1. “HOW TO PREPARE A MASTER BUDGET WITH A FOCUS ON OPERATING BUDGET” Dr. Can Öztürk 1 cozturk@baskent.edu.tr Ankara, December 5, 2012 BILKENT UNIVERSITY Department of Industrial Engineering Seminar to Teach IE 441 Cost Analysis & Control 1 Instructor of Accounting, Baskent University’s Department of Management © C.Öztürk 2012

2. TABLE OF CONTENTS What is Accounting ? What is Accounting ? Managerial versus Financial Accounting Managerial versus Financial Accounting Business Goals & Strategies Business Goals & Strategies Planning & Control Planning & Control Introduction to Master Budget Introduction to Master Budget Operating Budget Operating Budget A Recent Example of Production A Recent Example of Production © C.Öztürk 2012

3. What is Accounting ?  accounting is an information system that measures, processes and communicates financial information of an economic entity to the decision makers – economic entity is an economic organization that acts independently – business entity is an economic entity that sells goods or provides services © C.Öztürk 2012

4. Accounting Discipline Overview Managerial accounting—measures, analyzes, and reports financial and nonfinancial information to help make decisions to fulfill organizational goals. Managerial accounting—measures, analyzes, and reports financial and nonfinancial information to help managers make decisions to fulfill organizational goals. Financial accounting—focus on reporting of financial information to external users including. Financial accounting—focus on reporting of financial information to external users including investors, creditors, and governmental agencies. © C.Öztürk 2012

5. Major Differences Between Financial and Managerial Accounting Managerial AccountingFinancial Accounting PurposeDecision making Communicate financial position to outsiders Primary Users/ Decision Makers Internal managersExternal users Focus/EmphasisFuture-orientedPast-oriented Rules Do not have to follow GAAP; cost vs. benefit GAAP compliant; CPA audited Time Span Ultra current to very long time horizons Historical monthly, quarterly reports Behavioral Issues Designed to influence employee behavior Indirect effects on employee behavior © C.Öztürk 2012

6. Business Goals and Strategies Business Goal is the target of a business organization towards which all efforts are directed is the target of a business organization towards which all efforts are directed the goal of profit maximization or profitability the goal of profit maximization or profitability the goal of liquidity the goal of liquidity Business Strategies are the means to achieve the set goals are the means to achieve the set goals © C.Öztürk 2012

7. Planning and Control Systems selects goals, predicts results, decides how to attain goals, and communicates this to the organization. Planning selects goals, predicts results, decides how to attain goals, and communicates this to the organization. Budget— operating and financial budget takes actions that implement the planning decision, decides how to evaluate performance, and provides feedback to the organization. Control takes actions that implement the planning decision, decides how to evaluate performance, and provides feedback to the organization. © C.Öztürk 2012

8. Business Information System Components © C.Öztürk 2012

9. The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period & An aid to coordinating what needs to be done to implement that plan © C.Öztürk 2012

10. Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinateactivities Communicateplans Think about and plan for the future Means of allocating resources © C.Öztürk 2012

11. Components of Master Budgets —building blocks leading to the creation of the Operating budget—building blocks leading to the creation of the budgeted income statement —building blocks based on the operating budget that lead to the creation of the and the Financial budget—building blocks based on the operating budget that lead to the creation of the budgeted balance sheet and the budgeted statement of cash flows © C.Öztürk 2012

12. The Master Budget: An Overview © C.Öztürk 2012

13. Basic Operating Budget Steps 1. Prepare the sales(revenues) budget. 2. Prepare the production budget (in units). 3. Prepare the direct materials budget. 4. Prepare the direct labor budget. 5. Prepare the manufacturing overhead costs budget. © C.Öztürk 2012

14. Basic Operating Budget Steps 5. Prepare the ending inventories budget. 6. Prepare the cost of goods sold budget. 7. Prepare the operating expense(period cost) budget (nonmanufacturing costs budget). 8. Prepare the. 8. Prepare the budgeted income statement. © C.Öztürk 2012

15. Income Statement summarizes the revenues and expenses of an entity for a certain period in time summarizes the revenues and expenses of an entity for a certain period in time reveals the results of operations during a period reveals the results of operations during a period shows whether an entity is successful in achieving the goal of profitability shows whether an entity is successful in achieving the goal of profitability © C.Öztürk 2012

16. Example of an Multiple Step Income Statement © C.Öztürk 2012

17. Basic Financial Budget Steps Based on the operating budgets: 1. Prepare the capital expenditures budget. 2. Prepare the cash budget. 3. Prepare the. 3. Prepare the budgeted balance sheet. 4. Prepare the. 4. Prepare the budgeted statement of cash flows. © C.Öztürk 2012

18. Choosing the Budget Period Operating Budget 2005200620072008 The annual operating budget may be divided into quarterly or monthly budgets. The annual operating budget may be divided into quarterly or monthly budgets. A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. © C.Öztürk 2012

19. The Sales Budget The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30 th © C.Öztürk 2012

20. The Production Budget March 31 ending inventory March 31 ending inventory © C.Öztürk 2012

21. The Production Budget © C.Öztürk 2012

22. The Production Budget Assumed ending inventory. © C.Öztürk 2012

23. The Direct Materials Budget From production budget © C.Öztürk 2012

24. The Direct Materials Budget © C.Öztürk 2012

25. The Direct Materials Budget Calculate the materials to be purchased in May. March 31 inventory 10% of following month’s production needs. © C.Öztürk 2012

26. The Direct Materials Budget © C.Öztürk 2012

27. The Direct Materials Budget Assumed ending inventory © C.Öztürk 2012

28. The Direct Labor Budget From production budget. © C.Öztürk 2012

29. The Direct Labor Budget © C.Öztürk 2012

30. The Direct Labor Budget Greater of labor hours required or labor hours guaranteed. Greater of labor hours required or labor hours guaranteed. © C.Öztürk 2012

31. The Direct Labor Budget © C.Öztürk 2012

32. Manufacturing Overhead Budget Direct Labor Budget. © C.Öztürk 2012

33. Manufacturing Overhead Budget Depreciation is a noncash charge. © C.Öztürk 2012

34. Ending Finished Goods Inventory Budget Direct materials budget and information. Direct materials budget and information. © C.Öztürk 2012

35. Ending Finished Goods Inventory Budget Direct labor budget. © C.Öztürk 2012

36. Ending Finished Goods Inventory Budget Total mfg. OH for quarter $251,000 Total labor hours required 5,050 = $49.70 per hour * © C.Öztürk 2012

37. Ending Finished Goods Inventory Budget Production Budget. © C.Öztürk 2012

38. Cost of Goods Sold Budget

39. Selling and Administrative Expense Budget Calculate the selling and administrative cash expenses for the quarter. © C.Öztürk 2012

40. Selling and Administrative Expense Budget © C.Öztürk 2012

41. The Budgeted Income Statement Sales Budget. Cost of Goods Sold Budget. Cost of Goods Sold Budget. Selling and Administrative Expense Budget. Cash Budget. © C.Öztürk 2012

42. A Recent Example Company: Proctor & Gamble Sector: Detergent Sub-sector: Liquid Dishwasher Detergent Brand: Fairy Within two years, this product created 40 millions consumers in Turkey. P&G established its production line in Turkey to meet the needs of Turkish consumers. © C.Öztürk 2012

43. To meet the demand generated from Turkish consumers, the production line of the Fairy, a liquid dishwasher detergent of P&G, has been recently moved to Turkey. November 24, 2012 Saturday

44. Thank you. © C.Öztürk 2012