Financial and Managerial Accounting


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managerial accounting, managerial function, planning, directing, controlling, decision making, direct labor,direct material, factory overhead, product cost, period cost, cost of good manufactured, job order, process costing, abc costing, abc, equivalent units, variable cost, fixed cost, relevant cost, cvp, BEP, break even point, budgeting, production budget, jose cintron, advance business consulting,, miami

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Financial and Managerial Accounting

  1. 1. Financial and Managerial Accounting- MBA Professor-Jose Cintron, MBA-CPC Http://
  2. 2. Managerial AccountingManagerial accounting is directed towards providing information tomanagers inside the organization.Managerial accountants prepare reports and analyze data.Reporting and analysis is often related to parts/departments/functions ofthe company rather than reporting on the entire organization as a whole.
  3. 3. Managerial AccountingExamples of activities performed by managerial accountants are: 1. Determining the cost of providing a service or making a product 2. Assist management in profit planning and formalizing the plansinto budgets 3. Determine the behavior of costs and how profit will change assales and production volumes change 4. Compare actual costs and financial results with budgeted costsand results 5. Providing cost and sales information necessary for management touse to make a decision.
  4. 4. Management FunctionsPlanning: Identify objectives the company wants to accomplish which will addvalue to the company and increase profits. Discuss ways to accomplish the objectives Prepare budgets to accomplish the profit objective
  5. 5. Management FunctionsDirecting/Motivating: Coordinating the activities to produce a smooth running operation. Oversee day to day activities and keep the organization functioningsmoothly Assign jobs/tasks – answer questions – solve problems
  6. 6. Management FunctionsControlling: Make sure the plans are being followed and objectives areaccomplished Performance reporting – compare actual results to the budget Implement changes when objectives and goals are not beingaccomplished
  7. 7. Management FunctionsDecision Making: Use all information provided to make good business decisions. Product mix Buy or outsource Rent or Buy Upgrade or down grade
  8. 8. MANAGERIAL ACCOUNTINGMANAGERIAL ACCOUNTING: Does not follow GAAP and there are no reporting regulations Prepares reports only for management’s internal use Provides information to make decisions regarding the future Relevance of data is emphasized over reliability Focuses on timeliness of information Nothing is required to be reported, reports what management needsto see Reporting is focused on parts of the organization such asdepartments or divisions and not on the organization as a whole.
  9. 9. FINANCIAL ACCOUNTING Reports are provided outside the organization – external reports Reports past activities – based on a historical perspective Reliability of data is emphasized – reports take more time to providefocus on precise information since they are used outside the company Summarized data for entire company as a whole Must follow GAAP which has specific required external reports
  10. 10. ReviewDirect LaborDirect MaterialFactory
  11. 11. Review Product cost Period
  12. 12. Product vs Period costProduct Costs: Include all costs that arerequired to make a productPeriod Costs: Selling and Administrativecosts. These costs are reported on the incomestatement as they are incurred. Not part ofmanufacturing overhead, not related tomaking the product.
  13. 13. Cost of Goods Manufactured
  14. 14. What costing system?
  15. 15. Job order costingThe flow of costs through themanufacturing accounts isessentially the same in bothprocess costing and job-ordercosting.
  16. 16. Job order costing1.Many different jobs are worked on during eachperiod, with each job having different productionrequirements.2.Costs are accumulated by individual job.3.Job cost sheet is the key document controlling theaccumulation of costs by a job.4.Unit costs are computed by job on the job cost sheet.
  17. 17. What costing system?
  18. 18. What costing system?
  19. 19. Process
  20. 20. Process Costing1.A single product is produced either on continuous basisor for long periods. All units of product are identical.2.Costs are accumulated by departments.3.The department production report is the key documentshowing the accumulation and disposition of costs.4.Unit costs are computed by department on thedepartment production report.
  21. 21. Job order and Process costing
  22. 22. Job Order Cost Record
  23. 23.
  24. 24. Job order and Process costing1.Both systems have the same basic purposes-to assignmaterial, labor, and overhead costs to products and to providemechanism for computing unit product cost.2. Both systems use the same basic manufacturing accountants,including manufacturing overhead, Raw materials, Work inprocess, and Finished Good.3.The flow of costs through the manufacturing accounts isbasically the same in both systems.
  25. 25. What costing system???
  26. 26. What Costing System???
  27. 27. What costing system???
  28. 28. Activity based costing (ABC)Activity based costing (ABC) is a costing method that is designed toprovide managers with cost information for strategic and other decisionsthat potentially affect capacity and therefore "fixed cost".
