chapter 8 ppt
TRANSCRIPT
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Chapter 8
The Master Budget
Cost AccountingFoundations and Evolutions
Kinney, Prather, Raiborn
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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
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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
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Management
Planning is the cornerstone of effective management
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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
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The Planning Process
Strategic
Planning
Tactical
Planning
Budget
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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
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Strategic Planning
Effective strategic planning requires that managers build
plans and budgets that integrate external
considerations and influences with internal factors
Strategic
Planning
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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
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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
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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
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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
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Planning Relationships
Strategic
Planning
Tactical
Planning
Budget
Top Management
Top and Middle
Management
Top, Middle, and
OperationalManagement
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The Control Phase
• Actual-to-budget comparisons
• Determining and investigating variances
• Corrective action
• Feedback to operating managers
Budget
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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
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The Master Budget
Operating Budgets Financial BudgetsSales BudgetProduction BudgetPurchases BudgetDirect Labor BudgetOverhead Budget
Selling & Administrative Budget
Cash BudgetCapital Expenditures
BudgetBalance SheetIncome Statement
Statement of Cash Flows
Statement of Retained Earnings
Budget
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The Operating Budget
Sales Budget
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Sales Forecast
• Ask sales personnel
• Extrapolate past trends
• Use market research
• Employ statistical models and simulation
SalesForecast
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Sales Budget
Units to be sold
* Selling price per unit
= Dollars of sales
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The Operating Budget
Sales Budget
Production Budget
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Production Budget
• Production manager combines– Sales estimates– Beginning inventory targets– Ending inventory targets
• Determines the types, quantities, and timing of products to be manufactured
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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
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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
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The Operating Budget
Sales Budget
Production Budget
Purchases Budget
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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
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The Operating Budget
Sales Budget
Production Budget
Direct Labor Budget
Purchases Budget
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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
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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
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The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
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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
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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
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The Operating Budget
Sales Budget
Production Budget
Overhead Budget
Direct Labor Budget
Purchases Budget
Selling and Admin Budget
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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
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The Financial Budget
Operating Budget
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The Financial Budget
Operating Budget
Cash Budget
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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
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Cash BudgetBeginning 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
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Cash Collections/Disbursements
• Collections– Sales
• Cash
• Accounts Receivable
• Disbursements– Purchases
• Cash
• Accounts Payable
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Receipts/Disbursements
From Jan Feb Mar Total
Nov
Dec
Jan
Feb
Mar
Total
Cash Collections/Disbursements
Reduced by discounts and
estimated uncollectible
accounts
Percentage of cash
received/paid during the
month
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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
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The Financial Budget
Operating Budget
Cash Budget
Capital Budget
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Capital Budget
• Long-term fixed asset needs– Plant– Equipment
• Payment points
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The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement/COGMfg
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The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement/COGMfg
Statement of Retained Earnings
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The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement/COGMfg
Statement of Retained Earnings Balance Sheet
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The Financial Budget
Operating Budget
Cash Budget
Capital BudgetIncome
Statement/COGMfg
Statement of Retained Earnings Balance Sheet
Statement of Cash Flows
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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
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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
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Budgeting Terms
• Continuous budgeting
– 12-month rolling budget
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Budgeting Terms
• Continuous budgeting
• Budget slack– intentional underestimation of revenue– intentional overestimation of expenses
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Budgeting Terms
• Continuous budgeting
• Budget slack
• Participatory budget– developed by top management and operating
personnel
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Budgeting Terms
• Continuous budgeting
• Budget slack
• Participatory budget
• Imposed budgets– developed by top management– imposed on operating personnel
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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
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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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Questions
• How are strategic and tactical planning related to budgeting?
• In what order are the master budget schedules prepared?
• Why is the cash budget important in the master budgeting process?