Copyright © 2012 McGraw-Hill Ryerson Limited 9-1 PowerPoint Author: Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance.

Copyright © 2012 McGraw-Hill Ryerson Limited 9-1 PowerPoint Author: Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance MANAGERIAL ACCOUNTING Ninth Canadian Edition GARRISON, CHESLEY, CARROLL, WEBB, LIBBY Budgeting Chapter 9

9-2 Copyright © 2012 McGraw-Hill Ryerson Limited The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1.The act of preparing a budget is called budgeting. 2.The use of budgets to control an organization’s activity is known as budgetary control. LO 1

9-3 Copyright © 2012 McGraw-Hill Ryerson Limited Planning and Control Planning – involves developing objectives and preparing various budgets to achieve these objectives. Control – involves the steps taken by management that attempt to ensure the objectives are attained. LO 1

9-4 Copyright © 2012 McGraw-Hill Ryerson Limited Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinateactivities Communicateplans Think about and plan for the future Means of allocating resources LO 1

9-5 Copyright © 2012 McGraw-Hill Ryerson Limited Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent. Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent. LO 1

9-6 Copyright © 2012 McGraw-Hill Ryerson Limited Choosing the Budget Period Operating Budget 2012201320142015 The annual operating budget may be divided into quarterly or monthly budgets. The annual operating budget may be divided into quarterly or monthly budgets. A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. LO 1

9-7 Copyright © 2012 McGraw-Hill Ryerson Limited Participative (Self-Imposed) Budget A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a particpative budget. LO 1

9-8 Copyright © 2012 McGraw-Hill Ryerson Limited Advantages of Participative 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. Participative budgets eliminate this excuse. 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. Participative budgets eliminate this excuse. LO 1

9-9 Copyright © 2012 McGraw-Hill Ryerson Limited Participative (Self-Imposed) Budgets Participative (self-imposed) budgets should be reviewed by higher levels of management to prevent “budgetary slack.” Most companies do not rely exclusively upon participative budgets in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales. Participative (self-imposed) budgets should be reviewed by higher levels of management to prevent “budgetary slack.” Most companies do not rely exclusively upon participative budgets in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales. LO 1

9-10 Copyright © 2012 McGraw-Hill Ryerson Limited The Budget Committee A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget  resolving disputes related to the budget  approving the final budget A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget  resolving disputes related to the budget  approving the final budget LO 1

9-11 Copyright © 2012 McGraw-Hill Ryerson Limited Behavioural Factors in Budgeting The success of budgeting depends upon three important factors: 1. Top management must be enthusiastic and committed to the budget process. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. 3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets. The success of budgeting depends upon three important factors: 1. Top management must be enthusiastic and committed to the budget process. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. 3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets. LO 1

9-12 Copyright © 2012 McGraw-Hill Ryerson Limited Zero-Based Budgeting A zero-based budget requires managers to justify all budgeted expenditures, not just changes in the budget from the prior year. Most managers argue that zero-based budgeting is too time consuming and costly to justify on an annual basis. LO 1

9-13 Copyright © 2012 McGraw-Hill Ryerson Limited The Budget Committee A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget LO 1

9-14 Copyright © 2012 McGraw-Hill Ryerson Limited The Master Budget: An Overview Production budget Selling and administrative budget Selling and administrative budget Direct materials budget Direct materials budget Manufacturing overhead budget Manufacturing overhead budget Direct labour budget Cash Budget Sales budget Ending inventory budget Ending inventory budget Budgeted balance sheet Budgeted income statement LO 2

