8-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL

8-2 Budgeting for Planning and Control 8

8-3 The Role of Budgeting in Planning and Control 1 The Master Budget and Its Interrelationships

8-4 The Role of Budgeting in Planning and Control 1 Purposes of Budgeting: 1.Forces managers to plan. 2.Provides information to improve decision making. 3.Sets benchmarks for performance evaluation. 4.Improves communication and coordination.

8-5 The Role of Budgeting in Planning and Control 1 Components of the Master Budget Components of the Master Budget

8-6 The Role of Budgeting in Planning and Control 1 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.

8-7 2 Preparing the Operating Budget The first budget is the sales budget which is based on the sales forecast. Starting point for Production Budget Schedule 1 (in thousands) Starting point for Marketing Expense Budget Goes to Budgeted Income Statement

8-8 2 Preparing the Operating Budget Starting point for Direct Materials Purchases Budget Schedule 2 (in thousands) Starting point for Direct Labor Budget

8-9 2 Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 3 (in thousands)

Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 4 (in thousands) Starting point for Overhead Budget

Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 5 (in thousands)

8-12 a Amounts taken from Schedule 3. b Amounts taken from Schedule 4. c Amounts taken from Schedule 5. d Budgeted fixed overhead (Schedule 5)/Budgeted direct labor hours (Schedule 4) = $1,280/240 = $ Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 6 (in thousands)

8-13 *Production needs  $0.01 = 416,000  $ Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 7 (in thousands)

Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 8 (in thousands)

Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 9 (in thousands)

Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 10 (in thousands)

Preparing the Operating Budget Schedule 11 (in thousands)

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

Preparing the Financial Budget (Continued on next slide) Schedule 12 (in thousands)

Preparing the Financial Budget (Continued from previous slide) (Continued on next slide) Schedule 12 (in thousands)

Preparing the Financial Budget (Continued from previous slide) Schedule 12 (in thousands)

Preparing the Financial Budget

Preparing the Financial Budget Schedule 13 (in thousands) a Ending balance from Schedule 12. b 30 percent of fourth-quarter credit sales (0.30  $800,000)—see Schedules 1 and 12. c From Schedule 3 (5,000,000 lbs.  $0.01). d From Schedule 6. e From the December 31, 2006, balance sheet. f December 31, 2006, balance ($9,000,000) plus new equipment acquisition of $600,000 (see the 2006 ending balance sheet and Schedule 12). g From the December 31, 2006, balance sheet and Schedules 5, 8, and 10 ($4,500,000 + $800,000 +$20,000 + $40,000). h 20 percent of fourth-quarter purchases (0.20  $520,000)—see Schedules 3 and 12. i From the December 31, 2006, balance sheet. j $6,825,000 + $894,000 (December 31, 2006, balance plus net income from Schedule 11).

Flexible Budgets for Planning and Control Static budgets are master budgets that are developed around a particular level of activity.

Flexible Budgets for Planning and Control Performance Report: Quarterly Production Costs (in thousands)

Flexible Budgets for Planning and Control Flexible budgets provide expected costs for a range of activity or the actual level of activity.

Flexible Budgets for Planning and Control Flexible Production Budget (in thousands)

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.

Flexible Budgets for Planning and Control Actual versus Flexible Performance Report: Quarterly Production Costs (in thousands)

Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

Flexible Budgets for Planning and Control Activity Flexible Budget

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.

8-35 Activity-Based Budgets 5 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.

Activity-Based Budgets Traditional Budget for the Secure-Care Department

Activity-Based Budgets Flexible Budget for the Secure-Care Department

Activity-Based Budgets Activity-Based Budget for the Secure-Care Department

8-39 The Behavioral Dimension of Budgeting 6 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

8-40 End of Chapter 8