PowerPoint Presentation by Gail B. Wright Professor Emeritus

PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. MANAGEMENT ACCOUNTING 8th EDITION BY HANSEN & MOWEN 8 BUDGETING FOR PLANNING & CONTROL 1

LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING GOALS After studying this chapter, you should be able to: 2

LEARNING LEARNING OBJECTIVES OBJECTIVES 1. Discuss budgeting & its role in planning, control, & decision making. 2. Define & prepare a master budget, identify its major components, & outline the interrelationships of its various components. Continued 3

LEARNING LEARNING OBJECTIVES OBJECTIVES 3. Describe flexible budgeting, & list the features that a budgetary system should have to encourage managers to engage in goal-congruent behavior. 4. Explain how activity-based budgeting works. Click the button to skip Questions to Think About 4

QUESTIONS TO THINK ABOUT: Dr. Jones, DDS Why did Dr. Jones fire his bookkeeper? Were his financial problems her fault? Why or why not? 5

QUESTIONS TO THINK ABOUT: Dr. Jones, DDS How would a formal budgeting system help Dr. Jones get out of his financial difficulties? 6

QUESTIONS TO THINK ABOUT: Dr. Jones, DDS Many small businesses do not budget, reasoning that they are small enough to mentally keep track of all revenues & expenditures. Comment on this idea. 7

QUESTIONS TO THINK ABOUT: Dr. Jones, DDS Do you budget? Explain why you do or do not? 8

LEARNING LEARNING OBJECTIVE OBJECTIVE 1 Discuss budgeting & its role in planning, control, & decision making. 9

LO 1 PLANNING: PLANNING: Definition Definition Looking ahead to see what actions should be taken to realize particular goals. 10

LO 1 CONTROL: CONTROL: Definition Definition Looking backward, determining what actually happened & comparing it with previously planned outcomes. 11

LO 1 Where do budgets fit into planning & control? Budgets are financial plans for the future, identifying objectives & the actions needed to achieve them. 12

PLANNING, CONTROL & BUDGETS LO 1 EXHIBIT 8-1 Budgets provide feedback for investigation on achieving the strategic plan. 13

LO 1 ADVANTAGES OF BUDGETING A budgetary system provides the following advantages: Forces managers to plan Provides information that can be used to improve decision making Provides a standard for performance evaluation Improves communication & coordination 14

LO 1 BUDGETS Improve decision making Set standards Compare actual to budgeted results Communicate & coordinate 15

LEARNING LEARNING OBJECTIVE OBJECTIVE 2 Define & prepare a master budget. 16

LO 2 MASTER MASTER BUDGET: BUDGET: Definition Definition Comprehensive financial plan for organization as a whole. 17

LO 2 What is a “continuous” budget? A continuous budget is a moving 12-month budget, adding a month as each month expires. 18

LO 2 MASTER BUDGETS: Major Components Operating budget Describes income generating activities of a firm Financial budgets Detail inflows & outflows of cash 19

LO 2 OPERATING BUDGETS: Steps in the Process 1. 2. 3. 4. 5. 6. 7. 8. Sales budget Production budget Direct materials purchases budget Direct labor budget Overhead budget Selling & administrative budget Ending finished goods inventory budget Cost of goods sold budget 20

LO 2 TEXAS REX, INC.: Background Texas Texas Rex, Rex, Inc., Inc., is is aa trendy trendy restaurant restaurant in in the the Southwest Southwest that that sells sells T-shirts T-shirts with with aa Texas Texas Rex Rex dinosaur dinosaur logo. logo. The The operating operating budgets budgets that that follow follow are are for for manufacturing manufacturing costs costs of of Texas Texas Rex Rex T-shirts. T-shirts. 21

LO 2 SALES SALES BUDGET BUDGET Schedule 1 describes expected sales in units & dollars. 22

LO 2 FORMULAS: Production Units Except for JIT systems, production budgets must meet sales needs & satisfy ending inventory requirements. Units to be produced Expected unit sales Units in ending inventory – Units in beginning inventory 23

LO 2 PRODUCTION PRODUCTION BUDGET BUDGET Schedule 2 describes units to be produced to meet Sales Budget. 24

LO 2 TEXAS REX, INC.: Direct Materials Texas Texas Rex, Rex, Inc., Inc., purchases purchases 22 direct direct materials materials (DM) (DM) for for production production of of its its Texas Texas Rex Rex T-shirts: T-shirts: plain plain T-shirts T-shirts & & ink ink to to produce produce the the dinosaur dinosaur logo. logo. 25

