1. Copyright © 2007 Prentice-Hall. All rights reserved 1 The Master Budget and Responsibility Accounting Chapter 22

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Learn how to use a budget A budget is a plan that covers a specific period of time. It helps management determine how best to use its resources – both materials and manpower. Management estimates future cost and revenues

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Benefits of Budgeting Planning Coordination and communication Benchmarking

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Master Budget Operating budget - planned revenues and expenses Capital expenditures budget - plan for purchasing PP&E Financial budget - cash budget and budgeted balance sheet

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Master Budget Operating Budget Sales Budget Purchases & Cost of Goods Sold Budget Operating Expenses Budget Budgeted Income Statement The master budget is the financial plan for the entire organization The budgets on this slide represent the operating budget. The master budget is the financial plan for the entire organization The budgets on this slide represent the operating budget.

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Master Budget Budgeted Income Statement Capital Expenditures Budget Cash Budget Budgeted Balance Sheet

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Objective 2 Prepare an operating budget

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 Sales Budget Plan for sales revenues in a future period Budgeted sales revenue = sale price per unit x expected number of units to be sold

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 E22-8E22-8 Waterking Sales Budget MarchAprilTotal Cash sales(80%)$32,000$40,000 Credit sales(20%)8,00010,000 Total sales(100%)$40,000$50,000$90,000

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Purchases = Cost of goods sold + Ending inventory– Beginning inventory Inventory, Purchases, and Cost of Goods Sold Budget Cost of goods sold = Beginning inventory + Purchases– Ending inventory KnownCompute Unknown Once you know how much is predicted to be sold, you can plan how much inventory you need to purchase. Remember the equation to compute cost of goods sold The only element that is not known or can not be computed is purchases. Rearrange the equation to solve for Purchases

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Purchases = Cost of goods sold + Ending inventory– Beginning inventory E22-14E22-14 Purchases for first quarter: Beginning inventory is given = $19,000 Cost of goods sold = Sales x 60% = $60,000 Ending inventory = $20,000 + (10% x (60% x $150,000) = $29,000 Purchases for first quarter = $60,000 + 29,000 – 19,000 = $70,000

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 Purchases = Cost of goods sold + Ending inventory– Beginning inventory E22-14E22-14 Purchases for second quarter: Beginning inventory is given = $29,000 Cost of goods sold = Sales x 60% = $90,000 Ending inventory = $20,000 + (10% x (60% x $125,000) = $27,500 Purchases for second quarter = $90,000 + 27,500 – 29,000 = $88,500

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Purchases = Cost of goods sold + Ending inventory– Beginning inventory E22-14E22-14 Purchases for third quarter: Beginning inventory is given = $27,500 Cost of goods sold = Sales x 60% = $75,000 Ending inventory = $20,000 + (10% x (60% x $200,000) = $32,000 Purchases for third quarter = $75,000 + 32,000 – 27,500 = $79,500

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Quarter123 Cost of goods sold$60,000 +Desired ending inventory29,000 =Total required$89,000 -Beginning inventory 19,000 =Purchases$70,000 Inventory, Purchases & Cost of Goods Sold Budget Total cost of goods sold = $225,000 $75,000 32,000 $107,000 27,500 $79,500 $90,000 27,500 $117,50 29,000 $88,500

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 P22-28BP22-28B Sales Budget MayJuneTotal Total sales$42,900$43,900 $86,800

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Cost of Goods Sold Schedule MayJune Beginning inventory$14,000 +Purchases21,500 =Goods available for sale$35,500 -Ending inventory 20,000 =Cost of goods sold$15,500 P22-28BP22-28B $20,000 22,000 $42,000 19,600 $22,400

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 P22-28BP22-28B Operating Expense Budget April May Salary, fixed amount $4,000 $4,000 Commission 1,700 1,800 Total$5,700$5,800 Rent expense3,000 3,000 Depreciation expense600600 Insurance expense200200 Total$9,500$9,600

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Budgeted Income Statement Omaha Office Supply Co. Budgeted Income Statements May and June 2008 MayJune Sales revenue$42,900$43,900 Cost of goods sold* 15,500 22,400 Gross profit$27,400$21,500 Operating expenses* 9,500 9,600 Operating income$17,900$11,900 *see separate schedules

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 Objective 3 Prepare a financial budget

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 Financial Budget Cash budget Budgeted balance sheet

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Cash Budget Cash receipts and cash payments for a future period Cash receipts –Collections from customers –Receipts from sale of long-term assets –Receipts from borrowing –Receipts from owners

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 Cash Budget Cash payments –For inventory purchases –For operating expenses –Purchase long-term assets –Payment on loans –Payment to owners

