Cost Accounting (Raiborn and Kinney) SOLMAN Chapter 08 PDF

Preview

Summary

THE MASTER BUDGETQUESTIONS Budgeting translates goals and objectives into the resources, activities, and arrangements needed to accomplish those goals and objectives. The translation is extended to assign activities and allocate resources to departments and personnel who are responsible for executio...

Description

Chapter 8

1

THE MASTER BUDGET QUESTIONS 1.

2.

Budgeting translates goals and objectives into the resources, activities, and arrangements needed to accomplish those goals and objectives. The translation is extended to assign activities and allocate resources to departments and personnel who are responsible for execution of the budget. The strategic plan defines an organization’s basic purposes and goals. As such, the strategic plan identifies the key variables that will largely determine the organization’s success. Some major factors taken into account in formulating the strategic plan include the local and global economy, competitor actions, trends in technology, raw material input availability, outsourcing possibilities, and legislative and political climates. Internally, consideration must be given to core competencies and product development. The long-term and short-term information generated from the strategic plan influences the financial goals and objectives that underlie the budgeting process.

3.

Longer term (strategic) plans contain insufficient detail to direct a business. Although strategic plans provide general direction for a business, they are too vague to provide guidance on a day-to-day basis. Consequently, shorter term (tactical) plans are compiled to implement the strategic plans for a specific period. The tactical plans are prepared with greater attention to current organizational and environmental constraints (current market, material, and labor conditions). Also, roles of specific middle- and lower-level managers can be indicated in the detailed shortterm plans.

4.

The budget represents the cornerstone for a company’s management planning system. Budgeting originates with strategic planning and utilizes goals, objectives, and forecasts in developing plans for production, revenues, costs, cash flows, and resource procurement. As goals are implemented and programs/products are developed, management needs information about various alternatives so they can be evaluated. When a specific plan of action is determined, the budget becomes management’s master plan. The budget provides a basis against which management can compare actual with forecasted outcomes. If the plan is “off-track,” the budget-to-actual comparison can be viewed as a control indicator to management as to where changes (if they are possible) need to be made. Without formal planning, there can be little control.

5.

An operating budget presents units expected to be sold or used by a company and the price/costs associated with those units. Sales, production, and purchasing budgets are operating budgets. Results from the operating budgets are input sources for financial budgets. Financial

Chapter 8 2

budgets detail the funds to be generated or used during the budget period (cash budget and capital expenditure budget). For example, the sales figures in the (operating) sales budget affect the cash collections/receipts portion of the (financial) cash budget. Both types of budgets are needed because the units contained in operating budgets have to be “translated” into monetary amounts to generate the final result of the budgeting process—the budgeted financial statements. 6.

The master budget begins with a “demand driven” estimate of sales. It is, however, possible that demand does not “exist” at the point the budget is prepared (for example, when the company is introducing a new product); thus, estimates would be made about sales. Without sales or expected sales, the company would have no need to acquire resources or remain in operation. The production budget is prepared next as it follows directly from the sales budget. Production and purchases budgets are similar in that they begin with a key variable to their particular area, add ending inventory, and subtract beginning inventory. These budgets differ in that the key variable for the production area is sales, but the key variable for purchases is production. The production budget is used to schedule the needed manufacturing inputs of material, labor, and overhead. The purchases budget is used to determine the amount and timing of material input to the production process as well as provide input into the cash budget as to the amount and timing of cash disbursements for such purchases. Retail and service organizations will prepare purchasing budgets directly from sales budgets. To prepare the overhead budget for a specific production volume, costs must be separated into those that are volume dependent (variable costs) and those that are volume independent (fixed costs). The total variable cost is a function of the variable cost per unit and the expected volume of production. Expected overhead for a given period is the sum of the projected variable and fixed costs. Depreciation amounts must be noted separately as they are non-cash items. Selling and administrative budgets follow and then the cash budget is prepared. Managers estimate collections from sales through historical company data on collection patterns, industry trends/patterns, and judgment. Current economic information can play an important part in estimating the collection pattern since inflation or deflation, interest rates, and employment affect both business and consumer ability to pay. Cash collections are important in the budgeting process because of their impact on the cash budget and the availability of funds with which to make disbursements for operating and capital expenditures, and ownership distributions. After all of these budgets are prepared, a set of budgeted financial statements is prepared to visualize the expected financial results of operations and the ending balance sheet position. This sequence is necessary because the information from one budget is often a primary input into another budget.