LO 2 FORMULAS: Purchases Direct materials purchases budget tells amount & cost of raw materials purchased in each period. Direct materials (DM) purchased DM needed for production DM desired in ending inventory – DM in beginning inventory 26

LO 2 DM DM PURCHASES PURCHASES BUDGET BUDGET Schedule 3 describes DM to be purchased to meet Production Budget. 27

LO 2 DIRECT DIRECT LABOR LABOR BUDGET BUDGET Schedule 4 shows hours & cost of DL needed to meet Production Budget. 28

LO 2 OVERHEAD OVERHEAD BUDGET BUDGET Schedule 5 shows expected indirect costs needed to meet Production Budget. 29

LO 2 How do we determine the cost of finished goods ending inventory? Unit cost of finished goods is (per unit) DM DL Overhead. 30

LO 2 FINISHED FINISHED GOODS GOODS BUDGET BUDGET Schedule 6 shows unit cost of finished goods for balance sheet. 31

LO 2 CGS CGS BUDGET BUDGET Schedule 7 presents the expected cost of goods sold for the year. 32

LO 2 How do we project income from the operating budgets? Estimate selling & administrative expenses, then transfer all information into projected income statement. 33

LO 2 SALES SALES & & ADMINISTRATIVE ADMINISTRATIVE EXPENSES EXPENSES BUDGET BUDGET Schedule 8 outlines planned expenditures for nonmanufacturing activities. Schedule spread over 2 pages. 34

LO 2 BUDGETED BUDGETED INCOME INCOME STATEMENT STATEMENT Schedule 9 presents a projected income statement. 35

LO 2 FINANCIAL BUDGETS 1. Cash budget 2. Budgeted balance sheet 3. Budget for capital expenditures 36

LO 2 What is the purpose of the cash budget? Cash budgets document the need for cash & the ability to repay debt. 37

LO 2 FORMULA: Cash Budget Projecting the ending cash balance includes cash collections, payments, & borrowings & includes minimum cash needed. Ending cash balance Beginning balance (cash receipts – disbursements) (cash borrowing – repayments) 38

LO 2 CASH CASH BUDGET BUDGET Schedule 10 presents projected cash needs. 39

EXHIBIT 8-5 MASTER BUDGET INTERRELATIONSHIPS LO 2 40

LO 2 BUDGETED BUDGETED BALANCE BALANCE SHEET SHEET Schedule 11 presents end of year balance sheet. 41

LEARNING LEARNING OBJECTIVE OBJECTIVE 3 Describe flexible budgeting & features that should encourage goal-congruent behavior. 42

LO 3 STATIC STATIC BUDGET: BUDGET: Definition Definition A budget for a particular level of activity. 43

LO 3 Why are static budgets not good for performance evaluation? Actual level of activity may differ from the static budget level & misrepresent performance. 44

LO 3 FLEXIBLE FLEXIBLE BUDGET: BUDGET: Definition Definition A budget for expected costs of a range of activity levels. 45

LO 3 How are budgets related to performance evaluation? Bonuses, salary increases, promotions are based on achieving or beating budget targets. 46

LO 3 GOAL GOAL CONGRUENCE: CONGRUENCE: Definition Definition Alignment of managerial & organizational goals. 47

LO 3 What is participative budgeting? Participative budgeting involves subordinate managers in setting budget targets to achieve goal congruence. 48

LO 3 PARTICIPATIVE BUDGETING Potential problems Setting standards either too high or too low Building slack (padding) into the budget Deliberately underestimating revenues, overestimating costs Pseudoparticipation 49

LO 3 CONTROLLABLE CONTROLLABLE COSTS: COSTS: Definition Definition Are costs whose level a manager can influence 50

LEARNING LEARNING OBJECTIVE OBJECTIVE 4 Explain how activitybased budgeting works. 51

LO 4 ACTIVITY-BASED BUDGETING Activity-based Activity-based budgeting budgeting fits fits ABC ABC & & ABM ABM systems. systems. Budgets Budgets are are developed developed for for company company activities activities to to show show the the resources resources consumed. consumed. Can Can be be done done as as aa flexible flexible budget. budget. 52

LO 4 ACTIVITY FLEXIBLE BUDGET EXHIBIT 8-10 Budget can be developed based on different activity drivers. 53

CHAPTER 8 THE THE END END 54