Management Accounting - Assigment 2

Management Accounting

Lecturer: Dao Nam Giang
Class F04B


Prepared by: Lucky Group
Nguyen Thi Tu Anh – Lee
Nhâm Nguyễn Ngọc Anh - DJ
Nguyen Thi Ngoc – Gummy
Nguyen Hien Thanh – Tany
Tang Thanh Thuy - Mitchie

Submission date: 29th June, 2012


Contents


Executive summary
Managerial Accounting was called as a field of accounting that provides economic and financial
information for managers and other internal users. In this program, you will learn about
fundamental internal measurement and control systems, including structured measurement
models, analytical techniques and system biases. You also will learn how to align internal
measurement and control systems with your organization’s strategy and how to maintain control
without stunting initiative. Whether you are the measurer or the measure in your organization,
this program will deliver ideas that will help you do your job better, by promoting better systems,
challenging ineffective or inefficient metrics, and creating a lean measurement culture.


Introduction

The report has 3 main tasks bases on 7 outcomes of scenario:
Task 1include outcome:
-

3.1: Explain the purpose and nature of the budgeting process
3.2: Select appropriate budgeting methods for the organization and its needs
3.3: Prepare budgets according to the chosen budgeting method

Task 2 include outcome:
-

3.4: prepare a cash budget

Task 3 include outcome:
-

4.1: calculate variances identify possible causes and recommendation corrective action
4.2: prepare an operating statement reconciling budgeted and actual result
4.3: report findings to management in accordance with identified responsibility centers


I.
1.

Budgeting process
The purpose and nature of the budgeting process

a. The purposes and benefits of a budget:
•

Ensure the achievement of the organization’s objectives

This is the main purpose of budget. The organization’s objectives are quantified and drawn up as
targets to be achieved within the timescale of the budget plan. (BPP, 2004, pg.155)
•

Control and Evaluation

Budgeting allows a company to have a certain degree of control over costs, such as not allowing
many types of expenses to take place if they were not budgeted for, or assigning responsibility
for these expenses. A budget also helps company to evaluate business units, departments, and
even individual managers. (Tiffany Bradford, 2012)
•

Co-ordinate activities

The activities of different departments need to be co-ordinate to ensure maximum integration of
effort towards common goals. This implies, for example, that the purchasing department should
base its budget on production requirements and that the production budget should in turn be
based on sales expectations. (BPP, 2004, pg.155)
•

Planning


Planning is another purpose of budgeting process, and is arguably its primary purpose.
Budgeting allows a company to take stock of revenue and expenses from the previous period,
and judge where the business will be in future periods. It also allows the organization to add and
remove products and services from its plan for the future period. This allows top management to
get a picture of the entire business so they are able to better plan accordingly. (Tiffany Bradford,

2012)

•

Communication and Motivation

Budgets allow management to communicate goals and to promote goal congruence so resources
can be coordinated and focused in key areas. Budgets also allow a company to motivate its
employees by involving them in the budget. While top-down budgeting does not accomplish this
goal very effectively, participative budgeting can be motivating. When an employee is involved
in creating his or her department’s budget, that person will be more likely to strive to achieve
that budget. The budgeting process can also allow companies to communicate and achieve their
goals, and allow them to monitor those achievements as well. It is also an important step in
overall of business strategic planning. (Tiffany Bradford, 2012).
•

Provide a framework for responsibility accounting

Budgets require that managers of budget centers are made responsible for the achievement of
budget targets for the operations under their personal control. (BPP, 2004, pg.155)
b. Types of budget:


There are two components in master budgets including operating budgets and financial
budgets. Various types of budgets are shown in the picture below.

 Operating budgets
Operating budgets include many types.
Firstly, it is sales budget which is the first budget prepared. It is derived from the sales forecast
such as management’s best estimate of sales revenue for the budget period and every other

budget depends on the sales budget. (Ward & Ward, 2012)
The production budget is prepared after the sales budget. The production budget lists the
number of units that must be produced during each budget period to meet sales needs and to
provide for the desired ending inventory. (Accounting for management, accessed 2011). In


production budget, there are direct material budget, direct labor budget, and manufacturing
overhead budget.
•

Direct materials budget shows both the quantity and cost of direct materials to be
purchased, which are derived from the direct materials units required for production
(from the production budget) plus the desired change in ending direct materials units.

