1. The Master Budget and Responsibility Accounting Chapter 23

2. Learn Why Managers Use Budgets. Objective 1

3. Benefits of Budgeting requires managers to plan promotes coordination and communication Benchmarking: helps managers evaluate performance And motivates employees to achieve company goals

4. Components of the Master Budget Purchases Budget ____ Cost of Goods Sold Budget ____ Operating Expenses Budget ____ Budgeted Income Statement ____ Sales Budget ____ Inventory Budget ____ Operating Budget

5. Components of the Master Budget Budgeted Balance Sheet _____ Budgeted Statement of Cash Flows _____ Budgeted Income Statement _____ Capital Expenditures Budget _____ Cash Budget _____ Financial Budget

6. Preparing the Master Budget Suppose that J.J. manages Plantation Sporting Goods Store No. 13. Selected parts of the master budget will be prepared for Store No. 13 for April, May, June, and July.

7. Preparing the Master Budget Sales are 60% cash and 40% on credit. Credit sales are collected in the month following the sale. Accounts receivable on March 31 amounted to $16,000. How much were total sales in March? $16,000 ÷.40 = $40,000.

8. Projected Sales April ……………$50,000 May ……………$80,000 June ……………$60,000 July ……………$50,000 Preparing the Master Budget

9. Plantation 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. Target ending inventory on July 31 is $42,400.

10. Preparing the Master Budget What is the ending inventory on March 31? $20,000 + (0.80 × 0.70 × April sales of $50,000) = $48,000

11. Preparing the Master Budget Plantation pays for inventory as follows: 50% during the month of purchase and 50% during the next month. March purchases were $33,600. How much was paid in March for March’s purchases? $33,660 × 50% = $16,800

12. Prepare An Operating Budget. Objective 2

13. Sales Budget 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.

14. April May June July Cash sales 60%$30,000$48,000$36,000$30,000 Credit sales 40% 20,000 32,000 24,000 20,000 Total sales$50,000$80,000$60,000$50,000 Total sales April through July = $240,000 Sales Budget

15. Purchases, Cost of Goods Sold, and Inventory Budget Budgeted cost of goods sold = 70% × sales. How much are the cost of goods sold for May? 70% × $80,000 = $56,000 What is the desired ending inventory for April? $20,000 + (80% × $56,000) = $64,800

16. Beginning inventory + Purchases – Ending inventory = Cost of goods sold Cost of goods sold + Ending inventory – Beginning inventory = Purchases Purchases, Cost of Goods Sold, and Inventory Budget

17. April May June July Cost of goods sold (70% × sales)$35,000$56,000$42,000$35,000 +Desired ending inventory 64,800 53,600 48,000 42,400 =Total required$99,800 $109,600$90,000$77,400 -Beginning inventory 48,000 64,800 53,600 48,000 =Purchases$51,800$44,800$36,400$29,400 Inventory, Purchases & Cost of Goods Sold Budget

18. April………………$ 35,000 May………………. 56,000 June………………. 42,000 July………………. 35,000 Total$168,000 How much is the cost of goods sold for the four-month period? Inventory, Purchases & Cost of Goods Sold Budget

19. Additional Operating Expenses Budget Information Monthly payroll has two parts: salary of $2,500 plus commissions equal to 15% of sales (half paid this month, half the next) Other monthly expenses include rent expense ($2,000 paid as incurred), depreciation expense ($500), insurance expense ($200 expiration of prepaid amount), and misc. expenses (5% of sales, paid as incurred) What is the operating expenses budget?

20. April May June July Salary, fixed amount $2,500 $2,500 $2,500 $2,500 Commission (15%) 7,500 12,000 9,000 7,500 Rent expense 2,000 2.000 2,000 2,000 Depreciation exp. 500 500 500 500 Insurance expense 200 200 200 200 Misc. expenses 2,500 2,500 2,500 2,500 Total $15,200$21,200 $17,200 $15,200 Total operating expenses: $68,800 Operating Expenses Budget

21. Budgeted Income Statement Plantation Sporting Goods Store No. 13 Budgeted Income Statement Four Months Ending July 31, 20x6 Amount Source Sales$240,000Sales Budget Cost of goods sold 168,000Inv, Purch, COGS Budget Gross profit $ 72,000 Operating expense 68,800Op. Exp. Budget Operating income$ 3,200

22. Prepare a Financial Budget. Objective 3

23. Cash budget Budgeted balance sheet Preparing the Financial Budget The financial budget includes:

24. Preparing the Cash Budget The cash budget has the following major parts: –cash collections from customers –cash disbursements for purchases –cash disbursements for operating expenses –capital expenditures (not illustrated in this chapter)

25. Cash Collections from Customers April May June July Cash sales$30,000$48,000$36,000$30,000 Collections of last month’s credit sales 16,000* 20,000 32,000 24,000 Total$46,000$68,000$68,000$54,000 Total collections: $236,000 *16,000 = March 31 accounts receivable From Sales Budget

26. Cash Disbursements for Purchases April May June July Payment of last month’s purchases$16,800*$25,900$22,400$18,200 Payment of this month’s purchases 25,900 22,400 18,200 14,700 Total$42,700$48,300$40,600$32,900 * March 31 accounts payable Total disbursements: $164,500 From Inventory, Purchases & COGS Budget

