The Master Budget and Responsibility Accounting Chapter 23

Objective 1

Identify the benefits of budgeting.

Benefits of Budgeting

requires managers to plan

promotes coordination and communication

helps managers evaluate performance

motivates employees to achieve company goals

Components of the Master Budget

Inventory Budget ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Sales Budget ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Purchases Budget ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Cost of Goods Sold Budget ____ ____ ____ ____ ____ ____ ____ ____

Operating Expenses Budget ____ ____ ____ ____ ____ ____ ____ ____

Budgeted Income Statement ____ ____ ____ ____ ____ ____ ____ ____

Operating Budget

Components of the Master Budget

Cash Budget Budgeted Income Statement _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Capital Expenditures Budget _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____

Financial Budget
Budgeted Balance Sheet _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Budgeted Statement of Cash Flows _____ _____ _____ _____ _____ _____ _____ _____ _____ _____

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.

Preparing the Master Budget

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

Preparing the Master Budget

Projected Sales April May June July $50,000 $80,000 $60,000 $50,000

Preparing the Master Budget

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.

Preparing the Master Budget

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

Preparing the Master Budget

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 Marchs purchases? $34,160 50% = $17,080

Objective 2

Prepare an operating budget.

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.

Sales Budget (Schedule A)

April May June July Cash sales 60% $30,000 $48,000 $36,000 $30,000 Credit sales 40% 20,000 32,000 24,000 20,000 Total $50,000 $80,000 $60,000 $50,000 Total sales April through July = $240,000

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

Purchases, Cost of Goods Sold, and Inventory Budget

Beginning inventory + Purchases Ending inventory = Cost of goods sold

Cost of goods sold + Ending inventory Beginning inventory = Purchases

Schedule B
April May June July

Cost of goods sold (70% sales) $35,000 $56,000 $42,000 $35,000 Desired ending inventory 32,400 26,800 24,000 32,000 Total required $67,400 $82,800 $66,000 $67,000 Beginning inventory 24,000 32,400 26,800 24,000 Purchases $43,400 $50,400 $39,200 $43,000

Schedule B
How much is the cost of goods sold for the four-month period?
April $ 35,000 May. 56,000 June. 42,000 July. 35,000 Total $168,000

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)?

Operating Expenses Budget (Schedule C)

April Variable expenses (From Schedule A) 20% of sales Fixed expenses Total May June July

$10,000 $16,000 $12,000 $10,000 4,000 4,000 4,000 4,000 $14,000 $20,000 $16,000 $14,000

Total operating expenses: $64,000

Budgeted Income Statement

Plantation Sporting Goods Store No. 13 Budgeted Income Statement Four Months Ending July 31, 20xx

Sales Cost of goods sold Gross margin Operating expense Net income

Amount $240,000 168,000 $ 72,000 64,000 $ 8,000

Source Schedule A Schedule B Schedule C

Objective 3 Prepare the components of a financial budget.

Preparing the Financial Budget

The financial budget includes:

Cash budget

Budgeted balance sheet

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)

From Schedule A

Cash sales Collections of last months credit sales 19,200* 20,000 32,000 24,000 Total $49,200 $68,000 $68,000 $54,000 Total collections: $239,200 *19,200 = March 31 accounts receivable

April May June July $30,000 $48,000 $36,000 $30,000

Cash Disbursements for Purchases (Schedule E)

From Schedule B

April Payment of last months purchases Payment of this months purchases Total

May

June

July

$17,080 $21,700 $25,400 $19,600

21,700 25,200 19,600 21,500 $38,780 $46,900 $45,000 $41,100

Total disbursements: $171,780

Cash Disbursements for Operating Expenses (Schedule F)

From Schedule C

April Payment of last months expenses Payment of this months expenses Total

May

June

July

$ 6,800 $ 7,000 $10,000 $ 8,000

7,000 10,000 8,000 7,000 $13,800 $17,000 $18,000 $15,000

Total disbursements: $63,800

Cash Budget
Plantation Sporting Goods Store No. 13 Cash Budget Four Months Ending July 31, 20xx Budgeted cash receipts $239,200 Budgeted cash disbursements Purchases $171,780 Operating expenses 63,800 235,580 Budgeted cash increase $ 3,620

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

Objective 4 Use sensitivity analysis in budgeting.

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.

Objective 5 Distinguish among different types of responsibility centers.

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.

Responsibility Center

Cost

center

Revenue center

Profit center

Investment center

Objective 6 Prepare a performance report for management by exception.

Management by Exception
Northern California District Manager

San Francisco Branch Manager

San Jose Branch Manager

Oakland Branch Manager

Sacramento Branch Manager

Geary Store Manager

Beale Store Manager

Wharf Store Manager

Other Managers

Management by Exception
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.

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

Revenues Cost of goods sold Wages Repairs General Fixed costs Operating income

Month $50,000 35,000 6,700 2,000 1,300 4,000 $ 1,000

YTD $388,000 271,600 51,992 15,520 10,088 28,000 $ 10,800

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

Revenues Cost of goods sold Wages Repairs General Fixed costs Operating income

Month $55,000 37,400 7,370 550 900 4,000 $ 4,780

YTD $408,000 277,440 54,672 8,160 8,160 28,000 $ 31,568

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

Revenues Cost of goods sold Wages Repairs General Fixed costs Operating income

Budget $50,000 35,000 6,700 2,000 1,300 4,000 $ 1,000

Actual Variance (F/U) $55,000 $5,000 (F) 37,400 2,400 (U) 7,370 670 (U) 550 1,450 (F) 900 400 (F) 4,000 --$ 4,780 $3,780 (F)

Management by Exception
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 by Exception
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 by Exception
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.

Management by Exception
Broward County Branch Manager Plantation 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)

Management by Exception
South Florida District Manager Plantation 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)

Objective 7

Allocate indirect costs to departments.

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 Basis Indirect labor Time spent Building depreciation Square feet Heat, lights, etc. Square feet Janitorial services Square feet Payroll and personnel # of employees Purchasing # 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 Clinic Departmental Partial Income Statement For the Year Ended December 31, 20xx (in thousands) Total ENT Audiology Service revenue $500 $350 $150 Professional services 250 175 75 Margin $250 $175 $ 75 Rent expense 120 90 30 Other 100 70 30 Operating 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