct Materials + Direct Labour
28Inventoriable Product Costs DirectLabourIndirectLabourIndirectMaterialsOtherConversion Costs = Direct Labour+ Manufacturing Overhead
29Prepare the financial statements of a manufacturing company. Objective 5Prepare the financial statementsof a manufacturing company.
30Financial Statements for Service Companies There is no inventory and thus no inventoriable costs.The statement of financial performance does not include cost of goods sold.Revenues – Expenses = Net Profits
31Financial Statements for Retail Companies Statement of FinancialPositionStatement of FinancialPerformanceInventoriableCostsSales RevenuewhensalesoccurdeductPurchases ofInventory plusFreight-InInventoryCost ofGoods Soldequals Gross ProfitdeductPeriodCostsOperatingExpensesequals Net Profit
32Financial Statements for Manufacturing Companies Statement of FinancialPerformanceStatement of FinancialPositionInventoriableCostsSales RevenueMaterialsInventorywhensalesoccurdeductFinishedGoodsInventoryCost ofGoods Soldequals Gross ProfitdeductWork inProcessInventoryPeriodCostsOperatingExpensesequals Net Profit
33Manufacturing Company Example Kendall Manufacturing Company:Beginning and ending work-in-process inventories were $20,000 and $18,000.Direct materials used were $70,000.Direct labour was $100,000.Manufacturing overhead incurred was $150,000.
34Manufacturing Company Example What is the cost of goods manufactured?Beginning work in process $ 20,000Direct labour $100,000Direct materials ,000Mfg. overhead , ,000Ending work in process ,000Cost of goods manufactured $322,000
35Manufacturing Company Example Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.How much is the cost of goods sold?
36Manufacturing Company Example Beg. finished goods inventory $ 60,000+ Cost of goods manufactured ,000= Cost of goods available for sale $382,000– Ending finished goods ,000= Cost of goods sold $327,000
37Manufacturing Company Example Kendall Manufacturing Company had sales of $627,000 for the period.How much is the gross profit?Sales $627,000– Cost of goods sold ,000= Gross profit $300,000
38Manufacturing Company Example Kendall Manufacturing Company had operating expenses as follows:Sales salaries and commissions $ 80,000 Delivery expense ,000 Administrative expenses ,000 Total $120,000What is Kendall’s net profit?
39Manufacturing Company Example Gross profit $300,000– Operating expenses ,000= Net Profit $180,000
40Flow of Costs through a Manufacturer’s Accounts Work in Process InventoryBeginning inventoryDirect materials usedDirect labourManufacturing overheadTotal manufacturing coststo account forEnding inventoryCost of goods manufacturedDirect Materials InventoryBeginning inventoryPurchases andfreight-inDirect materials available for useEnding inventoryDirect materials used
41Flow of Costs through a Manufacturer’s Accounts Finished Goods InventoryBeginning inventoryCost of goods manufacturedCost of goods available for saleEnding inventoryCost of goods sold
43requires managers to plan promotes coordination motivates employees to Benefits of Budgetingrequires managers to planpromotes coordinationand communicationhelps managersevaluate performancemotivates employees toachieve company goals
44Components of the Master Budget InventoryBudget____ ____SalesBudget____ ____PurchasesBudget____ ____Cost ofGoods SoldBudget____ ____OperatingExpensesBudget____ ____BudgetedStatement ofFinancialPerformance____ ____Operating Budget
45Components of the Master Budget CashBudget_____ _____BudgetedStatement ofFinancialPerformance_____ _____CapitalExpendituresBudget_____ _____Financial BudgetBudgetedStatement ofFinancialPosition_____ _____BudgetedStatementof Cash Flows_____ _____
46Preparing the Master Budget (An expanded example in your textbook pages 838 – 45)Suppose you manage Whitewater Sporting Goods store No. 18.Selected parts of the master budget will be prepared for Store No. 18 for October, November, December and January.
47Preparing the Master Budget Sales are 60% cash and 40% on credit.Credit sales are collected in the month following the sale.Accounts receivable on September 30 amounted to $16,000.How much were total sales in Sept.?$16,000 ÷ .40 = $40,000
48Preparing the Master Budget Projected SalesOctober……………. $50,000November……….… $80,000December………..… $60,000January……..……… $50,000
49Preparing the Master Budget Whitewater maintains inventory equal to $20,000 plus 80% of the budgeted cost of goods sold for the following month.Cost of goods sold averages 70% of sales.What is the ending inventory on Sept. 31?$20,000 + (0.80 × 0.70 × October sales of $50,000) = $48,000
50Preparing the Master Budget What is the beginning inventory in September?$20,000 + (0.80 × 0.70 × $40,000) = $42,400Opening Inventory $ 42,400Plus Purchases $ ?Minus Closing Inv. $ 48,000Equals COGS (70% x $40,000) $ 28,000? = $ 33,600
51Preparing the Master Budget Whitewater pays for inventory as follows: 50% during the month of purchase and 50% during the next month.September purchases were $33,600.How much was paid in September for September’s purchases?$33,600 × 50% = $16,800
52Prepare an operating budget Objective 7Prepare an operating budgetfor a company.
