13-1 Visit UMT online at ACCT125© 2006 UMT ACCOUNTING FUNDAMENTALS FOR MANAGERS University of...

13-1Visit UMT online at www.umtweb.eduACCT125© 2006 UMT

ACCOUNTING ACCOUNTING FUNDAMENTALS FOR FUNDAMENTALS FOR

MANAGERSMANAGERS

University of Management and Technology1901 North Fort Myer Drive

Arlington, VA 22209Voice: (703) 516-0035 Fax: (703) 516-0985

Website: www.umtweb.edu


Carl S. WarrenCarl S. WarrenSurvey of AccountingSurvey of Accounting (2 (2ndnd ed.) ed.)

© 2004 South-Western© 2004 South-Western

Visit UMT online at www.umtweb.edu 13-3ACCT125© 2006 UMT

Task Force Clip Art Task Force Clip Art included in this electronic included in this electronic presentation is used with presentation is used with

the permission of New the permission of New Vision Technology of Vision Technology of

Nepean Ontario, Canada.Nepean Ontario, Canada.


Chapter 13Chapter 13

Budgeting and Standard Cost Budgeting and Standard Cost SystemsSystems


ContinuedContinuedContinuedContinued

Learning ObjectivesLearning Objectives

1. Describe the nature and objectives of budgeting.

2. Describe the master budget for a manufacturing business.

3. Describe the nature and use of standards.

4. Explain and illustrate how standards are used in budgeting.

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:


Learning ObjectivesLearning Objectives

5. Calculate and interpret the basic variances for direct materials and direct labor.

6. Explain how standards can be used for nonmanufacturing expenses.

7. Explain and provide examples of nonfinancial performance measures.


1Describe the nature

and objectives of

budgeting.

Learning ObjectiveLearning Objective


Nature and Objectives of BudgetingNature and Objectives of Budgeting

Establishing specific future goals

Executing plans to achieve the goals

Comparing actual results to the goals

Setting budget goals too tightly

Setting budget goals too loosely

Setting conflicting budget goals

Objectives of BudgetingObjectives of Budgeting

Human Behavior and BudgetingHuman Behavior and Budgeting


Static BudgetsStatic Budgets

A budget that does not reflect potential changes in volume or activity level

Simple—all expenses are budgeted as fixed costs

Does not reflect changes in revenues and expenses that occur as volumes change

Service organizations or administrative departments of retailers and manufacturers

Description:

Strength:

Weakness:

Typical Usage:


Flexible BudgetsFlexible Budgets

A budget that shows revenues and expenses for a variety of volumes or activity levels

Provides information needed to analyze the impact of volume changes on actual operating results

Requires greater research into costs—must differentiate fixed and variable costs

Operational departments of retailers and manufacturers whose costs change with sales and production

Description:

Strength:

Weakness:

Typical Usage:


Flexible BudgetingFlexible Budgeting

Colter Manufacturing CompanyAssembly Department Budget

For the Month Ending July 31, 2003

Units of productionUnits of production 8,0008,000 9,0009,000 10,00010,000

Variable cost:Direct labor ($5 per unit) $40,000 $45,000 $50,000Electricity ($0.5 per unit) 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000

Cost per unit is $5.50 at all levels of activityCost per unit is $5.50 at all levels of activity







Fixed cost:Electric power $ 1,000 $ 1,000 $ 1,000Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000







Fixed cost:Electric power $ 1,000 $ 1,000 $ 1,000Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000

Total department costs $60,000 $65,500 $71,000


Describe the master budget for a manufacturing business.2



SalesBudget

SalesBudget

Income Statement BudgetsIncome Statement Budgets


SalesBudget

SalesBudget

Production BudgetProduction Budget


Expected units of sales + Desired units in ending inventory

- Estimated units in beginning inventory

Total units to be produced


SalesBudget

SalesBudget



Direct MaterialsPurchases Budget


Materials needed for production + Desired ending materials inventory

- Estimated beginning materials inventory

Direct materials to be purchased


SalesBudget

SalesBudget


Direct LaborCost Budget






SalesBudget

SalesBudget




Factory OverheadCost Budget






SalesBudget

SalesBudget









Cost of GoodsSold Budget



SalesBudget

SalesBudget











Selling & Administrative

ExpensesBudget

Selling & Administrative

ExpensesBudget


Elite Accessories Inc.Sales Budget

For the Year Ending December 31, 2004

Wallet:East 287,000 $12.00 $3,444,000West 241,000 12.00 2,892,000Total 528,000 $6,336,000

Unit Sales Unit Selling Total Product and Region Volume Price Sales

How are these numbers determined?How are these numbers determined?






