MANAGEMENT ACCOUNTING

AGUS SISWANDI 01153056

PPT 8 -1

Chapter Eight

Functional and Activity-Based Budgeting

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Learning Objectives
q Define budgeting and discuss its role in planning,

control, and decision making.

q Define and prepare the master budget, identify its

major components, and explain the interrelationships of its various components.

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Learning Objectives (continued)

q Describe flexible budgeting and identify the

features that a budgetary system should have to encourage managers to engage in goal-congruent behavior.
q Describe activity-based budgeting.

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Definition and Role of Budgeting

Planning Strategic Plan Long-Term Objectives Short-Term Objectives Short-Term Plan Budgets Feedback Comparison of Actual with Planned Investigation Corrective action Budgets are quantitative expressions of plans Control Monitoring of Actual Activity

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Purposes of Budgeting
q It forces managers to plan. q It provides information that can be used to improve

decision making.
q It provides a standard for performance evaluation. q It improves communication and coordination.

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Two Dimensions of Budgeting

There are two dimensions to budgeting: 1. How is the budget prepared? 2. How is the budget used to implement the organizations plan?
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Master Budget
A master budget can be divided into operating and financial budgets. Operating budgets describe the income-generating activities of a firm: sales, production, and finished goods inventories. Financial budgets detail the inflows and outflows of cash and the overall financial position.

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The Operating Budget

The operating budget consists of a budgeted income statement accompanied by the following support schedules:
q Sales budget q Production budget q Direct material purchases budget q Direct labor budget q Overhead budget q Selling and administrative expenses budget q Ending finished goods inventory budget q Cost of goods sold budget
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Sales Budget (Schedule 1)

______________Quarter____________ 1 Units Unit selling price 2,000 x $0.70 $1,400 ===== 2 6,000 x $0.70 $4,200 ===== 3 6,000 x $0.80 $4,800 ===== 4 2,000 x $0.80 $1,600 ===== Year 16,000 x $0.75 $12,000 ======

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Production Budget (Schedule 2)

_____________Quarter____________

1 Sales (Schedule 1) Desired ending inventory Total needs 2,000 500 2,500

2 6,000 500 6,500 (500) 6,000 ====

3 6,000 100 6,100 (500) 5,600 ====

4 2,000 100 2,100 (100) 2,000 ====

Year 16,000 100 16,100 (100) 16,000 =====

Less: Beginning inventory (100) Units to be produced 2,400 ====

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Direct Materials Budget (Schedule 3)

______________Quarter______________

1 Units to be produced (2) 2,400 Direct materials per unit x 26 Production needs 62,400 Desired ending inventory 8,000 Total needs 70,400 Less: Beginning inventory (5,000) Direct materials to be purchased 65,400 Cost per pound x$0.01 Total purchase cost $654 ===

2 3 6,400 5,600 x 26 x 26 156,000 145,600 8,000 5,000 164,000 150,600 (8,000) (8,000) 156,000 x $0.01 $1,560 ===== 142,600 x $0.01 $1,426 =====

4 Year 2,000 16,000 x 26 x 26 52,000 416,000 5,000 5,000 57,000 421,000 (5,000) (5,000) 52,000 416,000 x $0.01 x $0.01 $520 $4,160 ==== ===== PPT 8 -12

Direct Labor Budget (Schedule 4)

________________Quarter____________ 1 Units to be produced (Sch. 2) Direct labor time Total hours needed Average wage per hour Total direct labor cost 2,400 x 0.015 36 x $10 $360 2 6,000 x 0.015 90 x $10 $900 3 5,600 x 0.015 84 x $10 $840 4 2,000 x 0.015 30 x $10 $300 Year 16,000 x 0.015 240 x $10 $2,400

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Overhead Budget (Schedule 5)

_____________Quarter_____________

1 Budgeted DLH ( Sch. 4) Variable overhead rate 36 x $8

2 90 x $8 $720 320 $1,040 =====

3 84 x $8 $672 320 $992 ====

4 30 x $8 $240 320 $560 ====

Year 240 x $8 $1,920 1,280 $3,200 =====

Budgeted variable overhead $288 Budgeted fixed overhead* Total overhead 320 $608 ====

