Copyright © 2007 Prentice-Hall. All rights reserved 1 The Master Budget and Responsibility...

Copyright © 2007 Prentice-Hall. All rights reserved 1

The Master Budget andThe Master Budget andResponsibility AccountingResponsibility AccountingThe Master Budget andThe Master Budget and

Responsibility AccountingResponsibility Accounting

Chapter 22


Objective 1Objective 1Objective 1Objective 1

Learn how to use a budget

A budget is a plan that covers a specific period of time. It helps management determine how best to use its resources – both materials and manpower. Management estimates future cost and revenues

A budget is a plan that covers a specific period of time. It helps management determine how best to use its resources – both materials and manpower. Management estimates future cost and revenues


Benefits of BudgetingBenefits of BudgetingBenefits of BudgetingBenefits of Budgeting

• Planning

• Coordination and communication

• Benchmarking


Master BudgetMaster BudgetMaster BudgetMaster Budget

• Operating budget - planned revenues and expenses

• Capital expenditures budget - plan for purchasing PP&E

• Financial budget - cash budget and budgeted balance sheet


Master BudgetMaster BudgetOperating BudgetOperating Budget

Master BudgetMaster BudgetOperating BudgetOperating Budget

Sales BudgetSales Budget

Purchases & Cost of Goods Sold Budget

Purchases & Cost of Goods Sold Budget

Operating Expenses BudgetOperating Expenses Budget

Budgeted Income StatementBudgeted Income Statement

The master budget is the financial plan for the entire organizationThe budgets on this slide represent the operating budget

.

The master budget is the financial plan for the entire organizationThe budgets on this slide represent the operating budget

.


Master BudgetMaster BudgetMaster BudgetMaster Budget

Budgeted Income Statement

Budgeted Income Statement

Capital Expenditures

Budget

Capital Expenditures

Budget

Cash BudgetCash

Budget

BudgetedBalanceSheet

BudgetedBalanceSheet



Prepare an operating budget


Sales BudgetSales BudgetSales BudgetSales Budget

• Plan for sales revenues in a future period

• Budgeted sales revenue = sale price per unit x expected number of units to be sold


E22-8E22-8E22-8E22-8

Waterking

Sales Budget

March April Total

Cash sales(80%) $32,000 $40,000

Credit sales(20%) 8,000 10,000

Total sales(100%) $40,000 $50,000 $90,000


Purchases = Cost of goods sold + Ending inventory– Beginning inventory

Inventory, Purchases, and Cost of Inventory, Purchases, and Cost of Goods Sold BudgetGoods Sold Budget

Inventory, Purchases, and Cost of Inventory, Purchases, and Cost of Goods Sold BudgetGoods Sold Budget

Cost of goods sold =

Beginning inventory + Purchases– Ending inventory

Known

ComputeCompute

Unknown

Once you know how much is predicted to be sold, you can plan how much inventory you need to purchase. Remember the equation to compute cost of goods sold

Once you know how much is predicted to be sold, you can plan how much inventory you need to purchase. Remember the equation to compute cost of goods sold

The only element that is not known or can not be computed is purchases. Rearrange the equation to solve for Purchases

The only element that is not known or can not be computed is purchases. Rearrange the equation to solve for Purchases



E22-14E22-14E22-14E22-14

Purchases for first quarter:

Beginning inventory is given = $19,000

Cost of goods sold = Sales x 60% = $60,000

Ending inventory = $20,000 + (10% x (60% x $150,000) = $29,000

Purchases for first quarter = $60,000 + 29,000 – 19,000 = $70,000



E22-14E22-14E22-14E22-14

Purchases for second quarter:




Purchases for second quarter = $90,000 + 27,500 – 29,000 = $88,500



E22-14E22-14E22-14E22-14

Purchases for third quarter:




Purchases for third quarter = $75,000 + 32,000 – 27,500 = $79,500


Quarter 1 2 3

Cost of goods sold $60,000+Desired ending inventory 29,000=Total required $89,000-Beginning inventory 19,000=Purchases $70,000

