Question 1Albarakah Kitchen is a charity kitchen supported by donations. They provide free meals to the less fortunate families
during Ramadan. The Kitchen’s budget for April was based on 2,400 meals. The Kitchen’s director has provided the
following cost data to use in the planning budget: groceries, $2.05 per meal; kitchen operations, $4,500 per month
plus $1.75 per meal; administrative expenses, $3,500 per month plus $0.20 per meal; and fundraising expenses,
$1,700 per month. The director has also provided the Kitchen’s statement of actual expenses for the month:
Albarakah Kitchen
Statement of Expenses
For the Month Ended April 30
Actual meals
2,700
Groceries
$ 5,575
Kitchen operations
9,015
Administrative expenses
3,900
Fundraising expenses
1,750
Total expense
$ 20,240
Required:
Prepare a flexible budget performance report showing both the activity variances and the spending variances for
each of the expenses and for total expenses for April. Label each variance as favorable (F) or unfavorable (U).
Question 2
Garson, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear
below:
Product
F
G
H
Selling price (per unit)
$50
$80
$70
Variable costs (per unit)
$40
$50
$55
Fixed costs (per unit)
$15
$6
$12
Milling machine time (minutes)
4
2
5
Demand for the three products exceeds the company’s productive capacity. The milling machine is the constraint,
with only 2,400 minutes of milling machine time available this week.
Required:
1. Given the milling machine constraint, which product should be emphasized?
2. Assume there is unlimited demand for the product you chose in part 1. If Garison uses all its capacity to produce
that one product only, how much would the company’s net income be for the week?
3. Assume that the demand for product F is 800 units, product G is 600 units, and product H is 100 units; what would
be the optimal production mix for Garson in this case?
Question 3
The master budget of a manufacturing company can be described as a collection of
O a. 9 budgets
O b. 10 budgets
O c. 11 budgets
O d. 12 budgets
O e. 8 budgets
Question 4
How many sections does the cash budget have? Name and briefly describe each one of them
Question 5
EXERCISE 9-10 Planning Budget LO9-1
Lavage Rapide is a Canadian company that owns and operates a large automatic car wash facility near Montreal. The following
table provides data concerning the company’s costs:
Fixed Cost per Month
Cleaning supplies
Electricity
Cost per Month Car Washed
$0.80
$1,200
Maintenance
$0.15
$0.20
Wages and salaries
$5,000
Depreciation
$6,000
Rent
$8,000
Administrative expenses
$4,000
$0.30
$0.10
For example, electricity costs are $1,200 per month plus $0.15 per car washed. The company expects to wash 9,000 cars in
August and to collect an average of $4.90 per car washed.
Required:
prepare the company’s planning budget for August.
Flexible Budget
Refer to the data for Lavage Rapide in Exercise 9-10. The company actually washed 8,800 cars in August.
Required:
prepare the company’s flexible budget for August.
Activity Variances
Refer to the data for Lavage Rapide in Exercise 9-10. The company actually washed 8,800 cars in August.
Required:
Calculate the company’s activity variances for August.
Revenue and Spending Variances
Refer to the data for Lavage Rapide in Exercise 9-10. Also assume that the company’s actual oper- ating results for August are as
follows:
Lavage Rapide Income Statement For the Month Ended August 31
Actual cars washed
8,800
Revenue.
$43,080
Expenses:
Cleaning supplies.
7,560
Electricity
2,670
Maintenance
2,260
Wages and salaries
8,500
Depreciation
6,000
Rent
8,000
Administrative expenses
4,950
Total expense
39,940
Net operating income
$ 3,140
Required:
Calculate the company’s revenue and spending variances for August.
Prepare a Flexible Budget Performance Report
Refer to the data for Lavage Rapide in Exercises 9-10 and 9-13.
Required:
prepare a flexible budget performance report that shows the com- pany’s revenue and spending variances and activity variances
for August.
Master Budgeting
CHAPTER 8
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
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8-2
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activities is known
as budgetary control.
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8-3
Choosing the Budget Period
Operating Budget
2017
2018
Operating budgets ordinarily
cover a one-year period
corresponding to a company’s fiscal
year. Many companies divide their
annual budget
into four quarters.
2019
2020
A continuous budget is a
12-month budget that rolls
forward one month (or quarter)
as the current month (or quarter)
is completed.