9-15 Copyright © 2012 McGraw-Hill Ryerson Limited Budgeting Example  Royal Company is preparing budgets for the quarter ending June 30.  Budgeted sales for the next five months are: April 20,000 units April 20,000 units May 50,000 units May 50,000 units June 30,000 units June 30,000 units July 25,000 units July 25,000 units August 15,000 units. August 15,000 units.  The selling price is $10 per unit.  Royal Company is preparing budgets for the quarter ending June 30.  Budgeted sales for the next five months are: April 20,000 units April 20,000 units May 50,000 units May 50,000 units June 30,000 units June 30,000 units July 25,000 units July 25,000 units August 15,000 units. August 15,000 units.  The selling price is $10 per unit. LO 2

9-16 Copyright © 2012 McGraw-Hill Ryerson Limited The Sales Budget The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30 th. LO 2

9-17 Copyright © 2012 McGraw-Hill Ryerson Limited Expected Cash Collections  All sales are on account.  Royal’s collection pattern is: 70% collected in the month of sale, 70% collected in the month of sale, 25% collected in the month following sale, 25% collected in the month following sale, 5% uncollectible. 5% uncollectible.  The March 31 accounts receivable balance of $30,000 will be collected in full.  All sales are on account.  Royal’s collection pattern is: 70% collected in the month of sale, 70% collected in the month of sale, 25% collected in the month following sale, 25% collected in the month following sale, 5% uncollectible. 5% uncollectible.  The March 31 accounts receivable balance of $30,000 will be collected in full. LO 2

9-21 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 LO 2

9-22 Copyright © 2012 McGraw-Hill Ryerson Limited What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000 Quick Check LO 2

9-24 Copyright © 2012 McGraw-Hill Ryerson Limited The Production Budget ProductionBudget Sales Budget and Expected Cash Collections Completed Production must be adequate to meet budgeted sales and provide for sufficient ending inventory. LO 2

9-25 Copyright © 2012 McGraw-Hill Ryerson Limited The Production Budget  The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.  On March 31, 4,000 units were on hand. Let’s prepare the production budget. Let’s prepare the production budget.  The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.  On March 31, 4,000 units were on hand. Let’s prepare the production budget. Let’s prepare the production budget. LO 2

9-28 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units LO 2

9-29 Copyright © 2012 McGraw-Hill Ryerson Limited What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units Quick Check LO 2

9-32 Copyright © 2012 McGraw-Hill Ryerson Limited The Direct Materials Budget DirectMaterialsBudget ProductionBudget Completed The direct materials budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. LO 2

9-33 Copyright © 2012 McGraw-Hill Ryerson Limited The Direct Materials Budget  At Royal Company, five pounds of material are required per unit of product.  Management wants materials on hand at the end of each month equal to 10% of the following month’s production.  On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Let’s prepare the direct materials budget.  At Royal Company, five pounds of material are required per unit of product.  Management wants materials on hand at the end of each month equal to 10% of the following month’s production.  On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Let’s prepare the direct materials budget. LO 2

9-37 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds LO 2

9-38 Copyright © 2012 McGraw-Hill Ryerson Limited How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds Quick Check LO 2

9-41 Copyright © 2012 McGraw-Hill Ryerson Limited Expected Cash Disbursement for Materials  Royal pays $0.40 per pound for its materials.  One-half of a month’s purchases is paid for in the month of purchase; the other half is paid in the following month.  The March 31 accounts payable balance is $12,000. Let’s calculate expected cash disbursements. Let’s calculate expected cash disbursements.  Royal pays $0.40 per pound for its materials.  One-half of a month’s purchases is paid for in the month of purchase; the other half is paid in the following month.  The March 31 accounts payable balance is $12,000. Let’s calculate expected cash disbursements. Let’s calculate expected cash disbursements. LO 2

9-44 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 LO 2

9-45 Copyright © 2012 McGraw-Hill Ryerson Limited What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400 Quick Check LO 2

9-47 Copyright © 2012 McGraw-Hill Ryerson Limited The Direct Labour Budget DirectLabourBudget DirectMaterialsBudget Completed The direct labour budget is a detailed plan showing labour requirements over some specific time period. LO 2

