9-1
MANAGERIAL ACCOUNTING
RSM222
Planning and Control
Chapter 9
9-2
Reminders
o Midterm
o Current Events Journal due on Oct. 21
o Groups
o Individual Costing Assignment due on Oct. 24
o Weekly HW assignment due after the reading week
o No class next week due to reading week
o Plan for today:
ü Ch. 9 – Budgeting
9-3
Course Roadmap
Foundations Intro to Analysis/Application
Analysis & cont.
Cost concepts Applications • Planning and Control
Cost behaviour • Budgeting
CVP analysis • Variance analysis
Costing systems:
Job-costing • Pro-forma FS
• Break-even
Process-costing analysis • Standard costs &
Activity-based costing Variance analysis
Variable costing • Relevant costs for
decision making
• Capital budgeting
decisions
• Balanced Score Cards
9-4
9-5
The Basic Framework of Budgeting
A budget is a detailed quantitative plan to obtain
and use 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 activity is known as
budgetary control.
à Planning and control functions
9-6
What do managers do?
Planning and Control Cycle
Formulating long- ü Budgets
and short-term plans
(Planning)
Comparing actual
Implementing
to planned
plans (Directing
performance
and Motivating)
(Controlling)
ü Variances
Measuring
performance
(Controlling)
ü Record actual performance
The Basics…
9-7
Choosing the Budget Period
Typical Operating Budget
2025 2026 2027 2028
The annual operating budget
may be divided into quarterly A continuous (perpetual) budget is a
or monthly budgets. 12-month budget that rolls
forward one month (or quarter)
Our focus is the annual budget. as the current month (or quarter)
is completed.
How is the budget prepared?
9-8
Participative (Self-Imposed) Budget
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9-9
Participative (Self-Imposed) Budget
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A budget is prepared with the full cooperation and
participation of managers at all levels. A participative
budget is also known as a self-imposed budget.
9-10
Advantages of Participative Budgets
1. Individuals at all levels of the organization are viewed
as members of the team whose judgments are valued
by top management.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
3. Motivation is generally higher when individuals
participate in setting their own goals than when the
goals are imposed from above.
4. A manager who is not able to meet a budget imposed
from above can claim that it was unrealistic.
Participative budgets eliminate this excuse.
9-11
How are budgets prepared?
A zero-based budget requires managers to
justify all budgeted expenditures, not just
changes in the budget from the prior year.
Most managers argue that
zero-based budgeting is too
time consuming and costly to
justify on an annual basis.
The traditional (incremental) approach starts
with last year’s budget as a baseline.
9-12
The Master Budget: The big picture
Exhibit 9-1
o Separate
o Interdependent
o Where to start?
o Sources and uses of cash
o Pro forma financial statement
© 2024 McGraw Hill Limited
9-13
Budgeting Example - (1) The Sales Budget
Royal Company is preparing budgets for the quarter ending
June 30. Royal sells one product at $10/unit.
The individual months of April, May, and June are summed to
obtain the total projected sales (i) in units and (ii) dollars for the
quarter ended June 30th.
9-14
(1.a) Schedule of Expected Cash Collections
Assumptions
} All sales are on account.
} Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% uncollectible.
} In addition, the March 31 accounts receivable balance of
$30,000 is expected to be collected in full.
} Let’s prepare the budget of expected cash collections for the quarter,
ending June 30th.
} What is the total cash collection for the quarter (A, M, J) ?
Sales in April: $200,000 May: $500,000 June: $300,000
9-15
(1.a) Schedule of Expected Cash Collections
ü We will use it later to prepare the cash budget.
9-16
(2) The Production Budget
(units)
ü How many units must be produced to meet the sales budget and
provide the desired ending inventory?
9-17
The Production Budget
Royal Company wants ending inventory to be equal to 20% of the
following month’s budgeted sales in units throughout the fiscal
year (January to December). Budgeted sales units are:
April: 20,000 units, May: 50,000 units, June: 30,000 units
July: 25,000 units
How many units should Royal Company produce in April?
A. 10,000 units
B. 20,000 units
C. 26,000 units
D. 30,000 units
E. 34,000 units
9-18
9-19
The Production Budget
(units)
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ending inventory MB+12B#DB3#13$D134B3&52* DDDD8./...
(20,000 * 20%)
9-20
The Production Budget
(units)
Based on July’s sales of 25,000 units
ü For a merchandizing firm, the merchandise purchases budget replaces
the production budget. The format is the same.
9-21
(3) The Direct Materials Budget
} 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 (ending
inventory requirement).
} 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.
9-22
The Direct Materials Budget
March 31 inventory
10% of following month’s
production needs (in pounds).
9-23
The Direct Materials Budget
9-24
(3.a)Expected Cash Disbursement for Materials
} Royal pays $0.40 per pound for its materials.