Handbag:East 156,400 $25.00 $3,910,000West 123,600 25.00 3,090,000Total 280,000 $7,000,000






Handbag:East 156,400 $25.00 $3,910,000West 123,600 25.00 3,090,000Total 280,000 $7,000,000

Total sales revenue $13,336,000


Elite Accessories Inc.Production Budget


Sales 528,000 280,000

UnitsWallet Handbag

From sales budgetFrom sales budget




UnitsWallet Handbag

Sales 528,000 280,000Plus desired ending

inventory, Dec. 31, 2003 80,000 60,000Total 608,000 340,000




UnitsWallet Handbag

Sales 528,000 280,000Plus desired ending

inventory, Dec. 31, 2003 80,000 60,000Total 608,000 340,000Less estimated beginning

inventory, Jan. 1, 2003 88,000 48,000Total production 520,000 292,000


Elite Accessories Inc.Direct Materials Purchases Budget


Units required for production:Wallet (Note A) 156,000 sq. yds.Handbag (Note B) 365,000

Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds.Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

Leather




Leather


Plus desired inventory, Dec. 31, 2003 20,000Total 541,000 sq. yds.





Leather


Plus desired inventory, Dec. 31, 2003 20,000Total 541,000 sq. yds.Less estimated inventory, Jan. 1, 2003 18,000Total square yards to be purchased 523,000 sq yds.





Leather


Plus desired inventory, Dec. 31, 2003 20,000Total 541,000 sq. yds.Less estimated inventory, Jan. 1, 2003 18,000Total square yards to be purchased 523,000 sq yds. Unit price x $ 4.50Total direct materials purchased $2,353,500



Elite Accessories Inc.Direct Labor Cost Budget


Hours required for production:Wallet (Note A) 52,000 130,000Handbag (Note B) 43,800 116,800

Note A: Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs.

Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs.Note B: Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs.

Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.

Cutting Sewing Total





Hours required for production:Wallet (Note A) 52,000 130,000Handbag (Note B) 43,800 116,800Total 95,800 246,800

Hourly rate x $12 x $15 Note A: Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs.







Hours required for production:Wallet (Note A) 52,000 130,000Handbag (Note B) 43,800 116,800Total 95,800 246,800

Hourly rate x $12 x $15Total direct labor cost $1,149,600 $3,702,000 $4,851,600Note A: Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs.




Elite Accessories Inc.Factory Overhead Cost Budget


Indirect factory wages $ 732,800Supervisor salaries 360,000Power and light 306,000Depreciation of plant and equipment 288,000Indirect materials 182,800Maintenance 140,280Insurance and property taxes 79,200


Elite Accessories Inc.Factory Overhead Cost Budget


Indirect factory wages $ 732,800Supervisory salaries 360,000Power and light 306,000Depreciation of plant and equipment 288,000Indirect materials 182,800Maintenance 140,280Insurance and property taxes 79,200Total factory overhead cost $2,089,080


Elite Accessories Inc.Budgeted Income Statement


Revenue from sales $13,336,000Cost of goods sold 9,047,780Gross profit $4,288,220Selling & admin. expenses:

Selling expenses $1,190,000Administrative expenses 695,000 Total sell. & admin. exp. 1,885,000

Income from operations $2,403,220Other income:

Interest revenue $ 98,000Other expense:

Interest expense 90,000 8,000Income before income tax $2,411,220Income tax 600,000Net income $1,811,220


























Elite Accessories Inc.Schedule of Collections from Sales

For the Three Months Ending March 31, 2004

Budgeted sales $1,080,000$1,240,000 $970,000

Cash sales (10%) 108,000 124,000 97,000

Credit sales (90%) $972,000$1,116,000 $873,000

January February March




Budgeted sales $1,080,000$1,240,000 $970,000

Cash sales (10%) 108,000 124,000 97,000

Credit sales (90%) $972,000$1,116,000 $873,000

Collections on account:

