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CHAPTER 6

Master Budgeting

andResponsibility Accounting

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-2

Budget Defined

The quantitative expression of a proposedplan of action by management for a specifiedperiod, and

An aid to coordinating what needs to be doneto implement that planMay include both financial and nonfinancialdata

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-3

The Ongoing Budget Process:

1. Managers and accountants plan theperformance of the company, taking intoaccount past performance and anticipated

future changes2. Senior managers distribute a set of goals

against which actual results will becompared

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-4

The Ongoing Budget Process:

3. Accountants help managers investigatedeviations from budget. Corrective actionoccurs at this point

4. Managers and accountants assess marketfeedback, changed conditions, and theirown experiences as plans are laid for thenext budget period

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-5

Advantages of Budgets

Provides a framework for judgingperformanceMotivates managers and other employeesPromotes coordination and communicationamong subunits within the company

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-6

Components of Master Budgets

Operating Budget building blocks leading tothe creation of the Budgeted IncomeStatement

Financial Budget building blocks based onthe Operating Budget that lead to the creationof the Budgeted Balance Sheet and theBudgeted Statement of Cash Flows

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-7

Basic Operating Budget Steps

1. Prepare the Revenues Budget2. Prepare the Production Budget (in Units)3. Prepare the Direct Materials Usage Budget

and Direct Materials Purchases Budget4. Prepare the Direct Manufacturing Labor

Budget

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-8

Basic Operating Budget Steps

5. Prepare the Manufacturing Overhead CostsBudget

6. Prepare the Ending Inventories Budget7. Prepare the Cost of Goods Sold Budget8. Prepare the Operating Expense (Period

Cost) Budget

9. Prepare the Budgeted Income Statement

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-10

Budgeting Overview Flowchart

RevenuesBudget

ProductionBudget

DirectManufacturingLabor Costs

Budget

EndingInventoryBudget

ManufacturingOverhead

Costs Budget

DirectMaterials

Costs Budget

Cost of GoodsSold Budget

OperatingExpenseBudget

BudgetedIncome

Statement

CapitalExpenditures

Budget

Cash Budget

Budgeted

Balance Sheet

BudgetedStatement ofCash Flows

Operating Budget Financial Budget

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-11

Other Budgeting Issues

Financial-planning software may be employed toconduct sensitivity (what -if) analysis to assist inthe budgetary process

Kaizen Budgeting incorporating continuousimprovement factors in the budgeting processActivity-Based Budgeting incorporating Activity-Based Costing in the budgetary process

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-12

Budgeting and the Organization:Responsibility Accounting

Responsibility Center a part, segment, orsubunit of an organization whose manager isaccountable for a specified set of activities

Responsibility Accounting a system thatmeasures the plans, budgets, actions, andactual results of each Responsibility Center

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-13

Types of Responsibility Centers

1. Cost accountable for costs only2. Revenue accountable for revenues only3. Profit accountable for revenues and costs4. Investment accountable for investments,

revenues, and costs

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-14

Budgets and Feedback

Budgets offer feedback in the form ofvariances: actual results deviate frombudgeted targets

Variances provide managers withEarly warning of problemsA basis for performance evaluation

A basis for strategy evaluation

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-15

Controllability

Controllability is the degree of influence that amanager has over costs, revenues, or relateditems for which he is being held responsible

Responsibility Accounting focuses oninformation sharing, not in laying blame on aparticular manager

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-16

Budgeting and Human Behavior

The budgeting process may be abused bothby superiors and subordinates, leading tonegative outcomes

Superiors may dominate the budget processor hold subordinates accountable for eventsthey have no control overSubordinates may build budgetary slack into

their budgets

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To accompany Cost Accounting 12e , by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 6-17

Budgetary Slack

The practice of underestimating budgetedrevenues, or overestimating budgetedexpenses, in an effort to make the resulting

budgeted goals (profits) more easilyattainable