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Cost Management ACCOUNTING AND CONTROL. HANSEN & MOWEN. 8. CHAPTER. Budgeting for Planning and Control. 1. OBJECTIVE. The Role of Budgeting in Planning and Control. The Master Budget and Its Interrelationships. 1. OBJECTIVE. The Role of Budgeting in Planning and Control.

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Cost Management ACCOUNTING AND CONTROL

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Cost ManagementACCOUNTING AND CONTROL

HANSEN & MOWEN


8

CHAPTER

Budgeting for Planning and Control


1

OBJECTIVE

The Role of Budgeting in Planning and Control

The Master Budget and Its Interrelationships


1

OBJECTIVE

The Role of Budgeting in Planning and Control

Purposes of Budgeting:

Forces managers to plan.

Provides information to improve decision making.

Sets benchmarks for performance evaluation.

Improves communication and coordination.


1

OBJECTIVE

The Role of Budgeting in Planning and Control

Components of the Master Budget


1

OBJECTIVE

The Role of Budgeting in Planning and Control

The master budget starts with the sales forecast, which is basis for the sales budget.

All other operating and most financial budgets are generated from the sales budget.

Production Budget

Direct Materials

Purchase Budget

Cost of Goods

Sold Budget

Cash Budget


2

OBJECTIVE

Preparing the Operating Budget

The first budget is the sales budget which is based on the sales forecast.

Schedule 1 (in thousands)

Starting point for Production Budget

Starting point for Marketing Expense Budget

Goes to Budgeted Income Statement


2

OBJECTIVE

Preparing the Operating Budget

Schedule 2 (in thousands)

Starting point for Direct Materials Purchases Budget

Starting point for Direct Labor Budget


2

OBJECTIVE

Preparing the Operating Budget

Schedule 3 (in thousands)

Goes to Cost of Goods Sold Budget


2

OBJECTIVE

Preparing the Operating Budget

Schedule 4 (in thousands)

Starting point for Overhead Budget

Goes to Cost of Goods Sold Budget


2

OBJECTIVE

Preparing the Operating Budget

Schedule 5 (in thousands)

Goes to Cost of Goods Sold Budget


2

OBJECTIVE

Preparing the Operating Budget

Schedule 6 (in thousands)

aAmounts taken from Schedule 3.

bAmounts taken from Schedule 4.

cAmounts taken from Schedule 5.

dBudgeted fixed overhead (Schedule 5)/Budgeted direct labor hours (Schedule 4) = $1,280/240 = $5.33.

Goes to Cost of Goods Sold Budget


2

OBJECTIVE

Preparing the Operating Budget

Schedule 7 (in thousands)

*Production needs  $0.01 = 416,000  $0.01.

Goes to Budgeted Income Statement


2

OBJECTIVE

Preparing the Operating Budget

Schedule 8 (in thousands)

Goes to Budgeted Income Statement


2

OBJECTIVE

Preparing the Operating Budget

Schedule 9 (in thousands)

Goes to Budgeted Income Statement


2

OBJECTIVE

Preparing the Operating Budget

Schedule 10 (in thousands)

Goes to Budgeted Income Statement


2

OBJECTIVE

Preparing the Operating Budget

Schedule 11 (in thousands)


3

OBJECTIVE

Preparing the Financial Budget

Cash flows are critical to managing a business and the lifeblood of an organization. Therefore, the cash budget is one of the most important budgets in the master budget.

The Cash Budget


3

OBJECTIVE

Preparing the Financial Budget

Schedule 12 (in thousands)

(Continued on next slide)


3

OBJECTIVE

Preparing the Financial Budget

Schedule 12 (in thousands)

(Continued from previous slide)

(Continued on next slide)


3

OBJECTIVE

Preparing the Financial Budget

Schedule 12 (in thousands)

(Continued from previous slide)


3

OBJECTIVE

Preparing the Financial Budget


3

OBJECTIVE

Preparing the Financial Budget

Schedule 13 (in thousands)

aEnding balance from Schedule 12.

b30 percent of fourth-quarter credit sales (0.30  $800,000)—see Schedules 1 and 12.

cFrom Schedule 3 (5,000,000 lbs.  $0.01).

dFrom Schedule 6.

eFrom the December 31, 2006, balance sheet.

fDecember 31, 2006, balance ($9,000,000) plus new equipment acquisition of $600,000 (see the 2006 ending balance sheet and Schedule 12).

gFrom the December 31, 2006, balance sheet and Schedules 5, 8, and 10 ($4,500,000 + $800,000 +$20,000 + $40,000).

h20 percent of fourth-quarter purchases (0.20  $520,000)—see Schedules 3 and 12.

iFrom the December 31, 2006, balance sheet.

j$6,825,000 + $894,000 (December 31, 2006, balance plus net income from Schedule 11).


4

OBJECTIVE

Flexible Budgets for Planning and Control

Static budgets are master budgets that are developed around a particular level of activity.


4

OBJECTIVE

Flexible Budgets for Planning and Control

Performance Report: Quarterly Production Costs (in thousands)


4

OBJECTIVE

Flexible Budgets for Planning and Control

Flexible budgets provide expected costs for a range of activity or the actual level of activity.


4

OBJECTIVE

Flexible Budgets for Planning and Control

Flexible Production Budget (in thousands)


4

OBJECTIVE

Flexible Budgets for Planning and Control

Managers can locate possible problem areas by examining the variances revealed on a performance report that compares budgeted costs for the actual level of activity to the actual costs for the same level.


4

OBJECTIVE

Flexible Budgets for Planning and Control

Actual versus Flexible Performance Report: Quarterly Production Costs (in thousands)


4

OBJECTIVE

Flexible Budgets for Planning and Control

Managerial Performance Report: Quarterly Production (in thousands)


4

OBJECTIVE

Flexible Budgets for Planning and Control

Managerial Performance Report: Quarterly Production (in thousands)


4

OBJECTIVE

Flexible Budgets for Planning and Control

Managerial Performance Report: Quarterly Production (in thousands)


4

OBJECTIVE

Flexible Budgets for Planning and Control

Activity Flexible Budget


4

OBJECTIVE

Flexible Budgets for Planning and Control

Activity-Based Performance Report

The activity-based performance report compares the budgeted costs for actual activity usage with the actual costs.


5

OBJECTIVE

Activity-Based Budgets

The activity-based budget begins with output and then determines the resources necessary to created that output. It works backwards from activities and their drivers to the underlying costs.


5

OBJECTIVE

Activity-Based Budgets

Traditional Budget for the Secure-Care Department


5

OBJECTIVE

Activity-Based Budgets

Flexible Budget for the Secure-Care Department


5

OBJECTIVE

Activity-Based Budgets

Activity-Based Budget for the Secure-Care Department


6

OBJECTIVE

The Behavioral Dimension of Budgeting

  • Characteristics of a Good Budgetary System

  • Frequent feedback on performance

  • Monetary and nonmonetary incentives

  • Participative budgeting

  • Realistic standards

  • Controllability of costs

  • Multiple measures of performance


End of Chapter 8


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