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Introduction to Management Accounting: The Master Budget
Chapter 20 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
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Objectives 1. Distinguish between financial accounting and management accounting, and use management accounting information for decision making. 2. Describe the value chain and classify costs by value-chain function 3. Distinguish direct costs from indirect costs 4. Distinguish among full product costs, inventoriable product costs and period costs
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Objectives 5. Prepare the financial statements of a manufacturing company 6. Identify the benefits of budgeting 7. Prepare an operating budget for a company 8. Prepare the components of a financial budget 9. Use sensitivity analysis in budgeting.
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The Functions of Management
Planning Acting Controlling Feedback
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Objective 1 Distinguish between financial accounting and management
accounting, and use management accounting information for decision-making
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Management Accounting and Financial Accounting
Primary Users Internal managers of the business Investors, Creditors, Government authorities (ATO, ASIC etc.)
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Management Accounting and Financial Accounting
Purpose of Information Help managers plan and control business operations Help investors, creditors, and others make investment, credit, and other decisions
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Management Accounting and Financial Accounting
Focus and Time Dimension Relevance Reliability, objectivity, and focus on the past
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Management Accounting and Financial Accounting
Type of Report Internal reports not restricted by GAAP Financial statements restricted by GAAP
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Management Accounting and Financial Accounting
Verification No independent audit Annual independent audit
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Management Accounting and Financial Accounting
Scope of Information Detailed reports on parts of the company Summary reports primarily on the company as a whole
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Management Accounting and Financial Accounting
Behavioral Implications Concern about how reports will affect employees behavior Concern about adequacy of disclosure
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Service, Retail, and Manufacturing Companies
Service Company: provides intangible services, rather than tangible products Retail Company: resells products previously bought from suppliers
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Service, Retail, and Manufacturing Companies
Manufacturing Company: uses labour, plant, and equipment to convert raw materials into finished products Materials inventory Work in process inventory Finished goods inventory
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Describe the value chain value-chain functions.
Objective 2 Describe the value chain and classify costs by value-chain functions.
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Value Chain Research and Development Design Production or Purchases
Marketing Distribution Customer Services
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Distinguish direct costs
Objective 3 Distinguish direct costs from indirect costs.
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Cost Objects, Direct Costs, and Indirect Costs
Cost objects are anything for which a separate measurement of costs is desired. Cost drivers are any factors that affect cost.
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Cost Objects, Direct Costs, and Indirect Costs
What are examples of cost objects? individual products alternative marketing strategies geographic segments of the business departments
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Cost Objects, Direct Costs, and Indirect Costs
What are direct costs? Direct costs are those costs that can be specifically traced to the cost object. What are indirect costs? Indirect costs are costs that cannot be specifically traced to the cost object.
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Distinguish among full product costs, inventoriable product
Objective 4 Distinguish among full product costs, inventoriable product costs, and period costs.
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Product Costs What are product costs?
They are the costs to produce (or purchase) tangible products intended for sale. There are two types of product costs: Full product costs Inventoriable product costs
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External Reporting Inventoriable product costs Period costs
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Inventoriable Product Costs
For external reporting, a retailers’ inventoriable product costs includes only costs that are incurred in the purchase of goods. Inventoriable costs are an asset. Period costs flow as expenses directly to the statement of financial performance.
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Inventoriable Product Costs
For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process. Inventoriable product costs are incurred only in the third element of the value chain. Costs incurred in other elements of the value chain are period costs.
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Inventoriable Product Costs
Direct Materials Direct Labour Indirect Labour Indirect Materials Other Manufacturing Overhead
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Inventoriable Product Costs
Direct Materials Direct Labour Prime Costs = Direct Materials + Direct Labour
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Inventoriable Product Costs
Direct Labour Indirect Labour Indirect Materials Other Conversion Costs = Direct Labour + Manufacturing Overhead
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Prepare the financial statements of a manufacturing company.
Objective 5 Prepare the financial statements of a manufacturing company.
