1. Copyright © 2008 Prentice Hall All rights reserved 10-1 The Master Budget and Responsibility Accounting Chapter 10

2. Copyright © 2008 Prentice Hall All rights reserved 10-2 Objective 1 Learn why managers use a budget

3. Copyright © 2008 Prentice Hall All rights reserved 10-3 Benefits of Budgeting Budgets force managers to plan Budgets promote coordination and communication Budgets provide a benchmark that motivates employees and helps managers evaluate performance

4. Copyright © 2008 Prentice Hall All rights reserved 10-4 Master Budget Set of budgeted financial statements and supporting schedules for the entire organization

5. Copyright © 2008 Prentice Hall All rights reserved 10-5 Master Budget Includes 3 Types of Budgets 1.Operating budget 2.Capital expenditures budget 3.Financial budget

6. Copyright © 2008 Prentice Hall All rights reserved 10-6 Operating Budget Sales budget Operating expense budget Purchases & cost of goods sold budget Inventory budget Budgeted income statement

7. Copyright © 2008 Prentice Hall All rights reserved 10-7 Capital Expenditures and Financial Budget Budgeted income statement Cash budget Budgeted balance sheet Budgeted statement of cash flows Capital expenditures budget Financial budget

8. Copyright © 2008 Prentice Hall All rights reserved 10-8 Objective 2 Prepare an operating budget

9. Copyright © 2008 Prentice Hall All rights reserved 10-9 Sales Budget Plan for sales revenues in a future period Budgeted sales revenue = sale price per unit x expected number of units to be sold

10. Copyright © 2008 Prentice Hall All rights reserved 10-10 S10-3 Sales Budget Example Grippers Sales Budget JanuaryFebruaryTotal Sales price/pair$185$220 Number of pairsx 4,000x3,500 Total sales$740,000$770,000$1,510,000

11. Copyright © 2008 Prentice Hall All rights reserved 10-11 Purchases = Cost of goods sold + Ending inventory– Beginning inventory Inventory, Purchases, and Cost of Goods Sold Budget Cost of goods sold = Beginning inventory + Purchases– Ending inventory KnownCompute Unknown

12. Copyright © 2008 Prentice Hall All rights reserved 10-12 S10-4 Inventory, Purchases and COGS Budget Grippers Inventory, Purchases, & Cost of Goods Sold Budget JanuaryFebruary Cost of goods sold (65%)$481,000$500,500 + Desired ending inventory ($10,000 + (50% x CGS for next month))260,250345,400 Total inventory required$741,250$845,900 - Beginning inventory(250,500)(260,250) Purchases Hint: Rearrange the cost of goods sold equation so that Purchases = COGS + Ending Inventory – Beginning Inventory

13. Copyright © 2008 Prentice Hall All rights reserved 10-13 Objective 3 Prepare a financial budget

14. Copyright © 2008 Prentice Hall All rights reserved 10-14 Financial Budget Components Cash budget Budgeted balance sheet Budgeted statement of cash flows

15. Copyright © 2008 Prentice Hall All rights reserved 10-15 Cash Budget Components Cash receipts and cash payments for a future period The Cash Budget has 5 major parts  Collections from customers  Cash payments for purchases  Cash payments for operating expenses  Cash payments for capital expenditures  Cash Financing – borrowings, repayments and interest

16. Copyright © 2008 Prentice Hall All rights reserved 10-16 Cash Payment Components Cash payments  For inventory purchases  For operating expenses  Purchase long-term assets  Payment on loans  Payment to owners

17. Copyright © 2008 Prentice Hall All rights reserved 10-17 Cash Budget Minimum Requirement Beginning cash balance + Cash receipts = Cash available - Cash payments (for inventory, operating expenses, purchase of long-term assets) = Ending balance before financing - Minimum balance = Excess (deficiency)

18. Copyright © 2008 Prentice Hall All rights reserved 10-18 Cash Budget Financing Section Financing: +Borrow - Principal payments - Interest expense Total Effects of financing Ending Cash Balance

19. Copyright © 2008 Prentice Hall All rights reserved 10-19 Cash receipts Jan Feb Cash sales Credit sales: 30% current month 60% prior month 6% 2 months ago Total cash collections$548,330.00$716,671.25 $192,500.00 S10-5: Cash Collections $770,000 x 25% $185,000.00 173,250.00 166,500.00 $740,000 x 25% 179,212.50333,000.00 17,617.5017,921.25 $740,000 x 75% x 30%$770,000 x 75% x 30% $398,250 x 75% x 60%$740,000 x 75% x 60% $391,500 x 75% x 6% $398,250 x 75% x 6%

20. Copyright © 2008 Prentice Hall All rights reserved 10-20 S10-6: Continuation of Cash Budget January Beginning cash balance$8,300 + Cash receipts548,330 = Cash available$556,630 - Cash payments(583,200) = Ending balance before financing$(26,570) - Minimum balance (7,500) = Excess (deficiency)$(34,070)

21. Copyright © 2008 Prentice Hall All rights reserved 10-21 Cost of Goods Sold Schedule AugSept Beginning inventory$90,000 +Purchases121,000 =Goods available for sale$211,000 -Ending inventory(91,000) =Cost of goods sold$120,000 P10-35B: Prepare a Budgeted Income Statement–Cost of Goods Sold Section $91,000 124,000 $215,000 (94,000) $121,000

22. Copyright © 2008 Prentice Hall All rights reserved 10-22 P10-35B: Prepare a Budgeted Income Statement–Operating Expense Section Operating Expense Budget Aug Sept Salary, fixed amount $15,000 $15,000 Commission 12,000 12,000 Total$27,000$27,000 Rent expense13,000 13,000 Depreciation expense4,0004,000 Insurance expense1,0001,000 Total$45,000$45,000

23. Copyright © 2008 Prentice Hall All rights reserved 10-23 P10-35B: Budgeted Income Statement Go Sports Budgeted Income Statements August and September 2009 AugustSeptember Sales revenue$202,000$206,000 Cost of goods sold?? Gross profit$82,000$85,000 Operating expenses45,000 Operating income$37,000$40,000 Income tax expense 11,000 12,000 Net income$ 26,000$ 28,000 Hint: What is the equation to determine gross profit for a merchandising company?