Current month (60%) $583,200 $669,600 $523,800





Budgeted sales $1,080,000$1,240,000 $970,000

Cash sales (10%) 108,000 124,000 97,000

Credit sales (90%) $972,000$1,116,000 $873,000


Current month (60%) $583,200 $669,600 $523,800

Prior month (40%) 370,000 388,800 446,400

Total on account $953,200$1,058,400 $970,200






Budgeted sales $1,080,000 $1,240,000 $970,000

Cash sales (10%) 108,000 124,000 97,000

Credit sales (90%) $972,000 $1,116,000 $873,000


Current month (60%) $583,200 $669,600 $523,800

Prior month (40%) 370,000 388,800 446,400

Total on account $953,200 $1,058,400 $970,200

Plus cash sales 108,000 124,000 97,000

Total collections $1,061,200 $1,182,400$1,067,200


Elite Accessories Inc.Cash Budget


Estimated cash receipts:Cash sales $108,000 $124,000 $97,000Accounts receivable 953,200 1,058,400 970,200Interest Revenue — — 24,500

Total cash receipts $1,061,200 $1,182,400 $1,091,700






Total cash receipts $1,061,200 $1,182,400 $1,091,700Estimated cash payments:

Manufacturing costs $802,000 $771,000 $780,000Selling & administrative exp. 160,000 165,000 145,000Capital additions — 274,000 —Interest expense 22,500 — —Income taxes — — 150,000

Total cash payments $984,500 $1,210,000 $1,075,000






Total cash payments $984,500 $1,210,000 $1,075,000Cash increase (decrease) $76,700 $(27,600) $16,700








Total cash payments $984,500 $1,210,000 $1,075,000Cash increase (decrease) $76,700 $(27,600) $16,700Beginning cash balance 280,000 356,700 329,100Ending cash balance $356,700 329,100 $345,800








Total cash payments $984,500 $1,210,000 $1,075,000Cash increase (decrease) $76,700 $(27,600) $16,700Beginning cash balance 280,000 356,700 329,100Ending cash balance $356,700 329,100 $345,800Minimum cash balance 340,000 340,000 340,000 Excess (deficiency) $16,700 $ (10,900) $ 5,800





Describe the nature and use of standards.3



Standards — Performance BenchmarksStandards — Performance Benchmarks

Requires joint efforts of accountants, engineers, and other management personnel.

Theoretical standards (ideal standards).

Currently attainable standards (normal standards).

Should be revised when they no longer reflect operating conditions they intended to measure.

Setting StandardsSetting Standards

Reviewing and Revising StandardsReviewing and Revising Standards

Types of StandardsTypes of Standards


Explain and illustrate how standards are used in budgeting.4



Western Rider Inc.Standard Cost per Pair of XL Jeans

$5.00 per square yard x 1.5 square yards $7.50

$9.00 per hour x .80 hours per pair 7.20

$6.00 per hour x .80 hours per pair 4.80 Total standard cost per pair $19.50

Direct Materials:

Direct Labor:

Factory Overhead:


Western Rider Inc.Budget Performance Report

For the Month Ended June 30, 2004

Direct materials $40,150 $37,500 $2,650

Direct labor 38,500 36,000 2,500

Factory overhead 22,400 24,000 (1,600)

Total mfg. costs $101,050 $97,500 $3,550

Actual Flexible Cost Manufacturing Costs Costs Budget Variance


Calculate and interpret the basic variances for direct materials and direct labor.5



Direct Materials Variance ReportFor the Month Ended June 30, 2004

Square yards per unit 1.50 Total units produced x 5,000 Total yards 7,500 Price per yard x $5.00 Total dollars $37,500

Description Standard Actual Variance

The standard is based on the actual units produced.




Square yards per unit 1.50 Total units produced x 5,000 Total yards 7,500 Price per yard x $5.00 Total dollars $37,500


$5.00$5.00

price

quantity

$37,500

7,5007,500

The total of this box is: $5.00 x 7,500 yards




Square yards per unit 1.50 1.46 .04 F (quantity) Total units produced x 5,000 x 5,000Total yards 7,500 7,300 200 F (quantity)Price per yard x $5.00 x $5.50 $.50 U (price) Total dollars $37,500 $40,150 $2,650 U (total)


Actual results are:200 yards under standard$.50 per yard over standard$2,650 over standard

Actual results are:200 yards under standard$.50 per yard over standard$2,650 over standard



Square yards per unit 1.50 1.46 .04 F (quantity) Total units produced x 5,000 x 5,000Total yards 7,500 7,300 200 F (quantity)Price per yard x $5.00 x $5.50 $.50 U (price) Total dollars $37,500 $40,150 $2,650 U (total)


$5.50

price

quantity

$40,150

7,300



Actual cost.Actual cost.



