McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 14 Cost Planning

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Control Control Steps taken by management to ensure that objectives are attained. Steps taken by management to ensure that objectives are attained. Planning Planning Developing objectives for acquisition and use of resources. Developing objectives for acquisition and use of resources. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. Budgeting L O 1

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Time consuming but enhances employee motivation and acceptance of goals. Participative Budgeting Flow of Budget Data L O2

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Operating Budget The annual operating budget may be divided into quarterly or monthly budgets. The Budget Time Frame Operating Budget L O3

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Continuous or Perpetual Budget This budget is usually a four-quarter budget that rolls forward one quarter as the current quarter is completed. The Budget Time Frame Budget for 2011 by quarters Quarter I Quarter II Quarter III Quarter IV Budget for last 3 quarters of 2011 and first quarter of 2012 Budget for 2012 by quarters 2011 Quarter IV Budget for last 2 quarters of 2011and first 2 quarters of 2012 Budget for last quarter of 2011 and first 3 quarters of 2012 L O3

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved OR Direct Materials Budget Production Budget (Manufacturer) Operating Expense Budget Direct Labor Budget Manufacturing Overhead Budget Sales Budget The Budgeting Process Cost of Goods Sold Budget Budgeted Balance SheetBudgeted Income Statement Budgeted Statement of Cash Flows Purchases Budget (Merchandiser) L O4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs provided by marketing personnel Sales Budget L O4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Inventory Flows Beginning balance Beginning balance Available Ending balance Ending balance Additions + = Withdrawals _ = The basic inventory flow model is used for production and purchases budgets. L O5 Ending balance Ending balance Withdrawals

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Budgeted product sales in units +Desired product units in ending inventory =Total product units needed – Product units in beginning inventory =Product units to produce The Production Budget L O5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved The materials purchases budget is based on production quantity and desired materials inventory levels. Units to produce × Material needed per unit =Material needed for units to produce +Desired units of material in ending inventory =Total units of material needed – Units of material in beginning inventory =Units of material to purchase Raw Materials Purchases Budget L O5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Selling expense budgets contain both variable and fixed items. Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries. Fixed items: advertising and sales salaries. Administrative expense budgets contain mostly fixed items. Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices. Executive salaries and depreciation on company offices. Selling expense budgets contain both variable and fixed items. Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries. Fixed items: advertising and sales salaries. Administrative expense budgets contain mostly fixed items. Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices. Executive salaries and depreciation on company offices. Selling and Administrative (S&A) Expense Budget L O6

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Total mfg. OH for quarter $188,400 Total labor hours required 38,400 units = $4.91 per unit (rounded) Budgeted Income Statement Manufacturing overhead is applied based on number of units produced. L O7

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Are standards the same as budgets? A standard is the expected cost for one unit. A budget is the expected cost for all units. Standard Costs are Based on carefully predetermined amounts. Used for planning material, labor, and overhead requirements. The expected level of performance. Benchmarks for measuring performance. Standard Costs L O 9

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Quantity Standards Use product design specifications. Price Standards Final, delivered cost of materials, net of discounts. Costing Products with Standard Costs L O 11 Rate Standards Use wage surveys and labor contracts. Time Standards Use time and motion studies for each labor operation.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead. Costing Products with Standard Costs L O 11

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Standard costs for a product might look like this: Costing Products with Standard Costs L O 11