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

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Selling and Administrative Expenses Budget (Schedule 6)

________________Quarter____________ 1 2 3 4 Planned sales in units (Sch. 1) 2,000 6,000 6,000 2,000 Variable S & A exp. per unit x $0.05 x $0.05 x $0.05 x $0.05 Total variable expense $100 $300 $300 $100 Fixed S & A expenses: Salaries $ 35 $ 35 $ 35 $ 35 Advertising 10 10 10 10 Depreciation 15 15 15 15 Insurance --15 -Travel 5 5 5 5 Total fixed expenses $ 65 $ 65 $ 80 $ 65 Total S & A expenses $165 $365 $380 $165 Year 16,000 x $0.05 $ 800 $ 140 40 60 15 20 $ 275 $1,075

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Ending Finished Goods Inventory Budget (Schedule 7)

Unit-cost computation: Direct materials (26 lb.. @ $0.01) Direct labor (0.015 hr. @ $10) Overhead: Variable (0.015 hr. @ $8) Fixed (0.015 hr. @ $5.33*) Total unit cost *$1,280/240 = $5.33 Units Finished goods: Concrete block 100,000 Unit Costs Total 0.12 0.08 $0.61 ==== $0.26 0.15

$0.61 $61,000 PPT 8 -16

Cost of Goods Sold Budget (Schedule 8)

Direct materials used (Schedule 3)* Direct labor used (Schedule 4) Overhead (Schedule 5) Budgeted manufacturing costs Beginning finished goods Goods available for sale Less: Ending finished goods (Schedule 7) Budgeted cost of goods sold $4,160 2,400 3,200 $9,760 55 $9,815 (61) $9,754 ===== *Production needs x $0.01 = 416,000 x $0.01
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The Financial Budgets

The usual financial budgets prepared are:

q The cash budget q The budgeted balance sheet q The budget for capital expenditures

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The Cash Budget

Beginning cash balance Add: Cash receipts Cash available Less: Cash disbursements Less: Minimum cash balance Cash surplus (deficiency) Add: Cash from loans Less: Loan repayments Add: Minimum cash balance End cash balance $x,xxx x,xxx $x,xxx x,xxx x,xxx $x,xxx x,xxx x,xxx x,xxx $x,xxx =====
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Cash Budget Example

a. A $100,000 minimum cash balance is required for the end of each quarter. Money can be borrowed and repaid in multiples of $100,000. Interest is 12 % per year. Interest payments are made only for the amount of the principal being repaid. All borrowing takes place at the beginning of a quarter and all repayment takes place at the end of a quarter. b. Half of all sales are for cash, 70% of credit sales are collected in the quarter of sale, and the remaining 30% are collected in the following quarter. The sales for the fourth quarter of 2000 were $2 million.
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Cash Budget Example (continued)

c. Purchases of raw materials are made on account; 80% of purchases are paid for in the quarter of purchase. The remaining 20% are paid for in the following quarter. The purchases for the fourth quarter of 2000 were $500,000. d. Budgeted depreciation is $200,000 per quarter for overhead and $15,000 per quarter for selling and administrative expenses (see Schedules 5 and 6).

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Cash Budget Example (continued)

e. The capital budget for 2001 revealed plans to purchase additional equipment to handle increased demand at a small plant in Nevada. The cash outlay for the equipment, $600,000, will take place in the first quarter. The company plans to finance the acquisition of the equipment with operating cash, supplementing it with short-term loans as necessary. f. Corporate income taxes are approximately $650,000 and will be paid at the end of the fourth quarter (Schedule 9). g. Beginning cash balance equals $120,000.
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Cash Receipts from Customers

Source Cash sales Received on account from: Quarter 4, 2000 Quarter 1, 2001 Quarter 2, 2001 Quarter 3, 2001 Quarter 4, 2001 Total cash receipts $1,490,000 $3,780,000 $4,710,000 ======== ======== ======== 300,000 490,000 210,000 1,470,000 630,000 1,680,000 720,000 560,000 $2,080,000 ======== -23 PPT 8 Quarter1 Quarter 2 Quarter 3 Quarter 4 $ 800,000 $ 700,000 $2,100,000 $2,400,000