27. April May June July Pmt of 50% of last month’s salary exp $ 4,250$ 5,000$7,250$ 5,750 Pmt of 50% of this month’s salary exp 5,000 7,250 5,750 5,000 Rent expense 2,0002,000 2,000 2,000 Misc. expense 2,500 4,000 3,000 2,500 Total$13,750 $18,250$18,000$15,250 Total disbursements: $65,250 Cash Disbursements for Operating Expenses From Operating Expenses Budget

28. Plantation Sporting Goods Store No. 13 Cash Budget Four Months Ending July 31, 20x6 Budgeted cash receipts$236,000 Budgeted cash disbursements Purchases$164,500 Operating expenses 65,250 229,750 Budgeted cash increase$ 6,250 Cash Budget

29. Preparing the Budgeted Balance Sheet Assets, liabilities, and owners’ equity are projected based upon the previous schedules. Assume that the cash balance on March 31 was $15,000. What is the budgeted cash balance on July 31? $15,000 + $6,250 expected increase = $21,250

30. Use Sensitivity Analysis in Budgeting. Objective 4

31. Budgeting 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.

32. Prepare Performance Reports for Responsibility Centers. Objective 5

33. Responsibility Accounting... Is a system for evaluating the performance of managers and the activities they supervise. A responsibility center is a part, segment, or subunit of an organization whose manager is accountable for specific activities.

34. Investment center Cost centerRevenue center Profit center Responsibility Center

35. Management by Exception Northern California District Manager San Francisco Branch Manager San Jose Branch Manager Oakland Branch Manager Sacramento Branch Manager Geary Store Manager Beale Store Manager Wharf Store Manager Other Managers

36. Management by Exception Performance reports show differences between budgeted and actual amounts. Management by exception is the practice of focusing on important variances so that managers can direct their attention to areas that need improvement.

37. Management by Exception Plantation Sporting Goods Store No. 13 Monthly Responsibility Report (Budget) Month YTD Revenues$50,000$388,000 Cost of goods sold 35,000 271,600 Wages 6,700 51,992 Repairs 2,000 15,520 General 1,300 10,088 Fixed costs 4,000 28,000 Operating income$ 1,000$ 10,800

38. Management by Exception Plantation Sporting Goods Store No. 13 Monthly Responsibility Report (Actual) Month YTD Revenues$55,000$408,000 Cost of goods sold 37,400 277,440 Wages 7,370 54,672 Repairs 550 8,160 General 900 8,160 Fixed costs 4,000 28,000 Operating income$ 4,780$ 31,568

39. Management by Exception Plantation Sporting Goods Store No. 13 July 20xx, Responsibility Report Budget Actual Variance (F/U) Revenues$50,000$55,000$5,000 (F) Cost of goods sold 35,000 37,400 2,400 (U) Wages 6,700 7,370 670 (U) Repairs 2,000 550 1,450 (F) General 1,300 900 400 (F) Fixed costs 4,000 4,000 --- Operating income$ 1,000$ 4,780$3,780 (F)

40. Management by Exception J.J., manager of Plantation Sporting Goods Store No. 13, will investigate why cost of goods sold and wages were more than budgeted.

41. Departmental Accounting Appendix

42. Allocation of Indirect Costs Indirect costs are allocated to departments or responsibility centers using the following steps: 1Choose an allocation base for the indirect cost. 2Compute an indirect cost allocation rate. 3Allocate the indirect cost.

43. Choose an Allocation Base Cost or Expense Basis Indirect laborTime spent Building depreciationSquare feet Heat, lights, etc.Square feet Janitorial servicesSquare feet Payroll and personnel# of employees Purchasing# of purchase orders placed

44. Choose an Allocation Base Let’s consider the Healthy Clinic, a provider of Ear, Nose, and Throat (ENT) plus Audiology services. Rent for the year is $120,000. Total square footage occupied by the clinic is 12,000. What is the rent per square foot? $120,000 ÷ 12,000 = $10

45. Compute a Cost Allocation Rate Other expenses amounted to $100,000 and are allocated on the basis of professional services expenses. Total professional services expenses amounted to $250,000. ENT accounted for $175,000 of these expenses and Audiology for $75,000.

46. Compute a Cost Allocation Rate What is the allocation rate? $100,000 ÷ $250,000 = 40% 40% of what? 40% of professional services expenses.

47. Allocate the Indirect Cost ENT occupies 9,000 square feet. How much rent is allocated to ENT? 9,000 × $10 = $90,000 How much rent is allocated to Audiology? 12,000 – 9,000 = 3,000 square feet 3,000 × $10 = $30,000

48. Allocate the Indirect Cost How much of the “other expenses” are allocated to ENT? $175,000 × 40% = $70,000 How much to Audiology? $75,000 × 40% = $30,000

49. Evaluate Performance Healthy Clinic Departmental Partial Income Statement For the Year Ended December 31, 20xx (in thousands) TotalENT Audiology Service revenue$500$350$150 Professional services 250 175 75 Margin$250$175$ 75 Rent expense 120 90 30 Other 100 70 30 Operating income$ 30$ 15$ 15

50. Evaluate Performance ENT generates a professional margin of $175,000 compared to $75,000 by Audiology. However, the margin per square foot is $175,000 ÷ 9,000 = $19.44 for ENT and $75,000 ÷ 3,000 = $25.00 for Audiology.

51. End of Chapter 23