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8-4
The Master Budget – An Overview – Part 1
Sales budget
Ending inventory
budget
Production budget
Direct materials
budget
Direct labor
budget
Selling and
administrative
budget
Manufacturing
overhead budget
Cash Budget
Budgeted
income
statement
Budgeted
balance sheet
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8-5
Budgeting Example
Royal Company is preparing budgets for the
quarter ending June 30th.
Budgeted sales for the next five months are:
April
20,000 units
May
50,000 units
June
30,000 units
July
25,000 units
August
15,000 units
The selling price is $10 per unit.
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8-6
The Sales Budget
The individual months of April, May, and June are
summed to obtain the total budgeted sales in units and
dollars for the quarter ended June 30th
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8-7
Expected Cash Collections – Part 1
All sales are on account.
Royal’s collection pattern is:
70% collected in the month of sale,
30% collected in the month following sale,
In April, the March 31st accounts receivable balance
of $30,000 will be collected in full in April.
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8-8
Expected Cash Collections – Part 2
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8-9
Expected Cash Collections – Part 3
From the Sales Budget for April.
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8-10
Expected Cash Collections – Part 4
From the Sales Budget for May.
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8-11
Expected Cash Collections – Part 5
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-12
The Production Budget – Part 1
Sales
Budget
and
Expected
Cash
Collections
Production
Budget
The production budget must be adequate to
meet budgeted sales and to provide for
the desired ending inventory.
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8-13
The Production Budget – Part 2
The management at Royal Company wants ending
inventory to be equal to 20% of the following month’s
budgeted sales in units.
On March 31st, 4,000 units were on hand.
Let’s prepare the production budget.
If Royal was a merchandising company it would prepare a
merchandise purchase budget instead of a production budget.
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8-14
The Production Budget – Part 3
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8-15
The Production Budget – Part 4
March 31
ending inventory.
Budgeted May sales
Desired ending inventory %
Desired ending inventory
50,000
20%
10,000
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8-16
The Production Budget – Part 5
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8-17
The Production Budget – Part 6
July sales of 25,000 units×20% = 5,000
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8-18
The Direct Materials Budget – Part 1
At Royal Company, five pounds of material are
required per unit of product.
Management wants materials on hand at the end of
each month equal to 10% of the following month’s
production.
On March 31, 13,000 pounds of material are on
hand. Material cost is $0.40 per pound.
Let’s prepare the direct materials budget.
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8-19
The Direct Materials Budget – Part 2
From production budget.
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8-20
The Direct Materials Budget – Part 3
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8-21
The Direct Materials Budget – Part 4
March 31 inventory.
10% of following month’s
production needs.
Now, why don’t you
calculate the materials to
be purchased in May.
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8-22
The Direct Materials Budget – Part 5
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-23
The Direct Materials Budget – Part 6
Beginning inventory from April.
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8-24
Expected Cash Disbursement for
Materials – Part 1
Royal pays $0.40 per pound for its materials.
One-half of a month’s purchases is paid for in the
month of purchase; the other half is paid in the
following month.
The March 31 accounts payable balance is $12,000.
Let’s calculate expected cash disbursements.
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8-25
Expected Cash Disbursement for
Materials – Part 2
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8-26
Expected Cash Disbursement for
Materials – Part 3
140,000 lbs. × $0.40/lb. = $56,000
Compute the expected cash
disbursements for materials
for the quarter.
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8-27
Expected Cash Disbursement for
Materials – Part 4
Accounts payable at June 30 = $56,800×50% = $28,400
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8-28
The Direct Labor Budget – Part 1
At Royal, each unit of product requires 0.05
hours (3 minutes) of direct labor. The labor can
be unskilled because the production process is
relatively simple and formal training is not
required.
Royal pays its workers at the rate of $10 per
hour.
Let’s prepare the direct labor budget.
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8-29
The Direct Labor Budget – Part 2
From production budget.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-30
The Direct Labor Budget – Part 3
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-31
The Direct Labor Budget – Part 4
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-32
Manufacturing Overhead Budget – Part 1
At Royal, manufacturing overhead is applied to units of
product on the basis of direct labor hours.
The variable manufacturing overhead rate is $20 per
direct labor hour.
Fixed manufacturing overhead is $50,000 per month,
which includes $20,000 of noncash costs (primarily
depreciation of plant assets).