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Financial Statements for Service Companies
There is no inventory and thus no inventoriable costs. The statement of financial performance does not include cost of goods sold. Revenues – Expenses = Net Profits
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Financial Statements for Retail Companies
Statement of Financial Position Statement of Financial Performance Inventoriable Costs Sales Revenue when sales occur deduct Purchases of Inventory plus Freight-In Inventory Cost of Goods Sold equals Gross Profit deduct Period Costs Operating Expenses equals Net Profit
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Financial Statements for Manufacturing Companies
Statement of Financial Performance Statement of Financial Position Inventoriable Costs Sales Revenue Materials Inventory when sales occur deduct Finished Goods Inventory Cost of Goods Sold equals Gross Profit deduct Work in Process Inventory Period Costs Operating Expenses equals Net Profit
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Manufacturing Company Example
Kendall Manufacturing Company: Beginning and ending work-in-process inventories were $20,000 and $18,000. Direct materials used were $70,000. Direct labour was $100,000. Manufacturing overhead incurred was $150,000.
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Manufacturing Company Example
What is the cost of goods manufactured? Beginning work in process $ 20,000 Direct labour $100,000 Direct materials ,000 Mfg. overhead , ,000 Ending work in process ,000 Cost of goods manufactured $322,000
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Manufacturing Company Example
Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000. How much is the cost of goods sold?
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Manufacturing Company Example
Beg. finished goods inventory $ 60,000 + Cost of goods manufactured ,000 = Cost of goods available for sale $382,000 – Ending finished goods ,000 = Cost of goods sold $327,000
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Manufacturing Company Example
Kendall Manufacturing Company had sales of $627,000 for the period. How much is the gross profit? Sales $627,000 – Cost of goods sold ,000 = Gross profit $300,000
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Manufacturing Company Example
Kendall Manufacturing Company had operating expenses as follows: Sales salaries and commissions $ 80,000 Delivery expense ,000 Administrative expenses ,000 Total $120,000 What is Kendall’s net profit?
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Manufacturing Company Example
Gross profit $300,000 – Operating expenses ,000 = Net Profit $180,000
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Flow of Costs through a Manufacturer’s Accounts
Work in Process Inventory Beginning inventory Direct materials used Direct labour Manufacturing overhead Total manufacturing costs to account for Ending inventory Cost of goods manufactured Direct Materials Inventory Beginning inventory Purchases and freight-in Direct materials available for use Ending inventory Direct materials used
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Flow of Costs through a Manufacturer’s Accounts
Finished Goods Inventory Beginning inventory Cost of goods manufactured Cost of goods available for sale Ending inventory Cost of goods sold
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Objective 6 Identify the benefits of budgeting.
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requires managers to plan promotes coordination motivates employees to
Benefits of Budgeting requires managers to plan promotes coordination and communication helps managers evaluate performance motivates employees to achieve company goals
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Components of the Master Budget
Inventory Budget ____ ____ Sales Budget ____ ____ Purchases Budget ____ ____ Cost of Goods Sold Budget ____ ____ Operating Expenses Budget ____ ____ Budgeted Statement of Financial Performance ____ ____ Operating Budget
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Components of the Master Budget
Cash Budget _____ _____ Budgeted Statement of Financial Performance _____ _____ Capital Expenditures Budget _____ _____ Financial Budget Budgeted Statement of Financial Position _____ _____ Budgeted Statement of Cash Flows _____ _____
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Preparing the Master Budget
(An expanded example in your textbook pages 838 – 45) Suppose you manage Whitewater Sporting Goods store No. 18. Selected parts of the master budget will be prepared for Store No. 18 for October, November, December and January.
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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 September 30 amounted to $16,000. How much were total sales in Sept.? $16,000 ÷ .40 = $40,000
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Preparing the Master Budget
Projected Sales October……………. $50,000 November……….… $80,000 December………..… $60,000 January……..……… $50,000
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Preparing the Master Budget
Whitewater maintains inventory equal to $20,000 plus 80% of the budgeted cost of goods sold for the following month. Cost of goods sold averages 70% of sales. What is the ending inventory on Sept. 31? $20,000 + (0.80 × 0.70 × October sales of $50,000) = $48,000
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Preparing the Master Budget
What is the beginning inventory in September? $20,000 + (0.80 × 0.70 × $40,000) = $42,400 Opening Inventory $ 42,400 Plus Purchases $ ? Minus Closing Inv. $ 48,000 Equals COGS (70% x $40,000) $ 28,000 ? = $ 33,600
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Preparing the Master Budget
Whitewater pays for inventory as follows: 50% during the month of purchase and 50% during the next month. September purchases were $33,600. How much was paid in September for September’s purchases? $33,600 × 50% = $16,800
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Prepare an operating budget
Objective 7 Prepare an operating budget for a company.
