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Chapter Eight
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Learning Objectives
q Define budgeting and discuss its role in planning,
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features that a budgetary system should have to encourage managers to engage in goal-congruent behavior.
q Describe activity-based budgeting.
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Purposes of Budgeting
q It forces managers to plan. q It provides information that can be used to improve
decision making.
q It provides a standard for performance evaluation. q It improves communication and coordination.
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There are two dimensions to budgeting: 1. How is the budget prepared? 2. How is the budget used to implement the organizations plan?
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Master Budget
A master budget can be divided into operating and financial budgets. Operating budgets describe the income-generating activities of a firm: sales, production, and finished goods inventories. Financial budgets detail the inflows and outflows of cash and the overall financial position.
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1 Sales (Schedule 1) Desired ending inventory Total needs 2,000 500 2,500
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1 Units to be produced (2) 2,400 Direct materials per unit x 26 Production needs 62,400 Desired ending inventory 8,000 Total needs 70,400 Less: Beginning inventory (5,000) Direct materials to be purchased 65,400 Cost per pound x$0.01 Total purchase cost $654 ===
2 3 6,400 5,600 x 26 x 26 156,000 145,600 8,000 5,000 164,000 150,600 (8,000) (8,000) 156,000 x $0.01 $1,560 ===== 142,600 x $0.01 $1,426 =====
4 Year 2,000 16,000 x 26 x 26 52,000 416,000 5,000 5,000 57,000 421,000 (5,000) (5,000) 52,000 416,000 x $0.01 x $0.01 $520 $4,160 ==== ===== PPT 8 -12
________________Quarter____________ 1 Units to be produced (Sch. 2) Direct labor time Total hours needed Average wage per hour Total direct labor cost 2,400 x 0.015 36 x $10 $360 2 6,000 x 0.015 90 x $10 $900 3 5,600 x 0.015 84 x $10 $840 4 2,000 x 0.015 30 x $10 $300 Year 16,000 x 0.015 240 x $10 $2,400
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Budgeted variable overhead $288 Budgeted fixed overhead* Total overhead 320 $608 ====
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$623 ====
$1,379 =====
$1,453 =====
$701 ====
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Cash Disbursements
____________ 1 Less cash disbursements: Raw materials: Current quarter Prior quarter Direct labor Overhead Selling and adm. Income taxes Equipment Total disbursements $523 100 360 408 150 --600 $2,141 $1,248 131 900 840 350 ----$3,469 $1,141 312 840 792 365 ----$3,450 $416 285 300 360 150 650 --$2,161 ______Quarter__________________ 2 3 4
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(8.0) F
$ 936 540 108 252 72 $1,908 $ 100 200 20 $ 320 $2,228 =====
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(20.0) F $ 127.3 U
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Activity-Based Budgeting
Activity flexible budgeting is the prediction of what activity costs will be as activity output changes.
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Driver: Machine Hours Fixed Maintenance Machining Subtotal $20,000 15,000 $35,000 ====== Variable $5.50 2.00 $7.50 ==== 8,000 $64,000 31,000 $95,000 16,000 $108,000 47,000 $155,000
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Driver: Number of Orders Fixed Purchasing Total $211,000 ======= Variable $1 == 15,000 $226,000 $678,000 ======= 25,000 $236,000 $948,000 =======
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End of Chapter 8
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