9-48 Copyright © 2012 McGraw-Hill Ryerson Limited The Direct Labour Budget  At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labour.  The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.  In exchange for the “no layoff” policy, workers agree to a wage rate of $10 per hour regardless of the hours worked (no overtime pay).  For the next three months, the direct labour workforce will be paid for a minimum of 1,500 hours per month. Let’s prepare the direct labour budget. Let’s prepare the direct labour budget.  At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labour.  The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.  In exchange for the “no layoff” policy, workers agree to a wage rate of $10 per hour regardless of the hours worked (no overtime pay).  For the next three months, the direct labour workforce will be paid for a minimum of 1,500 hours per month. Let’s prepare the direct labour budget. Let’s prepare the direct labour budget. LO 2

9-51 Copyright © 2012 McGraw-Hill Ryerson Limited The Direct Labour Budget Greater of labour hours required or labour hours guaranteed. Greater of labour hours required or labour hours guaranteed. LO 2

9-53 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000 What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000 LO 2

9-54 Copyright © 2012 McGraw-Hill Ryerson Limited What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000 What would be the total direct labour cost for the quarter if the company follows its no lay-off policy, but pays $15 (time-and-a-half) for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000 Quick Check LO 2

9-55 Copyright © 2012 McGraw-Hill Ryerson Limited The Manufacturing Overhead Budget ManufacturingOverheadBudget DirectLabourBudget Completed The manufacturing overhead budget provides a schedule of all costs of production other than direct materials and direct labour. LO 2

9-56 Copyright © 2012 McGraw-Hill Ryerson Limited Manufacturing Overhead Budget  At Royal, manufacturing overhead is applied to units of product on the basis of direct labour hours.  The variable manufacturing overhead rate is $20 per direct labour hour.  Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget. Let’s prepare the manufacturing overhead budget.  At Royal, manufacturing overhead is applied to units of product on the basis of direct labour hours.  The variable manufacturing overhead rate is $20 per direct labour hour.  Fixed manufacturing overhead is $50,000 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets). Let’s prepare the manufacturing overhead budget. Let’s prepare the manufacturing overhead budget. LO 2

9-60 Copyright © 2012 McGraw-Hill Ryerson Limited The Ending Finished Goods Inventory Budget EndingFinishedGoodsInventoryBudget ManufacturingOverheadBudget Completed After computing unit product costs, the carrying cost of the unsold units is computed on the ending finished goods inventory budget. LO 2

9-65 Copyright © 2012 McGraw-Hill Ryerson Limited The Selling and Administrative Expense Budget SellingandAdministrativeExpenseBudget EndingFinishedGoodsInventoryBudget Completed The selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing. LO 2

9-66 Copyright © 2012 McGraw-Hill Ryerson Limited Selling and Administrative Expense Budget  At Royal, the selling and administrative expenses budget is divided into variable and fixed components.  The variable selling and administrative expenses are $0.50 per unit sold.  Fixed selling and administrative expenses are $70,000 per month.  The fixed selling and administrative expenses include $10,000 in costs – primarily depreciation – that are not cash outflows of the current month. Let’s prepare the company’s selling and administrative expense budget.  At Royal, the selling and administrative expenses budget is divided into variable and fixed components.  The variable selling and administrative expenses are $0.50 per unit sold.  Fixed selling and administrative expenses are $70,000 per month.  The fixed selling and administrative expenses include $10,000 in costs – primarily depreciation – that are not cash outflows of the current month. Let’s prepare the company’s selling and administrative expense budget. LO 2

9-68 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 LO 2

9-69 Copyright © 2012 McGraw-Hill Ryerson Limited What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 What are the total cash disbursements for selling and administrative expenses for the quarter? a. $180,000 b. $230,000 c. $110,000 d. $ 70,000 Quick Check LO 2