53Sales Budget (Schedule A) Sales revenue is the key measure of business activity.The budgeted total sales revenue for each product is the sales price multiplied by the expected number of units sold.
54Sales Budget (Schedule A) Oct Nov Dec Jan.Cash sales 60% $30,000 $48,000 $36,000 $30,000Credit sales 40% 20,000 32, , ,000Total $50,000 $80,000 $60,000 $50,000Total sales Oct through Jan = $240,000
55Purchases, Cost of Goods Sold, and Inventory Budget Cost of goods sold = 70% × salesHow much are the cost of goods sold for November?70% × $80,000 = $56,000What is the desired ending inventory for October?$20,000 + (80% × $56,000) = $64,800
56Purchases, Cost of Goods Sold, and Inventory Budget Beginning inventory + Purchases– Ending inventory = Cost of goods soldCost of goods sold + Ending inventory– Beginning inventory = Purchases
58Operating Expenses Budget Assume that Whitewater incurs $5,200 of fixed expenses every month and that commissions and other variable expenses equal 20% of sales.What is the operating expenses budget (Schedule C)?
59Operating Expenses Budget (Schedule C) Oct Nov Dec Jan.Variable expenses(From Schedule A)20% of sales $ 10,000 $ 16,000 $12,000 $10,000Fixed expenses 5, , , ,200Total $15, $21,200 $17,200 $15,200Total wages and commission: $68,800
60Budgeted Statement of Financial Performance Whitewater Sporting Goods Store No. 18Budgeted Statement of Financial PerformanceFour Months Ending January 31, 2005Amount SourceSales $240,000 Schedule ACost of goods sold ,000 Schedule BGross profit $ 72,000Operating expense ,800 Schedule CNet profit $ 3,200
61Prepare the components Objective 8Prepare the componentsof a financial budget.
62Preparing the Financial Budget The financial budget includes:Cash budgetBudgetedStatement ofFinancial Position
63Preparing the Cash Budget The cash budget has the following major parts:cash collections from customers (Schedule D)cash disbursements for purchases (Schedule E)cash disbursements for operating expenses (Schedule F)capital expenditures (not illustrated in this chapter)
64Cash Collections from Customers (Schedule D) From Schedule AOct Nov Dec Jan.Cash sales $30,000 $48,000 $36,000 $30,000Collections of lastmonth’s credit sales 16,000* 20, , ,000Total $46,000 $68,000 $68,000 $54,000Total collections: $236,000*16,000 = September 30 accounts receivable
65Cash Disbursements for Purchases (Schedule E) From Schedule BOct Nov Dec Jan.Payment of lastmonth’s purchases $18,800 $25,900 $22,400 $18,200Payment of thismonth’s purchases 25, , , ,700Total $42,700 $48,300 $40,600 $32,900Total disbursements: $164,500
66Cash Disbursements for Operating Expenses (Schedule F) From Schedule COct Nov Dec Jan.Payment of lastmonth’s expenses $ 4,250 $ 5,000 $7,250 $ 5,750Payment of thismonth’s expenses , , , ,000Rent and Misc , , , ,500Total $13,750 $18,250 $18,000 $15,250Total disbursements: $65,250
67Cash Budget Whitewater Sporting Goods Store No. 18 Cash Budget Four Months Ending January 31, 2005Budgeted cash receipts $236,000Budgeted cash disbursementsPurchases $164,500Operating expenses , ,750Budgeted cash increase $ 6,250
68Preparing the Budgeted Statement of Financial Position Assets, liabilities, and owners’ equity are projected based upon the previous schedules.Assume that the cash balance on September 30 was $15,000.What is the budgeted cash balance on January 31?$15,000 + $6,250 expected increase = $21,250
70Budgeting and Sensitivity Analysis Sensitivity analysis helps managers plan for different courses of action.This type of “what if” analysis shows the result of changing an underlying assumption in the budgeting process.Sensitivity analysis may affect very specific plans.