Chapter 9 Master Budget and Responsible Accounting A Why and How do Managers Use Budgets involves setting long term goals that extend 5 10 years a Strategic Planning into the future b Rolling Budget months of operation are always budgeted I E January ends budget for next years January c Zero Based Budget justify every dollar that they spend all managers bein with a budget of zero and must is a budget that is continuously updated so that the next 12 d Benefits of Budgeting i Planning ii Coordination and Communication iii Benchmarking 1 Variance or difference between actual and budgeted figures It is used to evaluate how well the manager controlled operations and to determine whether the plan needs to be revised is the comprehensive planning documented for the entire are the budgets needed to run the daily operations of the e Master Budget organization f Operating Budget company see exhinit 9 4 on page 479 B How the Operating Budget is Prepared a Sales Budget i Total Sales Revenue of unit sales Sale Price per unit b Production Budget Units Needed for Sales Desired Ending Inventory Total Units Needed Total Units Needed Units in Beginning Inventory Units to produce c Direct Materials Budget Quantity of DM needed for Production Desired DM Ending Inv Total qty DM needed Total qty DM needed DM Beginning Inv Quantity of DM to Purchase d Direct Labor budget Units to be produced DL Hours per Unit Total DL Hours Required Total DL Hours Required DL Cost per Hour Total Direct Labor Cost e Budeted Income Statement Cost of Goods Sold Number of Unit Sales Manufacturing Cost per Unit C How Financial Budgets are prepared a Capital Expenditure Budget new property plant or equipment b Cash Collection Budget shows the company s intentions to invest in i Most sales are on credit and are payed back in time ii Some sales are in cash at time of order iii Some sales are never recovered and need to be budgeted accordingly in bad debts expense c Cash Payment Budget i Direct Materials Purchased ii Direct Labor iii Manufacturing Overhead 1 month that it occurs iv Operating Expenses 1 Month that it occurs v Capital Expenditures vi vii Dividends d Combined Cash Budget Income Taxes i Ending cash for the month becomes beginning cash for next month ii Budgeted cash payments are then subtracted to determine the ending cash balance iii Then company can decide whether to borrow money or invest extra money e Sensitivity Analysis is a what if technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes is a system for evaluating the performance od each D Responsibility Accounting responsibility center ant its managers a Responsibility Center manager is accountable for specific activities is a part or subunit of an organization whose i Cost Center managers are accountable for costs only 1 not incolved in gernerating revenue just cutting costs ii Revenue Center iii Profit Center iv Investment Center revenues and costs b Management by Exception managers are accountable primarily for revenues managers are responsible for revenue and costs managers are accountable for investments when they analyze performance reports
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