Chapter 8

3

7.

A firm’s production budget is influenced by the finished goods inventory policy because that policy dictates the quantity of goods that are expected to be on hand at period-end. Thus, a company cannot simply make production equal to sales if some finished goods are desired. Additionally, the finished goods from one period become the beginning inventory for the next period, which also influences the quantity of production needed in the following period. The computation for production is sales plus desired ending finished goods inventory minus beginning finished goods inventory.

8.

Cash is a very important resource for an organization because it is the medium of exchange for organizational inputs and outputs. A shortage of cash creates liquidity problems and may prevent the firm from acquiring inputs that are crucial to its survival. A firm can cover periods of cash shortages with loans, equity sales, or sales of assets. When the cash budget indicates a potential shortage, the accountant should suggest that management address the issue with the organization’s bank and (if extremely critical) creditors to make advance arrangements to borrow funds or defer payments.

9.

The cash budget and budgeted statement of cash flows are similar in that they both focus on the balance of cash and explain the change in cash balance over a period of time. However, the cash budget typically covers shorter time periods (generally monthly rather than for a quarter or year) and has as its primary objective the identification of periods of cash shortages and cash excesses. The statement of cash flows has as its primary purpose the identification of the activities (operating, investing, and financing) that explain the change in the cash balance for a period.

10.

Continuous budgeting is becoming more popular, in part, because of the rapidity of changes in the world. Rather than beginning with a 12-month budget period that keeps getting shorter as the year progresses, continuous budgeting allows managers to have a full 12-month period always in the forefront of the budgeting process. By using continuous budgeting, the planning process is on-going rather than a “once-a-year” activity that is entered into and then ignored until it is necessary to do again.

11.

The process of developing a budget is important because managers are able to view the interactions of their areas on the firm as a whole. Also, having a budget available forces managers to determine what caused the differences between actual and budgeted outcomes; sometimes, the causes are outside the control of management but other times they are not—in which case, knowing the causes should help managers to better budget in future periods. Three quotes are useful in understanding the helpfulness of budgets even without total accuracy: Dwight D. Eisenhower: In preparing for battle, I have always found that plans are useless, but planning is indispensable.

Chapter 8 4

Thomas A. Edison: Just because something doesn’t do what you planned doesn’t mean it’s useless. Victor Hugo: He who every morning plans the transaction of the day and follows out that plan, carries a thread that will guide him through the maze of the most busy life. But where no plan is laid, where the disposal of time is surrendered merely to the chance of incidence, chaos will soon reign. 12.

13.

Budgetary slack results from an overestimation of expected expenses or an underestimation of expected revenues so that the budget will be more easily achieved. Because managerial performance is often evaluated on an actual-to-budget comparison, the actual performance will appear to be more favorable if sufficient slack is contained in the budget. Two primary ways to reduce budget slack is to reduce participation by lower-level managers or to set up the reward system to encourage a more accurate budgeting process. The budget manual provides a “standard” methodology for preparing the budget as well as a recognized standard for the budgeting process. The budget manual directs similar events to be budgeted in similar ways. Having and using a budget manual communicates top management’s commitment to an effective budgeting process for lower-level managers.

Chapter 8

5

EXERCISES 14.

Each student will have a different answer; however, the following types of items might be included for each part. a. What inflation rates are expected for the countries in which the company operates? What will it cost to open a new plant in Country X? What will happen to net income if the price of an important raw material increases by X%? What would happen to demand if selling price was reduced by X %? Should the company attempt to advance the introduction of a new product by several months? What outsourcing opportunities are available and how would using these affect the company’s profitability and reputation? b. What new taxes or tax rates will be imposed in the coming year? How will the new one-way streets affect the company’s customer traffic? Can the company afford to meet the new competitor’s lower prices? How will the change in minimum wage affect the company’s ability to retain or increase the number of salespeople? How would advertising in a new medium affect company sales and profitability?

