Accounting 6

Management Accounting
Lesson 6

In 3-5 sentences, answer the following

questions. Handwrite the answers in a yellow
paper.
1.What is the role of accounting in budgeting?
2.Give at least three benefits of budgeting.
3.Briefly explain the idea of participative
budgeting.
4.What is budgetary slack?
5.Differentiate budget from a long-range plan.
6.Describe the master budget.

Planning
process of establishing enterprise-wide plans
(long-term and short-term)
includes the proposed ways to accomplish these plans
A formal written statement of management plans for a
specified period expressed in financial terms is called. . .

BUDGET
(control device)
Why is it considered a control device?

What is the role of accounting in budgeting?

Accounting

Historical data (revenues, costs, expenses)

Translate management plans into figures that
facilitates the measurement process
Communicates to employees for implementation
Prepare periodic reports that measures performance
by comparing actual results with planned objectives

However, the budget itself and the

administration of budget is entirely
management responsibilities.

It requires all levels of management to

plan ahead and to formalize the goals on
a recurring basis.
It provides definite objectives for
evaluating performance at each level of
responsibility.
It creates and early warning system for
potential problems so that management
can make changes before things can get
out of hand.

It facilitates the coordination of activities

within the business. The goals of each
segments are correlated with the
companys overall objectives.
It results in greater management
awareness of the entitys overall operation
and the impact of external factors.
It motivates personnel throughout the
organization to meet the planned
objectives.

A budget is an aid to
management, it is
not a
substitute to
management.

Sound

organizational
structure
Research and analysis
Acceptance by all levels
of management

One year
Any period of time

Factors:
Type of budget
Nature of the organization
Need for periodic appraisal
Prevailing business condition

Long enough to provide an attainable goal

under normal business condition but not
too long that reliable estimates are
impossible.

Collection of data

Sales forecast

- The budget committee (review-modify-reconcile)

Approval

- Factors to consider are general economic

condition, industry trends, market research
studies, anticipated advertising and promotion,
changes in prices and technological developments

Final form

- Past performance is used as starting point

- Board of Directors

Distribution

Participative budgeting
-

Lower managers participation is essential

because they are more knowledgeable as to the
needs of their departments.
Look at the budget as fair.

Budgetary slack
-

When managers intentionally misstate

revenues and expenses to achieve target easily

A set of interrelated budgets that

constitutes an enterprise-wide plan of
actions for a specified time period.
Operating budget individual budgets
that result in the preparation of the
income statement.
Financial budget focuses primarily on
cash, capital expenditures and the
projected balance sheet.

Sales Budget

OPERATING
BUDGET

Production Budget

Direct Materials
Budget

Direct Labor
Budget

Manufacturing
Overhead Budget

Selling &
Administrative
Expense Budget

FINANCIAL
Capital
Expenditures
Budget

Budgeted Income
BUDGETStatement
Cash Budget

Budgeted Balance
Sheet

SALES BUDGET
* The first budget to be prepared
* Other budgets depend on the sales budget

SALES FORECAST
* Management best estimate of sales revenue
for the budget period
* Inaccurate sales budget may have an
adverse effect

Overly optimistic sales forecast - excessive inventory

which may have to be sold at reduced prices
Too conservative sales forecast forego sales
opportunities because of inventory shortage

How to forecast sales?

* Estimate the number of units to be
sold
* Estimate the selling price
- May have a based year (e.g. previous year) and

then
estimate the periodic increment
EXPECTED NUMBER OF UNITS
x ESTIMATED SELLING PRICE
---------------------------------------------TOTAL SALES

Q1
Grand Total

Q2

Units Unit Price Total Units Unit Price Total Units Unit Price Total
XQ
103 20,000

