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

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Chapter 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 Study Objectives Define budgeting, and discuss its role in planning, controlling, and decision making Prepare the operating budget, identify its major components, and explain the interrelationships of the various components Identify the components of the financial budget, and prepare a cash budget Define flexible budgeting, and discuss its role in planning, control, and decision making Define activity-based budgeting, and discuss its role in planning, control, and decision making Identify and discuss the key features that a budgetary system should have to encourage managers to engage in goal-congruent behavior The Role of Budgeting in Planning and Control 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 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 The Role of Budgeting in Planning and Control Preparing the Operating Budget The first budget is the sales budget which is based on the sales forecast Schedule (in thousands) Starting point for Production Budget Starting point for Marketing Expense Budget Goes to Budgeted Income Statement Preparing the Operating Budget Schedule (in thousands) Starting point for Direct Materials Purchases Budget Starting point for Direct Labor Budget Preparing the Operating Budget Schedule (in thousands) * Follows the inventory policy of having million pounds of materials on hand at the end of the first and second quarters and million pounds on hand at the end of the third and fourth quarters Goes to Cost of Goods Sold Budget Preparing the Operating Budget Schedule (in thousands) Starting point for Overhead Budget Goes to Cost of Goods Sold Budget 10 Flexible Budgets for Planning and Control Static budgets • Master budget • Vital for planning • Less useful for control • Developed around a single level of activity • Budgeted activity level rarely equals actual activity Flexible budgets • Variable budget • Provides expected costs for a range of activity • Provides budgeted costs for the actual activity level 28 Flexible Budgets for Planning and Control 29 Flexible Budgets for Planning and Control • Flexible budget performance report – Compare budgeted costs given the actual level of activity to the actual costs for the same level – Locate possible problem areas by examining the flexible budget variances – Examines efficiency 30 Flexible Budgets for Planning and Control 31 Flexible Budgets for Planning and Control • Flexible budget performance report – Compare budgeted costs given the actual level of activity to the actual costs for the same level – Locate possible problem areas by examining the flexible budget variances – Examines efficiency • Managerial performance report – Flexible budget variances – Actual results vs flexible budget – Examines efficiency – Volume variances – Static budget vs flexible budget – Examines effectiveness 32 Flexible Budgets for Planning and Control 33 Flexible Budgets for Planning and Control A flexible budget can be built for five overhead activities using three drivers; each is budgeted for two activity levels 34 Flexible Budgets for Planning and Control The activity-based performance report measures budget variances for each of the overhead activities 35 Activity-Based Budgets • ABB begins with output and then determines the resources necessary to created that output • ABB works backwards from activities and their drivers to the underlying costs – Traditional budgeting relies on functional-based line items (salaries, supplies, etc.) – Flexible budget uses cost behavior to split functional-based line items into fixed and variable 36 Activity-Based Budgets Traditional budgeting relies on functional-based line items 37 Activity-Based Budgets Flexible budgeting uses cost behavior to split functional-based line items into fixed and variable costs 38 Activity-Based Budgets Steps to construct an ABB Determine the unit’s output Identify the activities (and related drivers) needed to deliver the output Estimate the demand for each activity Determine the cost of resources required to produce the relevant activities 39 Activity-Based Budgets 40 The Behavioral Dimension of Budgeting • Characteristics of a good budgetary system – Frequent feedback on performance – Monetary and nonmonetary incentives – Participative budgeting – Realistic standards – Controllability of costs – Multiple measures of performance 41 COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan End Chapter COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license 42 ... budget, and prepare a cash budget Define flexible budgeting, and discuss its role in planning, control, and decision making Define activity-based budgeting, and discuss its role in planning, control, ... (in thousands) * Follows the inventory policy of having million pounds of materials on hand at the end of the first and second quarters and million pounds on hand at the end of the third and fourth... Budget Schedule 11 (in thousands) 17 Operating Budgets for Merchandising and Service Firms • Merchandising – Merchandise purchases replaces production – Direct materials and direct labor are not