  29. 29. Activity Based Costing Activity Based Costing Identified all Mayor Activities Identified Established the Additional Major Resources Improvement Pools Opportunities Activity Costing CostAnalyzed Processes with Costs, Identify the cost Outcomes and Driver Associated Benchmarks with each activity Assigned cost rate per CostDriver Unit Activity Based Cost per Unit = Total Activity Cost . Total Number of Units for Activity
  30. 30. Activity based costing systemIs used to determine product costs for special management reports. Thissystem is ordinarily used as a supplement to the companys usual costingsystem. Most organizations that use ABC system have two costingsystems--the official costing system that is used for preparing externalfinancial reports and the activity based costing system that is used forinternal decision making and for managing activities.
  31. 31. ABC costingIn traditional cost accounting systems, the objective is to valueinventories and cost of goods sold for external financial reports inaccordance with the (GAAP).In activity based costing (ABC) system the objective is to understandoverhead and the profitability of products and customers and to manageoverhead.
  32. 32. ABC costing1. Non-manufacturing as well as manufacturing costs may be assigned toproducts.2. Some manufacturing costs may be excluded from product costs.3. A number of overhead cost pools are used, each of which is allocatedto products and other costing objects using its own unique measure ofactivity.4. The allocation bases often differ from those used in traditional costingsystem.5. The overhead rates or activity rates may be based on the level ofactivity at capacity rather than on the budgeted level of activity.
  33. 33. ABC
  34. 34. Job order costing Application of Manufacturing Overhead Cost in Job Order Costing:If a company has estimated that its total manufacturingoverhead cost will be $320,000 for the year and its total direct labor hour will be 40,000.Its predetermined overhead rate for the year will be $8 per direct labor hour, as calculated below: $320,000 / 40,000 = $8 per direct labor hour
  35. 35. Job CostingOverhead applied to a particular job = Predetermined overhead rate ×Amount of allocation incurred by the jobExample below indicates that 27 labor hours have been worked.Therefore a total of $216 of manufacturing overhead cost would beapplied to the job. See the following calculation:Overhead applied to job 2B47 = Predetermined overhead rate × Actualdirect labor hours charged to job 2B47 = $8 per DLH × 27 DLHs = $216 of overhead applied to job 2B47
  36. 36. Job cost sheet JOB COST SHEETJob Number 2B47 Date Initiated March 2Department Milling Date Completed March 8 Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount 14873 $660 843 5 $45 27 $8/DLH $216 14875 506 846 8 60 14912 238 850 4 21 --------- 851 10 54 $1,404 -------- -------- ===== 27 $180 ===== ===== Cost Summary Units ShippedDirect Materials $1,404 Date Number BalanceDirect Labor 180 March 8 -- 2Manufacturing Overhead 216Total Cost 1800Unit Product Cost 900
  37. 37. Unit cost under the method of process costingGlobal Defense starts with the manufacturing process. All units will startand end in this period. Altogether, Global Defense will manufacture 400 units of DG-19 during this period.Direct materials in this period: $ 32.000Conversion costs in this period: $ 24.000_______Total Assembly costs in January: $ 56.000Global Defense records direct materials and conversion costs in theAssembly Department as these costs are incurred. By averaging, theassembly cost per unit would be $
  38. 38. Equivalent UnitsFor example, if 1000 units are in work - in - process at the end of theperiod and are considered 80% complete, the equivalent production is800 units.The equivalent unit cost of manufacturing an item equals the total costdivided by the equivalent units. If the total cost of manufacturing theitem was $2,400, the unit cost would be $3 ($2,400/800).
  39. 39. Equivalent units process costingA term used in cost accounting to arrive at the cost per unit. The term isassociated with the units that are not completed at the end of anaccounting period.For example, if 500 units are completed as far as materials, but are only40% completed as far as direct labor and manufacturing overhead, theequivalent units are 500 for materials and 200 (40% of 500) for directlabor and manufacturing overhead.
  40. 40. Cost behavior analysisCost behavior analysis is the study of how specific costs respond tochanges in the level of business activity. As you might expect, somecosts change, and others remain the same. For example, for an airlinecompany such as Southwest or United, the longer the flight the higherthe fuel costs.A knowledge of cost behavior helps management plan operations anddecide between alternative courses of action
  41. 41. Variable CostVariable costs are costs that vary in total directly and proportionatelywith changes in the activity level. If the level increases 10%, totalvariable costs will increase 10%. If the level of activity decreases by25%, variable costs will decrease 25%. Examples of variable costsinclude direct materials and direct labor for a manufacturer; cost ofgoods sold and sales commissions. A variable cost may also be definedas a cost that remains the same per unit at every level of activity.
