Cost Management ACCOUNTING AND CONTROL

Cost ManagementACCOUNTING AND CONTROL HANSEN & MOWEN

8 CHAPTER Budgeting for Planning and Control

1 OBJECTIVE The Role of Budgeting in Planning and Control The Master Budget and Its Interrelationships

1 OBJECTIVE The Role of Budgeting in Planning and Control Purposes of Budgeting: Forces managers to plan. Provides information to improve decision making. Sets benchmarks for performance evaluation. Improves communication and coordination.

1 OBJECTIVE The Role of Budgeting in Planning and Control Components of the Master Budget

1 OBJECTIVE The Role of Budgeting in Planning and Control The master budget starts with the sales forecast, which is basis for the sales budget. All other operating and most financial budgets are generated from the sales budget. Production Budget Direct Materials Purchase Budget Cost of Goods Sold Budget Cash Budget

2 OBJECTIVE Preparing the Operating Budget The first budget is the sales budget which is based on the sales forecast. Schedule 1 (in thousands) Starting point for Production Budget Starting point for Marketing Expense Budget Goes to Budgeted Income Statement

2 OBJECTIVE Preparing the Operating Budget Schedule 2 (in thousands) Starting point for Direct Materials Purchases Budget Starting point for Direct Labor Budget

2 OBJECTIVE Preparing the Operating Budget Schedule 3 (in thousands) Goes to Cost of Goods Sold Budget

2 OBJECTIVE Preparing the Operating Budget Schedule 4 (in thousands) Starting point for Overhead Budget Goes to Cost of Goods Sold Budget

2 OBJECTIVE Preparing the Operating Budget Schedule 5 (in thousands) Goes to Cost of Goods Sold Budget

2 OBJECTIVE Preparing the Operating Budget Schedule 6 (in thousands) aAmounts taken from Schedule 3. bAmounts taken from Schedule 4. cAmounts taken from Schedule 5. dBudgeted fixed overhead (Schedule 5)/Budgeted direct labor hours (Schedule 4) = $1,280/240 = $5.33. Goes to Cost of Goods Sold Budget

2 OBJECTIVE Preparing the Operating Budget Schedule 7 (in thousands) *Production needs  $0.01 = 416,000  $0.01. Goes to Budgeted Income Statement

2 OBJECTIVE Preparing the Operating Budget Schedule 8 (in thousands) Goes to Budgeted Income Statement

2 OBJECTIVE Preparing the Operating Budget Schedule 11 (in thousands)

3 OBJECTIVE Preparing the Financial Budget Cash flows are critical to managing a business and the lifeblood of an organization. Therefore, the cash budget is one of the most important budgets in the master budget. The Cash Budget

3 OBJECTIVE Preparing the Financial Budget Schedule 12 (in thousands) (Continued on next slide)

3 OBJECTIVE Preparing the Financial Budget Schedule 12 (in thousands) (Continued from previous slide) (Continued on next slide)

3 OBJECTIVE Preparing the Financial Budget Schedule 12 (in thousands) (Continued from previous slide)

3 OBJECTIVE Preparing the Financial Budget

3 OBJECTIVE Preparing the Financial Budget Schedule 13 (in thousands) aEnding balance from Schedule 12. b30 percent of fourth-quarter credit sales (0.30  $800,000)—see Schedules 1 and 12. cFrom Schedule 3 (5,000,000 lbs.  $0.01). dFrom Schedule 6. eFrom the December 31, 2006, balance sheet. fDecember 31, 2006, balance ($9,000,000) plus new equipment acquisition of $600,000 (see the 2006 ending balance sheet and Schedule 12). gFrom the December 31, 2006, balance sheet and Schedules 5, 8, and 10 ($4,500,000 + $800,000 +$20,000 + $40,000). h20 percent of fourth-quarter purchases (0.20  $520,000)—see Schedules 3 and 12. iFrom the December 31, 2006, balance sheet. j$6,825,000 + $894,000 (December 31, 2006, balance plus net income from Schedule 11).

4 OBJECTIVE Flexible Budgets for Planning and Control Static budgets are master budgets that are developed around a particular level of activity.

4 OBJECTIVE Flexible Budgets for Planning and Control Performance Report: Quarterly Production Costs (in thousands)

4 OBJECTIVE Flexible Budgets for Planning and Control Flexible budgets provide expected costs for a range of activity or the actual level of activity.

4 OBJECTIVE Flexible Budgets for Planning and Control Flexible Production Budget (in thousands)

4 OBJECTIVE Flexible Budgets for Planning and Control Managers can locate possible problem areas by examining the variances revealed on a performance report that compares budgeted costs for the actual level of activity to the actual costs for the same level.

4 OBJECTIVE Flexible Budgets for Planning and Control Actual versus Flexible Performance Report: Quarterly Production Costs (in thousands)

4 OBJECTIVE Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

4 OBJECTIVE Flexible Budgets for Planning and Control Activity Flexible Budget

4 OBJECTIVE Flexible Budgets for Planning and Control Activity-Based Performance Report The activity-based performance report compares the budgeted costs for actual activity usage with the actual costs.

5 OBJECTIVE Activity-Based Budgets The activity-based budget begins with output and then determines the resources necessary to created that output. It works backwards from activities and their drivers to the underlying costs.

5 OBJECTIVE Activity-Based Budgets Traditional Budget for the Secure-Care Department

5 OBJECTIVE Activity-Based Budgets Flexible Budget for the Secure-Care Department

5 OBJECTIVE Activity-Based Budgets Activity-Based Budget for the Secure-Care Department

6 OBJECTIVE The Behavioral Dimension of Budgeting • Characteristics of a Good Budgetary System • Frequent feedback on performance • Monetary and nonmonetary incentives • Participative budgeting • Realistic standards • Controllability of costs • Multiple measures of performance

End of Chapter 8

Cost Management ACCOUNTING AND CONTROL