Nota² ku: Jawapan MA 12th ed- Chapter 6

CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

6-1

The budgeting cycle includes the following elements:

a. Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected.

b. Providing a frame of reference, a set of specific expectations against which actual results can be compared.

c. Investigating variations from plans. If necessary, corrective action follows investigation.

d. Planning again, in light of feedback and changed conditions.

6-2

The master budget expresses management's operating and financial plans for a specified period (usually a year) and comprises a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period.

6-3

Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans.

6-4

Budgeted performance is better than past performance for judging managers. Why? Mainly because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past.

6-5

Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing battles between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola:

• Communication. Marketing could share information about seasonal demand with production.

• Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer.

6-6

In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test.

6-7

A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by adding a period (month, quarter, or year) in the future as the period just ended is dropped. A four-quarter rolling budget for 2004 is superceded by a four-quarter rolling budget for April 2004 to March 2005, and so on.

6-8

The steps in preparing an operating budget are:

1. Prepare the revenues budget

2. Prepare the production budget (in units)

3. Prepare the direct materials usage budget and direct materials purchase budget

4. Prepare the direct manufacturing labor budget

5. Prepare the manufacturing overhead budget

6. Prepare the ending inventories budget

7. Prepare the cost of goods sold budget

8. Prepare the nonmanufacturing costs budget

9. Prepare the budgeted income statement

6-9

The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales.

6-10

Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how amounts change with changes in the underlying assumptions budgeted. This assists managers to monitor those assumptions that are most critical to a company attaining its budget or make timely adjustments to plans when appropriate.

6-11

Kaizen budgeting explicitly incorporates continuous improvement during the budget period into the budget numbers.

6-12

Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell products and services. Nonoutput-based cost drivers, such as the number of part numbers, number of batches, and number of new products can be used with ABB.

6-13

The choice of a responsibility center type guides the variables to be included in the budgeting exercise. For example, if a revenue center is chosen, the focus will be on variables that assist in forecasting revenue. Factors related to, say, costs of the investment base will be considered only if they assist in forecasting revenue.

6-17 Sales and production budget.

6-18 Direct material budget.

6-19 Budgeting material purchases.

Production Budget:

Direct Materials Purchases Budget:

6-20 Revenue and production budget.

1.

a 400,000 × 12 months = 4,800,000
b 100,000 × 12 months = 1,200,000

2.

3.
Beginning inventory
= Budgeted sales + Target EI - Budgeted production
= 1,200,000 + 200,000 - 1,300,000
= 100,000 4-gallon units

6-21 Direct materials usage, unit costs and gross margins (continuation of 6-20).

1.
Direct Materials Usage Budget

a $0.06 x 500,000 = $30,000

2.

a 4,500,000 x 12 ounces per unit = 54,000,000
b 1,300,000 x 128 ounces per gallon x 4 gallons per unit = 665,600,000

5.
The chosen cost allocation base is units of production, with different products (12- ounce bottles and 4-gallon containers) being given the same weight.

A key issue here is whether there is a cause-and-effect relationship between units produced and manufacturing overhead. Alternative allocation bases include direct material costs, direct manufacturing labor costs, direct manufacturing labor hours, and time on the production line.

6-22 Revenue, production, and purchases budget.

1.
800,000 motorcycles x 400,000 yen
= 320,000,000,000 yen

2.

Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very close to the major manufacturer. Inventories are controlled by just-in-time and similar systems. Indeed, some direct materials inventories are almost nonexistent.

6-23 Budget for production and direct manufacturing labor.

a100% of the first following month's sales plus 50% of the second following month's sales.

Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from employees' wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5% amounts are not additional costs to the employer.

6-24 Activity-based budgeting.

1.
This question links to the ABC example used in the Problem for Self-Study in Chapter 5 and to Question 5-21 (ABC, retail product-line profitability).

