2 Selling and Administrative Expenses Budget ►The selling and administrative expenses budget outlines planned expenditures for nonmanufacturing activities. ►As with overhead, selling and administrative expenses can be broken down into fixed and variable components. ►Such items as sales commissions, freight, and supplies vary with sales activity. The planning process that results in a formal budget provides an opportunity for various levels of management to think through and commit future plans to writing. In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels. For all these reasons, a budget must clearly reflect the expected results. The high-level plans, forecasts, and budgets need to be continuously tracked, monitored, and, if necessary, changed to meet the changing landscape.
Sales forecasts and the resulting revenue projections are often part of managerial accounting. Conversely, managerial accounting is used internally to make efficiency improvements within the company. Is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company’s objectives and how management intends to acquire and use resources to attain those objectives.
Ch09 Profit Planning
The term budget has negative connotations for many employees. Often in the past, management has imposed a budget from the top without considering the opinions and feelings of the personnel affected. Such a dictatorial process may result in resistance to the budget. A number of reasons may underlie such resistance, including lack of understanding of the process, concern for status, and an expectation of increased pressure to perform. Employees may believe that the performance evaluation method is unfair or that the goals are unrealistic and unattainable. They may lack confidence in the way accounting figures are generated or may prefer a less formal communication and evaluation system. Often these fears are completely unfounded, but if employees believe these problems exist, it is difficult to accomplish the objectives of budgeting.
The first applies to those situations in which a company competes in a fast-paced and highly-competitive business environment. Although many companies have used participatory budgeting successfully, it does not always work.
This information can be compared with budgeted operating costs to see if the heart hospital’s revenues can cover its costs. Cost accounting is often a subset of managerial accounting. Cost accounting measures the various costs involved in running a company, including fixed costs, such as the purchase of equipment and operating costs, which are the costs of running the daily operations. Also, variable costs, which fluctuate with production levels such as inventory, and overhead costs, such as rent for the corporate office, are all part of cost accounting. Depasquale Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.41 direct labor-hours.
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It will be difficult to forecast the cash inflows and outflows too far in advance. As a result, you will probably want to set up the cash budget for one to three months in advance and then update the forecasted numbers as the year progresses. Information from the past year can be used as a baseline, however, changing economic conditions will affect future amounts.
Also, employees may be motivated to perform their own functions within budget constraints if they are committed to achieving organizational goals. Management should frequently compare accounting data with budgeted projections during the budget period and investigate any differences. Budgeting, however, is not a substitute for good management. Instead, the budget is an important tool of managerial control. Managers make decisions in budget preparation that serve as a plan of action.
Describe the behavioral dimension of budgeting. Profit planning is the set of actions taken to achieve a targeted profit level. These actions involve the development of an interlocking set of budgets that roll up into a master budget. The management team adjusts the information in this set of budgets to arrive at the combination of actions needed to arrive at the targeted profit level. The planning process may involve a significant amount of what-if analysis, to see what happens to projected profits in different scenarios. Cash flow is the net cash position for a company as a result of cash inflows and outflows for the period. Cash flow analysis is a part of managerial accounting since companies need sufficient cash to meet their bills.
Project Management Decisions
The direct labor rate is $8.10 per direct labor-hour. The production budget calls for producing 5,000 units in May and 5,400 units in June. If the direct labor work force is fully adjusted to the total direct labor-hours needed each month, what would be the total combined direct labor cost for the two months? 2 Sales Budget ►The sales budget is approved by the budget committee and describes expected sales in units and dollars.
Measuring and tracking performance using managerial accounting can help executive management make decisions in real-time. Measuring performance against the forecasts and budgets helps to avoid costly overruns and allows a company to remain competitive. Managerial accounting is used to perform cost-benefit analysis for new projects and provide ongoing reports for existing projects. These projects might involve significant outlays of cash or capital as well as new debt to finance them. As a result, managerial accounting is critical to ensuring that these projects are delivered within budget and in a timely manner while also being profitable. Within a participatory budgeting process, accountants should be compilers or coordinators of the budget, not preparers. They should be on hand during the preparation process to present and explain significant financial data.
- ►Typically, the master budget is for a one-year period, corresponding to the fiscal year of the company.
- C) Better communication of the organization’s objectives.
- Managerial accounting is the practice of analyzing and communicating financial data to managers, who use the information to make business decisions.
- 3 Budgeted Balance Sheet ►The budgeted balance sheet depends on information contained in the current balance sheet and in the other budgets in the master budget.
- ►Then costs that vary with direct labor hours are pooled and called variable overhead.
Employees are more likely to strive toward organizational goals if they participate in setting them and in preparing budgets. Often, employees have significant information that could help in preparing a meaningful budget.
When Is Managerial Accounting Appropriate?
2 You Decide Budgeting in a Service Industry You are the controller for a large, regional medical center. The chief of cardiology has been pushing to have a free-standing heart hospital built on the medical center campus. However, you are concerned that taking the heart cases away from the main hospital will hurt its bottom line. While the medical center is nonprofit, it does need to cover all of its costs to stay in business. You also wonder whether the heart hospital will break even.
Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components. Define and prepare the financial budget, identify its major components, and explain the interrelationships of its various components.
Managerial Accounting For Dummies: Part 2
The direct materials to be purchased for a period can be obtained by subtracting the desired ending inventory of direct materials from the total direct materials needed for the period. 4 Multiple Measures of Performance ►Often, organizations make the mistake of using budgets as their only measure of managerial performance. ►While financial measures of performance are important, overemphasis can lead to a form of dysfunctional behavior called milking the firm or myopia. ►Myopic behavior occurs when a manager takes actions that improve budgetary performance in the short run but bring long-run harm to the firm. ►Budgetary measures alone cannot prevent myopic behavior.
3 You Decide Cash Budgeting for a Small Painting Company You are the accountant for a number of small businesses in your town, one of which is Ramon’s Paint and Plaster. Ramon has been through a tough year as construction in the town has been down. However, new home construction is picking up and Ramon has been asked to bid on twice as many jobs in the past month as he was last year at this time. Ramon needs to know what his cash flow will be for the coming year. You are starting to amass information to help you forecast monthly cash inflows and outflows for the next six months. What information do you need to forecast cash inflows and outflows for the paint and plaster business for the next six months? In profit planning, alternatives are evaluated to select the most likely option that will yield the required profit objective.
Flexibility If significant basic assumptions underlying the budget change during the year, the planned operating budget should be restated. For control purposes, after the actual level of operations is known, the actual revenues and expenses can be compared to expected performance at that level of operations. The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective.
The profit objective will normally be related to the return required on the investment in the business. Managerial accounting is the type of accounting that provides financial information to managers and decision-makers within a company or organization.
► Positive behavior occurs when the goals of each manager are aligned with the goals of the organization and each manager has the drive to achieve them. ► The alignment of managerial and organizational goals is often referred to as goal congruence. ► If the budget is improperly administered, subordinate managers may subvert the organization’s goals. ► Dysfunctional behavior is individual behavior that is in basic conflict with the goals of the organization. 2 Cost of Goods Sold Budget ►Assuming that the beginning finished goods inventory is valued at $1, 251, the budgeted cost of goods sold schedule can be prepared using information from Cornerstones 9 -3 to 9 -6. ►The cost of goods sold budget reveals the expected cost of the goods to be sold.
2 Direct Labor Budget ►The direct labor budget shows the total direct labor hours and the direct labor cost needed for the number of units in the production budget. ►As with direct materials, the budgeted hours of direct labor are determined by the relationship between labor and output. ►To prepare this budget, the unit cost of producing finished goods must be calculated by using information from the direct materials, direct labor, and overhead budgets. Which of the following statements is NOT correct concerning the Manufacturing Overhead Budget?