15

300.000 25,000

15

375,000 45,000

15

675,000

XQ
104 10,000

25

250,000 16,000

25

400,000 26,000

25

650,000

Total 30,000

550,000 41,000

775,000 71,000

1,325,000

P9-1A
2008

2009
Plan A

Plan B

Units
800,000
900,000
Selling Price
7
6.65

720,000

Total Sales
5,985,000

5,472,000

5,600,000

7.60

* Units to be produced to meet the

budgeted sales
* Realistic estimate is essential in
scheduling production requirements
- Raw materials
- Labor
- Overhead
* Excessive inventory may lead to
cutbacks and layoffs

Budgeted sales in units

+ Desired ending finished goods
- Beginning inventory
----------------------------------------------Required production in units
===========================
E9-2
Budgeted sales
Desired ending inventory
Beginning inventory
Required production

Q1

Q2

5,000
1,800
(1,500)
5,300

6,000
2,100
(1,800)
6,300_

P9-1A
2009
Plan A
Budgeted Sales
720,000
900,000
Desired ending finished goods
90,000
100,000
Beginning inventory
(70,000)
Required production
740,000
930,000

Plan B

(70,000)

E9.3
HD-240

Q1

Q2

Q3

Q4

Annual

Budgeted
Sales

5,000

7,000

8,000

10,000

30,000

Desired
Ending
Inventory

3,500

4,000

5,000

3,250

3,250

Beginning
Inventory

(2,500)

(3,500)

(4,000)

(5,000)

(2,500)

6,000

7,500

9,000

8,250

30,750

Required
Productio
n in units

* From the production budget, estimate the required raw

materials needed to produce the estimated units
* Determine the cost of purchases by multiplying the
required raw materials with the anticipated cost per unit
* Inadequate materials could result to temporary shutdown
Direct materials required for production
+ Desired ending direct materials
- Beginning direct materials
-----------------------------------------------------------------Required direct materials to be purchased
x Cost per unit
-----------------------------------------------------------------Total budgeted cost of direct materials
======================================

P9-1A
2009
Plan A Plan B
Budgeted Sales
720,000
900,000
Desired ending finished goods
90,000
100,000
Beginning inventory (70,000)
(70,000)
-------------------------------------------------Required production in units
740,000
930,000
x Direct materials cost per unit
2
2
-------------------------------------------------Budgeted direct materials cost 1,480,000
1,860,000
=============================

E9-6 January

February

March

Q1 Total

Budgeted production
in units
10,000
8,000
5,000
23,000
Required direct
materials per unit
3
3
3
3
---------------------------------------------------------Budgeted direct
materials (pounds) 30,000
24,000 15,000 69,000
Desired ending raw
materials
7,200
4,500
3,600
3,600
Beginning raw materials (9,000)
(7,200)
(4,500) (9,000)
---------------------------------------------------------Required purchases
28,200
21,300
14,100 63,600
Cost of raw materials
2
2
2
2
---------------------------------------------------------Budgeted purchases
56,400
42,600
28,200 127,200
==================================

* Contains the quantity and the cost of labor

necessary to meet the production
requirements
* Necessary to determine staff requirement to
produce the desired number of units
Units to be produced
x Required direct labor time per unit
x Direct labor cost per hour
---------------------------------------------------Budgeted direct labor cost
==============================

P9-1A
2009
Plan A Plan B
Budgeted Sales
720,000
900,000
Desired ending finished goods
90,000
100,000
Beginning inventory (70,000)
(70,000)
-------------------------------------------------Required production in units
740,000
930,000
x Direct labor cost per unit
1.50
1.50
-------------------------------------------------Budgeted direct labor cost
1,110,000
1,395,000
=============================

E9-4

Q1

Q2

Q3

Q4

Total

Budgeted production
in units
20,000
25,000
35,000
30,000
110,000
Required direct labor
hours per unit
1.6
1.6
1.6
1.6
-----------------------------------------------------------------------Budgeted direct labor
hours
32,000
40,000
56,000
48,000 176,000
Direct labor cost per
hour
15
15
16
16
------------------------------------------------------------------------Budgeted direct labor
cost 480,000 600,000 896,000
768,000 2,744,000
==========================================

