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Unformatted text preview: CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6-1 a. b. c. d. The budgeting cycle includes the following elements: Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected. Providing a frame of reference, a set of specific expectations against which actual results can be compared. Investigating variations from plans. If necessary, corrective action follows investigation. Planning again, in light of feedback and changed conditions. 6-2 The master budget expresses management’s operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period. 6-3 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans. 6-4 We agree that budgeted performance is a better criterion than past performance for judging managers, because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets. 6-5 Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing conflicts between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola: Communication. Marketing could share information about seasonal demand with production. Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer. 6-6 In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test. 6-7 A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2009 is superseded by a four-quarter rolling budget for April 2009 to March 2010, and so on. 6-1 6-8 The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget 2. Prepare the production budget (in units) 3. Prepare the direct material usage budget and direct material purchases budget 4. Prepare the direct manufacturing labor budget 5. Prepare the manufacturing overhead budget 6. Prepare the ending inventories budget 7. Prepare the cost of goods sold budget 8. Prepare the nonmanufacturing costs budget 9. Prepare the budgeted income statement 6-9 The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales. 6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change with changes in the underlying assumptions. This assists managers in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate. 6-11 Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers. 6-12 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activitybased budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell products and services. Nonoutput-based cost drivers, such as the number of part numbers, number of batches, and number of new products can be used with ABB. 6-13 The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager’s behavior. For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or investments. The choice of a responsibility center type guides the variables to be included in the budgeting exercise. 6-14 Budgeting in multinational companies may involve budgeting in several different foreign currencies. Further, management accountants must translate operating performance into a single currency for reporting to shareholders, by budgeting for exchange rates. Managers and accountants must understand the factors that impact exchange rates, and where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuations. In developing budgets for operations in different countries, they must also have good understanding of political, legal and economic issues in those countries. 6-15 No. Cash budgets and operating income budgets must be prepared simultaneously. In preparing their operating income budgets, companies want to avoid unnecessary idle cash and unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost effective ways of either using excess cash or raising cash from outside to achieve the company’s operating income goals. 6-2 6-16 1. (15 min.) Sales budget, service setting. McGrath & Sons Radon Tests Lead Tests 2009 Volume 11,000 15,200 At 2009 Selling Prices $250 $200 Expected 2010 Change in Volume +5% -10% Expected 2010 Volume 11,550 13,680 McGrath & Sons Sales Budget For the Year Ended December 31, 2010 Selling Price $250 $200 Units Sold 11,550 13,680 Total Revenues $2,887,500 2,736,000 $5,623,500 Expected 2010 Expected Change in 2010 Volume Volume +5% 11,550 -5% 14,440 Radon Tests Lead Tests 2. McGrath & Sons Radon Tests Lead Tests 2009 Volume 11,000 15,200 Planned 2010 Selling Prices $250 $190 McGrath & Sons Sales Budget For the Year Ended December 31, 2010 Selling Price $250 $190 Total Revenues $2,887,500 2,743,600 $5,631,100 Radon Tests Lead Tests Units Sold 11,550 14,440 Expected revenues at the new 2010 prices are $5,631,100, which are greater than the expected 2010 revenues of $5,623,500 if the prices are unchanged. So, if the goal is to maximize sales revenue and if Jim McGrath’s forecasts are reliable, the company should lower its price for a lead test in 2010. 