Inventory, Purchases & Cost of Inventory, Purchases & Cost of Goods Sold BudgetGoods Sold Budget

Inventory, Purchases & Cost of Inventory, Purchases & Cost of Goods Sold BudgetGoods Sold Budget

Total cost of goods sold = $225,000

$75,00032,000

$107,000 27,500 $79,500

$90,000 27,500$117,50

29,000$88,500


P22-28BP22-28BP22-28BP22-28B

Sales Budget

May JuneTotal

Total sales $42,900 $43,900 $86,800


Cost of Goods Sold ScheduleMay

JuneBeginning inventory $14,000+Purchases 21,500=Goods available for sale $35,500

-Ending inventory 20,000=Cost of goods sold $15,500

P22-28BP22-28BP22-28BP22-28B

$20,000 22,000$42,000 19,600$22,400


P22-28BP22-28BP22-28BP22-28B

Operating Expense Budget April May

Salary, fixed amount $4,000 $4,000Commission 1,700 1,800 Total $5,700 $5,800Rent expense 3,000 3,000Depreciation expense 600 600Insurance expense 200 200

Total $9,500 $9,600


Budgeted Income StatementBudgeted Income StatementBudgeted Income StatementBudgeted Income StatementOmaha Office Supply Co.

Budgeted Income Statements

May and June 2008

May June

Sales revenue $42,900 $43,900

Cost of goods sold* 15,500 22,400

Gross profit $27,400 $21,500

Operating expenses* 9,500 9,600

Operating income $17,900 $11,900

*see separate schedules



Prepare a financial budget


Financial BudgetFinancial BudgetFinancial BudgetFinancial Budget

• Cash budget

• Budgeted balance sheet


Cash BudgetCash BudgetCash BudgetCash Budget

• Cash receipts and cash payments for a future period

• Cash receipts– Collections from customers– Receipts from sale of long-term assets– Receipts from borrowing– Receipts from owners



• Cash payments– For inventory purchases– For operating expenses– Purchase long-term assets– Payment on loans– Payment to owners


Cash Collections from Customers – Cash Collections from Customers – S22-8S22-8

Cash Collections from Customers – Cash Collections from Customers – S22-8S22-8

March April Total

Cash sales $32,000 $40,000$72,000

Collections of last month’s credit sales 9,000 6,400*

15,400Total $41,000 $46,400

$87,400* March’s sales on account = March sales x 20%


Cash Payments for Purchases – Cash Payments for Purchases – S22-9S22-9

Cash Payments for Purchases – Cash Payments for Purchases – S22-9S22-9

May June TotalPayment of lastmonth’s purchases $8,000 $10,000 $18,000Payment of thismonth’s purchases 15,000 18,000 33,000 Total $23,000 $28,000 $51,000

Cash payments for operating expenses are also part of the cash budget….remember to include only cash expenses. Depreciation expense is a noncash expense, so do not include it

Cash payments for operating expenses are also part of the cash budget….remember to include only cash expenses. Depreciation expense is a noncash expense, so do not include it



Beginning cash balance

+ Cash receipts

= Cash available

- Cash payments (for inventory, operating expenses, purchase of long-term assets)

= Ending balance before financing

- Minimum balance

= Excess (deficiency)

Companies have a desired minimum balance in cash to keep operations moving smoothly. If cash falls below the minimum balance, the company will have to borrow some money

Companies have a desired minimum balance in cash to keep operations moving smoothly. If cash falls below the minimum balance, the company will have to borrow some money


Cash BudgetCash BudgetCash BudgetCash BudgetFinancing

Borrow

Principal payments

Interest expense

Total effects of financing

Ending cash balance


E22-17E22-17E22-17E22-17

Cash receipts Jan Feb Cash collections from creditcustomers $11,000 $15,000Receipt from note receivable 6,000 Total $17,000 $15,000


E22-17E22-17E22-17E22-17

Cash payments Jan Feb Purchases of inventory $13,000 $13,900Operating expenses 3,000 3,000 Total $16,000 $16,900


E22-17E22-17E22-17E22-17 Jan Feb Beginning cash balance $10,500+ Cash receipts 17,000= Cash available $27,500- Cash payments 16,000= Ending balance before financing $11,500- Minimum balance 10,000= Excess (deficiency) $1,500Total effects of financing Ending cash balance $11,500

$11,500

15,000$26,500

16,900$9,60010,000$(400)1,000

$10,600


E22-19E22-19E22-19E22-19 Cash A/R Invent Equip.Accum.

