HOMEWORK B2: Strategic Planning: Budgeting

annual business plan or master budget process typically
begins with operating budgets that are driven by sales budgets
that, in turn, provide the required variables for production, selling
and personnel budgets. Financial budgets including pro
forma financial statements and cash budgets come at the end

of the process and are prepared last. It documents specific short-term
operating performance goals for a period, normally one year or less. It is an overall
budget, consisting of many smaller budgets, that is based on one specific level of

Annual Business Plan
Mission strategy - what is the company strategy to
accomplish objectives

Short-term objectives

OPERATING BUDGET - driven by sales budgets, describe

the plan for revenue and
schedules that go with them.

expenses and the supporting

Sales budget
on sales forecast
inv. to sustain sales;

- foundation of the entire budget process -based

Production Budget - based on amt of inventory on hand &
based on sales budget or forecast

Direct Materials budget

DM purchases budget - $ amt (# of units & cost

of DM purchased)

DM usage budget - no. of units of DM

reqd for production

Direct Labor budget - based on hrs. to produce

each unit & hourly rate
production cost (applied

Factory Overhead budget - Fixed and variable

Sales) 2) Cash Disbursements .cash outlays associated with purchases and w/ operating exp.beginning cash (cash on hand n compensating bal. advertising n bad debt exp depreciation 3) acctg n data processng. Expenses (all fixed) .DL.adm salaries.sales commission. FOH applied) Feeds directly into the proforma INCOME STATEMENT 5) COST OF GOOD SOLD .sales salaries. CR & disbsmnt) FINANCIAL BUDGETS . delivery exp & 2) Fixed Selling Exp . operating budgets that assumed accrual basis of assumptions (e. credit sales & credit purchases)and based on cash receipts and disbursements & divided into: 1) Cash Available a) Cash balance . agreements b) Cash collections (1) Cash sales from current period (2) Collection of A/R from prior period (assumptions re: % of cr.Cash Budgets (detailed projections of Typically derived fr.To Inventory (COGM and COGS based on cost driver usually DL hours) 4) COG Manufactured .sum of product cost (DM..is matched with budgeted sales as a basis for Budgeted GROSS MARGIN. b. Selling & Administrative Expense Budget budgeted as period costs 1) Variable Selling Exp .g. . Depreciation and Other Adminstrative expenses B. General & Adm.

Exp to be paid in the current exp ex.. Proforma Balance Sheet . Proforma Income statements .display the balances of each B/S account consistent with the Income statement and cash budget plans .represent statements of planned cash receipts and disbursements and Are primarily affected by the amounts used in the budgeted income statements (Beg cash + cash collections . to defray the costs of (1) Cash disbursemnts budget excludes noncash operating (2) Includes % of prior mo. & FTM exp.cash disb . SG & A & Interest Expense 2.Pro-forma Financial Statements 1. Exp.consider the manner in w/c operating (line of credit) financing Will be used to maintain minimum cash balances or in w/c idle cash will be invested 4) Cash budgets . Is deferred until the ff. paid in cash current mo.adjusted for cash collections and . current mo. 3) Financing Budgets .Sales Budget..specify amts. FINANCIAL BUDGETS .cash requirements = working capital loans to Maintain cash requirements) C. disb. COSGS.expected to be paid for purchases (1) Cash purchases for current period (2) Credit purchases (A/P) for current period (3) Cash disbursements reqd to be paid during current period b) operating expenses Operating expenses .a) Purchases . mo. Depreciation mo.

. Benefits of C/F. Financing is a significant components of capital purchases budget. Pro Forma Income Statement .planned financing expenses and principal repayments are included in the Disbursements on the cash budget. Facilities. new products and LT investmnts. interest expense associated w/ planned financing 3. The CASH BUDGET must be prepared before you can complete the FORECASTED BALANCE SHEET. w/ the cash budget and the noncash trans. Accounted in the I/S.planned additions of cap. Equip. Cash Budget . Capital budgets plan for the purchase of capital assets. 3. to evaluate the capital additions of the org.planned additions of capital equip & 2.ID and allow mgt. equip.display the cash Effects of master budger on actual C/F. Capital Budget . often over a Multi layer period. assist in the determ'n if addt'l sources of financing Are req'd and evaluate the optimal use of trade credit II.derived fr. then reconciled to the cash budget. are used for budgeted Depreciation exp. the current & previous Budgeted B/S. Budgeted I/S. 1. Proforma Statement of Cash FLows . which will only affect the operating budget through their subsequent effect on expense via depreciation. related debt Pro Forma Balances Sheet .Disbursements asso. It detail The planned expenditures for capital items (ex. . Long-Term Objectives A.

