Bài giảng Cost Management - Chapter 10: Strategy and the Master Budget

Strategy and the Master BudgetChapter TenMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.10-2Describe the role of budgets in the overall management processDiscuss the importance of strategy and its role in the master budgeting processOutline the budgeting processPrepare a master budget and explain the interrelationships among its supporting schedulesLearning Objectives10-3Learning Objectives (continued)Deal with uncertainty in the budgeting processIdentify unique characteristics of budgeting for service companiesUnderstand alternative approaches to budgeting (viz., zero-base, activity-based, time-driven activity-based, and Kaizen budgeting)Discuss various behavioral considerations in budgeting10-4A budget:is a financial or nonfinancial expression of a plan of action for a specified periodidentifies the resources and commitments required to achieve the organization’s goals for an upcoming periodBudgeting:The process of preparing a budget (or set of budgets) is called budgetingBasic Terminology10-5The starting point in the budget-preparation process is specification of the organization’s strategyThe organization’s long-range plan identifies required actions over a 5- to 10-year period to attain the organization’s strategic goal(s)An organization expresses its strategic goals and long-term objectives in its capital budget and master budgetStrategic budget expenditures represent a special class of capital budgeting proposals, that is, those that lead to long-term value and competitive advantage by the organizationStrategy and the Master Budget10-6 Budget Committee Budget Period Budget Guideline Negotiation, Review, and Approval RevisionThe Budgeting Process10-7The Master BudgetRepresents the “grand plan of action” for an upcoming periodTranslates the organization’s short-term objectives into action stepsCulminates in the preparation of a set of pro-forma financial statementsCommunicates to employees and managers alike the expectations of top managementHelps coordinate subunit activities10-8The Master Budget (continued) The master budget comprises a set of operating and financial budgets:Operating budgets are plans that identify resources needed to carry out the budgeted activities, such as sales and services or productionOperating budgets include production, purchase, personnel, marketing budgets, and a budgeted income statementFinancial budgets identify sources and uses of funds for the budgeted operationsFinancial budgets include the cash budget, budgeted statement of cash flows, the budgeted balance sheet, and the capital expenditures budget10-9Preparing Individual Budgets (e.g., a Sales Budget) Three-step process:Define the “bottom-line” information contained in the budget (e.g., sales for the upcoming period)Determine what this information is a function of (e.g., budgeted unit sales, budgeted selling price/unit)Put together information in a user-friendly way10-10Sales Budget The sales budget is often referred to as the cornerstone of the entire master budget The sales budget has two components: Forecasted sales volume Budgeted selling prices10-11Sales Budget (Exhibit 10.3)April May June QuarterSales in units 20,000 25,000 35,000 80,000Selling price per unit × $30 × $30 × $30 × $30 Total sales $600,000 $750,000 $1,050,000 $2,400,000 Kerry Industrial CompanySales BudgetFor the Quarter Ended June 30, 201310-12Production BudgetAfter the sales budget, we prepare a set of manufacturing budgets, beginning with a production budget, which shows planned production for a given periodBudgeted production (in units) can be calculated through use of the following formula:10-13Production Budget (continued)Kerry example: Beginning inventory (April 1st) = 5,000 units (assumed) Desired ending inventory (April 30th) = 30% of the following month’s projected unit sales The sales budget has total sales for May at 25,000 units.10-14Production Budget (continued) 22,500 = 20,000 + 7,500 − 5,000 Desired ending level at April 30:30% × 25,000 units (May sales) = 7,500 units Inventory from April 1: 5,000 units From the Sales BudgetBudgeted production for April10-15Production Budget (Exhibit 10.4)30% of June’s budgeted salesJuly sales are budgeted at 40,000 units: 30% × 40,000 = 12,00010-16Direct Materials BudgetsTwo required budgets: Direct material usage budget Direct materials purchases budgetThe direct materials usage budget (Exhibit 10.5):Shows the amount (and budgeted cost) of direct materials required for budgeted productionThe last line of the production budget = first line of the direct materials usage budget10-17Direct Materials Purchases Budget (continued)The direct materials purchases budget (Exhibit 10.6):Contains budgeted purchases, in units and dollars, of direct materials for the upcoming periodIs needed to complete the direct materials usage budget (i.e., provides unit cost data)Is a function of: materials required for production (from materials usage budget), target ending inventory of materials, beginning-of-period materials inventory, budgeted purchase price per unit of raw material10-18Direct Materials Purchases Budget: Kerry Company (Exhibit 10.6)10-19Direct Labor Budget Enables the personnel department to plan for hiring & repositioning of employees, based on production needs Is prepared for each class (type) of labor, e.g., skilled and semi-skilled Is a function of: Budgeted output (from production budget) Standard labor hours per unit of output Standard wage rate per hour10-20Direct Labor Budget (continued)Kerry uses 0.5 hours of semiskilled labor and 0.2 hours of skilled labor per unit @ standard wage rates of $8 and $12 per hour, respectively10-21Direct Labor Budget: Kerry Company (Exhibit 10.7)10-22Cost of Goods Manufactured & Cost of Goods Sold (CGS) BudgetThe cost of goods manufactured and CGS budget is prepared after the factory overhead budget (see text Exhibit 10.8) is preparedThe budgeted income statement and the budgeted balance sheet both use information from this budget10-23Kerry Company: Cost of Goods Manufactured & CGS Budget, April 2013 (Exhibit 10.9, partial)*Finished goods beginning inventory, April 1, 5,000 units @ $18/unit. Selling & Administrative Expense BudgetSee Exhibit 10.10: This budget includes all the planned expenditures for selling and general administrative activitiesMany of the expenses included in this budget are