Session 13 - Master Budgets

.pptx

School

MIT School of Business**We aren't endorsed by this school

Course

HRM 202

Subject

Accounting

Date

Dec 29, 2024

Pages

Uploaded by ProfessorAtomHawk5

COST AND MANAGEMENT ACCOUNTINGPGP-28: Term II1Session 13Master Budgets and Responsibility ReportingChapter 6 of the Textbook.Welcome to Module 5:Cost ControlBy being possessive, you make the other person feel wantedBy being over-possessive, you makethe other person feel wasted!Be positively possessive but not obsessively possessive!!

Budget DefinedA budget is the management’s plan of action for a future period.Though it is a quantitative expression, it also considers nonfinancial aspects and serves as a road map for the company to follow in an upcoming period. It is strategic – in the sense, it flows from the corporate goals and transcends different levels.

Budgets Help Managers….Communicate directions and goals to different departments of a company to help them coordinate the actions they must pursue to satisfy customers and succeed in the marketplace.Motivateemployees to achieve their goals.Evaluate performance by measuring financial results against planned objectives, activities, and timelines to learn about potential problems.Incentivizeemployees for their achieved results.

Master BudgetThe master budget is notone single document. It is a collection of different operating and financial plans for a specified period:◦Operating budgets deal with how to best use the limited resources of an organization (the operating budget).◦Financial budgets deal with how to obtain the funds to acquire those resources (the financial budget).

Operating Budget Steps 1.Sales revenues budget 2.Production budget 3.Direct materials usage and purchases budgets 4.Direct manufacturing labor costs budget5.Manufacturing overhead costs budget 6.Ending inventories budget 7.Cost of goods sold budget 8.Nonmanufacturing costs budget 9.Budgeted income statement

Basic Financial Budget Steps1.Capital expenditures budget.2.Cash budget.3.Budgeted balance sheet.4.Budgeted statement of cash flows.

Financial Planning:Sensitivity analysisFinancial planning models are mathematical representations of the relationships among operating activities, financing activities and other factors that affect the master budget.Sensitivity analysis is a “what-if” technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes.

Responsibility ReportingReporting from different centers of responsibility in organizations.Cost centersRevenue centersProfit centersInvestment centersControllability is the key to providing performance information via responsibility reportingHowever, in practice, exceptions exist. Responsibility centers are made accountable for costs beyond their control.

Operating BudgetsApplication Exercise -1 (AE-1):First Class, Inc., expects to sell 29,000 pool cues for $13 each. Direct materials costs are $3, direct manufacturing labor is $5, and manufacturing overhead is $0.83 per pool cue. The following inventory levels apply to 2019: Beginning inventoryEnding inventory Direct materials 24,000 units 24,000 units Work-in-process inventory 0 units 0 units Finished goods inventory 1,200 units 2,800 units What are the 2019 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively? A) $72,000; $120,000; $19,920 B) $90,600; $151,000; $25,066 C) $91,800; $153,000; $25,398 D) $87,000; $145,000; $24,070

Operating budget:Solution for AE-1:Production budget:Budgeted sales quantity: 29,000 pool cuesAdd: Desired closing inventory: 2,800 pool cuesRequired quantity31,800 Less: Existing opening inventory1,200 Production quantity30,600 pool cuesProduction cost budget:Direct materials = 30,600 × $3 = $91,800; Direct manufacturing labor = 30,600 × $5 = $153,000; Manufacturing overhead = 30,600 × $0.83 = $25,398

Operating budgetApplication Exercise-2 (AE-2):2.The following information pertains to the January operating budget for Murphy Corporation, a retailer:Budgeted sales are $308,000 for JanuaryCollections of sales are 60% in the month of sale and 40% the next monthExpected merchandise purchases total $154,000 in January over 230 ordersBudgeted purchase order processing costs $ $200 per orderMarketing costs are $13,600 each monthDistribution costs are $25,000 each monthAdministrative costs are $10,500 each monthFor January, budgeted gross and net margins are ________.A) $58,900 and $108,000B) $154,000 and $58,900C)$108,000 and $58,900D) None of the above

Operating budgetSolution to Application Exercise-2 (AE-2):Budgeted Sales $308,000Less: Expected purchase costs $154,000Purchase order processing230 orders * $200 per order46,000$200,000Gross Margin $108,000Less: Marketing13,600Distribution 25,000Administration10,500$ 49,100Net Margin58,900

Operating budgetApplication Exercise-3 (AE-3):Christy Enterprises reports the year-end information from 2023-24 as follows: Sales (100,000 units)$500,000Less: Cost of goods sold300,000Gross profit200,000Operating expenses (includes $20,000 of Depreciation)120,000Net income$ 80,000Christy is developing the 2024-25 budget. In 2024-25 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2024-25.

Operating budgetSolution to Application Exercise-3 (AE-3):Christy EnterprisesBudgeted Income StatementFor the Year 2024-25 Sales (95,000 × $5.50)$522,500Cost of goods sold (sales × 62%)323,950Gross profit198,550Less: Operating expenses [($1.00 × 95,000] + $20,000) 115,000Net income$ 83,550