Cash Disbursements for Raw Materials

Source Current quarter Prior quarter Total cash disbursement for raw materials Quarter1 $523 100 Quarter 2 $1,248 131 Quarter 3 $1,141 312 Quarter 4 $416 285

$623 ====

$1,379 =====

$1,453 =====

$701 ====

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Cash Disbursements
____________ 1 Less cash disbursements: Raw materials: Current quarter Prior quarter Direct labor Overhead Selling and adm. Income taxes Equipment Total disbursements $523 100 360 408 150 --600 $2,141 $1,248 131 900 840 350 ----$3,469 $1,141 312 840 792 365 ----$3,450 $416 285 300 360 150 650 --$2,161 ______Quarter__________________ 2 3 4

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Cash Budget (Schedule 10)

_________ ______Quarter_______________ 1 Beginning cash balance Cash collections (PPT 8-23) Total cash available Total disbursements (PPT 8-25) Minimum cash balance Total cash needs Excess (deficiency) of cash Add: Borrowings Less: Repayments Less: Interest paid Ending cash balance $ 120 1,490 $1,610 $2,141 100 $2,241 $ (631) 700 ----$ 169 ====== 2 $ 169 3,780 $3,949 $3,469 100 $3,569 $ 380 --(300) (18) $ 162 ====== 3 $ 162 4,710 $4,872 $3,450 100 $3,550 $1,322 --(400) ( 36) $ 986 ====== 4 $ 986 2,080 $3,066 $2,161 100 $2,261 $ 805 ------$ 905 ===== $ Year 120 12,060 $12,180 $11,221 100 $11,321 $ 859 700 (700) (54) $ 905 ====== PPT 8 -26

Budgeted Income Statement

Sales (Schedule 1) Less: Cost of goods sold (Schedule 8) Gross margin Less: Selling and administrative expenses (Schedule 6) Operating income Less: Interest expense (Schedule 10) Income before taxes Less: Income taxes (PPT 8-25) Net income $12,000 (9,754) $ 2,246 (1,075) $ 1,171 (54) $ 1,117 (650) $ 467 ======
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Total Assets, Last Year

Assets Current assets: Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property, plant, and equipment: Land Building and equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets $ 2,500 9,000 (4,500) 7,000 $7,525 ===== PPT 8 -28 $ 120 300 50 55 $ 525

Total Liabilities and Stockholders Equity, Last Year

Liabilities and Stockholders Equity Current liabilities: Accounts payable Stockholders equity: Common stock, no par Retained earnings Total stockholders equity Total liabilities and stockholders equity $ 600 6,825 7,425 $7,525 ===== $ 100

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Budgeted Total Assets

Assets Current assets: Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property, plant, and equipment: Land Building and equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets $ 9,600 (5,360) 6,740 $7,996 ===== PPT 8 -30 $2,500 $ 905 240 50 61 $1,256

Budgeted Total Liabilities and Stockholders Equity

Liabilities and Stockholders Equity Current liabilities: Accounts payable Stockholders equity: Common stock, no par Retained earnings Total stockholders equity Total liabilities and stockholders equity $ 600 7,292 7,892 $7,996 ===== $ 104

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Flexible and Static Budgeting

Static Budgeting is a budget for a particular level of activity. Flexible Budgeting is a budget that provides a firm with the capability to compute expected costs for a range of activity.

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The Uses of Flexible Budget

q The flexible budget can be used to prepare the budget

before the fact for the expected level of activity.

q Flexible budgeting can be used to compare what costs

should have been for the actual level of activity.

q Flexible budgeting can help managers deal with uncertainty

by allowing them to see the expected outcomes for a range of activities.