Let’s prepare the manufacturing overhead budget.
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8-33
Manufacturing Overhead Budget – Part 2
Direct Labor Budget.
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8-34
Manufacturing Overhead Budget – Part 3
Total mfg. OH for quarter $251,000
Total labor hours required 5,050
= $49.70 per hour *
* rounded
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8-35
Manufacturing Overhead Budget – Part 4
Depreciation is a noncash charge.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-36
Ending Finished Goods Inventory Budget
– Part 1
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labor
0.05 hrs. $ 10.00
Manufacturing overhead
0.05 hrs. $ 49.70
$
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$ 24,950
Direct materials
budget and information.
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8-37
Ending Finished Goods Inventory Budget
– Part 2
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labor
0.05 hrs. $ 10.00
Manufacturing overhead
0.05 hrs. $ 49.70
$
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$ 24,950
Direct labor budget.
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8-38
Ending Finished Goods Inventory Budget
– Part 3
Production costs per unit
Direct materials
Direct labor
Manufacturing overhead
Quantity
Cost
5.00 lbs. $ 0.40
0.05 hrs. $10.00
0.05 hrs. $49.70
$
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
?
Total mfg. OH for quarter $251,000
= $49.70 per hour
Total labor hours required 5,050
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8-39
Ending Finished Goods Inventory Budget
– Part 4
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labor
0.05 hrs. $ 10.00
Manufacturing overhead
0.05 hrs. $ 49.70
$
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$ 24,950
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-40
Ending Finished Goods Inventory Budget
– Part 5
Production costs per unit Quantity
Cost
Direct materials
5.00 lbs. $ 0.40
Direct labor
0.05 hrs. $ 10.00
Manufacturing overhead
0.05 hrs. $ 49.70
$
$
Budgeted finished goods inventory
Ending inventory in units
Unit product cost
Ending finished goods inventory
Total
2.00
0.50
2.49
4.99
5,000
$ 4.99
$ 24,950
Production Budget.
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8-41
Selling and Administrative Expense
Budget – Part 1
At Royal, the selling and administrative expense budget is divided
into variable and fixed components.
The variable selling and administrative expenses are $0.50 per unit
sold.
Fixed selling and administrative expenses are $70,000 per month.
The fixed selling and administrative expenses include $10,000 in
costs – primarily depreciation – that are not cash outflows of the
current month.
Let’s prepare the company’s selling and administrative expense
budget.
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8-42
Selling and Administrative Expense
Budget – Part 2
Calculate the selling and administrative
cash expenses for the quarter.
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8-43
Selling Administrative Expense Budget –
Part 3
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-44
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash received
from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the company will
need to borrow money or if it will be able to repay funds previously
borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.
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8-45
Additional Cash Budget Information
Assume the following information for Royal:
➢Maintains a 16% open line of credit for $75,000.
➢Maintains a minimum cash balance of $30,000.
➢Borrows on the first day of the month and repays loans
on the last day of the month.
➢Pays a cash dividend of $49,000 in April.
➢Purchases $143,700 of equipment in May and $48,300
in June (both purchases paid in cash).
➢Has an April 1 cash balance of $40,000.
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8-46
The Cash Budget – Part 1
Schedule of Expected
Cash Collections.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
8-47
The Cash Budget – Part 2
Schedule of Expected
Cash Disbursements.
Manufacturing
Overhead Budget.
Selling and Administrative
Expense Budget.
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8-48
The Cash Budget – Part 3
Because Royal maintains
a cash balance of $30,000,
the company must borrow
$48,000 on its line-of-credit.
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8-49
The Cash Budget – Part 4
Because Royal maintains
a cash balance of $30,000,
the company must borrow
$48,000 on its line-of-credit.
Ending cash balance for April
is the beginning May balance.
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8-50
The Cash Budget – Part 5
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8-51
The Cash Budget – Part 6
$48,000 × 16% × 3/12 = $1,920
Borrowings on April 1 and
repayment on June 30.
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8-52
The Budgeted Income Statement – Part 1
Cash
Budget
Budgeted
Income
Statement
With interest expense from the cash budget, Royal
can prepare the budgeted income statement.
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8-53
The Budgeted Income Statement – Part 2
Sales Budget.
