Cost management accounting and control 6e by hansen mowen guan chapter 08

COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

Chapter 8
Budgeting for Planning
and Control
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

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Study Objectives
1. Define budgeting, and discuss its role in planning, controlling, and
decision making.
2. Prepare the operating budget, identify its major components, and
explain the interrelationships of the various components.
3. Identify the components of the financial budget, and prepare a
cash budget.
4. Define flexible budgeting, and discuss its role in planning, control,
and decision making.
5. Define activity-based budgeting, and discuss its role in planning,
control, and decision making.
6. Identify and discuss the key features that a budgetary system
should have to encourage managers to engage in goal-congruent
behavior.
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The Role of Budgeting

in Planning and Control

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The Role of Budgeting
in Planning and Control
• Types of budgets
– Master budget

• Operating budgets
• Financial budgets

• Time frame
– Annual period
– Multi-year rolling budget

4


The Role of Budgeting
in Planning and Control
• Gathering information
– Forecasting sales
– Forecasting other variables

The master budget starts with the sales
forecast, which is basis for the sales
budget.
All other operating and most financial

budgets are generated from the sales
budget.

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The Role of Budgeting
in Planning and Control

6


Preparing the Operating Budget
The first budget is the sales budget which is based on the
sales forecast.
Schedule 1 (in thousands)

Starting point for Production Budget
Starting point for Marketing Expense Budget
Goes to Budgeted Income Statement

7


Preparing the Operating Budget
Schedule 2 (in thousands)

Starting point for Direct Materials Purchases Budget
Starting point for Direct Labor Budget

8


Preparing the Operating Budget
Schedule 3 (in thousands)

* Follows the inventory policy of having 8 million pounds of materials on hand at the end of the first and second quarters and 5 million pounds on
hand at the end of the third and fourth quarters.

Goes to Cost of Goods Sold Budget

9


Preparing the Operating Budget
Schedule 4 (in thousands)

Starting point for Overhead Budget
Goes to Cost of Goods Sold Budget

10


Preparing the Operating Budget
Schedule 5 (in thousands)

*Includes $200,000 of depreciation in each quarter.

Goes to Cost of Goods Sold Budget

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Preparing the Operating Budget
Schedule 6 (in thousands)

a

Amounts taken from Schedule 3.

b

Amounts taken from Schedule 4.

c

Amounts taken from Schedule 5.

d

Budgeted fixed overhead (Schedule 5)/Budgeted direct labor hours (Schedule 4) = $1,280/240 = $5.33.

Goes to Cost of Goods Sold Budget

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Preparing the Operating Budget
Schedule 7 (in thousands)

*Production needs × $0.01 = 416,000 × $0.01.

Goes to Budgeted Income Statement

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Preparing the Operating Budget
Schedule 8 (in thousands)

Goes to Budgeted Income Statement

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Preparing the Operating Budget
Schedule 9 (in thousands)

Goes to Budgeted Income Statement

15


Preparing the Operating Budget
Schedule 10 (in thousands)

Goes to Budgeted Income Statement

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Preparing the Operating Budget
Schedule 11 (in thousands)

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Operating Budgets for
Merchandising and Service Firms
• Merchandising
– Merchandise purchases replaces production
– Direct materials and direct labor are not required

• For-profit service:
– Sales budget is the production budget
– Inventories are nonexistent

• Not-for-profit service:
– Budget for level and types of services provided
– Statement of sources and uses replaces income
statement
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Preparing the Financial Budget
Cash budget
– Break down into short time periods
– Forecast need for short-term borrowing
– Forecast periods of high cash balances

+
–
–
–
+
+

Beginning cash balance
Cash receipts
Cash available
Cash disbursements
Minimum cash balance
Excess or deficiency of cash
Repayments
Loans
Minimum cash balance
Ending cash balance

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Preparing the Financial Budget
Schedule 12 (in thousands)

(Continued on next slide)

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Preparing the Financial Budget

Schedule 12 (in thousands)

(Continued from previous slide)

(Continued on next slide)

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Preparing the Financial Budget
Schedule 12 (in thousands)

(Continued from previous slide)

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Preparing the Financial Budget
• Budgeted balance sheet
– Current (actual) balance sheet
– Integrate data from all other budgets

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Preparing the Financial Budget
Schedule 13 (in thousands)
a Ending balance from Schedule
12.
b 30 percent of fourth-quarter credit

sales (0.30 × $800,000); see
Schedules 1 and 12.
c From Schedule 3 (5,000,000 lbs.
× $0.01).
d From Schedule 6.
e From the December 31, 2009,
balance sheet.
f December 31, 2009, balance
($9,000,000) plus new equipment
acquisition of $600,000; see the
2009 ending balance sheet and
Schedule 12.
g From the December 31, 2009,
balance sheet and Schedules 5,
8, and 10 ($4,500,000 + $800,000
+ $20,000 + $40,000).
h 20% of fourth-quarter purchases;
see Schedules 3 and 12.
i From the December 31, 2009,
balance sheet.
j $6,825,000 + $894,000 (December
31, 2009, balance plus net income
from Schedule 11).

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Shortcomings of the Traditional
Master Budget Process
• Departmental orientation

– Plan from resources to outputs
– Does not recognize interdependencies among
departments

• Static budgets
– Developed for a single level of activity
– Based on incremental adjustments

• Results orientation
– Disconnects the process from its output
– Cost-cutting accomplished by across-the-board cuts
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