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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
LEARNING OBJECTIVES
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LEARNING GOALS
After studying this chapter, you should be able to:
LEARNING OBJECTIVES
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Continued
LEARNING OBJECTIVES
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Click the button to skip Questions to Think About
QUESTIONS TO THINK ABOUT:�Dr. Jones, DDS
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Why did Dr. Jones fire his bookkeeper? Were his financial problems her fault? Why or why not?
QUESTIONS TO THINK ABOUT:�Dr. Jones, DDS
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How would a formal budgeting system help Dr. Jones get out of his financial difficulties?
QUESTIONS TO THINK ABOUT:�Dr. Jones, DDS
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Many small businesses do not budget, reasoning that they are small enough to mentally keep track of all revenues & expenditures. Comment on this idea.
QUESTIONS TO THINK ABOUT:�Dr. Jones, DDS
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Do you budget? Explain why you do or do not?
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Discuss budgeting & its role in planning, control, & decision making.
LEARNING OBJECTIVE
PLANNING: Definition
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Looking ahead to see what actions should be taken to realize particular goals.
LO 1
CONTROL: Definition
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Looking backward, determining what actually happened & comparing it with previously planned outcomes.
LO 1
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Where do budgets fit into planning & control?
Budgets are financial plans for the future, identifying objectives & the actions needed to achieve them.
LO 1
PLANNING, CONTROL & BUDGETS
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LO 1
EXHIBIT 8-1
Budgets provide feedback for investigation on achieving the strategic plan.
ADVANTAGES OF BUDGETING
A budgetary system provides the following advantages:
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LO 1
BUDGETS
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LO 1
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Define & prepare a master budget.
LEARNING OBJECTIVE
MASTER BUDGET: Definition
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Comprehensive financial plan for organization as a whole.
LO 2
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What is a “continuous” budget?
A continuous budget is a moving 12-month budget, adding a month as each month expires.
LO 2
MASTER BUDGETS: Major Components
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LO 2
OPERATING BUDGETS: Steps in the Process
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LO 2
TEXAS REX, INC.: Background
Texas Rex, Inc., is a trendy restaurant in the Southwest that sells T-shirts with a Texas Rex dinosaur logo. The operating budgets that follow are for manufacturing costs of Texas Rex T-shirts.
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LO 2
SALES BUDGET
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LO 2
Schedule 1 describes expected sales in units & dollars.
FORMULAS: Production Units
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Except for JIT systems, production budgets must meet sales needs & satisfy ending inventory requirements.
LO 2
Units to be produced =
Expected unit sales +
Units in ending inventory –
Units in beginning inventory
PRODUCTION BUDGET
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LO 2
Schedule 2 describes units to be produced to meet Sales Budget.
TEXAS REX, INC.: Direct Materials
Texas Rex, Inc., purchases 2 direct materials (DM) for production of its Texas Rex T-shirts: plain T-shirts & ink to produce the dinosaur logo.
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LO 2
FORMULAS: Purchases
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Direct materials purchases budget tells amount & cost of raw materials purchased in each period.
LO 2
Direct materials (DM) purchased =
DM needed for production +
DM desired in ending inventory –
DM in beginning inventory
DM PURCHASES BUDGET
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LO 2
Schedule 3 describes DM to be purchased to meet Production Budget.
DIRECT LABOR BUDGET
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LO 2
Schedule 4 shows hours & cost of DL needed to meet Production Budget.
OVERHEAD BUDGET
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LO 2
Schedule 5 shows expected indirect costs needed to meet Production Budget.
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How do we determine the cost of finished goods ending inventory?
Unit cost of finished goods is (per unit) DM + DL + Overhead.
LO 2
FINISHED GOODS BUDGET
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LO 2
Schedule 6 shows unit cost of finished goods for balance sheet.
CGS BUDGET
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LO 2
Schedule 7 presents the expected cost of goods sold for the year.
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How do we project income from the operating budgets?
Estimate selling & administrative expenses, then transfer all information into projected income statement.
LO 2
SALES & ADMINISTRATIVE EXPENSES BUDGET
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LO 2
Schedule spread over 2 pages.
Schedule 8 outlines planned expenditures for nonmanufacturing activities.
BUDGETED INCOME STATEMENT
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LO 2
Schedule 9 presents a projected income statement.
FINANCIAL BUDGETS
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LO 2
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What is the purpose of the cash budget?
Cash budgets document the need for cash & the ability to repay debt.
LO 2
FORMULA: Cash Budget
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Projecting the ending cash balance includes cash collections, payments, & borrowings & includes minimum cash needed.
LO 2
Ending cash balance =
Beginning balance +
(cash receipts – disbursements) +
(cash borrowing – repayments)
CASH BUDGET
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LO 2
Schedule 10 presents projected cash needs.
MASTER BUDGET INTERRELATIONSHIPS
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LO 2
EXHIBIT 8-5
BUDGETED BALANCE SHEET
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Schedule 11 presents end of year balance sheet.
LO 2
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Describe flexible budgeting & features that should encourage goal-congruent behavior.
LEARNING OBJECTIVE
STATIC BUDGET: Definition
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A budget for a particular level of activity.
LO 3
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Why are static budgets not good for performance evaluation?
Actual level of activity may differ from the static budget level & misrepresent performance.
LO 3
FLEXIBLE BUDGET: Definition
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A budget for expected costs of a range of activity levels.
LO 3
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How are budgets related to performance evaluation?
Bonuses, salary increases, promotions are based on achieving or beating budget targets.
LO 3
GOAL CONGRUENCE: Definition
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Alignment of managerial & organizational goals.
LO 3
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What is participative budgeting?
Participative budgeting involves subordinate managers in setting budget targets to achieve goal congruence.
LO 3
PARTICIPATIVE BUDGETING
Potential problems
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LO 3
CONTROLLABLE COSTS: Definition
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Are costs whose level a manager can influence
LO 3
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Explain how activity-based budgeting works.
LEARNING OBJECTIVE
ACTIVITY-BASED BUDGETING
Activity-based budgeting fits ABC & ABM systems. Budgets are developed for company activities to show the resources consumed. Can be done as a flexible budget.
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LO 4
ACTIVITY FLEXIBLE BUDGET
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LO 4
EXHIBIT 8-10
Budget can be developed based on different activity drivers.
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THE END
CHAPTER 8