15.

a. A SWOT analysis is an internal and external environmental scan that details information on the company’s strengths, weaknesses, opportunities, and threats. Such an analysis is useful in the planning process in that it helps match the firm’s resources and capabilities to the competitive environment in which the firm operates. When preparing a SWOT analysis, company management should be realistic about the organization’s strengths and weaknesses and should differentiate where the company is currently and where it could be in the future (and what it would take to get the firm to that “new” position). It is helpful if the analysis indicates where the firm is in relation to its competition. b. Each student will have a different answer. However, the following sites provide descriptions of SWOT analyses for three companies: http://www.marketingteacher.com/SWOT/walmart_swot.htm http://www.marketingteacher.com/SWOT/starbucks_swot.htm http://www.marketingteacher.com/SWOT/nike_swot.htm

16.

Each student will have a different answer. However, some possibilities are: Reduce amounts spent for entertainment, including movies.

Chapter 8 6

Reduce amounts spent for dining out or in-home delivery. Put each person on an “allowance.” Set a maximum for gifts and do not buy gifts for each other. Get permission from the other person before spending amounts over a specific amount, such as $25. Reduce amounts spent on food: buy more vegetables and fruits rather than meats and pastries. Vacation “on the cheap”—camping, visiting relatives, or enjoying home town. Don’t buy “it” if cash cannot be paid for “it.” Put some money aside each pay period for savings. 17.

Business loans ($3,000,000 x .065) Consumer loans ($2,000,000 x .13) Investments ($800,000 x .035) Total projected revenue

18. A

B

C

$195,000 260,000 28,000 $483,000

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 300,000 150,000 320,000 230,000 x $15 x $14 x $12 x $10 $4,500,000 $2,100,000 $3,840,000 $2,300,000

$12,740,000

200,000 350,000 125,000 325,000 x $15 x $14 x $12 x $10 $3,000,000 $4,900,000 $1,500,000 $3,250,000

$12,650,000

265,000 240,000 400,000 x $15 x $14 x $12 $3,975,000 $3,360,000 $4,800,000

$13,085,000

95,000 x $10 $950,000

Total

The most financially beneficial scenario would be C; however, given the large discrepancies in sales quantities per quarter, Guding Company may need to smooth production activities over the year which would increase the costs of moving and storing units until the third and fourth quarters—resulting in additional NVA activities and costs. 19. Budgeted sales Ending inventory (10%) Total required Beginning inventory Budgeted production 20. Sales End. inv. (5%) 30,000

1st 540,000

January 51,200 4,800 56,000 (7,000) 49,000

February 48,000 6,400 54,400 (4,800) 49,600

Quarter 2nd 3rd 680,000 490,000 34,000 24,500

March 64,000 7,680 71,680 (6,400) 65,280 Total 4th 550,000 27,500

2,260,000 30,000

Chapter 8

7

Total Beg. inv. Production 21.

574,000 (27,000) 547,000

Sales of boots EI of boots Total BI of boots Production

704,500 (34,000) 670,500

517,500 (24,500) 493,000

580,000 (27,500) 552,500

2,290,000 (27,000) 2,263,000

42,960 5,800 48,760 (2,152) 46,608

46,608 pairs x 2.5 ft. = 116,520 ft. 116,520 ft. ÷ 3 ft. per yard = 38,840 yards Yards needed for production Ending inventory Total Beginning inventory Yards to purchase 22.

a., b. Sales (feet) EI Total BI Production

380,000 20,000 400,000 (24,500) 375,500

Production in feet Pounds per foot Pounds for production EI Total pounds needed BI Purchase (pounds) Cost per pound Total cost 23.

38,840 3,000 41,840 (2,000) 39,840

a.