  42. 42. Variable CostDamon Company manufactures radios that contain a $10 digital clock.The activity index is the number of radios produced. As Damonmanufactures each radio, the total cost of the clocks increases by $10.Total cost of the clocks will be $20,000 if Damon produces 2,000radios, and $100,000 when it produces 10,000 radios. We also can seethat a variable cost remains the same per unit as the level of activitychanges
  43. 43. Variable Cost
  44. 44. Fixed CostFixed costs are costs that remain the same in total regardless of changesin the activity level. Examples include property taxes, insurance, rent,supervisory salaries, and depreciation on buildings and equipment.Because total fixed costs remain constant as activity changes, it followsthat fixed costs per unit vary inversely with activity: As volumeincreases, unit cost declines, and vice versa.
  45. 45. Fixed Cost ExampleDamon Company leases its productive facilities at a cost of $10,000 permonth. Total fixed costs of the facilities will remain constant at everylevel of activity. But, on a per unit basis, the cost of rent will decline asactivity increases.At 2,000 units, the unit cost is $5 ($10,000 ÷ 2,000). When Damonproduces 10,000 radios, the unit cost is only $1 ($10,000 ÷ 10,000).
  46. 46. Fixed
  47. 47. Variable and Fixed (Rental)
  48. 48. Relevant RangeThe range of activity within which assumptions about variable and fixedcost behavior are valid.
  49. 49. Relevant
  50. 50. Teamwork (answer)1. If American Airlines is to make a profit when it reduces all domesticfares by 30%, what reduction in costs or increase in passengers will berequired?2.If Ford Motor Company meets workers demands for higher wages,what increase in sales revenue will be needed to maintain current profitlevels?3.If United States Steel Corp.s program to modernize plant facilitiesthrough significant equipment purchases reduces the work force by 50%,what will be the effect on the cost of producing one ton of steel?4.What happens if Kellogg Company increases its advertising expensesbut cannot increase prices because of competitive pressure?
  51. 51. Cost-volume-profit (CVP)Cost-volume-profit (CVP) analysis is the study of the effects of changesin costs and volume on a companys profit. CVP analysis is important toprofit planning. It is also a critical factor in such management decisionsas determining product mix, maximizing use of production facilities, andsetting selling prices.
  52. 52. CPV Income StatementThe CVP income statement classifies costs as variable or fixed andcomputes a contribution margin. Contribution margin is the amount ofrevenue remaining after deducting variable costs.
  53. 53. CVP Income Statement
  54. 54. Break-even Point Videos CVP income statement shows that total contribution margin(sales minus variable expenses) is $320,000, and the companyscontribution margin per unit is $200. Recall that contribution margin canalso be expressed in the form of the contribution margin ratio(contribution margin divided by sales), which in the case of Vargo is 40%($200 ÷ $500).
  55. 55. Break event chart
  56. 56. Target net incomeOnce a company achieves break-even, it then sets a sales goal that willgenerate a target net income. For example, assume that Vargosmanagement has a target net income of $250,000In order to achieve net income of $250,000, Vargo has to sell 2,250 DVDplayers, for a total price of $1,125,000.
  57. 57. Team-workWhat effect will a 10% discount on selling price have on thebreak-even point for DVD players?
  58. 58. Solution1 What effect will a 10% discount on selling price have on the break-even point for DVD players?Answer:A 10% discount on selling price reduces the selling price per unit to $450[$500 - ($500 × 10%)]. Variable costs per unit remain unchanged at$300. Thus, the contribution margin per unit is $150. Assuming nochange in fixed costs, break-even sales are 1,333 units, computed asfollows.
  59. 59. Cost volume profit analysis(CVP analysis) is one of the most powerful tools that managers have attheir command. It helps them understand the interrelationship betweencost, volume, and profit in an organization by focusing on interactionsamong the following five elements:Prices of productsVolume or level of activityPer unit variable costTotal fixed costMix of product sold
  60. 60. Cost Volume ProfitBecause cost-volume-profit (CVP) analysis helps managers understandthe interrelationships among cost, volume, and profit it is a vital tool inmany business decisions. These decisions include, for example, whatproducts to manufacture or sell, what pricing policy to follow, whatmarketing strategy to employ, and what type of productive facilities toacquire.
  61. 61. Pricing/cost/volume/profit$100 per unit, unit variable cost of $60. Sales are 3,000 units.The manager can drop prices and generate a 20% increase in volume.
