Introduction to Management Accounting: The Master Budget Chapter 20 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

Introduction toManagement Accounting:

The Master Budget

Chapter 20

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

20 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education AustraliaHorngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Objectives

1. Distinguish between financial accounting and management accounting, and use management accounting information for decision making.

2. Describe the value chain and classify costs by value-chain function

3. Distinguish direct costs from indirect costs4. Distinguish among full product costs,

inventoriable product costs and period costs


Objectives

5. Prepare the financial statements of a manufacturing company

6. Identify the benefits of budgeting

7. Prepare an operating budget for a company

8. Prepare the components of a financial budget

9. Use sensitivity analysis in budgeting.


Planning Acting

Feedback

Controlling

The Functions of Management


Distinguish between financialaccounting and management

accounting, and use management accounting information for decision-

making

Objective 1


Management Accounting and Financial Accounting

Internal managers of the businessInternal managers of the business

Investors, Creditors,Government authorities (ATO, ASIC etc.)

Investors, Creditors,Government authorities (ATO, ASIC etc.)

Primary Users



Help managers plan andcontrol business operations

Help managers plan andcontrol business operations

Help investors, creditors, and others makeinvestment, credit, and other decisions

Help investors, creditors, and others makeinvestment, credit, and other decisions

Purpose of Information



RelevanceRelevance

Reliability, objectivity, and focus on the pastReliability, objectivity, and focus on the past

Focus and Time Dimension



Internal reports not restricted by GAAPInternal reports not restricted by GAAP

Financial statements restricted by GAAPFinancial statements restricted by GAAP

Type of Report



No independent auditNo independent audit

Annual independent audit Annual independent audit

Verification



Detailed reports onparts of the company

Detailed reports onparts of the company

Summary reports primarilyon the company as a wholeSummary reports primarilyon the company as a whole

Scope of Information



Concern about how reportswill affect employees behavior

Concern about how reportswill affect employees behavior

Concern about adequacy of disclosureConcern about adequacy of disclosure

Behavioral Implications


Service, Retail, and Manufacturing Companies

Service Company:provides intangible services,rather than tangible products

Service Company:provides intangible services,rather than tangible products

Retail Company:resells products previously

bought from suppliers

Retail Company:resells products previously

bought from suppliers


Service, Retail, and Manufacturing Companies

Manufacturing Company:uses labour, plant, and equipment to convert

raw materials into finished products

Manufacturing Company:uses labour, plant, and equipment to convert

raw materials into finished products

Materials inventoryWork in process inventoryFinished goods inventory

Materials inventoryWork in process inventoryFinished goods inventory


Describe the value chain

and classify costs byvalue-chain

functions.

Objective 2


Value Chain

Research andDevelopment

DesignProduction or

Purchases

Marketing Distribution CustomerServices


Distinguish direct costs

from indirect costs.

Objective 3


Cost Objects, Direct Costs,and Indirect Costs

Cost objects are anything for which a separate measurement of costs is desired.

Cost drivers are any factors that affect cost.



What are examples of cost objects?– individual products– alternative marketing strategies– geographic segments of the business– departments



What are direct costs? Direct costs are those costs that can be

specifically traced to the cost object. What are indirect costs? Indirect costs are costs that cannot be

specifically traced to the cost object.


Distinguish among full product

costs, inventoriable product

costs, and period costs.

Objective 4


Inventoriableproduct

costs


costs

Fullproduct

costs

Fullproduct

costs

Product Costs

What are product costs? They are the costs to produce (or

purchase) tangible products intended for sale.

There are two types of product costs:


External Reporting


costs


costs

PeriodcostsPeriodcosts


Inventoriable Product Costs

For external reporting, a retailers’ inventoriable product costs includes only costs that are incurred in the purchase of goods.

Inventoriable costs are an asset. Period costs flow as expenses directly

to the statement of financial performance.



For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.

Inventoriable product costs are incurred only in the third element of the value chain.

Costs incurred in other elements of the value chain are period costs.


DirectMaterials

DirectLabour

IndirectLabour

IndirectMaterials

Other

Manufacturing Overhead




DirectMaterials

DirectLabour

Prime Costs = Direct Materials + Direct Labour



Conversion Costs = Direct Labour + Manufacturing Overhead

DirectLabour

IndirectLabour

IndirectMaterials

Other


Prepare the financial statements

of a manufacturing company.

Objective 5


Revenues – Expenses = Net Profits

Financial Statements forService Companies

There is no inventory and thus no inventoriable costs.

The statement of financial performance does not include cost of goods sold.


