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LEARNING OBJECTIVES

LEARNING OBJECTIVES. When you finish this chapter, you should be able to. LEARNING OBJECTIVES. Describe nature & objectives of budgeting. Describe master budget for manufacturing business. Describe nature & use of standards. Explain & illustrate how standards are used in budgeting.

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LEARNING OBJECTIVES

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  1. LEARNING OBJECTIVES When you finish this chapter, you should be able to

  2. LEARNING OBJECTIVES • Describe nature & objectives of budgeting. • Describe master budget for manufacturing business. • Describe nature & use of standards. • Explain & illustrate how standards are used in budgeting. Continued

  3. LEARNING OBJECTIVES • Calculate & interpret basic variances for direct materials & direct labor. • Explain how standards can be used for non-manufacturing expenses. • Explain & provide examples of nonfinancial performance measures.

  4. LEARNING OBJECTIVE 1 Describe nature, objectives of budgeting.

  5. LO 1 BUDGETING • Budget: Business plan in financial terms • Budgeting involves • Establishing specific goals • Executing plans to achieve goals • Periodically comparing results with goals

  6. LO 1 EXHIBIT 1

  7. LO 1 HUMAN BEHAVIOR & BUDGETING • Importance of setting a reasonable budget • Budgets set too tightly discourage employees when expectations too high • Budgets set too loosely leads to budgetary slack, “padding” • Spend it or loose it • Budgetary conflict means goals not met

  8. LO 1 CONTINUOUS BUDGETING SYSTEMS Continuous budgeting means maintaining a 12-month projection into future

  9. LO 1 EXHIBIT 3 Static budgeting means not changing a budget even if circumstances change

  10. LO 1 EXHIBIT 4 Flexible budgeting means showing budget results for different levels of activity

  11. LO 1 EXHIBIT 5 Flexible budgeting adjustments produce lower actual-to-budget differences

  12. LEARNING OBJECTIVE 2 Describe master budget for manufacturing business.

  13. LO 2 What is a master budget? A master budget is a combination of budgets linked to form budgeted income statement & budgeted balance sheet.

  14. LO 2 Income Statement Budgets EXHIBIT 6

  15. LO 2 Sales budget sets level of sales & selling price for 2 products: 528,000 wallets selling for $12 & 260,000 handbags selling for $25.

  16. LO 2 EXHIBIT 7 Sales budget created from decisions about # units sold & selling price.

  17. LO 2 Production budget derived from the sales budget requirements, provides input to 3 subsidiary budgets: direct materials, direct labor, factory overhead.

  18. LO 2 EXHIBIT 8 Production budget created from decisions about sales projections & inventory levels.

  19. LO 2 EXHIBIT 9 Direct materials budget created from decisions about sales projections & production levels.

  20. LO 2 EXHIBIT 10 Direct labor budget created from decisions about sales projections & production levels.

  21. LO 2 EXHIBIT 11 Factory overhead budget created from decisions about sales projections & production levels.

  22. LO 2 Cost of goods sold budget, derived from the sales & production budgets, includes beginning finished goods & work in process inventories and subtracts ending finished goods & work in processinventories.

  23. LO 2 EXHIBIT 12

  24. LO 2 EXHIBIT 13 Selling & Administrative budget is created independently.

  25. LO 2 EXHIBIT 14 Selling & Administrative budget is combined with Cost of Goods Sold budgets to form budgetedIncome Statement.

  26. LO 2 How many budgets make up the budgetedBalance Sheet?

  27. LO 2 2 budgets make up abudgeted Balance Sheet: Cash budget projects operating cash inflows & outflows Capital expenditures budget projects cash outflows for PPE.

  28. LO 2 Schedule of cash collections projects cash inflows from sales. EXHIBIT 15

  29. LO 2 EXHIBIT 16 Schedule of cash payments projects cash outflows for manufacturing costs.

  30. LO 2 Cash budget for 3 months based on projections of cash collections & payments. EXHIBIT 17

  31. LO 2 EXHIBIT 18 Capital Expenditure budget projects capital spending needs over 5 years.

  32. LEARNING OBJECTIVE 3 Describe nature, use of standards.

  33. LO 3 STANDARDS • Standards are performance goals • Standard costs systems • Provide a measure for performance • Allow measurement of variances from performance goals • Standards should be revised as necessary

  34. MEASURING CHANGES IN UNIT VARIABLE COSTS LO 3 Given: Fixed costs = $840,000; unit CM = $250 – 145 = $105 Break-even sales = $600,000 / 20 = 8,000 units 840,000 / {105 – ($250*2%)} = 8,400 When unit variable cost increased by $5, break-even units increased by 400.

  35. LEARNING OBJECTIVE 4 Explain, illustrate how standards are used in budgeting.

  36. LO 4 Budgetary performance evaluation compares actual performance to budget projections.

  37. LO 4 EXHIBIT 19 Standard costs for XL Jeans.

  38. LO 4 EXHIBIT 20 Budgetary performance evaluation for XL Jeans.

  39. LEARNING OBJECTIVE 5 Calculate, interpret basic variances for direct materials & direct labor.

  40. LO 5 Total difference between actual & budget is made up of variances in direct materials, labor and factory overhead.

  41. LO 5 Variances that make up Total Manufacturing Cost Variance.

  42. DIRECT MATERIALS VARIANCES: XL Jeans LO 5 Price standard = $5/yard Quantity standard = 1.5 yards/pair of jeans Direct Materials Standard Cost (5,000 pr.) = $36,500 Production: 5,000 pairs of jeans | Actual = Standard materials = 5,000 * 1.5 = 7,500 yards material | 7,300 * $5.50 = Standard Price = 7,500 * $5 = $37,500 | $40,150 ($5.50 - $5) * 7,300 = $3,650 U (7,500 – 7,300) * $5 = $1,000 F

  43. LO 5 EXHIBIT 21 Total Materials Variance = $3,650U + $1,000F = $2,650U

  44. DIRECT MATERIALS VARIANCES: XL Jeans LO 5 Rate standard = $9/hour Time standard = .8 hour/pair of jeans Direct Labor Standard Cost (5,000 pr.) = $36,000 Production: 5,000 pairs of jeans | Actual = Standard time = 5,000 * .8 = 4,000 labor hours | 3,850 * $10 = Standard rate = $9* 4,000= $36,000 | $38,500 ($10 - $9) * 3,850 = $3,850 U (4,000 – 3,850) * $9 = $1,350 F

  45. LO 5 EXHIBIT 22 Total Labor Variance = $3,850U + $1,350F = $2,500U

  46. LEARNING OBJECTIVE 6 Explain how standards can be used for non-manufacturing expenses.

  47. LO 6 Standards for non-manufacturing costs (selling & administrative expenses) are unusual unless they are repetitive and produce a common output.

  48. LEARNING OBJECTIVE 7 Explain, provide examples of non-financial performance measures.

  49. LO 7 Non-financial measures can augment financial measures for performance evaluation to avoid goal conflicts.

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