Managerial Accounting Exam 3 Concept Review annotates an excerpt directly from the text CHAPTER 5 Planning and Forecasting Strategic planning is very broad and helps to identify the overall focus of an organization Tactical Planning develops concrete actions that turn strategic plans into reality One type of tactical planning is the Budgeting process A means of allocating organizational resources among various divisions projects or other subsets or an organization A Budget is an operating plan that is expressed primarily in financial terms that is in dollars The budget has its beginnings in the organizations strategic plan Benefits of budgeting Forces managers to plan for the future facilitates communication between different divisions of the company serves as a benchmark to evaluate performance In a Top Down Budget environment executive management creates the budget and that budget is then pushed down through the rest of the organization Sometimes called an imposed budget because those who implement that budget have no input into it In a Bottom Up Budget the budgeting process begins at the lowest levels of management and filters up through the organization At each higher level of management the budget is reviewed and may be altered to satisfy the competing needs of various units within the organizations As changes are made to the budget the best practice is for management to communicate the rationale behind those changes to the affected units This approach is referred to as participative budgeting because those employees who will be held accountable for meeting the budget participate in its creation Types of budgeting o Incremental manager begins with the current years budget and adds or subtracts funds for any anticipated changes in operations o Zero based budgeting budget each year begins at 0 and each individual budget item must be justified o Rolling budget always includes 12 months of data As one month ends it is removed from the budget and the entire budget rolls forward one month Opposed to Annual budgets which compile detailed monthly budgets Behavioral effects of budgeting o Budgetary Slack managers are often tempted to include slack or padding in the budget They may budget lower revenues or higher costs than are expected to incur to attempt to beat the budget Performance Standards o Standards expectations called standards specify characteristics rules or guidelines that define a particular level of performance or quality o Ideal Standard Achievable under perfect conditions never occurs in manufacturing o Practical Standard Achievable with reasonable effort Represent a level of performance that can be attained with reasonable effort Product Standards o Standard Cost when the separate standard for each component of product cost have been determined a standard cost representing the cost to produce one unit of product can be calculated o Standard Quantity the amount quantity of input ex pounds of DM hours of DL etc that should be used to make a unit of output product o Standard Price the amount price that should be paid for a unit of input ex pound of DM hour of DL etc The Master Budget is a collection of smaller budgets that lead to pro forma budgeted financial statements o Operating Budget the portion of the master budget that provides a plan for operations during the budget period begins with the sales budget o The Sales Budget Forecasts the number of units expected to be sold as well as the prices expected to be charged Drives all other components of the master budget o The Selling and Administrative Budget estimates when and how much selling and administrative expenses will be incurred Includes expenses required for selling the product and managing the business such as advertising insurance accounting legal services etc o Production Budget provides a plan for when and how many units will be manufactured Shows the beginning inventory for the period and the desired ending inventory Budgeted sales Beginning ending inventory Budgeted beginning inventory Budgeted production needs o The Direct Materials Purchases Budget Once the monthly production is budgeted the amount of direct materials that needs to be purchased can be budgeted Itemizes the DM that must be purchased to meet budgeted production o DM Purchases Budget Production needs ending inventory beginning inventory purchases needed Enter budgeted production from the production budget Calculate the DM production needs by multiplying the number of units to be produced during the period by the direct materials standard quantity for one unit Calculate the desired budgeted ending inventory of DM Calculate the total DM required for the period by adding the budgeted ending inventory to the DM production needs Calculate the required purchases of direct materials by subtracting the beginning DM balance from the total DM required for the period Calculate the budgeted dollar amount of DM purchases by multiplying the required purchases of DM by the standard price per unit o Direct Labor Budget calculates the number of direct labor hours required to meet the budgeted level of production using the following steps Enter budgeted production from the production budget Calculate the number of direct labor hours needed to meet the production schedule by multiplying the number of units to be produced during the period by the standard number of direct labor hours for one unit Calculate the total budgeted direct labor payroll by multiplying the total required direct labor hours by the standard average wage rate for the period If the company pays a wider range of direct labor hours are calculated separately for each pay level Budgeted Production x standard direct labor hours total direct labor hours required Total direct labor hours required x standard average wage rate budgeted direct labor cost o Manufacturing overhead budget shows the expected overhead costs for the period All other manufacturing costs other than direct materials and direct labor fall into the manufacturing overhead category Enter budgeted activity base from appropriate budget Calculate the variable overhead costs per period using the variable rate and budgeted Calculate the fixed overhead cost per period assuming that costs are incurred evenly activity base throughout the period Calculate the total overhead costs for the period by adding the fixed and variable overhead costs Subtract the noncash overhead items from the total overhead cost to determine the cash
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