•

(Ward & Ward, 2012)
Direct labor budget shows both the quantity of hours and cost of direct labor necessary
to meet production requirements. It is critical in maintaining a labor force that can meet

•

expected production. (Ward & Ward, 2012)
Manufacturing overhead budget shows the expected manufacturing overhead costs for
the budget period, and it distinguishes between fixed and variable overhead costs (Ward
& Ward, 2012)

The next is Selling and Administrative Expense Budget lists the budgeted expenses for areas
other than manufacturing. In large organizations this budget would be a compilation of many
smaller, individual budgets submitted by department heads and other persons responsible for

selling and administrative expenses. For example, the marketing manager in a large organization
would submit a budget detailing the advertising expenses for each budget period. (Accounting
for management, accessed 2011).
The following budget is budgeted income statement. It is the summary of various component
projections of revenues and expenses for the budget period. It indicates the expected net income
for the period. (All business, 2005).
 Financial budgets


Financial budgets embrace the impacts of the financial decisions of the firm (Answer, accessed
2011).
The first financial budget is capital expenditure budget, which is a plan prepared for individual
capital expenditure projects. The time span of this budget depends upon the project. Capital
expenditures to be budgeted include replacement, acquisition, or construction of plants and major
equipment. (All business, accessed 2011).
The second is cash budget considered to be the most important output in preparing financial
budgets. It shows anticipated cash flows and contains three sections: cash receipts, cash
disbursements, and financing. Cash budget also shows beginning and ending cash balances.
(Ward & Ward, 2012).
Lastly, budgeted balance sheet is a projection of financial position at the end of the budget
period. It is developed from the budgeted balance sheet for the preceding year and the budgets
for the current year. (Ward & Ward, 2012).
c. Steps in the preparation of a budget:
The mechanics of budget preparation need to be concerned as the focus of building up a budget.
It is very important because of its function to appreciate the coordinating role of budgets. Hence,
the follow part of this report is going to describe every step in the preparation of a budget.

 Budget committee

Budget committee is a group of people who are responsible for co-ordination and administration
of budgets. In a company, this committee usually consists of the top management and the CEO.
They play key roles in the success or demise of a company or other corporate entity. Committees
that are able to keep their organizational budgets on track ensure smooth operation and financial
solvency. (Investopedia, accessed 2011). For this reason, every part of the organization should be
represented on the committees by representatives coming from every departments such as sales,
production, marketing and so on (BPP, 2004, p. 159). Commonly, functions of the budget
committee include the following:
•
•
•
•
•
•

Co-ordination and allocation of responsibility for the preparation of budgets
Issuing of the budget manual
Timetabling
Provision of information to assist in the preparation of budgets
Communication of final budgets to the appropriate managers
Monitoring the budgeting and planning process by comparing actual and budget results.

 Responsibility for budgets
Obviously, the responsibility for preparing the budgets should be tightened with the managers
who are responsible for implementing them. Managers in specific department would be those
who are able to grasp everything in this field. So they can give out the most accurate prediction
as well as the most overall view in budget. For example, the sales manager should draft the sale
budget and the selling overhead cost center budgets or the purchasing manager should draft the
material purchases budget (BPP, 2004, p.159).

