CHAPTER 5 expected future operating and environmental factors
Strategy and the Master Budget including economic, industry and marketing conditions.
BUDGET is a financial plan of the resources needed to
carry out tasks and meet financial goals.
It is also a quantitative expression of the goals
the organization wishes to achieve and the cost of
attaining these goals.
BUDGETARY CONTROL the use of budgets to
control firm’s activities.
STRATEGY is the path it chooses for attaining its long-
term goals and mission.
It is the starting point in preparing its plans and
budget.
FORMULATION OF STRATEGY
The process of determining a company’s strategy starts
with the assessment of external factors that affect
operation and evaluating internal factors than can be its
strengths and weaknesses.
EXTERNAL FACTORS
 Competition
 Technical, economic political, regulatory, social
and environment factors.
INTERNAL FACTORS
 Financial strength
 Managerial talent and expertise
 Functional structure
 Organizational culture
An organization presents its strategic goals and long-
term objectives through capital budget and master
budget.
Strategy provides the framework or parameters within
which a long range plan is developed.
A firm’s long-range plan identifies required actions
over a 5 years to 10 year period to attain the goals set
forth in their strategies.
LONG-RANGE PLANNING often entails capital
budgeting, which is a process of evaluating proposed
major projects such as purchases of new equipment,
construction of a new factory, addition of new products
and planning for resource requirement.
SHORT TERM OBJECTIVES are goals for coming
period, which can be a month, a quarter, a year or any
length of time desired by the organization for planning
purposes.
A firm determines short-term objectives for the budget
period based on strategic goals, long-term objectives
and plans, operating results of past periods, and
MASTER BUDGET is an overall financial and
operating plan for coming fiscal period and the
coordinated program fro achieving the plan. It is usually
prepared on a quarterly or an annual basis.
RESPONSIBILITY BUDGET which are segments of
the master budget relating to the aspect of the business
that is the responsibility of a particular manager are
often prepared monthly.
CASH BUDGETS may be prepared on the day to day
or monthly basis.
CONTINUOUS BUDGET whereby budgets are
constantly reviewed and updated.
SALES BUDGET showing what products will be sold
in what quantities at what prices, is the foundation on
which all other short-term budgets are build. It provides
the revenue predictions from which cash receipts from
customers can be estimated and supplies the basis data
for constructing the budgets for production costs and
selling and administrative expense.
SALES FORECAST is the keystone of the budget
structure.
PRODUCTION BUDGET after the sales budget has
been set, a decision can be made on the level of
production that will be needed for the period to support
sales and the production budget can be set as well.
RAW MATERIALS BUDGET after determining the
number of units to be produced, the raw materials
purchases can be now prepared.
DIRECT LABOR BUDGET the preliminary data
shows that the budgeted direct labor cost per unit
produced.
OVERHEAD COSTS BUDGET study of past records
will show how the cost reacts to changes in volume or in
relation to other factors. Some overhead items may be
projected on the basis of direct labor hours or on
materials costs or on machine hours.
CASH BUDGETS
CASH RECEIPTS comes from customers. The
possibility of cash from other sources (such as additional
investments, sales of assets, borrowings) should likewise
be considered when cash receipts are being budgeted.
CASH DISBURSEMENT data converted from
individual budgets previously illustrated supply the
basic information for the cash disbursement budget.
BUDGTED INCOME STATEMETN showing the net
income that is to be expected during the budget period.
BUDGETED STATEMENT OF FINANCIAL
POSITION is developed by beginning with the current
statement of financial position and adjusting it for the
data contained in the other budgets.
ZERO-BASE BUDGETING is a budgeting process
that requires managers to prepare budgets from a zero
base. Allows no activities or functions to be included in
the budget unless managers can justify their needs.
ACTIVITY-BASED BUDGETING (ABB) is a
budgeting process based on activities and cost drivers of
operations.
KAIZEN (CONTINUOUS IMPROVEMENT)
BUDGETING is a budgeting approach that explicitly
demands continuous improvement in operation process
and incorporated the improvements in the budget.
SPENDING THE BUDGET is another serious ethical
issues in budgeting.
GOAL CONGRUENCE is consistency between the
goals of the firm and the goals of its employees.
AUTHORITIVE BUDGETING in a top-down
budgeting process top management prepares budgets for
the entire organization, including those for lower-level
operation. Provides better decision-making control than
participative budgeting.
TOP MANAGEMENT sets the overall goals for the
budget period and prepare a budget for operations to
attain the goals.
PARTICIPATIVE BUDGETING PROCESS is a
bottom-up approach that involves the people affected by
the budget, including lower0level employees, in
preparing the budget.
PARTICIPATIVE BUDGET is a good communication
devices.
CHAPTER 6
Organizational Innovation: TQM; JIT Production
System
QUALITY the ultimate test of a quality product or
service is whether the products or service meets or
exceed customer’s expectations.
It is a requirement to meet or exceed customer’s
expectations then serve as specifications for operations
throughout the organization.
