1. PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. CARL S. WARREN SURVEY OF ACCOUNTING Chapter 13

2. 2 LEARNING OBJECTIVES When you finish this chapter, you should be able to

3. 3 1.Describe nature & objectives of budgeting. 2.Describe master budget for manufacturing business. 3.Describe nature & use of standards. 4.Explain & illustrate how standards are used in budgeting. LEARNING OBJECTIVES Continued

4. 4 LEARNING OBJECTIVES 5.Calculate & interpret basic variances for direct materials & direct labor. 6.Explain how standards can be used for non-manufacturing expenses. 7.Explain & provide examples of nonfinancial performance measures.

5. 5 LEARNING OBJECTIVE 1 Describe nature, objectives of budgeting.

6. 6 BUDGETING  Budget: Business plan in financial terms  Budgeting involves  Establishing specific goals  Executing plans to achieve goals  Periodically comparing results with goals LO 1

7. 7 EXHIBIT 1

8. 8 HUMAN BEHAVIOR & BUDGETING  Importance of setting a reasonable budget  Budgets set too tightly discourage employees when expectations too high  Budgets set too loosely leads to budgetary slack, “padding”  Spend it or loose it  Budgetary conflict means goals not met LO 1

9. 9 CONTINUOUS BUDGETING SYSTEMS LO 1 Continuous budgeting means maintaining a 12-month projection into future

10. 10 LO 1 EXHIBIT 3 Static budgeting means not changing a budget even if circumstances change

11. 11 LO 1 EXHIBIT 4 Flexible budgeting means showing budget results for different levels of activity

12. 12 LO 1 EXHIBIT 5 Flexible budgeting adjustments produce lower actual-to-budget differences

13. 13 LEARNING OBJECTIVE 2 Describe master budget for manufacturing business.

14. 14 LO 2 What is a master budget? A master budget is a combination of budgets linked to form budgeted income statement & budgeted balance sheet.

15. 15 LO 2 EXHIBIT 6 Income Statement Budgets

16. 16 LO 2 Sales budget sets level of sales & selling price for 2 products: 528,000 wallets selling for $12 & 260,000 handbags selling for $25.

17. 17 LO 2 EXHIBIT 7 Sales budget created from decisions about # units sold & selling price.

18. 18 LO 2 Production budget derived from the sales budget requirements, provides input to 3 subsidiary budgets: direct materials, direct labor, factory overhead.

19. 19 LO 2 EXHIBIT 8 Production budget created from decisions about sales projections & inventory levels.

20. 20 LO 2 EXHIBIT 9 Direct materials budget created from decisions about sales projections & production levels.

21. 21 LO 2 EXHIBIT 10 Direct labor budget created from decisions about sales projections & production levels.

22. 22 LO 2 EXHIBIT 11 Factory overhead budget created from decisions about sales projections & production levels.

23. 23 LO 2 Cost of goods sold budget, derived from the sales & production budgets, includes beginning finished goods & work in process inventories and subtracts ending finished goods & work in process inventories.

24. 24 LO 2 EXHIBIT 12

25. 25 LO 2 EXHIBIT 13 Selling & Administrative budget is created independently.

26. 26 LO 2 EXHIBIT 14 Selling & Administrative budget is combined with Cost of Goods Sold budgets to form budgeted Income Statement.

27. 27 LO 2 How many budgets make up the budgeted Balance Sheet?

28. 28 LO 2 2 budgets make up a budgeted Balance Sheet: Cash budget projects operating cash inflows & outflows Capital expenditures budget projects cash outflows for PPE.

29. 29 LO 2 EXHIBIT 15 Schedule of cash collections projects cash inflows from sales.

30. 30 Schedule of cash payments projects cash outflows for manufacturing costs. LO 2 EXHIBIT 16

31. 31 LO 2 EXHIBIT 17 Cash budget for 3 months based on projections of cash collections & payments.

32. 32 LO 2 EXHIBIT 18 Capital Expenditure budget projects capital spending needs over 5 years.

33. 33 LEARNING OBJECTIVE 3 Describe nature, use of standards.

34. 34 STANDARDS  Standards are performance goals  Standard costs systems  Provide a measure for performance  Allow measurement of variances from performance goals  Standards should be revised as necessary LO 3

35. 35 MEASURING CHANGES IN UNIT VARIABLE COSTS LO 3 Given: Fixed costs = $840,000; unit CM = $250 – 145 = $105 Break-even sales = $600,000 / 20 = 8,000 units 840,000 / {105 – ($250*2%)} = 8,400 When unit variable cost increased by $5, break-even units increased by 400.

36. 36 LEARNING OBJECTIVE 4 Explain, illustrate how standards are used in budgeting.

37. 37 LO 4 Budgetary performance evaluation compares actual performance to budget projections.

38. 38 LO 4 EXHIBIT 19 Standard costs for XL Jeans.

39. 39 LO 4 EXHIBIT 20 Budgetary performance evaluation for XL Jeans.

40. 40 LEARNING OBJECTIVE 5 Calculate, interpret basic variances for direct materials & direct labor.

41. 41 LO 5 Total difference between actual & budget is made up of variances in direct materials, labor and factory overhead.

42. 42 LO 5 Variances that make up Total Manufacturing Cost Variance.

43. 43 DIRECT MATERIALS VARIANCES: XL Jeans LO 5 Price standard = $5/yard Quantity standard = 1.5 yards/pair of jeans Direct Materials Standard Cost (5,000 pr.) = $36,500 Production: 5,000 pairs of jeans | Actual = Standard materials = 5,000 * 1.5 = 7,500 yards material | 7,300 * $5.50 = Standard Price = 7,500 * $5 = $37,500 | $40,150 ($5.50 - $5) * 7,300 = $3,650 U (7,500 – 7,300) * $5 = $1,000 F

44. 44 LO 5 EXHIBIT 21 Total Materials Variance = $3,650U + $1,000F = $2,650U

45. 45 DIRECT MATERIALS VARIANCES: XL Jeans LO 5 Rate standard = $9/hour Time standard =.8 hour/pair of jeans Direct Labor Standard Cost (5,000 pr.) = $36,000 Production: 5,000 pairs of jeans | Actual = Standard time = 5,000 *.8 = 4,000 labor hours | 3,850 * $10 = Standard rate = $9* 4,000= $36,000 | $38,500 ($10 - $9) * 3,850 = $3,850 U (4,000 – 3,850) * $9 = $1,350 F

46. 46 LO 5 EXHIBIT 22 Total Labor Variance = $3,850U + $1,350F = $2,500U

47. 47 LEARNING OBJECTIVE 6 Explain how standards can be used for non- manufacturing expenses.

48. 48 LO 6 Standards for non- manufacturing costs (selling & administrative expenses) are unusual unless they are repetitive and produce a common output.

49. 49 LEARNING OBJECTIVE 7 Explain, provide examples of non- financial performance measures.

50. 50 LO 7 Non-financial measures can augment financial measures for performance evaluation to avoid goal conflicts.

51. 51 NON-FINANCIAL PERFORMANCE MEASURES  Inventory turnover  On-time delivery  Lapsed time order to delivery  Customer preference rankings  Response time  Product development time  Employee satisfaction  Customer complaints LO 7

52. 52 THE END CHAPTER 13