23 - 1©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber the...

23 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

The Master Budget andResponsibility

AccountingChapter

23


Identify the benefits of budgeting.

Objective 1


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____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

Operating Budget


Components of the Master Budget

BudgetedBalanceSheet_____ __________ __________ __________ __________ _____

BudgetedBalanceSheet_____ __________ __________ __________ __________ _____

BudgetedStatementof Cash Flows_____ __________ __________ __________ __________ _____

BudgetedStatementof Cash Flows_____ __________ __________ __________ __________ _____

BudgetedIncomeStatement_____ __________ __________ __________ __________ _____

BudgetedIncomeStatement_____ __________ __________ __________ __________ _____

CapitalExpendituresBudget_____ __________ __________ __________ __________ _____

CapitalExpendituresBudget_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

Financial Budget


Preparing the Master Budget

Suppose that J.J. manages Plantation Sporting Store No. 13.

Selected parts of the master budget will be prepared for Store No. 13 for April, May, June, and July.



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

following the sale. Accounts receivable on March 31 amounted

to $19,200. How much were total sales in March? $19,200 ÷ .40 = $48,000


Projected Sales

April …………… $50,000May …………… $80,000June …………… $60,000July …………… $50,000




Plantation maintains inventory equal to $10,000 plus 40% of the budgeted cost of goods sold for the following month.

Cost of goods sold averages 70% of sales. Target ending inventory on July 31 is

$32,000.



What is the ending inventory on March 31? $10,000 + (0.40 × 0.70 × April sales of $50,000) What is the beginning inventory? $10,000 + (0.40 × 0.70 × $48,000) = $23,440



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

March purchases were $34,160. How much was paid in March for March’s

purchases? $34,160 × 50% = $17,080


Prepare an operating budget.

Objective 2


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.


April May June July

Cash sales 60% $30,000 $48,000 $36,000$30,000

Credit sales 40% 20,000 32,000 24,000 20,000Total $50,000 $80,000 $60,000 $50,000Total sales April through July = $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 May? 70% × $80,000 = $56,000 What is the desired ending inventory for April? $10,000 + (40% × $56,000) = $32,400


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


April May June July

Cost of goods sold (70% × sales) $35,000 $56,000 $42,000

$35,000Desired ending inventory 32,400 26,800 24,000 32,000Total required $67,400 $82,800 $66,000 $67,000Beginning inventory 24,000 32,400 26,800 24,000Purchases $43,400 $50,400 $39,200 $43,000

Schedule B


Schedule B

April……………… $ 35,000May………………. 56,000June………………. 42,000July………………. 35,000Total $168,000

How much is the cost of goodssold for the four-month period?


Operating Expenses Budget

Assume that Plantation Sporting Goods incurs $4,000 of fixed expenses every month and that commissions and other variable expenses equal 20% of sales.

What is the operating expenses budget (Schedule C)?


April May June JulyVariable expenses(From Schedule A)20% of sales $10,000 $16,000 $12,000 $10,000Fixed expenses 4,000 4,000 4,000 4,000

Total $14,000 $20,000 $16,000 $14,000

Total operating expenses: $64,000

Operating Expenses Budget

(Schedule C)


Budgeted Income Statement

Plantation Sporting Goods Store No. 13Budgeted Income Statement

Four Months Ending July 31, 20xx

Amount SourceSales $240,000 Schedule ACost of goods sold 168,000 Schedule BGross margin $ 72,000Operating expense 64,000 Schedule CNet income $ 8,000


Prepare the components

of a financial budget.

Objective 3


Cash budgetBudgeted

balance sheet

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)

April May June JulyCash sales $30,000 $48,000 $36,000 $30,000Collections of lastmonth’s credit sales 19,200* 20,000 32,000 24,000Total $49,200 $68,000 $68,000 $54,000Total collections: $239,200*19,200 = March 31 accounts receivable

From Schedule A


Cash Disbursements for Purchases

(Schedule E)

April May June JulyPayment of lastmonth’s purchases $17,080 $21,700 $25,400 $19,600Payment of thismonth’s purchases 21,700 25,200 19,600 21,500Total $38,780 $46,900 $45,000 $41,100

Total disbursements: $171,780

From Schedule B


April May June JulyPayment of lastmonth’s expenses $ 6,800 $ 7,000 $10,000 $ 8,000Payment of thismonth’s expenses 7,000 10,000 8,000 7,000Total $13,800 $17,000 $18,000 $15,000

Total disbursements: $63,800

Cash Disbursements for Operating Expenses (Schedule

F)

From Schedule C


Plantation Sporting Goods Store No. 13Cash Budget

Four Months Ending July 31, 20xx

Budgeted cash receipts $239,200Budgeted cash disbursements

Purchases $171,780Operating expenses 63,800 235,580

Budgeted cash increase $ 3,620

Cash Budget


Preparing the Budgeted Balance Sheet

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

Assume that the cash balance on March 31 was $15,000.

What is the budgeted cash balance on July 31? $15,000 + $3,620 expected increase = $18,620


Use sensitivity analysis in budgeting.

Objective 4


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.


Distinguish among differenttypes of responsibility

centers.

Objective 5


Responsibility Accounting...

– is a system for evaluating the performance of managers and the activities they supervise.

A responsibility center is a part, segment, or subunit of an organization whose manager is accountable for specific activities.


