1. 8-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL

2. 8-2 Budgeting for Planning and Control 8

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

4. 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.

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

6. 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.

7. 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. 8-8 2 Preparing the Operating Budget Starting point for Direct Materials Purchases Budget Schedule 2 (in thousands) Starting point for Direct Labor Budget

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

10. 8-10 2 Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 4 (in thousands) Starting point for Overhead Budget

11. 8-11 2 Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 5 (in thousands)

12. 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 = $5.33. 2 Preparing the Operating Budget Goes to Cost of Goods Sold Budget Schedule 6 (in thousands)

13. 8-13 *Production needs  $0.01 = 416,000  $0.01. 2 Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 7 (in thousands)

14. 8-14 2 Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 8 (in thousands)

15. 8-15 2 Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 9 (in thousands)

16. 8-16 2 Preparing the Operating Budget Goes to Budgeted Income Statement Schedule 10 (in thousands)

17. 8-17 2 Preparing the Operating Budget Schedule 11 (in thousands)

18. 8-18 3 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

19. 8-19 3 Preparing the Financial Budget (Continued on next slide) Schedule 12 (in thousands)

20. 8-20 3 Preparing the Financial Budget (Continued from previous slide) (Continued on next slide) Schedule 12 (in thousands)

21. 8-21 3 Preparing the Financial Budget (Continued from previous slide) Schedule 12 (in thousands)

22. 8-22 3 Preparing the Financial Budget

23. 8-23 3 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).

24. 8-24 4 Flexible Budgets for Planning and Control Static budgets are master budgets that are developed around a particular level of activity.

25. 8-25 4 Flexible Budgets for Planning and Control Performance Report: Quarterly Production Costs (in thousands)

26. 8-26 4 Flexible Budgets for Planning and Control Flexible budgets provide expected costs for a range of activity or the actual level of activity.

27. 8-27 4 Flexible Budgets for Planning and Control Flexible Production Budget (in thousands)

28. 8-28 4 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.

29. 8-29 4 Flexible Budgets for Planning and Control Actual versus Flexible Performance Report: Quarterly Production Costs (in thousands)

30. 8-30 4 Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

31. 8-31 4 Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

32. 8-32 4 Flexible Budgets for Planning and Control Managerial Performance Report: Quarterly Production (in thousands)

33. 8-33 4 Flexible Budgets for Planning and Control Activity Flexible Budget

34. 8-34 4 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.

35. 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.

36. 8-36 5 Activity-Based Budgets Traditional Budget for the Secure-Care Department

37. 8-37 5 Activity-Based Budgets Flexible Budget for the Secure-Care Department

38. 8-38 5 Activity-Based Budgets Activity-Based Budget for the Secure-Care Department

39. 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

40. 8-40 End of Chapter 8