9-71 Copyright © 2012 McGraw-Hill Ryerson Limited The Cash Budget CashBudget SellingandAdministrativeExpenseBudget Completed The cash budget pulls together much of the data developed in the preceding steps and displays it in four major sections: receipts, disbursements, cash excess or deficiency, and financing. LO 2

9-72 Copyright © 2012 McGraw-Hill Ryerson Limited Format of the Cash Budget The cash budget is divided into four sections: 1.Cash receipts listing all cash inflows excluding borrowing; 2.Cash disbursements listing all payments excluding repayments of principal and interest; 3.Cash excess or deficiency; and 4.The financing section listing all borrowings, repayments and interest. The cash budget is divided into four sections: 1.Cash receipts listing all cash inflows excluding borrowing; 2.Cash disbursements listing all payments excluding repayments of principal and interest; 3.Cash excess or deficiency; and 4.The financing section listing all borrowings, repayments and interest. LO 2

9-73 Copyright © 2012 McGraw-Hill Ryerson Limited The Cash Budget Royal: l Maintains a 16% open line of credit for $75,000 l Maintains a minimum cash balance of $30,000 l Borrows on the first day of the month and repays loans on the last day of the month l Pays a cash dividend of $49,000 in April l Purchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash) l Has an April 1 cash balance of $40,000 Royal: l Maintains a 16% open line of credit for $75,000 l Maintains a minimum cash balance of $30,000 l Borrows on the first day of the month and repays loans on the last day of the month l Pays a cash dividend of $49,000 in April l Purchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash) l Has an April 1 cash balance of $40,000 LO 2

9-75 Copyright © 2012 McGraw-Hill Ryerson Limited The Cash Budget Direct Labour Budget. Budget. Manufacturing Overhead Budget. Manufacturing Selling and Administrative Expense Budget. Selling and Administrative Expense Budget. Schedule of Expected Cash Disbursements. Schedule of Expected Cash Disbursements. LO 2

9-76 Copyright © 2012 McGraw-Hill Ryerson Limited The Cash Budget Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit. Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on its line-of-credit. LO 2

9-79 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 LO 2

9-80 Copyright © 2012 McGraw-Hill Ryerson Limited What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 Quick Check LO 2

9-82 Copyright © 2012 McGraw-Hill Ryerson Limited The Budgeted Financial Statements Cash Budget Budgeted Financial Statements Completed After we complete the cash budget, we can prepare the budgeted income statement and budgeted balance sheet for Royal. LO 2

9-84 Copyright © 2012 McGraw-Hill Ryerson Limited The Budgeted Balance Sheet Royal reported the following account balances prior to preparing its budgeted financial statements: Land – $50,000 Land – $50,000 Common shares – $200,000 Common shares – $200,000 Retained earnings – $146,150 Retained earnings – $146,150 Equipment – $175,000 Equipment – $175,000 Royal reported the following account balances prior to preparing its budgeted financial statements: Land – $50,000 Land – $50,000 Common shares – $200,000 Common shares – $200,000 Retained earnings – $146,150 Retained earnings – $146,150 Equipment – $175,000 Equipment – $175,000 LO 2

9-85 Copyright © 2012 McGraw-Hill Ryerson Limited 11,500 lbs. at $0.40/lb. 11,500 lbs. at $0.40/lb. 5,000 units at $4.99 each. 5,000 units at $4.99 each. 50% of June purchases of $56,800. 50% of June purchases of $56,800. 25% of June sales of $300,000. 25% of June sales of $300,000. LO 2

9-87 Copyright © 2012 McGraw-Hill Ryerson Limited Static budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. Static Budgets and Performance Reports LO 3

9-88 Copyright © 2012 McGraw-Hill Ryerson Limited Flexible Budgets Improve performance evaluation. May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Reveal variances related to cost control. Let’s look at CheeseCo. LO 3

9-94 Copyright © 2012 McGraw-Hill Ryerson Limited I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity. So, shouldn’t variable costs be lower if actual activity is lower? Static Budgets and Performance Reports LO 3