24. Copyright © 2008 Prentice Hall All rights reserved 10-24 P10-36B: Cash Budget–Collections Budgeted Cash Collections from Customers AugSept Total Cash sales$101,000$103,000 Collection of last month’s98,000101,000 Total collections$199,000$204,000$403,000

25. Copyright © 2008 Prentice Hall All rights reserved 10-25 P10-31B: Cash Budgets–Payments for Purchases Budgeted Cash Payments for Purchases AugSept Total 40% last month’s$52,000$48,480 60% this month’s72,72074,160 Total payments$124,720$122,640$247,360

26. Copyright © 2008 Prentice Hall All rights reserved 10-26 P10-31B: Cash Payments for Operating Expenses Budgeted Cash Payments for Operating Expenses AugSept Total Salaries & commissions: 25% last month’s$6,750$6,780 75% this month’s20,34020,520 Rent13,00013,000 Total payments$40,090$40,300$80,390

27. Copyright © 2008 Prentice Hall All rights reserved 10-27 P10-31B: Prepare a Cash Budget Go Sports Cash Budget Aug Sept Beginning cash balance$22,000 Cash collections from customers199,000 Cash available$221,000 Cash payments: Purchase inventory124,720 Operating expenses40,090 Total cash payments164,810 Ending cash balance$56,190 $56,190 204,000 $260,190 122,640 40,300 162,940 $97,250

28. Copyright © 2008 Prentice Hall All rights reserved 10-28 E10-21: Budgeted Balance Sheet Marine.com Budgeted Balance Sheet March 31, 2009 ASSETS Current Assets: Cash (click here for computations)$ 7,900(click here for computations) Accounts receivable (0.25  $12,200)3,050 Inventory 15,000$25,950 Plant assets: Furniture and fixtures34,800 Accumulated depreciation (30,470) 4,330 Total assets$30,280

29. Copyright © 2008 Prentice Hall All rights reserved 10-29 E10-21: Budgeted Balance Sheet Marine.com Budgeted Balance Sheet March 31, 2009 LIABILITIES Current liabilities: Accounts payable$ 4,300 Total liabilities$ 4,300 OWNERS' EQUITY Owners' equity (click here for computations) 25,980(click here for computations) Total liabilities and owners' equity$30,280

30. Copyright © 2008 Prentice Hall All rights reserved 10-30 E10-21: Budgeted Balance Sheet Cash beginning balance$11,400 Cash receipts14,300 Payments for inventory(4,600) Payments for operating expenses(8,200) Payments for taxes(5,000) Cash balance$7,900 Back

31. Copyright © 2008 Prentice Hall All rights reserved 10-31 E10-21: Budgeted Balance Sheet Owner’s equity: Beginning balance$26,700 Sales revenue12,200 Cost of goods sold(7,320) Depreciation expense(600) Other expenses(5,000) Ending balance$25,980 Back

32. Copyright © 2008 Prentice Hall All rights reserved 10-32 Objective 4 Use sensitivity analysis in budgeting

33. Copyright © 2008 Prentice Hall All rights reserved 10-33 Budgeting and Sensitivity Analysis Helps managers plan for different courses of action using “what-if” techniques Use of technology and budget software

34. Copyright © 2008 Prentice Hall All rights reserved 10-34 Objective 5 Prepare performance reports for responsibility centers

35. Copyright © 2008 Prentice Hall All rights reserved 10-35 Responsibility Accounting System for evaluating performance of managers and activities they supervise Responsibility center  a part, segment or subunit of an organization whose manager is accountable for its activities

36. Copyright © 2008 Prentice Hall All rights reserved 10-36 Cost center – Reports costs only Revenue center – Reports revenues only Profit center – Reports revenues, expenses and net income or loss Investment center – Reports revenues, expenses, income or loss and investment used Responsibility Center

37. Copyright © 2008 Prentice Hall All rights reserved 10-37 E10-27: Types of Responsibility Centers a.Profit center b.Investment center (or possibly a profit center) c.Cost center d.Profit center e.Cost center f.Profit center g.Investment center h.Revenue center

38. Copyright © 2008 Prentice Hall All rights reserved 10-38 Responsibility Accounting Performance reports compare budgeted and actual amounts Management by exception – management technique that focuses on important differences between budget and actual

39. Copyright © 2008 Prentice Hall All rights reserved 10-39 E10-28: Prepare Performance Reports at Different Organizational Levels In Touch Responsibility Accounting Performance Report (Amounts in thousands) September 2009 Manager – All handheld devices BudgetActualVariance Operating income: PDAs$ 75$ 60$(15) Cell Phones 474 519 45 Total operating income$549$579$ 30

40. Copyright © 2008 Prentice Hall All rights reserved 10-40 E10-28: Continued Assistant Manager – cell phones BudgetActualVariance Operating income: Video Cell Phones$410$440$30 Digital Cell Phones 64 79 15 Total operating income$474$519$45

41. Copyright © 2008 Prentice Hall All rights reserved 10-41 E10-28 Continued Assistant Manager – DIGITAL CELL PHONES BudgetActualVariance Revenues and expenses: Revenues$204$214$10 Expenses 140 135 5 Operating income$ 64$ 79$15

42. Copyright © 2008 Prentice Hall All rights reserved 10-42 End of Chapter 10