Depr A/POwner Equity

Feb 28 balance 11,400 5,150

17,720

34,800

(29,870) 10,500

28,700

Sales on credit 12,200 12,200

Cost of goods sold (7,320) (7,320)

Depreciation expense (600) (600)

Operating expenses (5,000) (5,000)

Collections on account 14,300 (14,300)

Payment for inventory (4,600) 4,600

Payments on account (8,200) (8,200)

Mar 31 balance 7,900 3,050 15,000 34,800 ( 30,470) 2,300 27,980


Budgeted Balance SheetBudgeted Balance SheetBudgeted Balance SheetBudgeted Balance SheetOleanders

Budgeted Balance Sheet

March 31, 2008

ASSETS

Current Assets:

Cash $ 7,900

Accounts receivable 3,050

Inventory 15,000 $25,950

Plant assets:

Furniture and fixtures 34,800

Accumulated depreciation (30,470) 4,330

Total assets $30,280


Budgeted Balance SheetBudgeted Balance SheetBudgeted Balance SheetBudgeted Balance SheetOleanders

Budgeted Balance Sheet

March 31, 2008 (continued)

LIABILITIES

Current liabilities:

Accounts payable $ 2,300

OWNERS' EQUITY

Owners' equity 27,980

Total liabilities and owners' equity $30,280


Budgeting and Sensitivity Budgeting and Sensitivity AnalysisAnalysis

Budgeting and Sensitivity Budgeting and Sensitivity AnalysisAnalysis

• Helps managers plan for different courses of action

• Use of technology and budget software



Prepare performance reports for responsibility centers


Responsibility AccountingResponsibility AccountingResponsibility AccountingResponsibility Accounting

• System for evaluating performance of managers and activities they supervise

• Responsibility center - part, segment, or subunit of an organization whose manager is accountable for its activities


• Cost center – reports costs only

• Revenue center – reports revenues only

• Profit center - reports revenues, expenses, and net income or loss

• Investment center - reports revenues, expenses, income or loss, and investment used

Responsibility CenterResponsibility CenterResponsibility CenterResponsibility Center


E22-20E22-20E22-20E22-20

a.Profit center

b. Investment center (or possibly a profit center)

c. Cost center

d.Profit center

e.Cost center

f. Profit center

g. Investment center

h.Revenue center


Responsibility AccountingResponsibility AccountingResponsibility AccountingResponsibility Accounting

• Performance reports compare budgeted and actual amounts

• Management by exception – management technique that focuses on important differences between budget and actual


E22-21E22-21E22-21E22-21

Web Touch

Responsibility Accounting Performance Report (Amounts in thousands)

September 2009

Manager – All handheld devices

Budget Actual Variance

Operating income:

PDAs $ 125 $ 120 $(5)

Cell Phones 474 519 45

Total operating income $599 $639 $ 40


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Assistant Manager – cell phones


Operating income:

Video Cell Phones $410 $440 $30

Digital Cell Phones 64 79 15

Total operating income $474 $519 $45


E22-21E22-21E22-21E22-21

Assistant Manager – DIGITAL CELL PHONES


Revenues and expenses:

Revenues $204 $214 $10

Expenses 140 135 5

Operating income $ 64 $ 79 $15


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• Monica should investigate the performance of the digital cell phones operation. Its favorable operating income variance is significant: 23% ($15/$64) of budget. Beverly likely would focus her investigation on how digital cell phones achieved both higher-than-expected revenue and lower-than-expected costs


End of Chapter 22End of Chapter 22End of Chapter 22End of Chapter 22

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Copyright © 2007 Prentice-Hall. All rights reserved 1 The Master Budget and Responsibility...

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