1.6

* Shows the estimated variable and fixed cost

of production
* Variable manufacturing overhead are those
that varies in direct proportion to volume of
production
* Fixed manufacturing overhead are those that
remains unchanged regardless of production

P9-1A
Plan A

2009
Plan B

Budgeted Sales
720,000
900,000
Desired ending finished goods
90,000
100,000
Beginning inventory (70,000)
(70,000)
---------------------------------------------------Required production in units
740,000
930,000
x Variable mfg. cost per unit
.50
.50
---------------------------------------------------Budgeted variable mfg. cost
370,000
465,000
Budgeted fixed mfg. cost
925,000
925,000
--------------------------------------------------Total budgeted mfg.
1,295,000
1,390,000
overhead cost
=============================
Budgeted mfg. overhead
cost per unit
1.75
1.49

E9-5

Q1

Q2

Q3

Q4

Total

Budgeted production
in units
10,000
12,000
14,000
16,000
52,000
Required direct labor
hours per unit
1.5
1.5
1.5
1.5
1.5
-----------------------------------------------------------------------Budgeted direct labor
hours
15,000
18,000
21,000
24,000
78,000
Variable mfg. overhead 2.40
2.40
2.40
2.40
2.40
cost (.7+1.2+.5)
-----------------------------------------------------------------------Budgeted variable
mfg. cost
36,000
43,200
50,400
57,600 187,200
Budgeted fixed mfg 63,000
63,000
63,000
63,000 252,000
cost ----------------------------------------------------------------------Total budgeted mfg. 99,000 106,200
113,400
120,600 439,200
cost =========================================

* Projects the anticipated selling and

administrative expenses for the budget
period
* Classified as to variable and fixed selling and
administrative (period costs)
- variable selling & administrative costs
varies in relation to volume of sales (e.g.
sales commission, freight-out)
- fixed selling & administrative costs are
based on assumed data

* Putting together all the operating

budgets, the end result is a projection of
the profitability of the companys
operation
* Necessary to determine whether the
company needs to cut on the controllable
costs or increase the projected sales in
order to recover the fixed costs and still
provide some profit for the owners.

E9-7
Sales
Cost of good sold:
Direct materials
Direct labor
Manufacturing overhead
Total cost of good sold
Gross Profit
Less selling & administrative expenses
Operating profit
Income tax
Net profit

30,000 x 80

2,400,000

30,000 x 2 x 5
30,000 x 3 x 12
30,000 x 3 x 6

300,000
1,080,000
540,000
1,920,000
480,000
200,000
280,000
84,000
196,000
=======

280,000 x 30%

Q1
Billabl
e
Hours

Rate

Aud.

2,20
0

70

Tax

3,00
0

Cons
.

1,50
0

Total

6,70
0

Servic
e

Q2
Billabl
e
Hours

Rat
e

154,000

1,60
0

80

240,000

90

Q3

Q4

Total

Billabl
e
Hours

Rat
e

Total

70

112,000

2,00
0

70

2,40
0

80

192,000

2,00
0

135,000

1,50
0

90

135,000

1,50
0

529,000

5,50
0

Total

Service

5,50
0

439,000 ANNUAL
Billable
Hours

Rate

Billabl
e
Hours

Rat
e

Total

140,000

2,40
0

70

168,000

80

160,000

2,50
0

80

200,000

90

135,000

1,50
0

90

135,000

435,000

6,40
0

Total

Auditing

8,200

70

574,000

Tax

9,900

80

792,000

Consulti
ng

6,000

90

540,000

Total

24,100

1,906,000

503,000

Capital expenditures budget

Cash budget
Budgeted balance sheet

* Shows the anticipated cash flows

* Considered to be the most important
budget
* Three sections
- cash receipts
- cash disbursements
- financing

* Shows the anticipated cash flows

* Considered to be the most important budget
* Contributes to effective cash management
(e.g. it tells manager whether there is a need
for financing)
* Three sections
- cash receipts
- cash disbursements
- financing