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Cash Collections from Customers – S22-8 March April Total Cash sales$32,000$40,000$72,000 Collections of last month’s credit sales 9,000 6,400*15,400 Total$41,000$46,400$87,400 * March’s sales on account = March sales x 20%

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Cash Payments for Purchases – S22-9 May June Total Payment of last month’s purchases$8,000$10,000$18,000 Payment of this month’s purchases15,000 18,000 33,000 Total$23,000$28,000$51,000 Cash payments for operating expenses are also part of the cash budget….remember to include only cash expenses. Depreciation expense is a noncash expense, so do not include it

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Cash Budget Beginning cash balance + Cash receipts = Cash available - Cash payments (for inventory, operating expenses, purchase of long-term assets) = Ending balance before financing - Minimum balance = Excess (deficiency) Companies have a desired minimum balance in cash to keep operations moving smoothly. If cash falls below the minimum balance, the company will have to borrow some money

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Cash Budget Financing Borrow Principal payments Interest expense Total effects of financing Ending cash balance

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 E22-17E22-17 Cash receipts Jan Feb Cash collections from credit customers$11,000$15,000 Receipt from note receivable6,000 Total$17,000$15,000

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 E22-17E22-17 Cash payments Jan Feb Purchases of inventory$13,000$13,900 Operating expenses3,0003,000 Total$16,000$16,900

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 E22-17E22-17 JanFeb Beginning cash balance$10,500 + Cash receipts17,000 = Cash available$27,500 - Cash payments16,000 = Ending balance before financing$11,500 - Minimum balance 10,000 = Excess (deficiency)$1,500 Total effects of financing Ending cash balance$11,500 $11,500 15,000 $26,500 16,900 $9,600 10,000 $(400) 1,000 $10,600

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 E22-19E22-19 CashA/RInventEquip. Accum. DeprA/P Owner Equity Feb 28 balance11,400 5,150 17,720 34,800 (29,870) 10,500 28,700 Sales on credit 12,200 Cost of goods sold (7,320) Depreciation expense (600) Operating expenses (5,000) Collections on account 14,300 (14,300) Payment for inventory (4,600) 4,600 Payments on account (8,200) Mar 31 balance 7,900 3,05015,00034,800( 30,470) 2,30027,980

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 Budgeted Balance Sheet Oleanders Budgeted Balance Sheet March 31, 2008 ASSETS Current Assets: Cash$ 7,900 Accounts receivable3,050 Inventory 15,000$25,950 Plant assets: Furniture and fixtures34,800 Accumulated depreciation(30,470) 4,330 Total assets$30,280

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 Budgeted Balance Sheet Oleanders Budgeted Balance Sheet March 31, 2008 (continued) LIABILITIES Current liabilities: Accounts payable$ 2,300 OWNERS' EQUITY Owners' equity 27,980 Total liabilities and owners' equity$30,280

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 Budgeting and Sensitivity Analysis Helps managers plan for different courses of action Use of technology and budget software

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Objective 4 Prepare performance reports for responsibility centers

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 Responsibility Accounting System for evaluating performance of managers and activities they supervise Responsibility center - part, segment, or subunit of an organization whose manager is accountable for its activities

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 Cost center – reports costs only Revenue center – reports revenues only Profit center - reports revenues, expenses, and net income or loss Investment center - reports revenues, expenses, income or loss, and investment used Responsibility Center

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 E22-20E22-20 a.Profit center b.Investment center (or possibly a profit center) c.Cost center d.Profit center e.Cost center f.Profit center g.Investment center h.Revenue center

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 Responsibility Accounting Performance reports compare budgeted and actual amounts Management by exception – management technique that focuses on important differences between budget and actual

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 E22-21E22-21 Web Touch Responsibility Accounting Performance Report (Amounts in thousands) September 2009 Manager – All handheld devices BudgetActualVariance Operating income: PDAs$ 125$ 120$(5) Cell Phones 474 519 45 Total operating income$599$639$ 40

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 E22-21E22-21 Assistant Manager – cell phones BudgetActualVariance Operating income: Video Cell Phones$410$440$30 Digital Cell Phones 64 79 15 Total operating income$474$519$45

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 E22-21E22-21 Assistant Manager – DIGITAL CELL PHONES BudgetActualVariance Revenues and expenses: Revenues$204$214$10 Expenses 140 135 5 Operating income$ 64$ 79$15

42. Copyright © 2007 Prentice-Hall. All rights reserved 42 E22-21E22-21 Monica should investigate the performance of the digital cell phones operation. Its favorable operating income variance is significant: 23% ($15/$64) of budget. Beverly likely would focus her investigation on how digital cell phones achieved both higher-than-expected revenue and lower-than-expected costs

43. Copyright © 2007 Prentice-Hall. All rights reserved 43 End of Chapter 22