6-3 6-17 (5 min.) Sales and production budget. 200,000 25,000 225,000 15,000 210,000 Budgeted sales in units Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 6-18 (5 min.) Direct materials purchases budget. Direct materials to be used in production (bottles) Add target ending direct materials inventory (bottles) Total requirements (bottles) Deduct beginning direct materials inventory (bottles) Direct materials to be purchased (bottles) 6-19 (10 min.) Budgeting material purchases. Production Budget: 2,500,000 80,000 2,580,000 50,000 2,530,000 Budgeted sales Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct Materials Purchases Budget: Finished Goods (units) 45,000 18,000 63,000 16,000 47,000 Direct materials needed for production (47,000 3) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased Direct Materials (in gallons) 141,000 50,000 191,000 60,000 131,000 6-4 6-20 1. (30 min.) Revenues and production budget. 12-ounce bottles 4-gallon units
a b Selling Price $0.25 1.50 Units Sold 4,800,000a 1,200,000b Total Revenues $1,200,000 1,800,000 $3,000,000 400,000 × 12 months = 4,800,000 100,000 × 12 months = 1,200,000 2. Budgeted unit sales (12-ounce bottles) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 4,800,000 600,000 5,400,000 900,000 4,500,000 3. Beginning = Budgeted + Target Budgeted inventory sales ending inventory production = 1,200,000 + 200,000 1,300,000 = 100,000 4-gallon units 6-21 (30 min.) Budgeting: direct material usage, manufacturing cost and gross margin. 1. Direct Material Usage Budget in Quantity and Dollars Material Wool Physical Units Budget Direct materials required for Blue Rugs (100,000 rugs × 30 skeins and 0.5 gal.) 3,000,0000 skeins Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) Wool: 349,000 skeins $ 715,450 Dye: 5,000 gallons To be purchased this period Wool: (3,000,000 - 349,000) skeins × $2 per skein 5,302,000 _ Dye: (50,000 – 5,000) gal. × $5 per gal. ________ Direct materials to be used this period: (a) + (b) $6,017,450 Dye Total 50,000 gal. $ 24,850 225,000 $ 249,850 $6,267,300 6-5 2. $18,852,000 Weaving budgeted = = $3.3664 per DMLH overhead rate 5,600,000 DMLH Dyeing budgeted = $12,809,000 = $28.4644 per MH overhead rate 450,000 MH 3. Budgeted Unit Cost of Blue Rug Input per Unit of Output 30 skeins 0.5 gal. 56 hrs. 1 mach-hrs. 4.5 56 DMLH Wool Dye Direct manufacturing labor Dyeing overhead Weaving overhead Total
10.15 Cost per Unit of Input $2 5 15 28.4644 3.3664 Total 60.00 2.50 840.00 128.09 188.52 $1219.11 $ machine hour per skein 30 skeins per rug = 4.5 machine-hrs. per rug. 4. Revenue Budget Selling Units Price Total Revenues 100,000 $2,000 $200,000,000 95,000 $2,000 $190,000,000 Blue Rugs Blue Rugs 5a. Sales = 100,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($840 × 100,000) Dyeing overhead ($128.09 × 100,000) Weaving overhead ($188.52 × 100,000) Cost of goods available for sale Deduct ending finished goods inventory Cost of goods sold $ $ 6,267,300 84,000,000 12,809,000 18,852,000 Total 0 121,928,300 121,928,300 0 $121,928,300 6-6 5b. Sales = 95,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($840 × 100,000) Dyeing overhead ($128.09 × 100,000) Weaving overhead ($188.52 × 100,000) Cost of goods available for sale Deduct ending finished goods inventory ($1,219.11 × 5,000) Cost of goods sold 6. Revenue Less: Cost of goods sold Gross margin 6-22 1. 2. 100,000 rugs sold $200,000,000 121,928,300 $ 78,071,700 95,000 rugs sold $190,000,000 115,832,750 $ 74,167,250 $ $ 6,267,300 84,000,000 12,809,000 18,852,000 121,928,300 121,928,300 6,095,550 $115,832,750 Total 0 (15–20 min.) Revenues, production, and purchases budget. 900,000 motorcycles 400,000 yen = 360,000,000,000 yen Budgeted sales (motorcycles) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct materials to be used in production, 880,000 × 2 (wheels) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased (wheels) Cost per wheel in yen Direct materials purchase cost in yen 900,000 80,000 980,000 100,000 880,000 3. 