5Describe the advantages Learning Objective 2Describe the advantagesof budgets.
6What are the Advantages of Budgets? #1Compels strategic planning#2Provides a frameworkfor judging performance
7What are the Advantages of Budgets? #3Motivates employeesand managers#4Promotes coordinationand communication
8Strategy, Planning, and Budgets Long-runPlanningLong-runBudgetsStrategyAnalysisShort-runPlanningShort-runBudgets
9Time Coverage of Budgets Budgets typically have a set timeperiod (month, quarter, year).This time period can itself be brokeninto subperiods.The most frequently used budgetperiod is one year.Businesses are increasingly usingrolling budgets.
10Prepare the operating budget and its supporting schedules. Learning Objective 3Prepare the operating budgetand its supporting schedules.
11Operating Budget Example Hawaii Diving expects 1,100 units to be soldduring the month of August 2004.Selling price is expected to be $240 per unit.How much are budgeted revenues for the month?1,100 × $240 = $264,000
12Operating Budget Example Two pounds of direct materials are budgeted perunit at a cost of $2.00 per pound, $4.00 per unit.Three direct labor-hours are budgeted per unitat $7.00 per hour, $21.00 per unit.Variable overhead is budgeted at $8.00per direct labor-hour, $24.00 per unit.Fixed overhead is budgeted at $5,400 per month.
13Operating Budget Example Variable nonmanufacturing costs areexpected to be $0.14 per revenue dollar.Fixed nonmanufacturing costs are$7,800 per month.
14Production Budget Example Budgeted sales (units)+Target ending finished goods inventory (units)–Beginning finished goods inventory (units)=Budgeted production (units)
15Production Budget Example Assume that target ending finished goodsinventory is 80 units.Beginning finished goods inventory is 100 units.How many units need to be produced?
16Production Budget Example Hawaii Diving Production Budgetfor the Month of August 2004Units required for sales 1,100Add ending inv. of finished unitsTotal finished units required 1,180Less beg. inv. of finished unitsUnits to be produced ,080
17Direct Materials Usage Budget Each finished unit requires 2 pounds of directmaterials at a cost of $2.00 per pound.Desired ending inventory equals 15% of thematerials required to produce next month’s sales.September sales are forecasted to be 1,600 units.What is the ending inventory in August?480 pounds
18Direct Materials Usage Budget September sales: 1,600 × 2 pounds per unit= 3,200 pounds3,200 × 15% = 480 pounds(the desired ending inventory)What is the beginning inventory in August?1,100 units × 2 × 15% = 330 units
19Direct Materials Usage Budget How many pounds are needed to produce1,080 units in August?1,080 × 2 = 2,160 pounds
20Material Purchases Budget Hawaii Diving Direct Material Purchases Budget for the Month of August 2004Units needed for production 2,160Target ending inventoryTotal material to provide for 2,640Less beginning inventoryUnits to be purchased ,310Unit purchase price $ 2.00Total purchase cost $4,620
21Direct Manufacturing Labor Budget Each unit requires 3 direct labor-hoursat $7.00 per hour.Hawaii Diving Direct Labor Budgetfor the Month of August 2004Units produced: ,080Direct labor-hours/unitTotal direct labor-hours: ,240Total $7.00/hour: $22,680
22Manufacturing Overhead Budget Variable overhead is budgeted at $8.00per direct labor-hour.Fixed overhead is budgeted at $5,400 per month.
23Manufacturing Overhead Budget Hawaii Diving Manufacturing OverheadBudget for the Month of August 2004Variable Overhead:(3,240 × $8.00) $25,920Fixed Overhead ,400Total $31,320
25Ending Inventory Budget What is the cost of the targetending inventory for materials?480 × $2 = $960What is the cost of the targetfinished goods inventory?80 × $54 = $4,320
26Cost of Goods Sold Budget Direct materials used:2,160 × $ $ 4,320Direct labor ,680Total overhead ,320Cost of goods manufactured $58,320
27Cost of Goods Sold Budget Assume that the beginning finishedgoods inventory is $5,400.Ending finished goods inventory is $4,320.What is the cost of goods sold?
28Cost of Goods Sold Budget Beginning finished goods inventory $ 5,400+ Cost of goods manufactured $58,320= Goods available for sale $63,720– Ending finished goods inventory $ 4,320= Cost of goods sold $59,400
29Nonmanufacturing Costs Budget Hawaii Diving Other Expenses Budgetfor the Month of August 2004Variable Expenses:($0.14 × $264,000) $36,960Fixed expenses ,800Total $44,760
30Cost of Goods Sold Budget Hawaii Diving has budgeted sales of$264,000 for the month of August.Cost of goods sold are budgeted at $59,400.What is the budgeted gross margin?