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
Cost of goods sold (100,000 @ $4.99)
Gross margin
Selling and administrative expenses
Operating income
Interest expense
Net income
$ 1,000,000
499,000
501,000
260,000
241,000
1,920
$
239,080
Ending Finished
Goods Inventory.
Selling and
Administrative
Expense Budget.
Cash Budget.
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8-54
Additional Budgeted Balance Sheet
Information
Royal reported the following account balances
prior to preparing its budgeted financial
statements:
•Land – $50,000
•Common stock – $150,000
•Retained earnings – $248,650 (April 1)
•Equipment – $175,000
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8-55
Budgeted Balance Sheet – Part 1
30% of June
sales of
$300,000.
11,500 lbs.
at $0.40/lb.
5,000 units
at $4.99 each.
50% of June
purchases
of $56,800.
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8-56
Budgeted Balance Sheet – Part 2
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8-57
End of Chapter 8
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MANAGERIAL ACCOUNTING
BALANCED SCORECARD
Learning Objective
• Understand how to construct and use a
balanced scorecard.
2
The Balanced Scorecard
• Developed by Kaplan and Norton (1992).
• Management translates its strategy into
performance measures that employees understand
and influence.
Customer
Financial
Performance
measures
Internal
business
processes
Learning
and growth
3
The Balanced Scorecard
4
BSC – From Strategy to Performance Measures
5
BSC – Non-financial Measures
6
Measures of Success: Examples
• Financial measures
– Sales growth
– Earnings growth
– Dividend growth
– Cash flow
– Market share price
• Non-financial measures
– Customer: market share/ growth in market share, customer
satisfaction, on-time delivery, brand recognition
– Internal processes: high product/ service quality, waste reduction
(product, time, material…)
– Learning & growth: competence, education attained, training
received, morale and company culture, innovation (new product,
services, processes)
7
The Balanced Scorecard for Individuals
8
BSC – Important Links
9
BSC and Compensation
1
0
1
1
Implementing the Balanced Scorecard
•
•
•
•
•
Define the business strategy
Draw a strategy map
Identify measures for the map
Select and fund key initiatives
Assign accountability to individual managers
1
2
Define the business strategy
• Strategy map outlines theoretical value
proposition/creation
• Lay out mission and values
• Define desired position in marketplace
• To develop BSc, business strategy needs to be
clear, otherwise measures used to track progress
will come out wrong
• Compare:
– Small entrepreneurial start- up: focused on
innovation, develop cutting edge products, raise
brand awareness, ensure sufficient cashflows
– Large established company: focus on cost,
efficiencies, expansion,,,
1
3
Draw a strategy map
• Determine cause-and-effect relationships
• Goals can be part of all four dimensions:
– Financial – achieving financial returns: profit margin, cash
flow, ROE…
– Customer – standing in the shoes of the customers:
measure generic customers metrics (satisfaction, loyalty),
also product attributes, brand image, reputation
– Internal Process – enhancing innovation and operational
efficiency: innovation, marketing, operations, sales and
engineering that create value for the customer
– Learning & Growth – aligning people, technology and
innovation: intangible human capital and infrastructure
resources: human capital, organizational capital,
information capital, recruitment, training, education,
certifications, seminars…
1
4
Identify measures and allocate resources
• Mix of outcome measures and Key Performance
Indicators (KPIs)
– Outcome measure, e.g. % increase in revenue (does
not yet communicate how this is achieved)
– Performance drivers, e.g. defect rates, can be used
to easily measure and assess performance for
operational sub-units and overall organization
• Choosing measures = SMART
– Specific
– Measurable
– Actionable
– Realistic
– Time-related
• Final step: allocate resources (employees, time,
money) to make it happen!
1
5
Assign responsibilities to individuals
• ‘What gets measured, gets managed’
• Powerful element of BSC – translate strategy into
actionable measures, so managers know what they
must achieve
• Attach incentives and everyone will have a great
motivation to work towards your measures!
1
6
Thank you!
1
7
Flexible Budgets and
Performance Analysis
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-2
Characteristics of Flexible Budgets
– Part 1
Planning budgets are prepared for a
single, planned level of activity.
Performance evaluation
is difficult when actual
activity differs from the
planned level of activity.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-3
Characteristics of Flexible Budgets –
Part 2
1. May be prepared for any activity level in
the relevant range.