is usually broken down into monthly periods and alerts management to periods when there will be excess cash available for investment. It is appropriate for any activity that has variable costs.A static budget is based on costs at one level of output or activity . The cash budget is done after all budgets have been prepared. They are not simply flexible in the sense that amounts or selected line items can be adjusted or modified during the budget period. etc.. DM usage budget Budgeted costs for actual output are the basis for computations flexible budget . The flexible budget identifies volume components of variances from planned activity. while it considers these issues in determining the amount of external financing to obtain. Static budgets thus include budgeted costs for budgeted output. Marketing budget. Capital projects often require the use of various types of financing. The primary feature of flexible budgets is their ability to adjust to actual volume based upon established relationships between revenue and variable costs. The cash budget shows itemized cash receipts and disbursements during the period. The main reason for preparing a cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing. The flexible budget isolates the impact of changes in volume on sales and variable costs. Ex. A flexible budget is a series of budgets based on different activity levels within the relevant range A flexible budget adjusts the budget amounts for different levels of activity. The cash budget provides information concerning the need for external financing. It is not necessary for the control of fixed costs since fixed costs do not vary with changes in the level of activity. not internal financing. The annual cash budget. The capital expenditure budget must be done before the cash budget can be prepared. is not specifically developed to ascertain which capital expenditure projects are feasible. including the financing activities and the beginning and ending cash balances. They are not based on or adjusted for actual performance.

. . Expected value is therefore the most useful of the listed statistics when risk is being prioritized. goals and objectives upon which an annual profit plan (also known as budgeted. purchasing and inventory requirements. by definition. Not all goals and objectives can be quantified. Low and high probability exposures identify ranges of likelihood but do not consolidate findings into a single expected value. Sales volumes will drive product supply requirements and. to be the best) measures. uncontrollable risk is not useful when prioritizing risk. Like sunk costs that will not change regardless of priorities. Ideal standards are based on optimum conditions.Forecast of sales volume is the first step in the budget development process. targeted or estimated financial statements) is most effectively based are a combination of financial. Low and high degree loss exposures identify ranges of impact but do not consolidate findings into a single expected value. Uncontrollable risks are. and qualitative (e. Attainable standards represent per unit budgets that assume normal conditions. Authoritative standards - Standards imposed by management without employee input Participative standards - Standards developed in collaboration with employees involved with the work. by extension. Expected value computations that assign probabilities to potential outcomes quantify both the likelihood (percentage) and outcome (amounts) into a single value. not within the ability of the manager to mitigate. The quantitative (number of units).g.

. Strategic plans are broad-based and long-term in nature. a user focus and exceptional items that are controllable. Performance reports are much more specific and shorter term. Sales volume variance arises solely because the quantity actually sold differs from the quantity budgeted to be sold. An unfavorable direct labor efficiency variance could be caused by a(n): An unfavorable direct labor efficiency variance could be caused by an unfavorable material usage variance.VARIANCE ANALYSIS . Poor quality materials could mean unfavorable material usage and cause inefficient labor usage. In this regard. Static budget variance does not occur when a flexible budget is used.B2 . and variance analysis usually requires use of a flexible budget. performance reports normally include all of the following: Specific time horizons.NOTES ON HOMEWORK Performance reports should be formatted and designed to meet organizational needs. A performance report would not normally include strategic plans.

Causes of these variances include: Purchasing nonstandard or uneconomical lots. not revenues. Poorly trained labor & Inadequate supervision. Job order cost systems may use standard costs. . For a company that produces more than one product. the sales volume variance can be divided into sales quantity variance and sales mix variance. It is the difference between the actual amounts and the flexible budget amounts for the actual output achieved. Participative management programs bring "managers" and "workers" together to participate in management decisions. Causes of these variances include: Substandard or inefficient equipment. Flexible budget variance deals with costs.For a company that produces more than one product. the sales volume variance can be divided into which two of the following additional variances? sales quantity variance and sales mix variance. In general. Management by objectives simply requires that objectives be defined before resources are used to achieve them. Purchasing from suppliers other than those offering the most favorable terms & Failure to correctly forecast price increases. A standard costing system is most often used by a firm in conjunction with flexible budgets. the purchasing manager is held responsible for unfavorable material price variances. the production manager or foreman is held responsible for unfavorable labor efficiency variances. In general.

The direct materials price variance could be used to monitor purchasing manager performance. Price variances are based on a comparison of quantities purchased priced at actual and standard rates per unit while usage variances are priced at standard for both actual quantities used and standard quantities allowed for input. The sole difference between these two calculated . This variance can be wholly explained by: A revenue variance (also known as a sales price variance) is due to a change in unit selling prices.Which of the following types of variances would a purchasing manager most likely influence? The purchasing manager is directly involved in the negotiation of materials prices and would have the greatest influence over the direct materials price variance. The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to: Use the knowledge about the variances to promote learning and continuous improvement in the manufacturing operations. In analyzing company operations. Market share variance is computed as follows: Rule: The formula for the production volume variance component for overhead variances is computed as applied overhead minus budgeted overhead based on standard hours. the controller of the Jason Corporation found a $250. The variance was calculated by comparing the actual results with the flexible budget.000 favorable flexiblebudget revenue variance.

not the actual direct labor hours used. therefore : std FOH rate x (Actual Production Standard Production) Rule: The formula for the variable overhead efficiency variance is computed as budgeted variable overhead based on standard hours minus budgeted variable overhead based on actual hours. Volume variances are computed as follows: Budgeted variable overhead based on standard hours: Note that direct labor hours based on standard hours means the direct labor hours allowed for the actual level of production. Production volume variance computed as: Applied Overhead (Standard variable overhead rate × Standard direct labor hours allowed) + (Standard fixed overhead rate × Actual Production) Less: Budgeted overhead based on standard hours (Standard variable overhead rate × Standard direct labor hours allowed) + (Standard fixed overhead rate × Standard Production) = Production Volume Variance The same . The sole difference between these two calculated amounts is the use of actual compared to standard hours for variable overhead.amounts is the application of fixed factory overhead. Budgeted variable OH = standard direct labor hours allowed x standard variable overhead rate .