2.
An ABB approach recognizes how different products require different mixes of support activities. The relative percentage of how each product area uses the cost driver at each activity area is:

3.
By recognizing these differences, FS managers are better able to budget for different unit sales levels and different mixes of individual product-line items sold. Using a single cost driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities) across product lines which does not occur at FS. Other benefits cited by managers include:
(1) better identification of resource needs,
(2) clearer linking of costs with staff responsibilities, and
(3) identification of budgetary slack.

6-25 Kaizen approach to activity-based budgeting (continuation of 6-24).

1.
March 2008 rates

These March 2008 rates can be used to compute the total budgeted cost for each activity area:

2.
A kaizen budgeting approach signals management's commitment to systematic cost reduction. Compare the budgeted costs from Question 6-24 and 6-25.

The kaizen budget number will show unfavorable variances for managers whose activities do not meet the required monthly cost reductions. This likely will put more pressure on managers to creatively seek out cost reductions by working "better" within FS or by having "better" interactions with suppliers or customers.

One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small incremental improvements each month. It is possible that some cost improvements arise from large discontinuous changes in operating processes, supplier networks, or customer interactions. Companies need to highlight the importance of seeking these large discontinuous improvements as well as the small incremental improvements.

6-27 Budget schedules for a manufacturer.

a.
Revenues Budget

b.
Production Budget in Units

c.
Direct Materials Usage Budget (units):

Direct Materials Purchases Budget:

d.
Direct manufacturing labor budget

e.
Manufacturing overhead budget

Total manufacturing overhead cost per hour
= $ 191,250 ÷ 4,250
= $45 per direct manufacturing labor-hour

Fixed manufacturing overhead cost per hour
= $ 42,500 ÷ 4,250
= $10 per direct manufacturing labor-hour

f.
Computation of unit costs of ending inventory of finished goods:

Ending Inventories Budget

g.
Cost of goods sold budget

2.
Areas where continuous improvement might be incorporated into the budgeting process:

(a) Direct materials.
Either an improvement in usage or price could be budgeted. For example, the budgeted usage amounts could be related to the maximum improvement (current usage – minimum possible usage) of 1 square foot for either desk:
• Executive: 16 square feet – 15 square feet minimum = 1 square foot
• Chairman: 25 square feet – 24 square feet minimum = 1 square foot

Thus, a 1% reduction target per month could be:
• Executive: 15 square feet + (0.99 × 1) = 15.99
• Chairman: 24 square feet + (0.99 × 1) = 24.99
Some students suggested the 1% be applied to the 16 and 25 square-foot amounts. This can be done so long as after several improvement cycles, the budgeted amount is not less than the minimum desk requirements.

(b) Direct manufacturing labor.
The budgeted usage of 3 hours/5 hours could be continuously revised on a monthly basis. Similarly, the manufacturing labor cost per hour of $30 could be continuously revised down. The former appears more feasible than the latter.

(c) Variable manufacturing overhead.
By budgeting more efficient use of the allocation base, a signal is given for continuous improvement. A second approach is to budget continuous improvement in the budgeted variable overhead cost per unit of the allocation base.

(d) Fixed manufacturing overhead.
The approach here is to budget for reductions in the year-to-year amounts of fixed overhead. If these costs are appropriately classified as fixed, then they are more difficult to adjust down on a monthly basis.

6-28 Sensitivity analysis, changing budget assumptions, and kaizen approach.

1.

a Chippo: 500,000 × 0.50 = 250,000 pounds chocolate chips;
...500,000 × 0.50 = 250,000 pounds cookie dough
b Choco: 500,000 × 0.25 = 125,000 pounds chocolate chips;
...500,000 × 0.75 = 375,000 pounds cookie dough

2.

c2,000 × (1 – 0.01);
d3,000 × (1 – 0.01);
e$160,000 × (1 – 0.02)

6-29 Revenue and production budgets.

This is a routine budgeting problem. The key to its solution is to compute the correct quantities of finished goods and direct materials. Use the following general formula:

Budgeted production @ purchases
= Target EI + Budgeted sales @ material used – Beginning Inventory

1.