1,760,000 60,000 1,820,000 50,000 1,770,000 16,000 28,320,000,000 6-7 Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very close to the major manufacturer. Inventories are controlled by just-in-time and similar systems. Indeed, some direct materials inventories are almost nonexistent. 6-23 (15-25 min.) Budgets for production and direct manufacturing labor. Roletter Company Budget for Production and Direct Manufacturing Labor for the Quarter Ended March 31, 2010 January 10,000 16,000 26,000 16,000 10,000 × 2.0 20,000 $200,000 10,000 3,000 8,000 15,000 $236,000 February 12,000 12,500 24,500 16,000 8,500 × 2.0 17,000 $170,000 8,500 2,550 6,800 12,750 $200,600 March 8,000 13,500 21,500 12,500 9,000 1.5 13,500 $135,000 6,750 2,025 5,400 10,125 $159,300 50,500 $505,000 25,250 7,575 20,200 37,875 $595,900 Quarter 30,000 13,500 43,500 16,000 27,500 Budgeted sales (units) Add target ending finished goods inventorya (units) Total requirements (units) Deduct beginning finished goods inventory (units) Units to be produced Direct manufacturing labor-hours (DMLH) per unit Total hours of direct manufacturing labor time needed Direct manufacturing labor costs: Wages ($10.00 per DMLH) Pension contributions ($0.50 per DMLH) Workers’ compensation insurance ($0.15 per DMLH) Employee medical insurance ($0.40 per DMLH) Social Security tax (employer’s share) ($10.00 0.075 = $0.75 per DMLH) Total direct manufacturing labor costs
a100% of the first following month’s sales plus 50% of the second following month’s sales. Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from employees’ wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5% amounts are not additional costs to the employer. 6-8 6-24 (20–30 min.) Activity-based budgeting. 1. This question links to the ABC example used in the Problem for Self-Study in Chapter 5 and to Question 5-23 (ABC, retail product-line profitability).
Activity Ordering $90 14; 24; 14 Delivery $82 12; 62; 19 Shelf-stocking $21 16; 172; 94 Customer support $0.18 4,600; 34,200; 10,750 Total budgeted indirect costs Percentage of total indirect costs (subject to rounding) Cost Hierarchy Batch-level Batch-level Output-unitlevel Output-unitlevel Soft Drinks $1,260 984 336 828 $3,408 Fresh Produce $ 2,160 5,084 3,612 6,156 $17,012 Packaged Food $1,260 1,558 1,974 1,935 $6,727 Total $ 4,680 7,626 5,922 8,919 $27,147 13% 63% 25% 2. Refer to the last row of the table in requirement 1. Fresh produce, which probably represents the smallest portion of COGS, is the product category that consumes the largest share (63%) of the indirect resources. Fresh produce demands the highest level of ordering, delivery, shelf-stocking and customer support resources of all three product categories—it has to be ordered, delivered and stocked in small, perishable batches, and supermarket customers often ask for a lot of guidance on fresh produce items. 3. An ABB approach recognizes how different products require different mixes of support activities. The relative percentage of how each product area uses the cost driver at each activity area is: Cost Hierarchy Batch-level Batch-level Output-unit-level Output-unit-level Soft Drinks 27% 13 6 9 Fresh Produce 46% 67 61 69 Packaged Food 27% 20 33 22 Activity Ordering Delivery Shelf-stocking Customer support Total 100% 100 100 100 By recognizing these differences, FS managers are better able to budget for different unit sales levels and different mixes of individual product-line items sold. Using a single cost driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities) across product lines which does not occur at FS. Other benefits cited by managers include: (1) better identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3) identification of budgetary slack. 6-9 6-25 1. (20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-24). Activity Ordering Delivery Shelf-stocking Customer support Cost Hierarchy Batch-level Batch-level Output-unit-level Output-unit-level Budgeted Cost-Driver Rates January February March $90.00 $89.82000 $89.64 82.00 81.83600 81.67 21.00 20.95800 20.92 0.18 0.17964 0.179 The March 2008 rates can be used to compute the total budgeted cost for each activity area in March 2008:
Activity Ordering $89.64 14; 24; 14 Delivery $81.67 12; 62; 19 Shelf-stocking $20.92 16; 172; 94 Customer support $0.179 4,600; 34,200; 10,750 Total Cost Hierarchy Batch-level Batch-level Output-unit-level Soft Drinks $1,255 980 335 Fresh Produce $ 2,151 5,064 3,598 Packaged Food $1,255 1,552 1,966 Total $ 4,661 7,596 5,899 Output-unit-level 823 $3,393 6,122 $16,935 1,924 $6,697 8,869 $27,025 2. A kaizen budgeting approach signals management’s commitment to systematic cost reduction. Compare the budgeted costs from Question 6-24 and 6-25. ShelfStocking $5,922 5,899 Customer Support $8,919 8,869 Question 6-24 Question 6-25 (Kaizen) Ordering $4,680 4,661 Delivery $7,626 7,596 The kaizen budget number will show unfavorable variances for managers whose activities do not meet the required monthly cost reductions. This likely will put more pressure on managers to creatively seek out cost reductions by working “smarter” within FS or by having “better” interactions with suppliers or customers. One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small incremental improvements each month. It is possible that some cost improvements arise from large discontinuous changes in operating processes, supplier networks, or customer interactions. Companies need to highlight the importance of seeking these large discontinuous improvements as well as the small incremental improvements. 6-10 6-26 (15 min.) Responsibility and controllability. 1. (a) Salesman (b) VP of Sales Permit the salesman to offer a reasonable discount to customers, but require that he clear bigger discounts with the VP. Also, base his bonus/performance evaluation not just on revenues generated, but also on margins (or, ability to meet budget). 2. (a) VP of Sales (b) VP of Sales VP of Sales should compare budgeted sales with actuals, and ask for an analysis of all the sales during the quarter. Discuss with salespeople why so many discounts are being offered—are they really needed to close each sale. Are our prices too high (i.e., uncompetitive)? 3. (a) Manager, Shipping department (b) Manager or Director of Operations (including shipping) Shipping department manager must report delays more regularly and request additional capacity in a timely manner. Operations manager should ask for a review of shipping capacity utilization, and consider expanding the department. 4. (a) HR department (b) Production supervisor The production supervisor should devise his or her own educational standards that all new plant employees are held to before they are allowed to work on the plant floor. Offer remedial in-plant training to those workers who show promise. Be very specific about the types of skills required when using the HR department to hire plant workers. Test the workers periodically for required skills. 5. (a) Production supervisor (b) Production supervisor Get feedback from the workers, analyze it, and act on it. Get extra coaching and training from experienced mentors. 6. (a) Maintenance department (b) Production supervisor First, get the requisite maintenance done on the machines. Make sure that the maintenance department head clearly understands the repercussions of poor maintenance. Discuss and establish maintenance standards that must be met (frequency of maintenance and tolerance limits, for example). Test and keep a log of the maintenance work. 6-11 6-27 1. (30 min.) Cash flow analysis, chapter appendix. The cash that TabComp, Inc., can expect to collect during April 2006 is calculated below. April cash receipts: April cash sales ($400,000 .25) April credit card sales ($400,000 .30 .96) Collections on account: March ($480,000 .45 .70) February ($500,000 .45 .28) January (uncollectible-not relevant) Total collections $100,000 115,200 151,200 63,000 0 $429,400 2. (a) The projected number of the MZB-33 computer hardware units that TabComp, Inc., will order on January 25, 2006, is calculated as follows. MZB-33 Units 110 27 137 33 104 March sales Plus: Ending inventorya Total needed Less: Beginning inventoryb Projected purchases in units
a0.30 b0.30 90 unit sales in April 110 unit sales in March (b) Selling price = $2,0...
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