 The budget manual


The administration of budgeting is documented in a budget manual. It contains the purpose of,
procedure for and responsibility of the people involved in budgeting. According to Investopedia
(accessed 2011), “Budgeting within large organizations is an extremely complex task. Financial
analysts must make assumptions about what the future will look like based on past data. This
means that even the best budgeting process is subject to considerable inaccuracies. Then, as the
year progresses, each group is held to a predefined budget, which may become inadequate due to
changing conditions. On the other hand, some groups will find that they have more money than
they require, and may choose to surreptitiously use up the “extra” budget with unnecessary
expenditures in order to avoid budget cuts”. Budget manuals should present to any reader the
system of clear, easy-to-understand rules and standards for managing the budget created.
 Steps in budgets preparation
In different organization there will be different procedures for preparing a budget applied.
However, all these differences also can be indicated shortly by three steps. Firstly, budget
committee will discuss several times then come into the final agree with master budget which
budgeted profit and loss account and balance sheet). At the ends of process, functional budget
which are amalgamated into the master budget may need to be amended many times over as a
consequence of the discussions between departments, changes in market conditions and so on
during the course of budget preparation (BPP, 2004).

 Identifying the principal budget factor


The principle budget or key budget factor is the factor which limits the activities of the
organization. The earlier identification of this factor is important in budgetary planning process
because it indicates which budget should be prepared first. For example, if sales volume is the
principle budget factor, and then the sale budgets must be prepared first, based on the available
sales forecasts. All other budgets should then be linked to this. Failure to identify the principle

budget factor at the early stage could lead to delays at the later stages when manager realize that
the targets they have been working are not feasible. (Walker. J, 2009, pg. 307).
The stages involved in the preparation of a budget can be summarized as follow:
•

Sales budget: this involves a realistic sales forecast. This is prepared in units of each
product and also in sales value. Methods of sales forecasting include: sales force
opinions, market research, statistical methods (correlation analysis and examination
of trends), and mathematical models.

•

Production budget: expressed in quantitative terms only and is geared to the
sales budget. The production manager's duties include: analysis of plant

•

utilization and work-in-progress budgets.
Raw materials and purchasing budget: the materials usage budget is in
quantities and the materials purchases budget is both quantitative and

•

financial.
Labor budget: is both quantitative and financial. This is influenced by: production
requirements, man-hours available, grades of labor required, wage rates (union

•

agreements) and the need for incentives.

Cash budget: a cash plan for a defined period of time. It summarizes monthly receipts
and payments. Hence, it highlights monthly surpluses and deficits of actual cash.


2.

Budgeting methods:

a. Incremental budgeting method:
According to BPP (2004, pg. 177), Incremental budgeting is a budgeting method focusing
mainly in the increasing of costs and revenues which have ability to occur in the next periods. It
uses “a previous period’s budget or actual performance as a basis with incremental amounts
added for the new budget period” (tutor2u, accessed 2011). It means that the basis of incremental
budgeting method is the allocations from the last periods. It is also provided to be reasonable
procedure if the current operations are effective, efficient and economical; as well as the
organization and the environments are not in changing circumstances.
The table below, taking information from website tutor2u, shows the advantages and
disadvantages of using this method.

Advantages
•

The budget changes gradually. Most of

•

the time, it is stable.
Departments can be operated on a

•

consistent basis.
This system is simple to operate and

•

easy to understand.
It helps to avoid conflicts by treating

•

departments equally.
Co-ordination between budgets is easy to

•

achieve.
The influence of change could be shown

Disadvantages
•

Assuming

•

methods of working are almost similar.
There is no support for developing new

•

•

ideas and reducing costs.
Encouraging to spend up to the budget
The budget may become out of date and

activities

and

assuming

no longer relate to the level of activity
•

or type of work being carried out.
The order of resources can be changed.


quickly.
b. Zero-based budgeting method:
“Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in
government and not for profit sectors of the economy” (accounting for management, accessed
2010). In the other words, “Zero based budgeting involves preparing a budget for each cost
centre from a zero based” (BPP, 2004, pg. 178). It is required to justify all budgeted expenditures
in the budget from the previous year.
By using this budgeting system, the managers are required to prepare a chain of decision
packages in which the departments’ activities are put in order based on their relative importance
and the cost of each activity is identified as well.
The advantages and disadvantages of zero based budgeting are shown in the table followed:

Advantages

Disadvantages

•
•

Allocation of resources is efficient.
Easy to find effective ways in improving

•

Hard to define decision units and

•
•

operations.
Detecting inflated budgets.
This practice excludes

•
•
•

decision packages.
Justifying detail of expenditure.
Difficult to understand.
It requires the managers to be trained.