  62. 62. Pricing/cost/volume/profitIncrease prices by 5% and take a 15% drop in sales. To see whether themanager should follow this alternative, consider the following graph.
  63. 63. Pricing/cost/volume/profitThe marketing department of this company wants to spend an additional$10,000 on promotion because they say it will increase unit sales by10%. Should the company make the investment in additional promotion
  64. 64. Pricing/cost/volume/profitFixed Costs Decrease by $10 Variable Costs Decrease by $1Fixed Costs Increase by $10 Unit Sales Price Drops by $1Variable Costs Increase by $1 Unit Sales Price Increases by $1
  65. 65. CVP High and LowFor purposes of CVP analysis, mixed costs must be classified into theirfixed and variable elements. How does management make theclassification? One possibility is to determine the variable and fixedcomponents each time a mixed cost is incurred. But because of time andcost constraints, this approach is rarely followed. Instead, the usualapproach is to collect data on the behavior of the mixed costs at variouslevels of activity. Analysts then identify the fixed and variable costcomponents. Companies use various types of analysis. One type ofanalysis, called the high-low method,
  66. 66. The high-low methodUses the total costs incurred at the high and low levels of activity toclassify mixed costs into fixed and variable components. The differencein costs between the high and low levels represents variable costs, sinceonly the variable cost element can change as activity levels change
  67. 67. The high-low methodTransit Company has the following maintenance costs andmileage data for its fleet of buses over a 4-month period.The difference in maintenance costs is $33,000 ($63,000 -$30,000), and the difference in miles is 30,000 (50,000 -20,000). Therefore, for Metro Transit, variable cost per unit is$1.10, computed as follows.
  68. 68. High-Low methodMaintenance costs are therefore $8,000 per month plus $1.10 per mile.This is represented by the following formula:For example, at 45,000 miles, estimated maintenance costs would be$8,000 fixed and $49,500 variable ($1.10 × 45,000) for a total of$57,500
  69. 69. Institute of Management Accountants(IMA®) Institute of Management Accountants is a professionalorganization headquartered in New Jersey more than 60,000professionals worldwide. The IMA vision is to be the leading resourcefor developing, certifying, connecting, and supporting the world’s bestaccountants and financial professionals working in business.IMA is a collective voice for professionals around the world who work inbusiness, distinct from public accounting.
  70. 70. Certified Management AccountantThe Certified Management Accountant (CMA®), for critical internalfinancial management responsibilities, includingplanning, budgeting, business reporting, decision analysis, and riskmanagement. Members can achieve career development through accessto an active professional community, continuing education, valuableinformation, and resources.Recognizing that the roles of in-house professionals (which includeCFOs and controllers) are distinct from the functions of auditing andfinancial reporting, IMA raises awareness of management accountants,who serve in key decision support, planning, and control positions.
  71. 71. Six SigmaSix Sigma is a business management strategy originally developed byMotorola, USA in 1986Six Sigma seeks to improve the quality of process outputs by identifyingand removing the causes of defects (errors) and minimizing variability inmanufacturing and business processes. It uses a set of qualitymanagement methods, including statistical methods, and creates a specialinfrastructure of people within the organization ("Black Belts", "GreenBelts", etc.) who are experts in these methods
  72. 72. Team Work (5min.)Matt Reiss owns the Fredonia Barber Shop. He employs five barbers andpays each a base rate of $1,000 per month. One of the barbers serves asthe manager and receives an extra $500 per month. In addition to thebase rate, each barber also receives a commission of $5.50 per haircut.Other costs are as follows. What the variable cost per haircut?Advertising $200 per monthRent $900 per monthBarber supplies $0.30 per haircutUtilities $175 per month plus $0.20 per haircutMagazines $25 per monthMatt currently charges $10 per haircut.
  73. 73. BudgetingOne of managements major responsibilities is planning.Planning is the process of establishing enterprise-wideobjectives. A successful organization makes both long-termand short-term plans.Budgeting is used as a planning tool by management. Throughbudgeting, it should be possible for management to maintainenough cash to pay creditors, to have sufficient raw materialsto meet production requirements, and to have adequatefinished goods to meet expected sales.
  74. 74. Budgeting and AccountingAccounting information makes major contributions to the budgetingprocess. From the accounting records, companies can obtain historicaldata on revenues, costs, and expenses.Normally, accountants have the responsibility for presentingmanagements budgeting goals in financial terms. In this role, theytranslate managements plans and communicate the budget to employeesthroughout the company. They prepare periodic budget reports thatprovide the basis for measuring performance and comparing actualresults with planned objectives.