31Budgeted Statement of Income Hawaii Diving Budgeted Income Statementfor the Month ending August 31, 2004Sales $264, %Less cost of sales , %Gross margin $204, %Other expenses , %Operating income $159, %
33Financial Planning Models Financial planning models are mathematical representations of the interrelationships among operating activities, financial activities, and other factors that affect the master budget.
34SoftwareSoftware packages are now readily available to reduce the computational burden and time required to prepare budgets.These packages assist managersto do sensitivity analysis.
35Sensitivity Analysis Consider Hawaii Diving. What if some parameters in the budget modelwere to change?For example, what if the selling price isexpected to be $230 instead of $240?What are expected revenues?1,100 × $230 = $253,000 instead of $264,000
36Sensitivity AnalysisWhat if the materials cost is expected to increase to $2.50 per pound instead of $2.00.What is the cost of goods sold?1,100 × $55 = $60,500 instead of $59,400Why the increase?Because materials cost per unit become$5.00 instead of $4.00.
37Hawaii Diving has the following Cash BudgetHawaii Diving has the followingcollection pattern:In the month of sale: %In the month following sale: 27%In the second month following sale: 20%Uncollectible: %
38Cash Budget Budgeted charge sales are as follows: June $200,000 July $250,000August $264,000September $260,000What are the expected cash collections in August?
39Cash Budget Budgeted Cash Receipts for the Month Ending August 31, 2004August sales: $264,000 × 50% $132,000July sales: $250,000 × 27% ,500June sales: $200,000 × 20% ,000Total $239,500
40Cash Budget Budgeted Cash Disbursements for the Month Ending August 31, 2004August purchases $ 4,620Direct labor ,680Total overhead ,320Other expenses ,760*Total $68,380*Other expenses exclude depreciation
41Cash Budget Cash Budget for the Month Ending August 31, 2004 Budgeted receipts $239,500Budgeted disbursements ,380Net increase in cash $171,120
42Explain kaizen budgeting Learning Objective 5Explain kaizen budgetingand how it is used forcost management.
43What is Kaizen? The Japanese use the term “kaizen” for continuous improvement.Kaizen budgeting is an approach thatexplicitly incorporates continuousimprovement during the budgetperiod into the budget numbers.
44Kaizen BudgetingIt was previously estimated that it should take 3 labor-hours for Hawaii Diving to manufacture its product.A kaizen budgeting approach wouldincorporate future improvements.
45Kaizen Budgeting Budgeted Hours/Item January – March 2004 3.00 April – JuneJuly – SeptemberOctober – December
46Prepare an activity-based Learning Objective 6Prepare an activity-basedbudget.
47Activity-Based Budgeting Activity-based costing reports and analyzes past and current costs.Activity-based budgeting (ABB) focuseson the budgeted cost of activities necessaryto produce and sell products and services.
48Activity-Based Budgeting Product A Product BUnits produced:Labor-hours per unit:Budgeted setup-hours:Total budgeted machine setup related cost is$25,920 per month.
49Activity-Based Budgeting Total budgeted labor-hours are:Product A: 880 × 3 2,640Product B: 200 ×Total ,240What is the allocation rate per labor-hour?$25,920 ÷ 3,240 = $8.00
50Activity-Based Budgeting Total cost allocated to each product line:Product A: $8.00 × 2,640 = $21,120Product B: $8.00 × = $ 4,800
51Activity-Based Budgeting Under ABB, the number of setups is the cost driver.$25,920 budgeted machine setup cost÷ 10 budgeted machine setup-hours= $2,592 allocation rate per machine setup-hour.How much machine setup related costs areallocated to each product line?
54What is a Responsibility Center? It is any part, segment, or subunitof a business that needs control.– production– service
55Types of Responsibility Centers Cost centerInvestment centerProfit center
56Explain how controllability relates to responsibility Learning Objective 8Explain how controllabilityrelates to responsibilityaccounting.
57What is Controllability? It is the degree of influence that a specificmanager has over costs, revenues,or other items in question.A controllable cost is any cost that isprimarily subject to the influence of agiven responsibility center managerfor a given time period.
58Controllability Responsibility accounting focuses on information and knowledge, not control.A responsibility accounting system couldexclude all uncontrollable costs froma manager’s performance report.In practice, controllability is difficult to pinpoint.