bg management accounting chapter 7 3956

CHAPTER BUDGETING PROCESS 7.1 Master budget 7.1.1 Definition and characteristic of master budget A Budget is a detailed plan for acquiring and using financial and other resources over a specified time period It presents a plan for the future expressed in formal quantitative terms The master budget is a summary of a company’s plans that sets specific target for sales, production, distribution and financing activities Characteristic of master budget Objectives Meanings Advantages/disadvantages Characteristics Methods Components 7.2 Preparing master budget Ending Finished Goods Budget Direct Materials Budget Sales Budget Production Budget Selling and Administrative Budget Direct Labor Budget Manufacturing Manufacturing Overhead Overhead Budget Budget Cash Budget Budgeted Financial Statements The Sales Budget This budget displays the projected/expected sales in units for each budget period and then multiplies the unit selling price to determine sales revenue The Production Budget The production budget list the number of units that must be produced during each budget period to meet anticipated sales demand and satisfy ending inventory requirements The Direct Materials Budget The Direct Materials Budget The direct materials budget shows the amount and cost of raw materials that must be purchased and used during a budget period Format of the Cash Budget The cash budget is divided into four sections: Cash receipts listing all cash inflows excluding borrowing Cash disbursements listing all payments excluding repayments of principal and interest Cash excess or deficiency The financing section listing all borrowings, repayments and interest 7.2 Flexible budget 7.2.1 Definition and characteristic of flexible budget Definition : A flexible budget provides estimates of what costs should be for any level of activity within a specified range Characteristics: When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget 7.2.2 Flexible budget variance All of the variances are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period, they are called activity variances The most important activity variance appears at the very bottom of the report; namely, the favorable variance for net operating income 7.3 Standard costs 7.3.1 Definition and setting standard cost Standards are benchmarks or “norms” for measuring performance Two types of standards are commonly used Quantity standards specify how much of an input should be used to make a product or provide a service Cost (price) standards specify how much should be paid for each unit of the input Variance Analysis Cycle Identify questions Receive explanations Take corrective actions Conduct next period’s operations Analyze variances Prepare standard cost performance report Begin 7.3.2 Using standard cost to analysis variance Variance Analysis Price Variance Materials price variance Labor rate variance VOH spending variance Quantity Variance Materials quantity variance Labor efficiency variance VOH efficiency variance 7.3.2 Using standard cost to analysis variance Actual Quantity × Actual Price Actual Quantity × Standard Price Price Variance Standard Quantity × Standard Price Quantity Variance 7.3.3 Evaluation of controls based on standard costs - Direct- materials price variance - Direct- materials quantity variance - Direct- labor rate variance - Direct- labor efficiency variance .. .7. 1 Master budget 7. 1.1 Definition and characteristic of master budget A Budget is a detailed plan for acquiring... excess or deficiency The financing section listing all borrowings, repayments and interest 7. 2 Flexible budget 7. 2.1 Definition and characteristic of flexible budget Definition : A flexible budget... the very bottom of the report; namely, the favorable variance for net operating income 7. 3 Standard costs 7. 3.1 Definition and setting standard cost Standards are benchmarks or “norms” for measuring