•
•
•

planning departments.
Make it easier for output to identify.
Providing initiative to motivate staff.
Clearly identify missions and their
relationship to goals.

municipal


c. Fixed budgeting method:
According to BPP (2004, p.168), master budgets are based on planned volumes of production
and sales but do not include any provision for the event that actual volumes may differ from the
budget. In this sense they may be described as fixed budgets. A fixed budget is a budget which is
set for a single activity level. In other words, a fixed budget is a financial plan that does not
change through the budget period, irrespective of any changes from the plan in actual activity
levels experienced (Accounting tools, accessed 2011). Fixed budget has two characteristics as
the followings (All business, accessed 2011):
•

It is geared toward only one level of activity.

•

Actual results are compared against budgeted (standard) costs only at the original budget
activity level.

d. Flexible budgeting method:
According to BPP (2004, p.168), a flexible budget is ‘a budget which, by recognizing different
cost behavior patterns, is designed to change as volume of activity changes’. A flexible budget
has two advantages as the followings:
At the planning stage, it may be helpful to know what the effects would be if the actual outcome
differs from the prediction. For example, GOF Company may budget to sell 10,000 units of its
product, but may prepare flexible budgets based on sales of, say, 8,000 and 12,000 units. This
would enable contingency plans to be drawn up if necessary.


At the end of each month or year, actual results may be compared with the relevant activity level
on the flexible budget as a control procedure.
There are four main steps which are used to prepare a flexible budget (Dennis Caplan, accessed
2011):
•

Step 1: Determine the budgeted variable cost per unit of output. Also determine the
budgeted sales price per unit of output, if the entity to which the budget applies generates
revenue (e.g., the retailer or the hospital).

•

Step 2: Determine the budgeted level of fixed costs.

•

Step 3: Determine the actual volume of output achieved (e.g., units produced for a
factory, units sold for a retailer, patient days for a hospital).

•

Step 4: Build the flexible budget based on the budgeted cost information from steps 1 and
2, and the actual volume of output from step 3.

2.1.

Choosing the appropriate method for PhongPhu Ltd.

2.2.

Operating budget

The operating budget for Phong Phu will be prepare as below:

Revenue/sales budget

Budgeted sales in unit

A

B

11,200

12,900


Budgeted selling price per
unit

$150

$90

Budgeted revenue

$1,680,000

$1,161,000

Production budget
Process 2:

A

B

Budgeted sales in unit

11,200

12,900

Desired ending FG inventory

700

180

Total unit required

11,900

13,080

Less: beginning FG inventory

500

200

Good finished output required

11,400

12,880

Good yield from cost center P2

95%

92%

Gross production needed from cost
center P2

12,000

14,000

Process 1

A

B


Budgeted good units to be
transferred to P2

12,000

14,000

Desired ending WIP inventory

300

125

Total units required

12,300

14,125

Less: beginning WIP inventory

150

100

Good finished output required

12,150

14,025

Good yield from cost center P2

90%

85%

Gross production needed from cost
center P1

13,500

16,500

In Process 2, we can calculate required finish good for each product. Firstly, product A needs
11,400 units of good finished output but we must reject the rates 5% of the process.
 The good yield of process 2 of product A = 100% - 5% = 95%
 The gross production = = 12,000 units.
 Product B, we have the gross production from cost center P2= = 14,000 units
To meet the target good final products after P2, there must be certain output produced from P1.
Product A and product B, work in process units at the end of P1 needs 12,150 and 14,025 units.
Product A and product B reject the rate about 10% and 15%so

 The gross production from P1 product A = = 13,500 units
 The gross production from P1 product B = = 16,500 units


Direct material budget
Direct material budget

X

Y

Required production in units (P1)

13,500

16,500

Direct material per unit

2.5

3

Total Direct material required

33,750

49,500

Less: beginning direct material inventory

500

300

Plus: desired ending direct material
inventory

600

350

Direct material to be purchased in unit

33,850

49,550

Budgeted direct material cost

$20

$8

Budgeted cost of direct material to be
purchased

$677,000

$396,400

Process 1add materials, therefore, the materials needed will be based on production requirements
in the process 1. X is the material used in producing A and Y is used to make B.
 2.5 units of X are used to make 1 product A and 13,500 units are required
 Total direct material required = = 33,750.