Concrete 375,500 x8 3,004,000 68,600 3,072,600 (82,000) 2,990,600 x $0.11 $ 328,966 Boxes

Production budget Units of sales Units desired in ending inv. Units needed Units in beginning inv. Budgeted production

84,000 1,200 85,200 (1,000) 84,200

Gravel 375,500 x 15 5,632,500 92,500 5,725,000 (65,300) 5,659,700 x $0.05 $ 282,985 Trays 60,000 450 60,450 (300) 60,150

b. Purchases budget - Material A Pounds needed for production: (84,200 x 2) + (60,150 x 1) = (168,400 + 60,150) Desired ending inventory Total requirements Less beginning inventory Pounds to be purchased

Total 144,000 1,650 145,650 (1,300) 144,350 Total 228,550 2,500 231,050 (2,000) 229,050

Chapter 8 8

Cost per pound Total cost of Material A purchases

x $0.05 $11,452.50

Purchases budget - Material B Pounds needed for production: (84,200 x 3) + (60,150 x 4) = (252,600 + 240,600) Desired ending inventory Total requirements Less beginning inventory Pounds to be purchased Cost per pound Total cost of Material B purchases Material purchases: Material A Material B Total

229,050 lbs. 491,600 lbs. 720,650 lbs.

$11,452.50 39,328.00 $50,780.50

Materials purchases budget – Boxes Purchase requirements for production: Material A (84,200 x 2 x $0.05) Material B (84,200 x 3 x $0.08) Total cost of materials for box production

$ 8,420.00 20,208.00 $28,628.00

Materials purchases budget – Trays Purchase requirements for production: Material A (60,150 x 1 x $0.05) Material B (60,150 x 4 x $0.08) Total cost of materials for tray production

$ 3,007.50 19,248.00 $22,255.50

c. Direct labor budget Required hours: Boxes (84,200 x 2) Trays (60,150 x 0.5) Total DLHs d. Overhead budget Activity base (hours) Multiplied by OH rate Overhead applied 24.

493,200 3,400 496,600 (5,000) 491,600 x .08 $39,328

168,400 30,075 198,475

Boxes 168,400 x $1.60 $269,440

a. Nov. sales (30% × $41,500) Dec. sales (30% × $38,000) Dec. sales (30% × $38,000) Jan. sales (40% × $39,500 × 99%) Jan. sales (30% × $39,500) Jan. sales (30% × $39,500) Feb. sales (40% × $44,000 × 99%) Feb. sales (30% × $44,000) 13,200 Mar. sales (40% × $29,500 × 99%)

January $12,450 11,400

Trays Total 30,075 x $1.60 $48,120 $317,560 February

March

$11,400 15,642 11,850 $11,850 17,424 ______

______

11,682

Chapter 8

9

Total collections

$39,492

$40,674

b. Feb. sales to be collected in April (30% × $44,000) March sales to be collected in April (30% × $29,500) March sales to be collected in May (30% × $29,500) Total A/R balance at March 31 25.

a. October collections: From A/R balance From October billings ($200,000 x .15) Total October collections

$36,732

$13,200 8,850 8,850 $30,900

$22,000 30,000 $52,000

November collections: From October billings ($200,000 x .55) $110,000 From November billings ($130,000 x .15) 19,500 Total November collections $129,500 December collections: From October billings ($200,000 x .30) $ 60,000 From November billings ($130,000 x .55) 71,500 From December billings ($30,000 x .15) 4,500 Total December collections $136,000 b. October collections Less October business costs Remainder 10/31 November collections Total Less November business costs Remainder 11/30

$ 52,000 (45,000) $ 7,000 129,500 $136,500 (45,000) $ 91,500

Yes, Ms. Catlett could pay the $90,000 for the trip at the end of November. c. If Ms. Catlett pays for the trip and if everything works out exactly as planned, she would have $1,500 of cash on hand in the business. This is an exceptionally small “cushion” and she should probably not make such a large cash expenditure at the end of November. Remainder 11/30 December collections Total Less December business costs Remainder 12/31

$ 91,000 136,000 $227,000 (45,000) $182,000

However, if Ms. Catlett has good credit, she could borrow the $90,000 to pay for the trip at the end of November and pay it back at the end of December when she has a substantial cash balance. For example, if she can borrow at 12%, that would only be 1% per

10 8 Chapter

month or $900 ($90,000 x .01) until the end of December. By paying for the trip in November, she’d be saving $10,000 and spending $900—saving a total of $9,100. Given the 10% discount opportunity, she’d be better off borrowing for one month until the annual borrowing rate becomes 120% (10% x 12 months)—a ...