Financial and nonfinancial features of an organization that contribute to its success in achieving strategy are referred to as critical success factors Critical success factors are classified as follows: 1) Financial .efficiency and effectiveness of business operations 3) Customer satisfaction . BEC 2 .RESPONSIBILITY ACCOUNTING THE BALANCED SCORECARD GATHERS information on multiple dimensions of an organizations's performance defined by critical success facotrs necessary to accomplish the firm's strategy.customer's happiness 4) Advancement of innovation and human resource development .Less : Budgeted overhead based on actual hours: Budgeted variable OH = actual direct labor hours x standard variable overhead rate = Variable overhead efficiency variance: A favorable material price variance coupled with an unfavorable material usage variance would most likely result from: The purchase of lower than standard quality material will often result in an unfavorable material usage variance (the inferior material causes more waste) and a favorable material price variance (the inferior material costs less).resposibility segment / SBU 2) Internal business process .

employee effectiveness. employee satisfaction and retention are measures used under which of the following perspectives? Employee satisfaction and retention measures are used under the "learning and growth" perspective of the balanced scorecard. Retention itself often relates to reduced retraining. and reduced investment in learning curves. increased opportunity for human resource development. and retention. Employee satisfaction typically correlates with productivity. . is concerned with linking strategy with reward and recognition.Under the balanced scorecard concept developed by Kaplan and Norton.

All other costs (including direct labor) are expensed on the throughput contribution margin statement in the period in which they occur. Decentralized firms can delegate authority and yet retain control and monitor managers' performance by structuring the organization into responsibility centers.g. such as Discount's prices compared to competitor's prices for a cost leader). low-price leader. Controllable margin is computed as contribution margin(CM) net of controllable costs (fixed costs that managers can impact in less than one year): Formula: (CM .. customer satisfaction and customer retention. is concerned with target markets (e. is concerned with the capture of increased market share).The customer perspective of the balanced scorecard measures results of business operation (e.. Throughput costing (Super-variable costing) . The internal business perspective of the balanced scorecard measures results of business operation (e. therefore would not have any revenues to include in a performance report. so controllable revenues would be included in a profit center's performance report. improvements in throughput and other measures of efficiency.g. Cost centers do not generate revenues and. so these are the only costs assigned to the product. improved margins or improved cash flows.Controllable FC) Profit centers generate revenues and incur costs. is concerned with maintaining low costs that are supported with low prices). Measurement of customer value. This method assumes that the only truly variable costs are the costs for direct materials.. Which one of the following organizational segments is most like an ..g. The financial perspective of the balanced scorecard measures traditional results of business operation (e. Kaizen is synonymous with continuous improvement. Although this is a concept that embraces multiple processes within a business Market value added contemplates the degree to which management's actions improve stockholder value.g.is a relatively recent development in costing methods.

Contribution accounting measures performance based on the contribution of a business segment. but also the relationship between profits generated and assets invested.independent business? An investment center is most like an independent business. but revenue generation is not under the control of the managers. Investment centers are responsible for revenues. the level of costs incurred. and invested capital. Managers of a revenue SBU only have responsibility for one dimension of financial performance. Responsibility accounting is a system of accounting that recognizes various responsibility or decision centers throughout an organization and reflects the plans and actions of each of these centers by assigning particular revenues and costs to the one having the responsibility for making decisions about these revenues and costs. A revenue center is responsible for revenues only. A cost center is responsible for costs only. and costs AND the relationship between the two. and the authority to do something about them. Managers not only consider cost. . are necessary for a successful responsibility accounting system. Clearly the uncertainty associated with generating sales increases the risk and difficulty associated with the manager's responsibility. revenues and their relationship. Managers in a cost SBU only have responsibility for one dimension of financial performance and it is one that they control entirely. Transfer pricing deals with prices charged by one business segment to another within a company. Profit SBUs represent a greater responsibility than either cost or revenue SBUs. expenses. Revenue SBUs represent a greater responsibility than cost SBUs. Profit SBUs require the manager to maintain control of revenues. A profit center is responsible for revenues and expenses. Responsibility for costs. Investment SBUs represent the organizational segment with the highest level of responsibility.

.Strategic Business Units (SBUs) are classified into different types based on the responsibility levels assigned to their managers. Each of the following items are reasons for classifying Strategic Business Units as cost. or investment: Goal congruence. improved operational and financial control and isolating the relevant measure of financial performancel. revenue. profit. Strategic Business Units are established in a decentralized environment not a centralized environment.