6-30 Budgeted income statement.

6-31 Responsibility of purchasing agent.

The time lost in the plant should be charged to the purchasing department. The plant manager probably should not be asked to underwrite a loss due to failure of delivery over which he had no supervision. Although the purchasing agent may feel that he has done everything he possibly could, he must realize that, in the whole organization, he is the one who is in the best position to evaluate the situation. He receives an assignment. He may accept it or reject it. But if he accepts, he must perform. If he fails, the damage is evaluated. Everybody makes mistakes. The important point is to avoid making too many mistakes and also to understand fully that the extensive control reflected in responsibility accounting is the necessary balance to the great freedom of action that individual executives are given.

Discussions of this problem have again and again revealed a tendency among students (and among accountants and managers) to "fix the blame"––as if the variances arising from a responsibility accounting system should pinpoint misbehavior and provide answers. The point is that no accounting system or variances can provide answers. However, variances can lead to questions. In this case, in deciding where the penalty should be assigned, the student might inquire who should be asked––not who should be blamed.

Classroom discussions have also raised the following diverse points:
(a) Is the railroad company liable?
(b) Costs of idle time are usually routinely charged to the production department. Should the information system be fine-tuned to reallocate such costs to the purchasing department?
(c) How will the purchasing managers behave in the future regarding willingness to take risks?

The text emphasizes the following: Beware of overemphasis on controllability. For example, a time-honored theme of management is that responsibility should not be given without accompanying authority. Such a guide is a useful first step, but responsibility accounting is more far-reaching. The basic focus should be on information or knowledge, not on control. The key question is: Who is the best informed? Put another way, "Who is the person who can tell us the most about the specific item, regardless of ability to exert personal control?"

6-32 Comprehensive operating budget, budgeted balance sheet.

1.

6.
Budgeted manufacturing overhead rate:
= $104,500 ÷ 5,500
= $19.00 per hour

7.
Budgeted manufacturing overhead cost per output unit:
= $104,500 ÷ 1,100
= $95.00 per output unit

8.
Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2007

a cost is per board foot, yard or per hour
b inputs is the amount of each input per board

9.

10.

11.

12.

6-33 Cash budgeting (Chapter Appendix)

1.
Projected Sales

Cash Budget for the months of July, August, September 2007

2.
Yes, Slopes has a budgeted cash balance of $69,650 on 10/1/2007 and so will be in a position to pay off the $30,000 1-year note on October 1, 2004.

3.
No. Slopes does not maintain a $10,000 minimum cash balance in July. It could encourage its customers to pay earlier by offering a discount. Alternatively, slopes could seek short-term credit from a bank.

6-34 Comprehensive budget; fill in schedules.

1.a)
Schedule A: Budgeted Monthly Cash Receipts

*Given.

1.b)
Schedule B: Budgeted Monthly Cash Disbursements for Purchases

Note that purchases are 70.0% of next month’s sales given a gross margin of 30%.
*Given.

1.c)
Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs

*Given.

1.d)
Schedule D: Budgeted Total Monthly Cash Disbursements

*Given.

1.e)
Schedule E: Budgeted Cash Receipts and Disbursements

*Given.

1.f)
Schedule F: Financing Required

*Given.

Interest computation:
Total interest expense
= ($ 4,000 @ 18% for 3 months) + ($12,000 @ 18% for 2 months)
= $180 + $360
= $540

2.
Short-term, self-liquidating financing is best. The schedules clearly demonstrate the mechanics of a self-liquidating loan. The need for such a loan arises because of the seasonal nature of many businesses. When sales soar, the payroll and suppliers must be paid in cash. The basic source of cash is proceeds from sales. However, the credit extended to customers creates a lag between the sale and the collection of cash. When the cash is collected, it in turn may be used to repay the loan. The amount of the loan and the timing of the repayment are heavily dependent on the credit terms that pertain to both the purchasing and selling functions of the business. Somewhat strangely, in seasonal businesses, the squeeze on cash is often heaviest in the months of peak sales and is lightest in the months of low sales.