TOTAL QUALITY MANAGEMENT is the
unyielding and continually improving effort by everyone
in an organization to understand, meet and exceed the
expectation of customers.
CORE PRINCIPLES OF TQM
 Focus on satisfying the customer
 Strive for continuous improvement
 Involve fully the entire work force
 Support and involve top management actively
 Use clear and measurable objective
 Recognize quality achievements in a timely manner
 Provide training on TQM continuously
TYPES OF CONFORMANCE
1. GOALSPOST CONFORMANCE ( zero defects
conformance) this conformance to a quality
specifications expresses as a specified range around the
target. The target is the ideal or desired outcome of the
operation.
2. ABSOLUTE QUALITY CONFORMANCE
( robust quality approach ) this is conformance which
requires that all products or services to meet the target
value exactly with no variation. Considered a better
approach that zero-defects conformance.
BENCHMARKING which involves studying
organizations that are among the best in the world at
performing particular tasks.
COST OF QUALITY
1. PREVENTION COSTS these are the costs incurred
to avoid poor-quality goods or services or educe the
number of defects in products or services.
2. APPRAISAL COSTS these cost, also called
inspection costs, are incurred to identify products before
the products are shipped to customer.
3. INTERNAL FAILURE COST these are costs that
results from identification of defects during appraisal
process.
4. EXTERNAL FAILURE COSTS these are incurred
when poor-quality goods or services are detected after
delivery to customer.
Prevention and appraisal costs are costs of
conformance because they are incurred to ensure that
products and services meet customer’s expectation.
Internal failure and external failure costs are costs of
nonconformance because they are costs incurred and
opportunity costs because of rejection of products or
services.
COST OF QUALITY is the sum of conformance and
nonconformance costs.
TWO COMMON OPERATIONAL MEASURE OF
TIME
1. CUSTOMER-RESPONSE TIME is the duration
from time a customer places an order for a product or
service to the time the product or service is delivered to
the customer.
MANUFACTURING LEAD TIME (Manufacturing
cycle time) is the duration between the time an order is
received by manufacturing to the time it become a
finished goods
DELIVERY TIME is how long it takes to deliver a
completed order to the customers
2. CUSTOMER SATISFACTION measures of quality
service and low cost, among others, as indicators of how
well the firm satisfies its customers.
3. INTERNAL BUSINESS PROCESS measures of the
efficiency and effectiveness with which the firm
produces the product or services.
4. INNOVATION AND LEARNING measures of the
firm’s ability to develop and utilize human resources to
meet the strategic goals now and into the future.
The following analytical relationships may be used:

2. ON-TIME PERFORMANCE refers to situations in 1. GROWTH COMPONENT

which products or service is actually delivered by the
time it was schedule to be delivered. Revenue Effect of growth component (Quantity
Factor)
JUST-IN-TIME (JIT) PRODUCTION also called
Lean Production is a demand-pull manufacturing Actual units of output sold this year
system because each component in a production line is xx
produced as soon and only when needed y the next step Less: Actual units of output sold last year xx
in the production line. Increase(Decrease) xx
Multiply by: Output price ear xx
JIT Production systems aim to simultaneously Favorable(unfavorable) xx
(1) Meet customer demand in a timely way
(2) With high-quality products Cost effect of growth component
(3) At the lowest possible total cost
Actual units of input or capacity that would
have been used to produce this years’
CHAPTER 7
output assuming the same input-output
The balance scorecard: A tool to implement strategy relationship that existed last year xx
Less: Actual units of inputs or capacity
BALANCE SCORECARD translate an organization’s To produce last years’ output xx
mission and strategy into a set of performance measures Increase(Decrease) xx
that provides the framework for implementing the Multiply by: Input prices last year xx
strategy. Favorable (Unfavorable) xx
It consists of an integrated system of performance
measures that are derived from and support the 2. PRICE-RECOVERY COMPONENT
company’s strategy.
Revenue effect of price-recovery component (Price
The scorecard measures an organization’s performance Factor)
from four perspectives; (1) financial, (2) customer, (3)
internal processes, and (4) learning and growth. Output price this year xx
Less: Output price last year xx
FINANCIAL PERFORMANCE MEASURES Increase (decrease) xx
Multiply by:Actual units of output sold
summarize the results of past actions and are important
Year xx
to a firm’s owners, creditors, employees and so forth. Favorable (unfavorable) xx

NONFINANCIAL PERFORMANCE MEASNRES Cost effect of price recovery component

concentrate on current activities which will be the
drivers of future financial performance. Input Price this year xx
Less: Input prices last year xx
FOUR PERSPECTIVE OF THE BALANCE Increase (decrease) in output price xx
SCORECARD Multiply by: Actual units of inputs or
capacity that would been used to produce
1. FINANCIAL PERSPECTIVE measures of this years output assuming the same input-
profitability and market value among others, as Output relationship that existed last year xx
indicators of how well the firms satisfies its owner and (Favorable) Unfavorable xx
shareholders.
