Lecture Accounting: What the numbers mean (5/e) - Chapter 14: Cost analysis for planning

After reading this chapter, you should be able to answer the following questions: What is the cost terminology that relates to the budgeting process? Why are budgets useful, and how does management philosophy influence the budget process? How are alternative budget time frames used?...

CHAPTER 14 COST ANALYSIS FOR PLANNING McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives What is the cost terminology that relates to the budgeting process? Why are budgets useful, and how does management philosophy influence the budget process? How are alternative budget time frames used? What is the significance of the sales forecast (or revenue budget) to the overall operating budget? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives How is the purchases/production budget developed? What is the importance of cost behavior patterns in developing the operating expense budget? Why are a budgeted income statement and balance sheet prepared? How is the cash budget developed? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objectives Why and how are standards useful in the planning and control process? 10 How is the standard cost of a product developed? 11 How are standard costs used in the cost accounting system? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã What is the cost terminology that relates to the budgeting process? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Planning and Budgeting ã Planning is the initial part of the planning and control cycle • A budget is a plan in financial terms • The results of an organization’s activities will be reported in terms of income, cash flow, and financial position – the financial statements McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Revisit Plans Strategic, Operational, and Financial Planning Planning and Control Cycle Performance Analysis: Plans vs Actual Results (Controlling) McGraw­Hill/Irwin Implement Plans Data Collection and Performance Feedback Executing Operational Activities (Managing) âTheMcGrawưHillCompanies,Inc.,2002 Usefulness of Budgets ã The preparation of a budget forces management to plan • The budget provides a benchmark against which to compare actual performance • The budgeting process requires communication and coordination among functional areas of a firm McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Standard Costs ã A standard cost is a budget for each component – materials, labor, and overhead – of a product • Standard costs are used in the planning and control processes of manufacturing and other types of companies McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Cost Classifications ã Classifying costs based on the relationship of total cost to volume of activity results in categories of variable, fixed, and mixed costs • Classifying costs according to a time-frame perspective results in committed and discretionary costs – A committed cost is incurred to execute a long-range policy decision – A discretionary cost is one that can be adjusted in the short term at managements discretion McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã Why are a budgeted income statement and balance sheet prepared? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Budgeted Income Statement • Use the sales forecast, the cost of goods sold budget, and the operating expense budget to prepare budgeted income statement • An important step in determining profitability and overall satisfactory results McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Budgeted Balance Sheet • A budgeted balance sheet is prepared after the impact of all the other budgets has been determined • Depreciation, amortization, inventory, cash, liabilities, and owners’ equity are all affected by the other budgets McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective ã How is the cash budget developed? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Cash Budget • Like a budgeted cash flow statement – but with a short time frame • Must anticipate short-term borrowing needs • Must know when excess cash can be invested for interest revenue • Must make assumptions about collection of accounts receivable and sales through a cash receipts budget • Must make assumptions about cash payments McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective • Why and how are standards useful in the planning and control process? McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Standard Costs ã Used in: – Planning and control process of management – Value inventory for financial reporting • Has two inputs: – Quantity of input – Cost per unit of input • Is a unit budget McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Using Standard Costs ã Standard costs are used to compare to actual costs • Differences are called variances • The variances may be due to either differences in input quantity or differences in cost per input unit • Appropriately developed, standard costs can be used in the cost accounting system McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Learning Objective 10 ã How is the standard cost of a product developed? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Developing Standards • Ideal standards – assumes operating conditions will be ideal; maximum efficiency at all times; usually will have unfavorable variances • Attainable standards – recognizes there will be some operating inefficiencies; will have both favorable and unfavorable variances • Past experience standards – includes all inefficiencies from past operations; does not contain a challenge McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Learning Objective 11 • How are standard costs used in the cost accounting system? McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Costing Products with Standard Costs • Must aggregate the individual standard costs for each of the inputs: – Raw materials – Direct labor – Overhead • Purchasing agent provides information about materials costs • Human resources will provide information about labor costs McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Overhead Standard Costs • Overhead costs are classified as fixed or variable • Variable overhead will be expressed in terms that reflect the causes of overhead expenditures • Fixed overhead will be expressed as a total cost per accounting period and allocated to individual products McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 Other Uses of Standards • Can be used for planning and control of period costs • Can be used with quantitative goals of the organization • The development of goals can be expressed as standards • Do not have to be expressed in dollars McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Budgeting for Other Analytical Purposes ã Service firms can use budgeting techniques for financial and nonfinancial resources such as time budgets • Can also be used in manufacturing firms in areas not related to production such as customer service McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc., 2002 ... are standard costs used in the cost accounting system? McGraw­Hill/Irwin ? ?The? ?McGraw­Hill Companies, Inc., 2002 Learning Objective • What is the cost terminology that relates to the budgeting... be prepared for a single period or for several periods • A single-period budget is prepared in the months preceding the beginning of the year and is used the entire year • A multi-period or rolling... McGrawưHill/Irwin âTheMcGrawưHillCompanies,Inc.,2002 Planning and Budgeting ã Planning is the initial part of the planning and control cycle • A budget is a plan in financial terms • The results of