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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.
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Sales Budget (Schedule A)
Oct Nov Dec Jan. Cash sales 60% $30,000 $48,000 $36,000 $30,000 Credit sales 40% 20,000 32, , ,000 Total $50,000 $80,000 $60,000 $50,000 Total sales Oct through Jan = $240,000
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Purchases, Cost of Goods Sold, and Inventory Budget
Cost of goods sold = 70% × sales How much are the cost of goods sold for November? 70% × $80,000 = $56,000 What is the desired ending inventory for October? $20,000 + (80% × $56,000) = $64,800
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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
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Schedule B Oct. Nov. Dec. Jan. Cost of goods sold
(70% × sales) $35,000 $56,000 $42,000 $35,000 Desired ending inventory ,800 53, , ,400 Total required $99, , , ,400 Beginning inv , , , ,000 Purchases $51,800 $44,800 $36,400 $29,400
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Operating Expenses Budget
Assume that Whitewater incurs $5,200 of fixed expenses every month and that commissions and other variable expenses equal 20% of sales. What is the operating expenses budget (Schedule C)?
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Operating Expenses Budget (Schedule C)
Oct Nov Dec Jan. Variable expenses (From Schedule A) 20% of sales $ 10,000 $ 16,000 $12,000 $10,000 Fixed expenses 5, , , ,200 Total $15, $21,200 $17,200 $15,200 Total wages and commission: $68,800
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Budgeted Statement of Financial Performance
Whitewater Sporting Goods Store No. 18 Budgeted Statement of Financial Performance Four Months Ending January 31, 2005 Amount Source Sales $240,000 Schedule A Cost of goods sold ,000 Schedule B Gross profit $ 72,000 Operating expense ,800 Schedule C Net profit $ 3,200
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Prepare the components
Objective 8 Prepare the components of a financial budget.
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Preparing the Financial Budget
The financial budget includes: Cash budget Budgeted Statement of Financial Position
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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)
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Cash Collections from Customers (Schedule D)
From Schedule A Oct Nov Dec Jan. Cash sales $30,000 $48,000 $36,000 $30,000 Collections of last month’s credit sales 16,000* 20, , ,000 Total $46,000 $68,000 $68,000 $54,000 Total collections: $236,000 *16,000 = September 30 accounts receivable
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Cash Disbursements for Purchases (Schedule E)
From Schedule B Oct Nov Dec Jan. Payment of last month’s purchases $18,800 $25,900 $22,400 $18,200 Payment of this month’s purchases 25, , , ,700 Total $42,700 $48,300 $40,600 $32,900 Total disbursements: $164,500
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Cash Disbursements for Operating Expenses (Schedule F)
From Schedule C Oct Nov Dec Jan. Payment of last month’s expenses $ 4,250 $ 5,000 $7,250 $ 5,750 Payment of this month’s expenses , , , ,000 Rent and Misc , , , ,500 Total $13,750 $18,250 $18,000 $15,250 Total disbursements: $65,250
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Cash Budget Whitewater Sporting Goods Store No. 18 Cash Budget
Four Months Ending January 31, 2005 Budgeted cash receipts $236,000 Budgeted cash disbursements Purchases $164,500 Operating expenses , ,750 Budgeted cash increase $ 6,250
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Preparing the Budgeted Statement of Financial Position
Assets, liabilities, and owners’ equity are projected based upon the previous schedules. Assume that the cash balance on September 30 was $15,000. What is the budgeted cash balance on January 31? $15,000 + $6,250 expected increase = $21,250
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Use sensitivity analysis
Objective 9 Use sensitivity analysis in budgeting.
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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.
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End of Chapter 20
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