Cash receipts section

- cash sales
- collection of accounts receivable
(projected based on experience e.g.
50% collected in the month of sales,
30% in month following the month of
sale and 20% in the 2nd month following
the month of sales)
- other receipts (dividends, sale of
investments, fixed assets and issuance
of stocks)

Cash disbursements section

- cash payments for direct materials,
direct labor manufacturing overhead
and selling & administrative expense
- other payments (dividends, taxes,
investments and acquisition of fixed
assets)

Financing section
- expected borrowings and repayment
of
the borrowed funds and interests
- when there is cash deficiency or when
the cash balance has reached beyond
the companys minimum balance
requirements

Beginning cash balance

Add cash receipts (itemized)
-----------------------------------------Total cash available
Less cash disbursement (itemized)
------------------------------------------Excess (deficiency) cash
Financing
-------------------------------------------Required ending cash balance

===================

Cash receipts (itemized)

Less cash payments (itemized)
------------------------------------------Excess (deficiency) cash
Add cash beginning
------------------------------------------Cash ending
Add financing / Less investment
-------------------------------------------Required cash balance / Minimum cash balance

===================

E9-9 (Expected collection from

customers)
January
February
March
Cash sales (40%)
80,000
88,000
108,000
Collection of credit sales:
Month of sale (10%)
12,000
13,200
16,200
Month ff. month of sale (50%)
60,000
66,000
2nd month ff. month of sale (36%)
43,200
Total cash collection
92,000
161,200
233,400
Cash purchases (50%) 15,000
17,500
20,500
Payment of credit purchases:
Month of purchase (40%)
6,000
7,000
8,200
Month ff. month of purchase (60%)
9,000
10,500
Total cash payments
21,000 33,500 39,200

Pink Martini Cash Budget Quarter 1, 2008

Cash receipts:
Collections from customers 180,000
Sale of equipment
3,500
183,000
Cash payments:
Direct materials
41,000
Direct labor 70,000
Manufacturing overhead
35,000
Selling and administrative exp.
45,000
Purchase of securities
12,000
203,000
Excess/(Deficiency) of cash
(19,500)
Cash beginning
31,000
Cash ending
11,500
Financing
13,500
Required cash balance 25,000

E9-11 January February

Beginning cash balance 46,000
31,000
Add cash receipts:
Collections from customers 100,000
160,000
Sale of marketable securities
10,000
Total cash available
156,000
191,000
Less cash payments:
Direct materials
60,000
80,000
Direct labor 30,000
45,000
Manufacturing overhead (net of depreciation)
20,000
30,000
Selling & administrative expenses
15,000
20,000
Total cash payments 125,000
175,000
Excess of available cash over payments
31,000
16,000
Financing (bank loan)
9,000
Ending cash balance
=====================

31,000

25,000

* Projection of the financial position for the budgeted

period
* Some data can be referred from the previous years
balance sheet (fixed asset plus the budgeted
acquisition & disposal if any; depreciation; longterm liabilities; stockholders equity section)
* Other information may be referred from the budgeted
income statement and cash budget
- Cash (ending cash balance from cash budget)
- AR from the projected schedule of collections
- Inventories from the production budget
- AP from the projected schedule of cash payments

BALANCE SHEET
Current assets

Current liabilities

Cash

xxx

Accounts payable

xxx

Accounts receivable

xxx

Income tax payable

xxx

Inventory

xxx

Accrued expenses

xxx

Total current assets

xxx

Non-current assets

Total current
liabilities

xxx

Non-current liabilities

xxx
xxx

Equipment

xxx

Total liabilities

Less accum. Dep.

xxx
xxx

Equity

Furniture & fixture

xxx

Less accum. Dep.

xxx
xxx

Total non-current
assets

Beginning balance
Additional
investment
xxx

xxx
xxx

Net income/(loss)

xxx

Withdrawal

(xxx)