9-95 Copyright © 2012 McGraw-Hill Ryerson Limited The relevant question is... “How much of the favourable cost variance is due to lower activity, and how much is due to good cost control?” To answer the question, we must the budget to the actual level of activity. The relevant question is... “How much of the favourable cost variance is due to lower activity, and how much is due to good cost control?” To answer the question, we must the budget to the actual level of activity. Static Budgets and Performance Reports LO 3

9-96 Copyright © 2012 McGraw-Hill Ryerson Limited Preparing a Flexible Budget To a budget we need to know that:  Total variable costs change in direct proportion to changes in activity.  Total fixed costs remain unchanged within the relevant range. Fixed Variable LO 3

9-98 Copyright © 2012 McGraw-Hill Ryerson Limited Preparing a Flexible Budget Fixed costs are expressed as a total amount. Variable costs are expressed as a constant amount per hour. $40,000 ÷ 10,000 hours is $4.00 per hour. CheeseCo LO 3

9-102 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. LO 3

9-103 Copyright © 2012 McGraw-Hill Ryerson Limited What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. What should be the total overhead costs for the Flexible Budget at 12,000 hours? a. $92,500. b. $89,000. c. $106,800. d. $104,000. Quick Check Total overhead cost = $14,000 + $7.50 per hour  12,000 hours = $14,000 + $90,000 = $104,000 LO 3

9-107 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F LO 4

9-108 Copyright © 2012 McGraw-Hill Ryerson Limited What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F What is the variance for indirect labour when the flexible budget for 8,000 hours is compared to the actual results? a. $2,000 U b. $2,000 F c. $6,000 U d. $6,000 F Quick Check LO 4

9-110 Copyright © 2012 McGraw-Hill Ryerson Limited Quick Check What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F LO 4

9-111 Copyright © 2012 McGraw-Hill Ryerson Limited What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F What is the variance for indirect material when the flexible budget for 8,000 hours is compared to the actual results? a. $1,500 U b. $1,500 F c. $4,500 U d. $4,500 F Quick Check LO 4

9-113 Copyright © 2012 McGraw-Hill Ryerson Limited Remember the question: “How much of the total variance is due to lower activity and how much is due to cost control?” Flexible Budget Performance Report LO 4

9-115 Copyright © 2012 McGraw-Hill Ryerson Limited Difference between original static budget and actual overhead = $11,650 F. Overhead Variance Analysis Let’s place the flexible budget for 8,000 hours here. Flexible Budget Performance Report LO 4

9-116 Copyright © 2012 McGraw-Hill Ryerson Limited Overhead Variance Analysis This $15,000F variance is due to lower activity. Activity This $3,350U variance is due to poor cost control. Cost control Flexible Budget Performance Report LO 4

9-117 Copyright © 2012 McGraw-Hill Ryerson Limited Budgeting for Not-for-Profit Entities With not-for-profit (NFP) entities, there is often no relationship between revenues expected to be received and expenditures expected to be incurred. Examples of NFP entities: municipal, provincial and federal governments, hospitals, universities, voluntary associations, etc. Examples of NFP entities: municipal, provincial and federal governments, hospitals, universities, voluntary associations, etc. The profit motive is replaced with a service orientation in NFP organizations. Budget information is gathered to assist in decisions regarding what programs and expenditures the entity will undertake. LO 5

9-118 Copyright © 2012 McGraw-Hill Ryerson Limited International Aspects of Budgeting When a multinational company enters into the budgeting process there are at least three major problems that must be dealt with... 1.Fluctuations in foreign currency exchange rates. 2.High inflation rates. 3.Local economic conditions and governmental policies. LO 5

Copyright © 2012 McGraw-Hill Ryerson Limited 9-1 PowerPoint Author: Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance.

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Copyright © 2012 McGraw-Hill Ryerson Limited 9-1 PowerPoint Author: Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance.

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