Based on the beginning inventory and desired ending, direct material purchased is 33,850 units
of X. The cost per unit of X is $20
 The total budgeted cost to purchase X = = $677,000
 The cost to purchased Y = $396,400

Direct labor budget
Budgeted direct labor cost in Process 1

A

B

Gross production in units

13,500

16,500

DL required per unit, in hours

1

0.6

Total DL hours required

13,500

9,900

Budgeted cost per DL hour

$10

$10

Budgeted direct labour cost in P1

$135,000

$99,000

Budgeted direct labor cost in Process
2

A

B

Gross production in units

12,000

14,000

DL required per unit, in hours

2

0.9


Total DL hours required

24,000

12,600

Budgeted cost per DL hour

$10

$10

Budgeted direct labour cost in P2

$240,000

$126,000

 The total direct labour hours required for units of A = = 13,500 hours.
 The workers is paid $10, so it will cost = = $135,000 to make 13,500 units of A in
process 1.

 The budgeted cost in P1 for product B is $99,000.
 Producing A and B process 2will cost $240,000 and $126,000.

Fixed manufacturing overhead budget in P1
Budget for fixed manufacturing overhead

A

B

Budgeted DL hours required for each
product

13,500

9,900

Budgeted total DL hours required in P1

23,400

Budgeted fixed manufacturing overhead
rate

$3.49

Budgeted fixed overhead allocated to each
product

$47,076.92

In PhongPhu Ltd., the base to calculate overhead is direct labour hours.

$34,523.08


-

In process 1, total fixed cost is $81,600 and the total direct labour hours required is

23,400.
 The rate to allocate fixed overhead = = $3.49 per hour.
 The budgeted fixed overhead to be allocate to A is $47,076.92 and B is $34,523.08

Total manufacturing overhead budget in P1
Budget for total manufacturing
overhead in P1

A

B

Total DL hours required

13,500

9,900

Budgeted variable overhead per DL
hours

$5

$5

Total budgeted variable
manufacturing overhead

$67,500

$49,500

Budgeted fixed manufacturing
overhead

$47,076.92

$34,523.08

Total budgeted manufacturing
overhead

$114,576.92

$84,023.08

The rate per hour of variable overhead is determined as $5
 The total budgeted variable overhead for A is $67,500 and B is $49,500.

Budget for manufacturing overhead in P2
Budget for fixed manufacturing overhead

A

B

Budgeted DL hours required for each product

24,000

12,600

Budgeted total DL hours required in P1

36,600

Budgeted fixed manufacturing overhead rate

$3.43

Budgeted fixed overhead allocated to each product

$82,327.87

$43,222.13

Total manufacturing overhead budget in P2
Budget for total manufacturing overhead in P2

A

B

Total DL hours required

24,000

12,600

Budgeted variable overhead per DL hours

$3

$3

Total budgeted variable overhead

$72,000

$37,800

Budgeted fixed overhead

$82,327.87

$43,222.13

Total budgeted overhead

$154,327.87

$81,022.13


Applying the same calculation in process 1 for process 2, we will have a final result of total
budgeted overhead for A is $154,327.87 and B is $81,022.13

Ending inventory budget for materials
Ending inventory budget for materials

X

Y

Budgeted cost of DM purchase

$677,000

$396,400

Beginning DM inventory

$9,000

$1,800

DM available for use

$686,000

$398,200

Budgeted cost of desired ending DM inventory

$12,000

$2,800

Budgeted cost of DM to be used

$674,000

$395,400

Based on the direct material budget, PhongPhu Ltd can know how much the cost of material to
be used is. It is computed following this calculation
=

Ending inventories budget for WIP and cost of WIP to be used in P2
Ending inventories budget for WIP

A

B

Budgeted cost of DM to be used

$674,000

$395,400