Financial Statements for Retail Companies

Purchases ofInventory plus

Freight-In Inventory

Sales Revenue

Cost ofGoods Sold

Statement of Financial Performance

Operating Expenses

InventoriableCosts

Statement of FinancialPosition

equals Net Profit

whensalesoccur

deduct

equals Gross Profitdeduct

PeriodCosts


Financial Statements forManufacturing Companies

MaterialsInventory

FinishedGoods

Inventory

Sales Revenue

Cost ofGoods Sold

Statement of Financial Performance

Operating Expenses

InventoriableCosts

Statement of FinancialPosition

equals Net Profit

whensalesoccur

deduct

equals Gross Profitdeduct

Work inProcess

Inventory

PeriodCosts


Manufacturing Company Example

Kendall Manufacturing Company: Beginning and ending work-in-process

inventories were $20,000 and $18,000. Direct materials used were $70,000. Direct labour was $100,000. Manufacturing overhead incurred was

$150,000.



What is the cost of goods manufactured?

Beginning work in process $ 20,000Direct labour $100,000Direct materials 70,000Mfg. overhead 150,000 320,000Ending work in process 18,000Cost of goods manufactured $322,000



Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.

How much is the cost of goods sold?



Beg. finished goods inventory $ 60,000+ Cost of goods manufactured 322,000= Cost of goods available for sale $382,000– Ending finished goods 55,000= Cost of goods sold $327,000



Kendall Manufacturing Company had sales of $627,000 for the period.

How much is the gross profit?

Sales $627,000– Cost of goods sold 327,000= Gross profit $300,000



Kendall Manufacturing Company had operating expenses as follows:

Sales salaries and commissions $ 80,000 Delivery expense 10,000 Administrative expenses 30,000 Total $120,000

What is Kendall’s net profit?



Gross profit $300,000– Operating expenses 120,000= Net Profit $180,000


Flow of Costs through a Manufacturer’s Accounts

Direct Materials Inventory

Beginning inventory+ Purchases and freight-in

= Direct materials available for use

– Ending inventory= Direct materials used

Work in Process Inventory Beginning inventory+ Direct materials used+ Direct labour+ Manufacturing overhead= Total manufacturing costs

to account for– Ending inventory= Cost of goods manufactured


Flow of Costs through a Manufacturer’s Accounts

Finished Goods Inventory Beginning inventory

+ Cost of goods manufactured

= Cost of goods available for sale– Ending inventory= Cost of goods sold


Identify the benefits

of budgeting.

Objective 6


Benefits of Budgeting

requires managers to plan promotes coordinationand communication

helps managersevaluate performance

motivates employees toachieve company goals


Components of the Master Budget

PurchasesBudget____ ________ ________ ________ ________ ____

PurchasesBudget____ ________ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

BudgetedStatement of FinancialPerformance____ ________ ________ ________ ____

BudgetedStatement of FinancialPerformance____ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

Operating Budget


Components of the Master Budget

BudgetedStatement ofFinancial Position_____ __________ __________ __________ __________ _____

BudgetedStatement ofFinancial Position_____ __________ __________ __________ __________ _____

BudgetedStatementof Cash Flows_____ __________ __________ __________ __________ _____

BudgetedStatementof Cash Flows_____ __________ __________ __________ __________ _____

BudgetedStatement ofFinancial Performance_____ __________ __________ __________ __________ _____

BudgetedStatement ofFinancial Performance_____ __________ __________ __________ __________ _____

CapitalExpendituresBudget_____ __________ __________ __________ __________ _____

CapitalExpendituresBudget_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

Financial Budget


Preparing the Master Budget

(An expanded example in your textbook pages 838 – 45)

Suppose you manage Whitewater Sporting Goods store No. 18.

Selected parts of the master budget will be prepared for Store No. 18 for October, November, December and January.



Sales are 60% cash and 40% on credit. Credit sales are collected in the month

following the sale. Accounts receivable on September 30

amounted to $16,000. How much were total sales in Sept.? $16,000 ÷ .40 = $40,000


Projected Sales

October……………. $50,000November……….… $80,000December………..… $60,000January……..……… $50,000




Whitewater maintains inventory equal to $20,000 plus 80% of the budgeted cost of goods sold for the following month.

Cost of goods sold averages 70% of sales. What is the ending inventory on Sept. 31? $20,000 + (0.80 × 0.70 × October sales of

$50,000) = $48,000



What is the beginning inventory in September?

$20,000 + (0.80 × 0.70 × $40,000) = $42,400 Opening Inventory $ 42,400 Plus Purchases $ ? Minus Closing Inv. $ 48,000 Equals COGS (70% x $40,000) $ 28,000 ? = $ 33,600



Whitewater pays for inventory as follows: 50% during the month of purchase and 50% during the next month.

