Lecture 8 Slides

Management Accounting Overview

• Course Code: ACC5040

• Semester: 1 - 2024/25

• Lecture Topic: The Budgeting Process

• Instructor: Dr. Sarah G. Mohamed (Sarah.Mohamed@bcu.ac.uk)

Session’s Agenda

1. Lecture 7 Recap

2. Budgeted Income Statement

3. The Financial Budget and Cash Budget

4. Reminder: 2nd Moodle Quiz

Lecture 7 Recap

• Summary of key points from Lecture 7.

Budgeting Process

• The budgeting process is centered around the preparation of a Master Budget.

• Components of the Master Budget:

  • Operating (Production) Budget: Serves as building blocks for the budgeted income statement.

  • Financial Budget: Constructs based on the operating budget to create the budgeted balance sheet and budgeted cash flow statement.

Operating (Production) Budget

• Budget Building Blocks:

  • Materials: Direct materials usage and purchases.

  • Labor: Direct labor costs involved in production.

  • Factory Overhead Budget: Costs related to manufacturing overhead.

  • Sales Budget: Anticipated sales figures.

Basic Operating (Production) Budget Steps

1. Prepare the sales/revenues budget.

2. Prepare the production budget (in units).

3. Prepare the direct materials usage budget and direct materials purchases budget.

4. Prepare the direct manufacturing labor budget.

5. Prepare the manufacturing overhead costs budget.

6. Prepare the operating expense (period cost) budget.

7. Prepare the budgeted income statement.

Budgeted Income Statement

• The final step in preparing the operating budget is the budgeted income statement.

• It follows the structure of a regular income statement and requires data from previous budgets such as:

  • Budgeted Sales: From Sales Budget

  • Budgeted Cost of Goods Sold (COGS): Accounts for production costs.

  • Budgeted Operating Expenses: From the operating expense budget.

Budgeted COGS Calculation

• Formula:

  • Budgeted COGS = Opening Stock of Finished Goods (FG) + Cost of Goods Manufactured (COGM) - Closing Stock of FG

• Where:

  • FG = Finished Goods Inventory

  • COGM = Total Production Costs = DM used in production + DL + MOH

• Alternatively, if total production costs are not given:

  • COGM = Production units x Unit production costs

Unit Production Costs Breakdown

• Unit production costs =

  • DM cost per unit + DL cost per unit + MOH cost per unit

• Where:

  • DM = Direct Material Cost

  • DL = Direct Labour Cost

  • MOH = Manufacturing Overhead Cost

Exercise: Budgeted Income Statement for Russell Company

• Projected Account Balances (as of January 31, 2025):

  • Accounts Payable: £80,000

  • Sales: £1,600,000

  • Accounts Receivable: £200,000

  • Capital Stock: £800,000

  • Opening Stock of FG: 360,000 units

  • Cash: £112,000

  • Direct Materials Used: £400,000

  • Direct Labour: £280,000

  • Factory Overhead Costs: Detailed below

• Calculate Budgeted COGS:

  • Budgeted COGS = Opening Stock of FG + COGM - Closing Stock of FG

  • COGM = DM + DL + Total manufacturing overhead costs

Financial Budget Overview

• Components of the Financial Budget:

  • Capital expenditures budget

  • Cash budget

  • Budgeted balance sheet

  • Budgeted statement of cash flows

Cash Budget Essentials

• A summary of anticipated cash collections and disbursements.

• Formula for Cash Closing Balance:

  • Closing Balance = Cash Opening Balance + Total Cash Receipts - Total Cash Disbursements

• Typical Cash Budget Format:

  • Month-wise calculations of opening balances, receipts, payments, and closing balances.

Exercise: Cash Budget for Jan-Mar 2025

• Projected Sales: December - £30,000, January - £40,000, February - £50,000, March - £60,000

• Operating Costs: £25,000 for production, £5,000 for operating expenses.

2nd Moodle Quiz Reminder

• Date: Friday, 15th November 2024, @ 10am (UK time)

• Duration: 40 minutes

• Content Covered: Chapter 11 and part of Chapter 15

• Instructions: Quiz is open for 24 hours but will be limited to 40 minutes once started. Ensure to prepare well for the quiz.