considered discretionary and are a likely place for spending cutsManagers must be careful not to focus solely on short-term affects when making cuts in these areas (e.g., customer-service expenditures)10-2410-25Kerry Company—Cash Receipts Budget: Operating Activities April 2013 (Exhibit 10.11, partial) Cash Budget The cash budget brings together the cash effects of all budgeted activities--to ensure that the firm has adequate cash on hand:This budget generally has three sections:Cash flow from operationsInvesting activities, and Financing activitiesPreparation of this budget involves careful review of all other budgets to identify cash inflows and outflows10-2610-27Kerry Company—Cash Budget: April 2013 (Exhibit 10.14, partial)Budgeted I/S and B/SThe budgeted income statement (I/S) and budgeted balance sheet (B/S) can then be prepared using all the aforementioned budgets:The budgeted I/S describes the expected net income for the upcoming periodThe budgeted B/S, the last budget in the budget-preparation process, incorporates the effects of all operations and cash flows during the budget period and shows projected ending balances in asset, liability, and equity accounts10-28Budgeted Income Statement: Kerry Company (Exhibit 10.13, partial)10-29Budgeted Balance Sheet: Exhibit 10.15 (Total Assets)10-30Budgeted Balance Sheet: Exhibit 10.15 (Liabilities + Stockholders’ Equity)10-3110-32Uncertainty and the Budgeting ProcessWhat-If Analysis (see Exhibit 10.16)Sensitivity Analysis (see Exhibit 10.17)Scenario analysis: Best-case scenario Worst-case scenario Most-likely scenario10-33Budgeting in Service CompaniesThese firms have different operating characteristics, operating environments, and considerations than those of manufacturing and merchandising firmsService firms are different due to the absence of production or merchandise purchase budgets and their ancillary budgets–the focus of the budgeting process must be personnel planning:Does the firm have sufficient staff and resources to provide the expected level of service output in the upcoming period?Do staff members have the appropriate skills?10-34Alternative Budgeting Approaches Zero-base budgeting (ZZB) is a budgeting process that requires managers to prepare budgets from a zero baseThis type of budgeting allows no activities or functions to be included in the budget unless managers can justify their needsIn-depth reviews and analyses of all budget items make managers aware of activities and functions that have outlived their usefulnessCan be a difficult and time-consuming process10-35Alternative Budgeting Approaches (continued)Activity-based budgeting (ABB) is a budgeting process based on activities and cost drivers of operations:Starts with the budgeted output and segregates costs required for the budgeted output into homogeneous cost poolsCan be a simple extension of a firm’s ABC systemTime-driven activity-based budgeting is a budgeting process based on the use of time-driven activity-based costing (TDABC) system10-36Alternative Budgeting Approaches (continued)Budgeting in both ABC and TDABC systems facilitates resource capacity planningRole of practical capacity? Kaizen (Continuous improvement) budgeting:Incorporates continuous improvement expectations into the budgetsPromotes active engagement in reforming and altering business practices and processes10-37Behavioral Issues in BudgetingBudgetary slack, or padding the budget, is the practice of managers knowingly including a higher amount of expenditures or a lower amount of revenue in a budgetSpending the budget is another issue; managers often feel if they do not use all the resources they receive, next year’s budget may be cut Goal congruence is a term that refers to the degree of consistency between goals of the firm, its subunits, and its employeesInvolving employees in the budgeting process fosters goal congruence10-38Behavioral Issues in Budgeting (continued)Difficulty level of the budget target?An easy budget may fail to encourage employees to give their best efforts, while a very difficult target can be discourage managers from even tryingA “highly achievable target” is suggested with incentives for exceeding the budgeted figuresAuthoritative or participative budgeting?Top-down budgeting is referred to as authoritative budgetingBottom-up budgeting is referred to as participative budgetingEffective budgeting processes often combine the two types 10-39Behavioral Issues in Budgeting (continued)Linkage of compensation and budgeted performance: Problems with the “fixed performance contract” Gaming the performance measure Suggested improvements to basing incentive compensation on the basis of the fixed performance contract:Use of linear compensation planUse of “rolling forecasts” and relative performance (relative improvement contracts10-40A budget is a financial or nonfinancial expression of an organization’s plan of action for a specified period; it identifies the resources and commitments required to achieve the organization’s goals for the period identifiedStrategy is the starting point in preparing its plans and budgetsThe “grand plan of action” for an upcoming period is the organization’s Master BudgetChapter Summary10-41 Components of a master budget for a manufacturing firm include: Sales budgetProduction budgetDirect materials usage budgetDirect materials purchases budgetDirect labor budgetFactory overhead budgetBudgeted cost of goods manufactured/cost of goods sold budgetSelling and general administrative expenses budgetCash receipts budgetCash budgetBudgeted income statement (I/S), and Budgeted balance sheet (B/S)Chapter Summary (continued)Chapter Summary (continued)Service organizations have different operating characteristics, operating environments, and considerations than those of manufacturing and merchandising firmsZBB, ABB (activity-based budgeting), time-driven activity-based budgeting (TDABB), and kaizen are alternative approaches to budgeting that can improve budgeting effectiveness10-42Chapter Summary (continued) Primary behavioral issues associated with the budgeting process:Managers must be aware of the potential for budgetary slack and “budget spending”Participative budgeting often increases motivation in employeesgoal-congruence problems associated with the use of “fixed performance” contractsfuture role of relative performance (relative improvement) contracts and rolling financial forecasts10-43