Cost Accounting, Chapter 6 11ch06

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Chapter 6

Master Budget and

Responsibility

Accounting

Master Budget and

Responsibility

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Understand what a master budget

is and explain its benefits.

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Budgeting Cycle

Performance planning

Providing a frame of reference Investigating variations

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The Master Budget

Master Budget_{Master Budget}

Operating

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Describe the advantages

of budgets.

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What are the Advantages

of Budgets?

Compels strategic planning

Provides a framework for judging performance #1

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of Budgets?

What are the Advantages

of Budgets?

Motivates employees and managers

Promotes coordination and communication #3

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Strategy, Planning, and Budgets

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Time Coverage of Budgets

Budgets typically have a set time period (month, quarter, year).

This time period can itself be broken into subperiods.

The most frequently used budget period is one year.

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Learning Objective 3

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Operating Budget Example

Hawaii Diving expects 1,100 units to be sold during the month of August 2004.

Selling price is expected to be $240 per unit. How much are budgeted revenues for the month?

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Operating Budget Example

Two pounds of direct materials are budgeted per unit at a cost of $2.00 per pound, $4.00 per unit.

Three direct labor-hours are budgeted per unit at $7.00 per hour, $21.00 per unit.

Variable overhead is budgeted at $8.00 per direct labor-hour, $24.00 per unit.

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Variable nonmanufacturing costs are expected to be $0.14 per revenue dollar.

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Production Budget Example

Budgeted sales (units)

Target ending finished goods inventory (units) Beginning finished goods inventory (units)

Budgeted production (units)

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Assume that target ending finished goods inventory is 80 units.

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Hawaii Diving Production Budget for the Month of August 2004

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Direct Materials Usage Budget

Each finished unit requires 2 pounds of direct materials at a cost of $2.00 per pound.

Desired ending inventory equals 15% of the materials required to produce next month’s sales.

September sales are forecasted to be 1,600 units. What is the ending inventory in August?

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Direct Materials Usage Budget

September sales: 1,600 × 2 pounds per unit = 3,200 pounds

3,200 × 15% = 480 pounds (the desired ending inventory)

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How many pounds are needed to produce 1,080 units in August?

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Material Purchases Budget

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Direct Manufacturing

Labor Budget

Direct Manufacturing

Labor Budget

Hawaii Diving Direct Labor Budget for the Month of August 2004

Units produced: 1,080 Direct labor-hours/unit 3 Total direct labor-hours: 3,240 Total budget $7.00/hour: $22,680

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Manufacturing Overhead Budget

Variable overhead is budgeted at $8.00 per direct labor-hour.

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Manufacturing Overhead Budget

Hawaii Diving Manufacturing Overhead Budget for the Month of August 2004

Variable Overhead:

(3,240 × $8.00) $25,920 Fixed Overhead 5,400

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Ending Inventory Budget

Cost per finished unit:

Materials $ 4

Labor 21

Variable manufacturing overhead 24 Fixed manufacturing overhead 5*

Total $54

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Ending Inventory Budget

What is the cost of the target ending inventory for materials?

480 × $2 = $960

What is the cost of the target finished goods inventory?

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Cost of Goods Sold Budget

Direct materials used:

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Cost of Goods Sold Budget

Ending finished goods inventory is $4,320. What is the cost of goods sold?

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Nonmanufacturing Costs Budget

Hawaii Diving Other Expenses Budget for the Month of August 2004

Variable Expenses:

($0.14 × $264,000) $36,960 Fixed expenses 7,800

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Cost of Goods Sold Budget

Cost of goods sold are budgeted at $59,400. What is the budgeted gross margin?

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Budgeted Statement of Income

Hawaii Diving Budgeted Income Statement

for the Month ending August 31, 2004 Sales $264,000 100% Less cost of sales 59,400 22%

Gross margin $204,600 78%

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Learning Objective 4

Use computer-based financial

planning models in

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Financial Planning Models

Financial planning models are

mathematical representations of the interrelationships among operating activities, financial activities, and other

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Software

Software packages are now readily available to reduce the computational

burden and time required to prepare budgets.

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Sensitivity Analysis

Consider Hawaii Diving.

What if some parameters in the budget model were to change?

For example, what if the selling price is expected to be $230 instead of $240?

What are expected revenues?

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Sensitivity Analysis

What if the materials cost is expected to increase to $2.50 per pound instead of $2.00.

What is the cost of goods sold?

1,100 × $55 = $60,500 instead of $59,400 Why the increase?

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Cash Budget

Hawaii Diving has the following collection pattern:

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Cash Budget

Budgeted charge sales are as follows:

June $200,000

July $250,000

August $264,000

September $260,000

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Cash Budget

Budgeted Cash Receipts

for the Month Ending August 31, 2004

August sales: $264,000 × 50% $132,000 July sales: $250,000 × 27% 67,500 June sales: $200,000 × 20% 40,000

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Cash Budget

Budgeted Cash Disbursements

for the Month Ending August 31, 2004 August purchases $ 4,620 Direct labor 22,680 Total overhead 31,320 Other expenses 9,760*

Total $68,380

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Cash Budget

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Explain kaizen budgeting

and how it is used for

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What is Kaizen?

The Japanese use the term “kaizen”

for continuous improvement.

Kaizen budgeting is an approach that explicitly incorporates continuous

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Kaizen Budgeting

It was previously estimated that it should take 3 labor-hours for Hawaii Diving to

manufacture its product.

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Kaizen Budgeting

Budgeted Hours/Item

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Activity-Based Budgeting

Activity-based costing reports and analyzes past and current costs.

Activity-based budgeting (ABB) focuses on the budgeted cost of activities necessary

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Activity-Based Budgeting

Product A Product B Units produced: 880 200

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Total budgeted labor-hours are:

Product A: 880 × 3 2,640 Product B: 200 × 3 600

Total 3,240

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Product A: $8.00 × 2,640 = $21,120 Total cost allocated to each product line:

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Activity-Based Budgeting

$25,920 budgeted machine setup cost ÷ 10 budgeted machine setup-hours

= $2,592 allocation rate per machine setup-hour. Under ABB, the number of setups is the cost driver.

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Product A Product B $2,592 × 5 $12,960 $2,592 × 5 $12,960 Setup-related cost per unit:

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Learning Objective 7

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What is a Responsibility Center?

It is any part, segment, or subunit of a business that needs control.

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Investment center_{Investment center} Cost center_{Cost center}

Profit center_{Profit center}

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Explain how controllability

relates to responsibility

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What is Controllability?

It is the degree of influence that a specific manager has over costs, revenues,

or other items in question.

A controllable cost is any cost that is primarily subject to the influence of a

given responsibility center manager

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Controllability

Responsibility accounting focuses on information and knowledge, not control. A responsibility accounting system could

exclude all uncontrollable costs from a manager’s performance report.

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