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Performance Report (Exhibit 8-6)

Actual Units produced Direct materials cost Direct labor costs Overhead: Variable: Supplies Indirect labor Power Fixed: Supervision Depreciation Rent Total 90.0 200.0 30.0 $2,037.3 ====== 100.0 200.0 20.0 $1,592.0 ====== (10.0) F 0.0 10.0 U 80.0 220.0 40.0 72.0 168.0 48.0 8.0 52.0 U U 3,000 ==== $ 927.3 450.0 Budgeted 2,400 ==== $ 624.0 360.0 Variance 600 F === $303.3 90.0 U U

(8.0) F

$445.3 U ===== PPT 8 -34

Flexible Production Budget (Exhibit 8-7)

Production Costs Variable: Direct materials Direct labor Variable overhead: Supplies Indirect labor Power Total variable costs Fixed overhead: Supervision Depreciation Rent Total fixed costs Total production costs Variable Cost per Unit 2,400 Range of Production 3,000 3,600

$0.26 0.15 0.03 0.07 0.02 $0.53

$ 624 360 72 168 48 $1,272 $ 100 200 20 $ 320 $1,592 =====

$ 780 450 90 210 60 $1,590 $ 100 200 20 $ 320 $1,910 =====

$ 936 540 108 252 72 $1,908 $ 100 200 20 $ 320 $2,228 =====

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Actual vs. Flexible Performance Report (Exhibit 8-8)

Actual Units produced Production costs: Direct materials Direct labor Variable overhead: Supplies Indirect labor Power Total variable costs Fixed overhead: Supervision Depreciation Rent Total fixed costs Total production costs $90.0 200.0 30.0 $ 320.0 $2,037.3 ====== $100.0 200.0 20.0 $ 320.0 $1,910.0 ====== $(10.0) F 0.0 10.0 $0.0 $ 127.3 U ===== U 80.0 220.0 40.0 $1,717.3 90.0 210.0 60.0 $1,590.0 (10.0) F 10.0 U $ 927.3 450.0 $ 780.0 450.0 $ 147.3 0.0 U 3,000 ==== Budget 3,000 ==== Variance ----====

(20.0) F $ 127.3 U

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Behavior Dimensions of Budgeting

q Goal Congruence q Dysfunctional Behavior q Frequent Feedback on Performance q Monetary and Nonmonetary Incentives q Participative Budgeting q Realistic Standards q Controllability of Costs q Multiple Measures of Performance
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Activity-Based Budgeting

Activity flexible budgeting is the prediction of what activity costs will be as activity output changes.

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Flexible Budget: Direct Labor Hours

Cost Formula Fixed Direct materials Direct labor Maintenance Machining Inspections Setups Purchasing Total ----$ 20,000 15,000 120,000 50,000 220,000 $425,000 ======= Variable $10 8 3 1 ------$22 === Direct Labor Hours 10,000 $100,000 80,000 50,000 25,000 120,000 50,000 220,000 $645,000 ======= 20,000 $200,000 160,000 80,000 35,000 120,000 50,000 220,000 $865,000 =======
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Activity Flexible Budget

Driver: Direct Labor Hours Formula Fixed Direct materials Direct labor Subtotal ----$0 == Variable $10 8 $18 === Level of Activity 10,000 $100,000 80,000 $180,000 20,000 $200,000 160,000 $360,000

Driver: Machine Hours Fixed Maintenance Machining Subtotal $20,000 15,000 $35,000 ====== Variable $5.50 2.00 $7.50 ==== 8,000 $64,000 31,000 $95,000 16,000 $108,000 47,000 $155,000
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Activity Flexible Budget (continued)

Driver: Number of Setups Fixed Inspections Setups Subtotal $80,000 --$80,000 ====== Variable $2,100 1,800 $3,900 ===== 25 $132,500 45,000 $177,500 30 $143,000 54,000 $197,000

Driver: Number of Orders Fixed Purchasing Total $211,000 ======= Variable $1 == 15,000 $226,000 $678,000 ======= 25,000 $236,000 $948,000 =======
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Activity-Based Performance Report

Actual Costs Direct materials Direct labor Maintenance Machining Inspections Setups Purchasing Total $101,000 80,000 55,000 29,000 125,500 46,500 220,000 $657,000 ======= Budgeted Costs $100,000 80,000 64,000 31,000 132,500 45,000 226,000 $678,500 ======= Budget Variance $1,000 U --9,000 F 2,000 F 7,000 F 1,500 U 6,000 F $21,500 F ======

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Variances for the Inspection Activity

Activity Inspection: Fixed Variable Total $ 82,000 43,500 $125,500 ======= $ 80,000 52,500 $132,500 ======= $2,000 U 9,000 F $7,000 F ===== Actual Cost Budgeted Cost Variance

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End of Chapter 8

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