} April purchases: 140,000 lbs x $0.40 = $56,000
} May purchases: 221,500 lbs x $0.40 = $88,600
} June purchases: 142,000 lbs x $0.40 = $56,800
} 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
ü Let’s calculate expected cash disbursements.
9-25
Expected Cash Disbursement for Materials
9-26
(4) The Direct Labour Budget
} At Royal, each unit of product requires 0.05 hours (3
minutes) of direct labour.
} The Company has a “no layoff” policy so all
employees will be paid for 40 hours of work each week.
} In exchange for the “no layoff” policy, workers agree to a
wage rate of $10 per hour regardless of the hours
worked (no overtime pay).
} For the next three months, the direct labour workforce
will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labour budget.
9-27
The Direct Labour Budget
From production budget.
9-28
The Direct Labour Budget
9-29
(5) Manufacturing Overhead Budget
} At Royal, manufacturing overhead is applied to
units of product on the basis of direct labour
hours.
} The variable manufacturing overhead rate is $20
per direct labour hour.
} Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of noncash costs
(primarily depreciation of plant assets).
ü Let’s prepare the manufacturing overhead budget
9-30
Manufacturing Overhead Budget
Direct Labour Budget.
9-31
Manufacturing Overhead Budget
(5) Manufacturing Overhead Budget AND
9-32
(5.a) Cash disbursements for MOH
Depreciation is a noncash expense
ü What else can be calculated using the information above?
9-33
Manufacturing Overhead Budget
Total mfg. OH for quarter $251,000
= $49.70 per hour *
Total labour hours required 5,050
* rounded
ü We need the POHR to calculate the unit cost of the product.
9-34
(6) Ending Finished Goods Inventory Budget
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ü Where else is the budgeted unit product cost used?
9-35
(7) Selling and Administrative Expense Budget
• At Royal, the selling and administrative expenses
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.
9-36
(7) Selling and Administrative Expense Budget
(7.a) Cash disbursements for S&A
9-37
The Master Budget: The big picture
Exhibit 9-1
© 2024 McGraw Hill Limited
9-38
(8) The Cash Budget
9-39
Format of the Cash Budget
The cash budget is divided into four sections:
• Cash receipts listing all cash inflows excluding
borrowing;
• Cash disbursements listing all payments excluding
repayments of principal and interest;
• Cash excess or deficiency; and
• The financing section listing all borrowings,
repayments and interest.
LO 2
9-40
The Cash Budget – additional assumptions
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
LO 2
9-41
(8) The Cash Budget
9-42
(9) The Budgeted Financial Statements
Cash Budgeted
Budget Financial
Statements
ted
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pl
om
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After we complete the cash budget, we can prepare
the budgeted income statement and budgeted
balance sheet for Royal.
9-43
The Budgeted Income Statement
Sales Budget.
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9-44
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9-45
What do managers do?
Planning and Control Cycle
Formulating long- ü Budgets
and short-term plans
(Planning)
Comparing actual
Implementing
to planned
plans (Directing
performance
and Motivating)
(Controlling)
ü Variances
Measuring
performance
(Controlling)
ü Record actual performance
Budgeting and Performance Reports
9-46
Variance Analysis – MOH costs
CheeseCo
9-47
Static Budgets and Performance Reports
U = Unfavorable variance CheeseCo was unable to achieve
CheeseCo
the budgeted level of activity.
9-48
Static Budgets and Performance Reports
CheeseCo
Since cost variances are favourable, have
we done a good job controlling costs?
9-49
Static Budgets and Performance Reports
The relevant question is . . .
“How much of the favourable cost variance
is due to lower activity, and how much is due
to good cost control?”
To answer the question,
we must
the budget to the
actual level of activity.
9-50
Preparing a Flexible Budget
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labour $ 4.00 $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000
Fixed costs
Depreciation $ 12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000
9-51
Flexible Budget Performance Report
CheeseCo
Cost Total
Formula Fixed Flexible Actual
per Hour Cost Budget Results Variances
Machine hours 8,000 8,000
Variable costs
Indirect labour $ 4.00 $ 32,000 $ 34,000
Indirect material 3.00 24,000 25,500
Power 0.50 4,000 3,800
Total variable cost $ 7.50 $ 60,000 $ 63,300
Fixed costs
Depreciation $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,050
Total fixed cost $ 14,000 $ 14,050
Total overhead costs $ 74,000 $ 77,350
LO 4
9-52
Flexible Budget Performance Report
CheeseCo
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9-53
Back to our original comparison…
How much of the $11,650 favourable variance is due
to lower activity and how much is due to cost control?
9-54
Flexible Budget Performance Report
Overhead Variance Analysis
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and actual overhead = $11,650 F.
9-55
Flexible Budget Performance Report
Overhead Variance Analysis
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Activity Cost control
This $15,000F variance is This $3,350U
due to lower activity. variance is due
to poor cost control.
9-56
Enjoy the Reading Week!
Happy Halloween!