September purchases were $33,600. How much was paid in September for

September’s purchases? $33,600 × 50% = $16,800


Prepare an operating budgetfor a company.

Objective 7


Sales Budget (Schedule A)

Sales revenue is the key measure of business activity.

The budgeted total sales revenue for each product is the sales price multiplied by the expected number of units sold.


Oct. Nov. Dec. Jan.Cash sales 60% $30,000 $48,000 $36,000 $30,000Credit sales 40% 20,000 32,000 24,000 20,000Total $50,000 $80,000 $60,000 $50,000

Total sales Oct through Jan = $240,000

Sales Budget (Schedule A)


Purchases, Cost of Goods Sold,

and Inventory Budget Cost of goods sold = 70% × sales How much are the cost of goods sold for

November? 70% × $80,000 = $56,000 What is the desired ending inventory for

October? $20,000 + (80% × $56,000) = $64,800


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

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

Purchases, Cost of Goods Sold,

and Inventory Budget


Oct. Nov. Dec. Jan.Cost of goods sold (70% × sales) $35,000 $56,000 $42,000 $35,000Desired ending inventory 64,800 53,600 48,000

42,400Total required $99,800 109,600 90,000

77,400Beginning inv. 48,000 64,800 53,600

48,000Purchases $51,800 $44,800 $36,400 $29,400

Schedule B


Operating Expenses Budget

Assume that Whitewater incurs $5,200 of fixed expenses every month and that commissions and other variable expenses equal 20% of sales.

What is the operating expenses budget (Schedule C)?


Oct. Nov. Dec Jan.Variable expenses(From Schedule A)20% of sales $ 10,000 $ 16,000 $12,000 $10,000Fixed expenses 5,200 5,200 5,200 5,200

Total $15,200 $21,200 $17,200 $15,200

Total wages and commission: $68,800

Operating Expenses Budget

(Schedule C)


Budgeted Statement of Financial Performance

Whitewater Sporting Goods Store No. 18Budgeted Statement of Financial Performance

Four Months Ending January 31, 2005

Amount SourceSales $240,000 Schedule ACost of goods sold 168,000 Schedule BGross profit $ 72,000Operating expense 68,800 Schedule CNet profit $ 3,200


Prepare the components

of a financial budget.

Objective 8


Cash budgetBudgeted

Statement of Financial Position

Preparing the Financial Budget

The financial budget includes:


Preparing the Cash Budget

The cash budget has the following major parts:– cash collections from customers (Schedule D)– cash disbursements for purchases (Schedule E)– cash disbursements for operating expenses

(Schedule F)– capital expenditures (not illustrated in this

chapter)


Cash Collections from Customers

(Schedule D)

Oct. Nov. Dec. Jan.Cash sales $30,000 $48,000 $36,000 $30,000Collections of lastmonth’s credit sales 16,000* 20,000 32,000 24,000Total $46,000 $68,000 $68,000 $54,000

Total collections: $236,000

*16,000 = September 30 accounts receivable

From Schedule A


Cash Disbursements for Purchases

(Schedule E)

Oct. Nov. Dec. Jan.Payment of lastmonth’s purchases $18,800 $25,900 $22,400 $18,200Payment of thismonth’s purchases 25,900 22,400 18,200 14,700Total $42,700 $48,300 $40,600 $32,900

Total disbursements: $164,500

From Schedule B


Oct. Nov. Dec. Jan.Payment of lastmonth’s expenses $ 4,250 $ 5,000 $7,250 $ 5,750Payment of thismonth’s expenses 5,000 7,250 5,750 5,000Rent and Misc. 4,500 6,000 5,000 4,500Total $13,750 $18,250 $18,000 $15,250

Total disbursements: $65,250

Cash Disbursements for Operating Expenses (Schedule

F)From Schedule C


Whitewater Sporting Goods Store No. 18Cash Budget

Four Months Ending January 31, 2005

Budgeted cash receipts $236,000Budgeted cash disbursements

Purchases $164,500Operating expenses 65,250 229,750

Budgeted cash increase $ 6,250

Cash Budget


Preparing the Budgeted Statement of Financial Position

Assets, liabilities, and owners’ equity are projected based upon the previous schedules.

Assume that the cash balance on September 30 was $15,000.

What is the budgeted cash balance on January 31?

$15,000 + $6,250 expected increase = $21,250


Use sensitivity analysis in budgeting.

Objective 9


Budgeting and Sensitivity Analysis

Sensitivity analysis helps managers plan for different courses of action.

This type of “what if” analysis shows the result of changing an underlying assumption in the budgeting process.

Sensitivity analysis may affect very specific plans.


End of Chapter 20

Documents

Introduction to Management Accounting: The Master Budget Chapter 20 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT