D196 Unit 5 Controlling Costs & Profits

...

Master Budget

A group of budgets that outline the overall operating and financing plans for a specific period, one year.

Sales Budget

Master budget begins with “ Sales Budget’. Configuring what does the company want to do (goals).

Production budget

This is the budget for materials, timing, employee salaries. Also known as the branch for direct materials budget, direct labor budget, and manufacturing overhead budget.

Cash Budget

Selling and Adminstrative expense and production budget added together. This budget shows how much TOTAL cash will go out and will come in.

Pro Forma Finanial statements

It is the budget income statement and balance sheet. Financial statements that show a forecast of a company’s future performance based on certain assumptions rather than historical data.

Production Budget Formula

Total Units to produce = expected sales + desired ending inventory- beginning finished goods.

The Direct Materials Budget

There are two parts:

1. materials needed for production

2. Materials purchase budget (how much you can spend/ buy)

Forumla for Direct Materials Budget

X * Y which is x = units to produce and y= direct materials per unit

2. Formula: DM = (Materials needed for production + ending DM inventory)- beginning DM inventory.

Direct Labor Budget

A schedule of direct labor requirements for the budget period. There are two parts to this budget.

1. Total direct labor hours needed based on: units to produce * hours per unit

2. Total direct labor cost (direct labor hours * hourly wage rate).

Manufacturing Overhead Budget

A budget covering everything after direct labor & direct materials budget. Ex. covers indirect matierals ( glue, nails, cleaning supplies, machine matnience costs). It includes the variable costs and fixed costs. Adding the two together makes the budget.

Variable Cost

Costs that change with production

Fixed Costs

Costs that stay the same

Selling & Adminstrative Expense Report

Is a non- production costs needed to run the business. Due, to how big the budget is it involves different teams/ departments (marketing, R&D, distrbution etc..)

Orginizational Segments

A companies sub units, segments, sometimes called groups, divisions, product lines, or subsidiaries. The subsidaries will have sub segments.

Resposibility Accounting

A system in which managers are assigned and held accounjtabloe for certain costs, revenues, or assets.

Two Behavioral Considerations in Assigning reposnsiblities to managers

1. Goal Participation

2. Controllability

Goal Participation

• Managers are involved in developing their plans.

• Making goals reasonable and realistic.

Controllablity

• Managers should only be held accountable for costs, revenues, or assets they can significantly influence.

• Managers are responsible only for items they control.

Favorable Variances

Means extra resources if it is a variable variance. It means the difference between acutal costs & budgeted.

Unfavorable Variance

Requires fixing

Exception Reports

Report that only highlights significant variances from the budget. These variances are reported up the chain of HQ.

Responbiblity Centers

Different Managers control different things. Evaluate managers based on what they control. Three centers:

1. Costs center

2. Profit Center

3. Investment Center

Cost Center

An Orginizational unit in which the manager has control over the costs inccurred.

Profit Centers

An orginzational unit which managers have control over boths costs and revenues.

Investment Centers

Manager is resposible for costs, revenues, and assets. Also, determines amount of funds to be invested in & rate of return on investments.

The Segment Margin Statement

Each segment reports the revenues and costs it can control with the segment margin, which shows how profitable the segment actually is.

Segment Margin

controllable profit of a profit center. Typically used for profit centers. It includes revenues (sales), variable costs, fixed costs (controllable).

Segment Margin Formula

Segment Margin = (sales - variable costs) - controllable fixed costs.

Operating Profit

These costs are not controlled by segment managers. Formula: Total segment - common (corporate - level) fixed costs.

Contribution Formula

Contrubution= sales - variable costs

Sequence of budgets in a manufacturing business

Sales, Production, Direct Labor