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Learning Objectives (1 of 2)
• Explain why budgeting is important
• Describe how strategic planning is related to budgeting
• Identify the starting point of a master budget and explain why it is the starting point
• Prepare various master budget schedules and explain how they relate to one another
Learning Objectives (2 of 2)
• Explain why the cash budget is important in
the master budgeting process
• List the benefits provided by a budget
• (Appendix) Explain how a budget manual
facilitates the budgeting process
Terms
• Budgeting - Formalizes plans and translates
qualitative narratives into a documented,
quantitative format
• Budget - Expresses a commitment to
planned activities and resource acquisition
and use
Strategic Planning
• Long-term (5 to 10 years)
• Top-level management
• Long-range goals, strategies, and policies
• Foundation for short-term planning
• Identify and gather information on key
variables, both internal and external
Strategic
Planning
Strategic Planning
Effective strategic planning requires that managers build
plans and budgets that integrate external considerations and
influences with internal factors
Strategic
Planning
External Key Variables
• Competitor actions
• U.S. market conditions
• U.S. political/regulatory climate
• Emerging technology issues
• Consumer trends and attitudes
• International market conditions
• Demographics
• International political/regulatory climate
Strategic
Planning
Tactical Plans
• Short-term (1 to 18 months)
• Top and middle management
• Specific objectives and means to achieve
strategic plans
• Basis against which results can be measured
Tactical
Planning
Budgets
• Communicate objectives, constraints, and
expectations
• Provide financial predictions
• Provide nonfinancial performance goals and
objectives
• Identify potential difficulties
• Determine resource allocation and constraints
• Permit control through budget-to-actual
comparisons
Budget
Budgeting
• Short-term
• Top, middle, and operational management involvement
• Usable guidelines to implement strategic and tactical plans
• Allocates resources
• Standard against which performance can be measured
Budget
Planning Relationships
Strategic
Planning
Tactical
Planning
Budget
Top
Management
Top and
Middle
Management
Top, Middle,
and
Operational
Management
The Control Phase
• Actual-to-budget comparisons
• Determining and investigating variances
• Corrective action
• Feedback to operating managers
Budget
The Master Budget
• A comprehensive set of budgets, budgetary
schedules, and pro forma organizational
financial statements
• For a specific period of time
• Static – based on a single level of output
demand
• Interactive – departments generate and
consume information
The Master Budget
Operating Budgets Financial BudgetsSales Budget
Production Budget
Purchases Budget
Direct Labor Budget
Overhead Budget
Selling & Administrative Budget
Cash Budget
Capital Expenditures
BudgetBalance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained Earnings
Budget
Sales Forecast
• Ask sales personnel
• Extrapolate past trends
• Use market research
• Employ statistical models
and simulation
Sales
Forecast
Production Budget
• Production manager combines
– Sales estimates
– Beginning inventory targets
– Ending inventory targets
• Determines the types, quantities, and timing
of products to be manufactured
Ending Inventory Policy
• Percentage of next period’s projected sales
• Constant amount
• Increasing amount
• Near-zero in just-in-time systems
Cost of holding inventory includes storage,
insurance, obsolescence, shrinkage, damage
Production Budget
Finished Good Units
Units to be sold (from sales budget)
+ Desired ending inventory
= Total units needed during period
- Units in beginning inventory
= Units to be produced
Purchases Budget
Units to be produced (from production budget)
+ Desired ending inventory
= Total needed
- Beginning inventory
= Units for which purchases are required
* Quantity required per unit
= Quantity to purchase
* Price per pound
= Total cost of purchases
Direct Labor Budget
• Total number of people
• Specific types of workers
• Production hours needed
• Costs
– Union contracts
– Minimum wage laws
– Fringe benefit costs
– Payroll taxes
Direct Labor Budget
Units to be produced (or DM components)
* Standard time allowed per unit
= Standard labor time allowed
* Per hour direct labor cost
= Total direct labor cost
The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
Overhead Budget
• Identify activity base
• Estimate overhead costs
• Separate costs as fixed or variable
• Show total costs for operating budgets
• Show costs without depreciation for cash
budgets
Overhead Budget
Predicted activity base
* Variable overhead rate per unit of activity
= Total variable overhead cost
+ Fixed overhead cost
= Total overhead cost
= Total cost without depreciation
The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
Selling and
Admin
Budget
Selling and Administrative Budget
Predicted sales dollars (or other measure)
* Variable S&A rate per dollar
= Total variable overhead cost
+ Fixed S&A cost
= Total S&A cost
= Total cost without depreciation
Cash Budget
• Highlights importance of cash for organization’s continued existence
• Translates accrual-based information into cash flows
• Indicates effectiveness of credit practices
• Allows for planned cash borrowing or investing
• Used to prepare pro forma Cash Flow Statement
Cash Budget
Beginning cash balance
+ Cash receipts (collections)
= Cash available for disbursements
- Cash disbursements
= Cash excess or deficiency
- Minimum desired cash balance
= Cash needed/available for investment or loan
repayment
+/- Various financing measures
= Ending cash balance
Cash Collections/Disbursements
• Collections
– Sales
• Cash
• Accounts Receivable
• Disbursements
– Purchases
• Cash
• Accounts Payable
Receipts/Disbursements
From Jan Feb Mar Total
Nov
Dec
Jan
Feb
Mar
Total
Cash Collections/Disbursements
Reduced by discounts andestimated
uncollectible accounts
Percentage of cash
received/paid during the month
How to Improve Cash Flow
• Establish sound credit
practices
• Expedite fulfillment and
shipping
• Bill promptly and accurately
• Offer discounts for prompt
payments
• Aggressively follow up on
past due accounts
• Deposit payments promptly
• Seek better payment terms
from suppliers/banks
• Keep tight control of
inventory
• Review and reduce expenses
• Pay bills on time but never
before they are due
NY State Society CPAs
The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement/
COGMfg
Statement of
Retained Earnings
The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement/
COGMfg
Statement of
Retained Earnings Balance Sheet
The Financial Budget
Operating Budget
Cash Budget
Capital
BudgetIncome
Statement/
COGMfg
Statement of
Retained Earnings Balance Sheet
Statement of
Cash Flows
Budgets Provide
• Guide to align activities and resources with
organizational goals
• Vehicle to promote employee participation,
cooperation, and departmental coordination
• Tool to enhance planning, controlling,
problem solving, and evaluating
Budget
Budgeting Provides
• Basis to sharpen responsiveness to internal
and external factors
• Model to view future performance and
consider alternative measures
• Benchmark to judge organizational
effectiveness and efficiency
Budget
Budgeting Terms
• Continuous budgeting
• Budget slack
– intentional underestimation of revenue
– intentional overestimation of expenses
Budgeting Terms
• Continuous budgeting
• Budget slack
• Participatory budget
– developed by top management and operating
personnel
Budgeting Terms
• Continuous budgeting
• Budget slack
• Participatory budget
• Imposed budgets
– developed by top management
– imposed on operating personnel
Activity Budget
• Connect line items in budget to list of
activities
• Raise awareness of non-value-added
activities
• Question and reduce non-value-added costs
Budget
Budget Manual
• Statements of budgetary purpose and its
desired results
• Listing of specific budgetary activities to be
performed
• Calendar of scheduled budgetary activities
• Sample of budgetary forms
• Original, revised, and approved budgets
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