  75. 75. Benefits of budgeting1. It requires all levels of management to plan ahead and to formalizegoals on a recurring basis.2. It provides definite objectives for evaluating performance at eachlevel of responsibility.3. It creates an early warning system for potential problems so thatmanagement can make changes before things get out of hand.
  76. 76. Benefits of budgeting4. It facilitates the coordination of activities within the business. It doesthis by correlating the goals of each segment with overall companyobjectives.5. It results in greater management awareness of the entitys overalloperations and the impact on operations of external factors, such aseconomic trends.6. It motivates personnel throughout the organization to meet plannedobjectives.
  77. 77. Budget PeriodBudget period is not necessarily one year in length. A budget may beprepared for any period of time.The budget period should be long enough to provide an attainable goalunder normal business conditions.The most common budget period is one year. The annual budget, inturn, is often supplemented by monthly and quarterly budgets. Manycompanies use continuous 12-month budgets. These budgets drop themonth just ended and add a future month. One advantage of continuousbudgeting is that it keeps management planning a full year ahead.
  78. 78. Budgeting processThe budgeting process usually begins with the collection of data fromeach organizational unit of the company. Past performance is often thestarting point from which future budget goals are formulated.The budget is developed within the framework of a sales forecast.Sales forecasting involves a consideration of various factors:(1) general economic conditions, (2) industry trends, (3) market researchstudies, (4) anticipated advertising and promotion, (5) previous marketshare, (6) changes in prices, and (7) technological developments. Theinput of sales personnel and top management is essential to the salesforecast.
  79. 79. Budgeting and Human BehaviorA budget can have a significant impact on human behavior.In developing the budget, each level of management should be invited toparticipate. This “bottom-to-top” approach is referred to as participativebudgeting.
  80. 80. Master BudgetThe master budget is a set of interrelated budgets that constitutes a planof action for a specified time period.The master budget contains two classes of budgets. Operating budgetsare the individual budgets that result in the preparation of the budgetedincome statement. These budgets establish goals for the companys salesand production personnel.In contrast, financial budgets are the capital expenditure budget, thecash budget, and the budgeted balance sheet. These budgets focusprimarily on the cash resources needed to fund expected operations andplanned capital expenditures.
  81. 81. Operating vs. FinancialIt is necessary to be familiar with the various types of budgets tounderstand the whole picture. The types of budgets include master,operating (for income statement items comprised of revenue andexpenses), financial (for balance sheet items)
  82. 82. Operating and financial
  83. 83. The sales budget is the first budget preparedThe sales budget is the first budget prepared. Each of the otherbudgets depends on the sales budget. The sales budget is derived fromthe sales forecast. It represents managements best estimate of salesrevenue for the budget period.
  84. 84. Production budgetThe production budget shows the units to produce to meet anticipatedsales. Production requirements are determined from the followingformula.
  85. 85. Production budgetHayes Company believes it can meet future sales requirements bymaintaining an ending inventory equal to 20% of the next quartersbudgeted sales volume.
  86. 86. Direct material budgetHayes Company maintains an ending inventory of raw materials equal to10% of the next quarters production requirements. Each Kitchen-Materequires 2 pounds of raw materials, and the expected cost per pound is $4
  87. 87. Direct labor budgetLike the direct materials budget, the direct labor budget contains thequantity (hours) and cost of direct labor necessary to meet productionrequirements. The total direct labor cost is derived from the followingformula.
  88. 88. Direct Labor BudgetDirect labor hours are determined from the production budget. At HayesCompany, two hours of direct labor are required to produce each unit offinished goods. The anticipated hourly wage rate is $10
  89. 89. Team work (10min.) Neely, Inc., is preparing its direct labor budget for 2008 from thefollowing production budget based on a calendar year. Quarter Units Quarter Units 1. 20,400 3. 35,100 2. 25,400 4. 30,100Each unit requires 1.9 hours of direct labor.Prepare a direct labor budget for 2008. Wage rates are expected to be $17for the first 2 quarters and $16 for quarters 3 and 4.