Investment centerInvestment center

Cost centerCost center Revenue centerRevenue center

Profit centerProfit center

Responsibility Center


Prepare a performance report

for management by exception.

Objective 6


Management by Exception

Northern California District Manager

San FranciscoBranch

Manager

San JoseBranch

Manager

OaklandBranch

Manager

SacramentoBranch

Manager

GearyStore

Manager

BealeStore

Manager

WharfStore

Manager

OtherManagers



Performance reports show differences between budgeted and actual amounts.

Management by exception is the practice of focusing on important variances so that managers can direct their attention to areas that need improvement.



Plantation Sporting Goods Store No. 13Monthly Responsibility Report (Budget)

Month YTDRevenues $50,000 $388,000Cost of goods sold 35,000 271,600Wages 6,700 51,992Repairs 2,000 15,520General 1,300 10,088Fixed costs 4,000 28,000Operating income $ 1,000 $ 10,800



Plantation Sporting Goods Store No. 13Monthly Responsibility Report (Actual)

Month YTDRevenues $55,000 $408,000Cost of goods sold 37,400 277,440Wages 7,370 54,672Repairs 550 8,160General 900 8,160Fixed costs 4,000 28,000Operating income $ 4,780 $ 31,568



Plantation Sporting Goods Store No. 13July 20xx, Responsibility Report

Budget Actual Variance (F/U)Revenues $50,000 $55,000 $5,000 (F)Cost of goods sold 35,000 37,400 2,400 (U)Wages 6,700 7,370 670 (U)Repairs 2,000 550 1,450 (F)General 1,300 900 400 (F)Fixed costs 4,000 4,000 --- Operating income $ 1,000 $ 4,780 $3,780 (F)



J.J., manager of Plantation Sporting Goods Store No. 13, will investigate why cost of goods sold and wages were more than budgeted.

Cost of goods sold was originally budgeted to be 70% of sales.

Wages was budgeted to be 67% of total operating variable expenses or 13.4% of sales.



Management will determine that cost of goods sold were 68% of sales instead of the 70% originally budgeted.

$37,400 ÷ $55,000 = 68% Pleasant news!



Management may investigate why wages were 84% of total variable operating expenses instead of the 67% originally budgeted, although in total they remained 13.4% of sales.

$7,370 ÷ $8,820 = 84% It will be determined that other variable

operating expenses were less than anticipated.



Broward County Branch ManagerPlantation Sporting Stores

July 20xx, Responsibility Report

Budget Actual Variance (F/U)Branch manager office expense $20,000 $25,000 $ 5,000 (U)Income:Store 13 1,000 4,780 3,780 (F)Others 80,000 95,220 15,220 (F)Operating income $61,000 $75,000 $14,000 (F)



South Florida District ManagerPlantation Sporting Stores

July 20xx, Responsibility Report Budget Actual Variance (F/U)

District manager office expense $ 95,000 $ 99,000 $ 4,000 (U)Income:Broward county 61,000 75,000 14,000 (F)Other counties 280,000 325,000 45,000 (F)Operating income $246,000 $301,000 $55,000 (F)


Allocate indirect costs

to departments.

Objective 7


Allocation of Indirect Costs

Indirect costs are allocated to departments or responsibility centers using the following steps:

1 Choose an allocation base for the indirect cost.2 Compute an indirect cost allocation rate.3 Allocate the indirect cost.


Choose an Allocation Base

Cost or Expense BasisIndirect labor Time spentBuilding depreciation Square feetHeat, lights, etc. Square feetJanitorial services Square feetPayroll and personnel # of employeesPurchasing # of purchase orders placed


Choose an Allocation Base

Lets consider the Healthy Clinic, a provider of Ear, Nose, and Throat (ENT) plus Audiology services.

Rent for the year is $120,000. Total square footage occupied by the clinic is

12,000. What is the rent per square foot? $120,000 ÷ 12,000 = $10


Compute a Cost Allocation Rate

Other expenses amounted to $100,000 and are allocated on the basis of professional services expenses.

Total professional services expenses amounted to $250,000.

ENT accounted for $175,000 of these expenses and Audiology for $75,000.


Compute a Cost Allocation Rate

What is the allocation rate? $100,000 ÷ $250,000 = 40% 40% of what? 40% of professional services expenses.


Allocate the Indirect Cost

ENT occupies 9,000 square feet. How much rent is allocated to ENT? 9,000 × $10 = $90,000 How much rent is allocated to Audiology? 12,000 – 9,000 = 3,000 square feet 3,000 × $10 = $30,000


Allocate the Indirect Cost

How much of the “other expenses” are allocated to ENT?

$175,000 × 40% = $70,000 How much to Audiology? $75,000 × 40% = $30,000


Evaluate Performance

Healthy ClinicDepartmental Partial Income Statement

For the Year Ended December 31, 20xx (in thousands)

Total ENT AudiologyService revenue $500 $350 $150Professional services 250 175 75Margin $250 $175 $ 75Rent expense 120 90 30Other 100 70 30Operating income $ 30 $ 15 $ 15


Evaluate Performance

ENT generates a professional margin of $175,000 compared to $75,000 by Audiology.

However, the margin per square foot is $175,000 ÷ 9,000 = $19.44 for ENT and $75,000 ÷ 3,000 = $25.00 for Audiology.


End of Chapter 23

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