ACC 311 – BUDGETING AND VARIANCES I



ACCTG 505 – CHAPTERS 6 and 7

PLANNING & CONTROL 1, MASTER AND FLEXIBLE BUDGETS

***************************************************************************

The Master Budget -- Chapter 6

A. Budgeting ~ financial blueprint ~ guidance towards reaching operational goals.

Basic Roles of Budgeting

planning only planning some companies do

feedback & evaluation people and organizational subunits

motivation goal congruence

Environment of Budgeting

Driven by sales forecast;~ so what factors affect that?

External:

Internal: “Tone at the Top”

organizational structure:

corporate culture:

management style:

B. Master budget -- formal statement of future plans expressed in quantitative terms. Static/fixed budget.

1. Made up of several schedules and sub-budgets.

operational decisions ~ operating budgets

financial decisions ~ financial budgets

(Compilation order follows listings above.)

2. Time period

generally one year – in incremental units (months, quarter)

rolling budget (continuous) budget ~ allows regular updating

3. Some Technical Issues:

a) Production and Purchases Budgets

Example: Maui Diving expects 1,100 units to be sold during August. Target ending inventory is 80 units. Beginning inventory units on hand are 100. How many units must be produced?

Units required for August’s sales 1,100

Target ending inventory 80

Total units needed 1,180

Less beginning inventory 100

Units to be produced 1,080

Each unit requires 2 lb of direct materials at $20 per pound. Ending materials inventory is to be 15% of materials needed for next month’s sales. September sales forecasted at 1,600 units.

What is August’s desired ending inventory?

September sales x 2 lb = 3,200 lb

3,200 x 15% = 480 lb.

What is August’s beginning inventory?

August sales x 2 lb = 2,200 lb

2,200 x 15% = 330 units

What is August’s materials purchasing budget?

Materials needed for August production

Plus target ending inventory

Total materials needed

Less units in beginning inventory

Material units to be purchased

Cost per pound

Cost of materials to be purchased

b) Cash Budget ~ perhaps most important budget schedule

cash receipts budget

– cash sales + receipts from credit sales

cash disbursements

financing needs ~ special arrangements with bank?

Example: Maui Diving’s sales are 25% cash sales, 75% credit sales. Collection pattern is 50% in month of sale, 27% month following sale, 20% second month following sale, 3% uncollectible

Budgeted sales are June $200,000

July $250,000

August $264,000

Sept. $260,000

What are expected cash collections in September?

Sept. cash sales

Sept. credit sales

Aug. credit sales

July credit sales

Total cash receipts

E. Activity Based Budgeting (ABB). Budgets for indirect costs in each activity cost pool. Provides information on levels of support required by each product from the different activities.

F. Kaizen Budgeting

kaizen ~ continuous, incremental improvement

Incorporate these improvements (usually cost reductions) into budget so targets are improved as time goes by in budget period.

II Responsibility Accounting

Managers are evaluated based on the activities over which they have control

A. Controllability

degree of influence a manager has over costs, revenues, and use of resources in his/her department

B. Responsibility Centers

• cost centers ~ e.g. purchasing dept., nursing function in a hospital

• revenue centers ~ e.g. sales dept.,

• profit centers ~ reports revenues, costs, and an income

• investment centers ~ reports revenues, costs, income, and return relative to investment (assets) used by the center. Most autonomous.

C. Theoretically, managers of responsibility centers should be evaluated on only the costs and revenues over which they have control.

III. FlexibleBudgets, Standard Costing Systems and Variance Analysis -- Chapter 7

A. Questions Addressed

1. How useful is the master budget?

•

•

2. Alternative? Adopt standard costing system and flexible budgeting.

3. What are standard costing systems?

cost tracking based on quantity of input units should have used at price should have paid for actual output.

4. What are the differences between actual and expected results and who/what responsible for those differences?

Variance analysis

• flexible budget variances – (covered)

• sales activity variances – (limited coverage)

Illustration: SP, $10 per unit. Variable costs, $6 per unit. Fixed costs, $20,000. Anticipated output & sales, 10,000 units. Actual results, 8000 units produced and sold.

Actual Results Master (Static) Budget

8,000 units 10,000 units

actual rev. expected rev.

actual standard

input input

costs costs

for for

actual expected

output output

activity activity

Static Variance

Actual Results Flexible Budget Master Budget

8,000 units 8000 units 10,000 units

actual rev. exp. rev. exp. rev

actual standard standard

input input input

costs costs costs

for for for

actual actual expected

output output output

activity activity activity

Flexible-Budget Var. Sales-Volume Var.

Simplifying assumption: sales activity is equal to production for period.

B. Sales Volume Variance – An Activity Variance

Arises because actual output and sales not equal to master budget (expected) output and sales.

Measurement:

(Actual units minus expected units) x CM per unit

8,000 – 10,000 x $4 per unit = $8,000 U

C. Flexible Budget Variances – Why Arise?

unit input ______ component

unit input _______ component

D. Materials and Labor Price and Efficiency Variances

Formula:

Overall (Net) Flexible Budget Variance

Actual input quantity Actual input quantity Standard input quantity

x x x

Actual input price Standard input price Standard input price

Price Variance Efficiency Variance

A#(A$ -- S$) S$(A# -- S#)

Example: Assume the following facts:

Standards and Budget Information:

Standard input quantity for direct materials per unit 10 lb

Standard purchase price per lb material $5

Standard direct labor hours per unit 2 hrs.

Standard direct labor rate per hour $20

Master budget production and sales expected (output) 25 units

Actual Results:

Actual production and sales 20 units

Purchased 500 lb material at $4.90 per lb

Actual materials used 220 lb

Direct labor hours actually used 36 hrs.

Average hourly labor rate actually incurred $21

Determine Price and Efficiency variances for materials and labor inputs.

Materials: (Price isolated at purchase point; quantity, at usage point)

Journalize the materials variances (2 entries):

Labor variances:

Journalize the labor variances (1 compound entry):

III. Accountability for Variances – Who Responsible?

A. Materials Variances

Price variance ~ presumed to be purchasing dept.

Issues: negotiations with suppliers, discounts, quality control

Efficiency variance ~ degree of wastage, production dept?

Issues: product design? process design? quality of materials?

B. Labor Variances

Price variance ~ production department

Issues: skill levels assigned to job, production problems leading to overtime,

Efficiency Variance ~ production department

poorly trained workers

poorly motivated workers

inappropriate skill level – over- or under-skilled

general manufacturing conditions – assigning overtime hours

C. When to Investigate

• always?

• when exceptional by some measure?

• materiality? but a small variance may be critical in some situations

• periodically – end of every quarter?

-----------------------

Financial

Statements

Now

Future

Financial

Statements

OPERATING BUDGETS

Revenue (Sales) Budget

Ending Inventory Budget

Production Budget in Units

Direct Materials budget

Direct Labor Budget

Manufacturing Overhead Budget

Cost of Goods Sold Budget

Nonmanufacturing costs budget

R&D Design

Marketing

Distribution

Customer Support Budget

Administrative Cost

Budgeted Income Statement

FINANCIAL BUDGETS

Cash Budget

Budgeted Balance Sheet

Other:

Capital Budget (Chp. 21)

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download