  90. 90. Solution AE-9-7 NEELY, INC. Direct Labor Budget For the Year Ending December 31, 2008 Quarter 1 2 3 4 YearUnits to be produced 20,400 25,400 35,100 30,100Direct labor time (hours) perunit × 1.9 × 1.9 × 1.9 × 1.9Total required direct laborhours 38,760 48,260 66,690 57,190Direct labor cost per hour × $17 × $17 × $16 × $16 $3,461,420Total direct labor cost $658,920 $820,420 $1,067,040 $915,040
  91. 91. Manufacturing overhead budgetThe manufacturing overhead budget shows the expected manufacturingoverhead costs for the budget period. This budget distinguishes betweenvariable and fixed overhead costs.Hayes Company expects variable costs to fluctuate with productionvolume on the basis of the following rates per direct labor hour: indirectmaterials $1.00, indirect labor $1.40, utilities $0.40, and maintenance$0.20. Thus, for the 6,200 direct labor hours to produce 3,100units, budgeted indirect materials are $6,200 (6,200 × $1), and budgetedindirect labor is $8,680 (6,200 × $1.40). Hayes also recognizes that some maintenance is fixed. The amountsreported for fixed costs are assumed for our example.
  92. 92. Manufacturing Overhead Budget
  93. 93. Selling and administrative expense budgetHayes Company combines its operating expenses into one budget, theselling and administrative expense budget. This budget projectsanticipated selling and administrative expenses for the budget period.
  94. 94. Budgeted income statementThe budgeted income statement is the important end-product of theoperating budgets. This budget indicates the expected profitability ofoperations for the budget period. The budgeted income statementprovides the basis for evaluating company performance. Budgetedincome statements often act as a call to action.
  95. 95. Team work(10min.)Goody Company estimates that unit sales will be 10,500 in quarter 1;12,200 in quarter 2; 14,800 in quarter 3; and 19,000 in quarter 4. Using asales price of $85 per unit, prepare the sales budget by quarters for theyear ending December 31, 2008.
  96. 96. Solution GOODY COMPANY Sales Budget For the Year Ending December 31, 2008 Quarter 1 2 3 4 YearExpected unit 10,500 12,200 14,800 19,000 56,500salesUnit selling price × $85 × $85 × $85 × $85 × $85 $4,802,500Total sales $892,500 $1,037,000 $1,258,000 $1,615,000
  97. 97. Budgeted Income Statement
  98. 98. Financial BudgetFinancial budgets consist of the capital expenditure budget, the cashbudget, and the budgeted balance sheet.The cash budget shows anticipated cash flows. Because cash is so vital,this budget is often considered to be the most important financial budget.
  99. 99. Cash BudgetCash budget contains three sections (cash receipts, cash disbursements,and financing) and the beginning and ending cash balances
  100. 100. Cash budget componentsThe cash receipts section includes expected receipts from the companysprincipal source(s) of revenue. These are usually cash sales andcollections from customers on credit sales.The cash disbursements section shows expected cash payments. Suchpayments include direct materials, direct labor, manufacturing overhead,and selling and administrative expenses. Includes projected payments forincome taxes, dividends, investments, and plant assets.The financing section shows expected borrowings and the repayment ofthe borrowed funds plus interest.
  101. 101. Cash
  102. 102. Budgeted balance sheetThe budgeted balance sheet is a projection of financial position at the endof the budget period. This budget is developed from the budgetedbalance sheet for the preceding year and the budgets for the current year.
  103. 103. Team work(15min.)Turney Company produces and sells automobile batteries, the heavy-duty HD. The 2008 sales budget is as follows. Quarter HD 1 5,300 2 7,300 3 8,500 4 10,500The January 1, 2008, inventory of HD is 2,900 units. Managementdesires an ending inventory each quarter equal to 50% of the nextquarters sales. Sales in the first quarter of 2009 are expected to be 30%higher than sales in the same quarter in 2008.Prepare quarterly production budgets for each quarter and in total for2008.
  104. 104. Solution TURNEY COMPANY Production Budget For the Year Ending December 31, 2008 Product HD-240 Quarter 1 2 3 4 YearExpected unit sales 5,300 7,300 8,500 10,500Add: Desired end. finishedgoods units 3,650 4,250 5,250 3,445Total required units 8,950 11,550 13,750 13,945Less: Beg. finished goods units 2,900 3,650 4,250 5,250 32,145Required production units 6,050 7,900 9,500 8,695
  105. 105. Static BudgetThe master budget formalizes managements planned objectives for thecoming year. When used in budgetary control, each budget included inthe master budget is considered to be static. A static budget is aprojection of budget data at one level of activity. These budgets do notconsider data for different levels of activity. As a result, companiesalways compare actual results with budget data at the activity level thatwas used in developing the master budget.
  106. 106. Static Budgetwe will use selected data prepared for Hayes Company. Budget andactual sales data for the Kitchen-Mate product in the first and secondquarters of 2008 are as follows.
