Key Concepts in Budgeting and Responsibility Accounting

Key Concept Cohort 2 - Accounting Review

Introduction

• Instructor: Robin Patrick, part of the accounting team.

• Focus: Key concepts from Units 4 and 5 of the course.

• Aim: Understand budgeting cash flows through examples.

• Reminder: Not all concepts are covered in videos; importance of reading the textbook and completing learning checks emphasized.

Budgeting Cash Flows

• Importance of understanding cash flows to manage financial operations.

• Cash receipt schedules and cash payment schedules will be discussed.

Cash Receipts

• Definition: Cash receipts relate to revenue generated from sales made on credit, where the customer owes money.

• Relevant Accounts:

  • Accounts Receivable: Asset account for credit sales.

  • Accounts Payable: Liability account for credit purchases.

Cash Receipt Schedule Example

1. Understanding Timing:

   • Cash collections in October depend on sales made in previous months.

   • Focus on August, September, and October for calculations.

2. Segregating Sales:

   • Breakdown of sales into cash and credit for October:

     • Total sales for October: $550,000

     • Cash sales (30%):
       550,000 imes 0.30 = 165,000

     • Credit sales (70%):
       550,000 imes 0.70 = 385,000

3. Calculating Cash Collections:

   • Percentages for collections:

     • 10% of the current month sales paid in the month of sale.

     • 60% of prior month sales paid in the following month.

     • 25% of sales from two months prior collected in the current month.

   • Calculating collections for October:

     • From October (10%):
       385,000 imes 0.10 = 38,500

     • From September (60%):
       472,500 imes 0.60 = 283,500

     • From August (25%):
       577,500 imes 0.25 = 144,375

   • Total Cash Collected in October:
     165,000 + 38,500 + 283,500 + 144,375 = 631,375

Managing Cash Flow

• Importance of ensuring inflows (cash collected) are sufficient to cover cash outflows (payments).

• Methods for visually organizing cash collections can aid understanding.

Cash Payments

Example Problem: Cash Outflow Calculation

1. Understanding Previous Purchases:

   • Looking at cash outflow for November, examining September, October, and November.

   • Need to calculate purchases based on cost of goods sold.

2. Calculating Cost of Goods Sold/Purchases:

   • Cost of goods is 75% of sales.

   • If total purchases for the month are $625,000, then:

     • Calculate cash purchases (25%):
       625,000 imes 0.25 = 156,250

     • Calculate credit purchases (75%):
       625,000 imes 0.75 = 468,750

3. Payment Breakdown:

   • Payment percentages:

     • 20% of current month credit purchases paid in the month.

     • 75% of prior month credit purchases paid in the following month.

     • 5% from two months prior payments.

   • Payment calculations for November:

     • From November (20%):
       468,750 imes 0.20 = 93,750

     • From October (75%):
       (Assuming October purchases were $492,500)
       492,500 imes 0.75 = 369,375

     • From September (5%):
       (Assuming September purchases were $379,688)
       379,688 imes 0.05 = 18,984.4

4. Total Cash Outflow for November:
   156,250 + 93,750 + 369,375 + 18,984.4 = 438,516

Transition to Unit Five

Understanding Financial Performance

• Understanding costs and revenues is critical for organizational performance management.

• Budgets are tools for comparing actual to planned financial performance.

Master Budget Overview

1. Creating a Master Budget:

   • The flow:

   1. Sales Budget: Determine expected sales for the upcoming period.

   2. Production Budget: Based on expected sales, determine how many units to produce.

   3. Finished Goods Budget: Manage inventory to avoid overproduction or underproduction.

   4. Material, Labor, Overhead Budget: Estimate costs needed to produce the determined units.

   5. Cash Budget: Combining all estimates to determine cash flow needs.

   6. Income Statement Budget: Budgeted income reflecting predicted revenue and expenses.

   7. Budgeted Balance Sheet: Final statement summarizing expected financial position at period end.

Responsibility Accounting

• Defined: Evaluating managers based on costs and revenues they control.

• Key Aspects of Responsibility Centers:

  • Cost Centers: Managers responsible only for costs incurred.

  • Profit Centers: Managers accountable for both costs and revenues.

  • Investment Centers: Managers responsible for costs, revenues, and investment decisions with assets.

Cost Variances

• Definition: Difference between budgeted and actual performance.

  • Favorable Variance: When actual spending is less than what was budgeted (e.g. $100,000 actual costs vs. $600,000 budgeted).

  • Unfavorable Variance: When actual costs exceed the budgeted amount.

Segment Analysis

• Definition of Segment: A division within a company (e.g., product line, department).

• Purpose of Segment Margin Statements: To assess performance and decision-making for each segment, allowing management to identify strengths and weaknesses.

  • Example illustrated an international manufacturing company with multiple segments, each performing distinct operations.

• Understanding segment performance is crucial for strategic planning and operational assessments.

Conclusion

• Reinforcement of budgeting concepts from Units 4 and 5.

• Emphasis on practice and understanding cash flows for better performance in problem-solving.

• Reminder for additional resources for charts available in the course resource page.