3.a)

*Note: Ending inventory and proof of cost of goods sold:

3.b)

4.
All of the transactions have been simplified––for example, no bad debts are considered. Also, many businesses face wide fluctuation of cash flows within a month. For example, perhaps customer receipts lag and are bunched together near the end of a month, and disbursements are due evenly throughout the month, or are bunched near the beginning of the month. Cash needs would then need to be evaluated on a weekly and, perhaps, daily basis rather than on a monthly basis.

6-35 Budgetary slack and ethics.

The use of budgetary slack, particularly if it has a detrimental effect on the company, may be unethical. In assessing the situation, the specific “Standards of Ethical Conduct for Management Accountants,” described in Exhibit 1-7, that the management accountant should consider are listed below.

Competence
Clear reports using relevant and reliable information should be prepared. Reports prepared on the basis of incorrect revenue or cost projections would violate the management accountant's responsibility for competence. Ford and Granger's performances would appear to look better than they actually are because their performances are being compared to understated and unreliable budgets.

Integrity
Any activity that subverts the legitimate goals of the company should be avoided. Incorrect reporting of revenue and cost budgets could be viewed as violating the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information. Atkins will probably regard Ford's and Granger's behavior as unethical because it is attempting to project their results in a favorable light.

Objectivity
The management accountant’s Standards of Ethical Conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant’s standpoint, Ford and Granger are clearly violating both these precepts. For the various reasons cited above, Atkins should take the position that the behavior described by Ford and Granger is unethical.

6-36 Comprehensive review of budgeting, cash budgeting, chapter appendix.

a.
Schedule 1: Revenues Budget
For the Year Ended December 31, 2005

b.
Schedule 2: Production Budget in Units
For the Year Ended December 31, 2005

c.
Schedule 3A: Direct Materials Usage Budget in Units and Dollars
For the Year Ended December 31, 2005

d.
Schedule 3B: Direct Materials Purchases Budget in Units and Dollars
For the Year Ended December 31, 2005

e.
Schedule 4: Direct Manufacturing Labor Budget
For the Year Ended December 31, 2005

f.
Schedule 5: Manufacturing Overhead Costs Budget
for the Year Ended December 31, 2005

Fixed manufacturing overhead per bottling hour
= $1,200,000 ÷ 3,000
= $400.

Note that the total number of bottling hours is 3,000 hours: 2,000 hours for Lemonade (2 hours per lot × 1,000 lots) plus 1,000 hours for Diet Lemonade (2 hours per lot × 500 lots).

g.
Schedule 6A: Ending Finished Goods Inventory Budget
as of December 31, 2005

*From Schedule 6B

Schedule 6B: Computation of Unit Costs of Manufacturing Finished Goods
For the Year Ended December 31, 2005

*Variable manufacturing overhead varies with bottling hours (2 hours per lot for both Lemonade and Diet Lemonade). Fixed manufacturing overhead is allocated on the basis of bottling hours at the rate of $400 per bottling hour calculated in Schedule 5.

h.
Schedule 7: Cost of Goods Sold Budget
For the Year Ended December 31, 2005

*Given in description of basic data and requirements
(Lemonade, $5,300 × 100; diet Lemonade, $5,200 × 50)

i.
Schedule 8: Marketing Costs Budget
For the Year Ended December 31, 2005

Marketing costs × Revenues
= 12% x $14,310,000
= $1,717,200

j.
Schedule 9: Distribution Costs Budget
For the Year Ended December 31, 2005

Distribution costs × Revenues
= 8% x $14,310,000
= $1,144,800

k.
Schedule 10: Administration Costs Budget
For the Year Ended December 31, 2005

Administration costs × Cost of goods manufactured
= 10% x$8,215,000
= $ 821,500

l.
Budgeted Income Statement
For the Year Ended December 31, 2005