  107. 107. Flexible BudgetIn contrast to a static budget, which is based on one level of activity, aflexible budget projects budget data for various levels of activity. Inessence, the flexible budget is a series of static budgets at differentlevels of activity. The flexible budget recognizes that the budgetaryprocess is more useful if it is adaptable to changed operating conditions
  108. 108. Static vs. Flexible BudgetThe demand for steel ingots has increased, and Barton produces and sells12,000 units during the year, rather than 10,000.
  109. 109. Static vs. Flexible BudgetAnalyzing the budget data for these costs at 10,000 units, you arrive atthe following per unit results.
  110. 110. Flexible
  111. 111. Responsibility accounting Responsibility accounting involves accumulating and reporting costs(and revenues, where relevant) on the basis of the manager who has theauthority to make the day-to-day decisions about the items. Underresponsibility accounting, a managers performance is evaluated onmatters directly under that managers control. Responsibility accountingcan be used at every level of management. 1. Costs and revenues can be directly associated with the specific levelof management responsibility.2. The costs and revenues can be controlled by employees at the level ofresponsibility with which they are associated.3. Budget data can be developed for evaluating the managerseffectiveness in controlling the costs and revenues.
  112. 112. Responsibility accounting
  113. 113.
  114. 114.
  115. 115. Teamwork(10min.)In Mussatto Company, direct labor is $22 per hour. The company expectsto operate at 10,100 direct labor hours each month. In January 2008,direct labor totaling $229,000 is incurred in working 10,800 hours.Prepare (a) a static budget report and (b) a flexible budget report.
  116. 116. SolutionABE10-3 MUSSATTO COMPANY Static Direct Labor Budget Report For the Month Ended January 31, 2008 Budget Actual DifferenceDirect Labor $222,200.000000 (10,100 × $22) $229,000 $6,800 Unfavorable MUSSATTO COMPANY Flexible Direct Labor Budget Report For the Month Ended January 31, 2008 Budget Actual DifferenceDirect Labor $237,600 (10,800 × $22) $229,000 $8,600 FavorableT
  117. 117. Flexible BudgetFoxs management uses a flexible budget for monthly comparisons ofactual and budgeted manufacturing overhead costs of the FinishingDepartment. The master budget for the year ending December 31, 2008,shows expected annual operating capacity of 120,000 direct labor hoursand the following overhead costs.
  118. 118. Flexible BudgetThe activity index is direct labor hours. The relevant range is 8,000–12,000 direct labor hours per month.There are three variable costs. The variable cost per unit is found bydividing each total budgeted cost by the direct labor hours used inpreparing the master budget (120,000 hours)There are three fixed costs. Since Fox desires monthly budget data, itdivides each annual budgeted cost by 12 to find the monthly amounts. *Prepare the budget for selected increments of activity within therelevant range.
  119. 119. Flexible Budget
  120. 120. Total budgeted cost graphThe graph highlights two activity levels (10,000 and 12,000). As shown,total budgeted costs at these activity levels are $70,000 [$30,000 + ($4 ×10,000)] and $78,000 [$30,000 + ($4 × 12,000)], respectively.
  121. 121. Analyzing and Reporting Variances from StandardsOne of the major management uses of standard costs is to identifyvariances from standards. Variances are the differences between totalactual costs and total standard costs.In producing 1,000 gallons in the month, incurred the following costs.
  122. 122. Computation of total varianceCompanies determine total standard costs by multiplying the unitsproduced by the standard cost per unit. The total standard cost is $42,000(1,000 gallons × $42). Thus, the total variance is $2,500, as shownbelow.
  123. 123. FavorableUnfavorableWhen actual costs exceed standard costs, the variance is unfavorable.. Itsuggests that the company paid too much for one or more of themanufacturing cost elements or that it used the elements inefficiently.If actual costs are less than standard costs, the variance is favorable Itsuggests efficiencies in incurring manufacturing costs and in using directmaterials, direct labor, and manufacturing overhead.However, be careful: A favorable variance could be obtained by usinginferior materials. A variance is not favorable if the company hassacrificed quality control standards.
  124. 124. Materials varianceIn completing the order for 1,000 gallons, Xonic used 4,200 pounds ofdirect materials. These were purchased at a cost of $3.10 per unit.The total materials variance is $1,020 ($13,020 - $12,000) unfavorable
  125. 125. The materials price variance.The company analyzes the total variance to determine the amountattributable to) price (costs and to quantity (use). The materials pricevariance. The materials price variance is $420 ($13,020 - $12,600) unfavorable
  126. 126. Materials quantity varianceFormula for the materials quantity variance and the calculation for Xonic The materials quantity variance is $600 ($12,600 - $12,000) unfavorable
  127. 127. Total materials varianceThe total materials variance of $1,020 U, therefore, consists of thefollowing.