Square yards per unit 1.50 1.46 .04 F (quantity) Total units produced x 5,000 x 5,000Total yards 7,500 7,300 200 F (quantity)Price per yard x $5.00 x $5.50 $.50 U (price)Total dollars $37,500 $40,150 $2,650 U (total)


$5.50

$5.00$5.00

price

quantity

$3,650

7,300 7,5007,500

Who is responsible for an unfavorable price variance?

Who is responsible for an unfavorable price variance?

Unfavorable price variance ($.50 x 7,300 yards)






$5.50

$5.00$5.00

price

quantity

$1,000

7,300 7,5007,500

Who is responsible for a favorable quantity variance?

Who is responsible for a favorable quantity variance?

Favorable quantity variance (200 yards x $5.00)






$5.50

$5.00$5.00

price

quantity

$3,650

$1,000

7,300 7,5007,500






Direct Labor Variance ReportFor the Month Ended June 30, 2004

Hours per unit .80 Total units produced x 5,000 Total hours 4,000 Rate per hour x $9.00 Total dollars $36,000






Hours per unit .80 Total units produced x 5,000 Total hours 4,000 Rate per hour x $9.00 Total dollars $36,000


$9.00$9.00

rates

hours

$36,000

4,0004,000

The total of this box is: $9.00 x 4,000 hours




Hours per unit .80 .77 .03 F (time)Total units produced x 5,000 x 5,000 Total hours 4,000 3,850 150 F (time)Rate per hour x $9.00 x $10.00 $1.00 U (rate)Total dollars $36,000 $38,500 $2,500 U (total


Actual results are:150 hours under standard$1.00 per hour over standard$2,500 over standard

Actual results are:150 hours under standard$1.00 per hour over standard$2,500 over standard



Hours per unit .80 .77 .03 F (time)Total units produced x 5,000 x 5,000 Total hours 4,000 3,850 150 F (time)Rate per hour x $9.00 x $10.00 $1.00 U (rate)Total dollars $36,000 $38,500 $2,500 U (total


$10.00

rates

hours

$38,500

3,850



Actual cost.Actual cost.



Hours per unit .80 .77 .03 F (time) Total units produced x 5,000 x 5,000Total hours 4,000 3,850 150 F (time)Rate per hour x $9.00 x $10.00 $1.00 U (rate)Total dollars $36,000 $38,500 $2,500 U (total)


$10.00

$9.00$9.00

rates

hours

$3,850

3,850 4,0004,000

Unfavorable rate variance ($1.00 x 3,850 hours)


Who is responsible for an unfavorable rate variance?

Who is responsible for an unfavorable rate variance?





$10.00

$9.00$9.00

rates

hours 3,850 4,0004,000

Who is responsible for a favorable time variance?

Who is responsible for a favorable time variance?

$1,350Favorable time variance (150 hours x $9.00)

Favorable time variance (150 hours x $9.00)





$10.00

$9.00$9.00

rates

hours

$3,850

$1,350

3,850 4,0004,000






Explain how standards can be used for nonmanufacturing expenses.

6Learning ObjectiveLearning Objective


Standard cost to process sales order- Actual cost to process sales order Variance

Standards for Standards for Nonmanufacturing ExpensesNonmanufacturing Expenses


Explain and provide examples of nonfinancial performance measures.

7Learning ObjectiveLearning Objective


Employee TrainingEmployee ExperienceNumber of new menu itemsNumber of employeesFryer reliabilityFountain supply availability

Employee TrainingEmployee ExperienceNumber of new menu itemsNumber of employeesFryer reliabilityFountain supply availability

Counter serviceCounter service Line waitPercent order accuracyFriendly service score

Line waitPercent order accuracyFriendly service score

Nonfinancial Performance Measures Nonfinancial Performance Measures of a Fast-Food Restaurantof a Fast-Food Restaurant

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