05 03 2011 CHAPTER 9 The Master Budget and Responsibility Accounting Describe how and why managers use budgets Budgeting A plan for a specific period of time Helps management determine how to use resources Used to estimate future costs and revenues Develop strategy plan act control develop strategy A budget that is continuously updated so that the next 12 months of operations are Rolling or continuous Budget always budgeted Participative Budgeting Involves many levels of management Benefits o Lower level managers are closer to the action and should have a more detailed knowledge for creating realistic budgets o Managers are more likely to accept and be motivated by budgets they helped to create Disadvantages o Budget process can become much more complex and time consuming as more people participate in the process o Managers intentionally build slack into the budget for their area of operation by over budgeting expenses or under budgeting revenue Starting point for Developing the budgets Prior year s budgeted figures or actual results or Zero based budgeting Benefits of budgeting Forces managers to plan Promotes coordination and communication Provides a benchmark Comprehensive planning document for entire organization Consists of all supporting budgets Master Budget Operating Budget The budgets needed to run the daily operations of the company Culminate in a budgeted income statement SLIDE 10 CH 9 SLIDE 11 Prepare the operating budgets Sales Budget Plan for sales revenues in future periods Number of units to be sold x Sales price per unit Total sales revenue SLIDE 16 18 20 o Shows the company s plans to invest in new property plant or equipment Prepare the financial budgets Financial Budget Components Capital expenditures budget Cash collections budget Cash payments budget Combined cash budget Budgeted balance sheet Sensitivity Analysis A what if technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes Describe the four types of responsibility centers and prepare performance reports Responsibility Accounting System for evaluating performance of managers and activities they supervise Four types of Responsibility Centers Cost center o Managers are accountable for costs only plant manager controls costs by ensuring that the entire production process runs efficiently o Plant manager is not responsible for generating revenues because he or she is not involved in selling the product o Evaluated on his or her ability to control costs by comparing actual costs to budgeted costs Revenue center o Managers are accountable primarily for revenues o May also be responsible for the costs of their own sales operations o Performance reports compare actual with budgeted revenues Profit center o Managers are accountable for both revenues and costs and profits o Accountable for increasing sales revenue and controlling costs to achieve the profit goals for the entire line of soups o Reports include both revenues and expenses to show the profit center s o Superiors evaluate by comparing actual revenues expenses and profits to the income budget Investment center o Managers are accountable for investments revenues and costs o Responsible for generating sales controlling costs and efficiently managing the division s assets o Treated almost as stand alone companies Management by Exception Only investigate budget variances that are material in amount Focuses management attention where needed Not a question of blame Prepare a merchandiser s Cost of Goods Sold Inventory and Purchases Budget Master Budget for Service and Merchandising Companies Service companies include o The Sales Budget o The Operating Expenses Budget o The Budgeted Income Statement o Financial budgets are the same Merchandising companies include o Sales Budget o Cost of Goods Sole Inventory and Purchases Budget o Operating Expenses Budget o Budgeted Income Statement o Financial budgets are the same CHAPTER 10 Flexible Budget and Standard Costs Prepare a flexible budget for planning purposes Budgets Static budget prepared for one level of sales volume Flexible budgets prepared for different levels of volume Variance difference between actual results and the budget Flexible Budget Summarized budgets prepared for different levels of volume Flexible budgets can help managers answer such questions as o Why did the unfavorable expense variance occur o Were materials wasted o Did the cost of materials suddenly increase o How much of the additional expense and revenues arose because of a change in a business decision Using Flexible Budgets for Evaluating Performance Use the flexible budgets at the end of the period to evaluate the company s financial Compare the actual results against the flexible budget for the actual volume of output performance and help control costs that occurred during the period Use the sales volume variance and flexible budget variance to explain why actual results Static budget for the units expected to be sold minus Flexible Budget for the differ from the master budget Sales volume variance units actually sold Flexible Budget Variance Flexible Budget for the units actually sold minus Actual Results Interpreting the Variances Favorable variances increase operating income Unfavorable variances decrease operating income o Higher sales o Lower expenses o Lower sales o Higher expenses Identify the benefits of standard costs and learn how to set standards Standard Costs Budget for a Single Unit Quantity Standard Price Standard Quantity Standards Components Direct Materials Direct labor Manufacturing overhead Price Standards Components costs Direct Materials purchase price after early pay discount freight in receiving Direct labor basic pay rates payroll taxes fringe benefits Manufacturing overhead determine resources needed for support activities and determine appropriate allocation base Standard Cost Rate for Overhead Determine Standard Manufacturing Overhead Rates o Variable overhead rate o Fixed overhead rate overhead rate Standard total overhead rate standard variable overhead rate standard fixed Standard manufacturing overhead rate either fixed or variable estimated total overhead cost estimated total allocation base Standard Cost of Inputs Quantity Standard times Price Standard Standard Cost of Input per unit Direct Materials Standard Cost Direct Labor Standard Cost Variable Overhead Standard Cost Standard Variable Manufacturing Cost per Unit Fixed Overhead
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