  128. 128. Completed matrix for thedirect materials variance
  129. 129. Causes of Material Variances
  130. 130. Matrix for direct labor variances
  131. 131. Causes of Labor Variances
  132. 132. Total overhead variance?Sandra Co. produced 1,000 units during the period. Actual direct laborhours were 2,200 and the standard hours per unit were 2. Actualoverhead costs were $10,500 and the actual overhead rate was $5.10 perhour. The predetermined overhead rate was $5.00 per hour. Compute thetotal overhead variance.$300 U$300 F$500 F$500 U
  133. 133. Standards and actual costs ?Marley Office Goods budgeted 12,000 and produced 11,000 tapedispensers during June. Resin used to make the dispensers is purchasedby the pound.Standards andactual costsfollow for June: Standards Actual 2 pounds @ $5.00 20,900 pounds @ Materials a pound $4.90 per pound .25 hours @ $15.00 2,700 hours Labor per hour @$15.30 per hour Variable $3.25 per dispenser $36,500 Overhead $17,250 Fixed $1.50 per dispenser Overhead
  134. 134. Total, price, and quantity variancesIvonne purchased (at a cost of $11,700) and used 2,360 pounds ofmaterials during May. Buerhles standard cost of materials per unitproduced is based on 2 pounds per unit at a cost $5 per pound.Production in May was 1,120 units.Compute the total, price, and quantity variances for materials
  135. 135. Total, price, and quantity variancesIvonne purchased (at a cost of $11,700) and used 2,360 pounds ofmaterials during May. Buerhles standard cost of materials per unitproduced is based on 2 pounds per unit at a cost $5 per pound.Production in May was 1,120 units.Compute the total, price, and quantity variances for materials(AQ × AP) - (SQ × SP) = Total Materials Variance($11,700) - (2,240 × $5) = $500 U(AQ × AP) - (AQ × SP) = Materials Price Variance(11,700) - (2,360 × $5) = $100 F(AQ × SP) - (SQ × SP) = Materials Quantity Variance(2,360 × $5) - (2,240 × $5) = $600 U
  136. 136. Incremental AnalysisWhat Does Incremental Analysis Mean?A decision-making technique used in business to determine the true costdifference between alternatives. Incremental analysis ignores sunk costsand costs that are the same between the two alternatives to look only atthe remaining costs.Example; Replacing all printer.Cost of the old printer (sunk cost) -NoCost of electricity -YesCost of tuner -Yes
  137. 137. Incremental analysisHere are some examples of incremental analysis:Accepting additional business.Making or buying parts or products.Selling products or processing them further.Eliminating a segment.Allocating scarce resources (sales mix).
  138. 138. Accepting additional businessIt is currently operating at 75% of its capacity. It currently makes andsells 84,000 packets per year. Per Unit Annual Total Sales $25.00 $2,100,000 Direct Materials 12.00 1,008,000 Direct Labor 6.00 504,000 Overhead .50 42,000 Selling Expenses 1.75 147,000 Administrative Expenses .25 21,000 Total Costs and Expenses 20.50 1,722,000 Operating Income $ 4.50 $378,000
  139. 139. Accepting additional businessAurora received a special order request for 15,000 packets at a price of$20 per packet to be shipped overseas. If 84,000 packets is 75% ofcapacity, 112,000 packets would be 100% of capacity. Aurora has thecapacity to prepare the 15,000 packets requested without changing itsexisting operations. The order would generate a $7,500 loss. ???
  140. 140. Accepting additional business Per Unit TotalSales $20.00 $300,000Direct Materials 12.00 180,000Direct Labor 6.00 90,000Overhead .50 7,500Selling Expenses 1.75 26,250Administrative .25 3,750Expenses Total Costs and 20.50 307,500ExpensesOperating $ (.50) $(7,500)Income
  141. 141. Incremental analysisIncremental analysis, which identifies only those revenues and costs thatchange if the order were accepted, should be used to analyze thealternative. This requires a review of the costs.To manufacture 15,000 packets would require $12.00 of direct materialsand $6.00 of direct labor.The per unit overhead cost of $0.50 is 50% variable ($0.25) and 50%fixed ($0.25).Selling costs (includes commissions and delivery costs) for the 15,000packets would be $7,000.Administrative expenses would not change.
  142. 142. Using incremental analysis Per Unit TotalsSales $20.00 $300,000Direct Materials 12.00 180,000Direct Labor 6.00 90,000Overhead .25 3,750Selling Expenses 7,000 Total Costs and Expenses 280,750Operating Income $19,250