2. Show costs that should have been incurred
at the actual level of activity, enabling
“apples to apples” cost comparison.
3. Help managers control costs.
4. Improve performance evaluation.
Let’s look at Larry’s Lawn Service.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-4
Deficiencies of the Static Planning Budget
– Part 1
Larry’s Lawn Service provides lawn care in a planned
community where all lawns are approximately the same size.
At the end of May, Larry prepared his June budget based on
mowing 500 lawns. Since all of the lawns are similar in size,
Larry felt that the number of lawns mowed in a month would
be the best way to measure overall activity for his business.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-5
Deficiencies of the Static Planning Budget
– Part 2
Larry’s Planning Budget
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-6
Deficiencies of the Static Planning Budget
– Part 3
Larry’s Actual Results
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-7
Deficiencies of the Static Planning Budget
– Part 4
Larry’s Actual Results Compared with the Planning Budget
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-8
Deficiencies of the Static Planning Budget
– Part 6
Larry’s Actual Results Compared with the Planning Budget
Since these variances are unfavorable, has Larry
done a poor job controlling costs?
Since these variances are unfavorable, has
Larry done a poor job controlling costs?
Since these variances are favorable, has Larry
done a good job controlling costs?
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-9
Deficiencies of the Static Planning Budget
– Part 7
At this point, we cannot answer this question
because the actual level of activity is greater than
the planned level of activity. Therefore, actual
variable costs are likely to be higher than planned
variable costs regardless of Larry’s managerial
efficiency.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-10
Deficiencies of the Static Planning Budget
– Part 8
The relevant question is . . .
“How much of the cost variances are due to
higher activity and how much are due to cost
control?”
To answer the question, we need to flex the
planning budget to accommodate the actual level of
activity.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-11
How a Flexible Budget Works – Part 1
To flex a budget, we need to know that:
◦ Total variable costs change in direct proportion to
changes in activity.
◦ Total fixed costs remain unchanged within the
relevant range.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-12
Preparing a Flexible Budget
Larry’s Flexible Budget
$75 × 550 lawns
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-13
Quick Check 1
What should the total wages and salaries cost
be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-14
Quick Check 1a
What should the total wages and salaries cost
be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000. Total wages and salaries cost
= $5,000 + ($30 per lawn 600 lawns)
c. $23,000.
= $5,000 + $18,000 = $23,000
d. $25,000.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-15
Activity Variances – Part 1
An activity variance arises solely due to the
difference in the actual level of activity and the
level of activity included in the planning budget.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-16
Activity Variances – Part 3
Larry’s Flexible Budget Compared with the Planning Budget
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-17
Activity Variances – Part 4
Larry’s Flexible Budget Compared with the Planning Budget
Activity and revenue increase by 10 percent, but net operating income
increases by more than 10 percent due to the presence of fixed costs.
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9-18
Key Terminology
Actual revenue
Flexible budget revenue
The difference is a revenue variance.
Actual cost
Flexible budget cost
The difference is a spending variance.
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9-19
Revenue and Spending Variances – Part 2
Larry’s Flexible Budget Compared with the Actual Results
$1,750 favorable
revenue variance
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9-20
Revenue and Spending Variances – Part 3
Larry’s Flexible Budget Compared with the Actual Results
Spending
variances
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-21
A Performance Report Combining Activity and
Revenue and Spending Variances – Part 2
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-22
Flexible Budgets with Multiple Cost
Drivers – Part 1
More than one cost
driver may be needed to
adequately explain all of
the costs in an organization.
The cost formulas used
to prepare a flexible
budget can be adjusted
to recognize multiple
cost drivers.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-23
Flexible Budgets with Multiple Cost
Drivers – Part 2
Because the time required for edging and trimming is
different for different lawns, Larry decided to add an
additional cost driver (hours) for the time required for
edging and trimming. So Larry estimated the additional
hours and developed a new flexible budget that includes
the second cost driver in both his revenue and expense
budget formulas.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-24
Flexible Budgets with Multiple Cost
Drivers – Part 3
Larry’s Budget Based on More than One Cost Driver
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further distribution permitted without the prior written consent of McGraw-Hill Education.
9-25
Thank you!
Questions?
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further distribution permitted without the prior written consent of McGraw-Hill Education.
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