3. PRODUCTIVITY COMPONENT
Actual units of inputs or capacity
Used to produce this year’s output xx
Less: Actual inputs or capacity that would
Have been used to produce this year’s output
Assuming the same input-output
Relationship that existed last year xx
Increase(decrease) xx
Multiply by: Input price this year xx
Favorable (Unfavorable) xx
CHAPTER 8
Cost planning for product life cycle:
Life-Cycle costing and Long-Term Pricing; Target
Costing and Theory of Constraint
2 ASPECTS OF PRODUCT LIFE CYCLE
1. COST LIFE CYCLE is the sequence of activities
within the firm that begins with research and
development, followed by design, manufacturing,
marketing/distribution and customer service.
2. SALES LIFE CYCLE is the sequence of phases in
the product’s or service’s to growth in sales and finally
maturity, decline and withdrawal from the market.
The methods helpful in analyzing the cost life cycle are
A. LIFE-CYCLE COSTING is used throughout the
cost life cycle to minimize overall cost.
B. TARGET COSTING is used for managing costs
primarily in the design activity.
C. THEORY OF CONSTRAINTS is a method for
managing manufacturing.
Two of the methods, target costing and theory of
constraints are particularly applicable to manufacturing
firms because they deal primarily with product design
and manufacture.
LIFE-CYCLE COSTING is a management techniques
used to identify and monitor the costs of product or
service throughout its life cycle. It provides a long-term
perspective of product costs and product or service
profitability,.
Why Design is Important
The critical success factors at the design stage include:
1. REDUCED TIME-TO-MARKET the speed of
product development and the speed of delivery and
efforts to reduce time-to-market are critical for a
business firm to sustain its competitiveness.
2. REDUCED EXPECTED SERVICE COSTS
By careful simple design and the use of interchangeable
or modular components can reduce expected service
costs.
3. IMPROVED EASE-OF-MANUFACTURE the
design must be easy to manufacture in order to reduce
production costs and speed production
4. PROCESS PLANNING AND DESIGN the plan for
process should be flexible, allowing for fast setups and
products changeovers, using computer-intergrated
manufacturing computer assisted design and concurrent
engineering.
COMMON DESIGN MODELS
1. BASIC ENGINEERING this is a method in which
product designers work independently from marketing
and manufacturing to develop a design from specific
plans and specifications
2. PROTOTYPING this is a method in which
functional models of products are developed and tested
by engineers and trial customers
3. TEMPLATING this is a design method in which an
existing product is scaled up or down to fit the
specifications of the desired new products.
4. CONCURRENT ENGINEERING or simultaneous
engineering, is an important new approach in which
product design is integrated with manufacturing and
marketing throughout the product’s life cycle.
COST MANAGEMENT OVER THE SALE LIFE
CYCLE
SALES LIFE CYCLE is the sequence of phases in the
product’s or service life in the market from the
introduction of the product or service to growth in sales
and finally, maturity, decline and withdrawal from the
market.
PHASES OF THE SALE LIFE CYCLE
PHASE 1: Product Introduction
In the first phase there is little competition, and sales rise
slowly as customers become aware of the new product
or service.
PHASE 2: Growth
Sales begin to grow rapidly and product variety
increases.
PHASE 3: Maturity
Sales continue to increase but at a deceasing rate. There
is a reduction in the number of competitors and of
product variety.
PHASE 4: Decline
Sales begin to decline, as to do number of competitors.
STRATEGIC PRICING STRATEGY
FIRST PHASE pricing is set relatively high to recover
development costs and to take advantage of product
differentiation and the new demand for the product.
SECOND PHASE pricing likely to stay relatively high
as firms attempts to build profitability in the growing
market.
IN THE LATTER PHASE pricing becomes more
competitive, and target costing and life-cycle costing
methods are used, as the firms becomes more of a price
taker rather a price setter and makes effort to reduce
upstream and downstream costs.
VALUR ENGINEERING is used in target costing to
reduce product costs by analyzing the trade-offs between
different types and levels of products functionally and
total product costs.
FUNCTIONAL ANALYSIS in which the performance
and costs of each major function or feature of the
product is examined.
BENCHMARKING which is used to determine which
features give the firm a competitive advantage.
DESIGN ANALYSIS is the common form of value
engineering for products in grouptwo, industrial and
specialized products.
COST TABLES are computer-based databases that
include comprehensive information about the firm’s
drivers.
GROUP TECHNOLOGY is a method of identifying
similarities in the parts of products a firms
manufactures, so the same parts can be used in tow or
more products, thereby reducing costs.
THEORY OF CONSTRAINT a techniques used to
improved speed in the manufacturing process and thus a
speed.
CHAPTER 9
Decentralized Operations and Segment Reporting
DECENTRALIZED the process of delegating the
decision-making authority throughout an organization.
SEGMENT is any part or activity of an organization
about which managers seeks costs, revenue, or profit
data.
SEGMENT REPORTING statement of income
designed to focus on various segments of the company.
The purpose of segment reporting is to provide
information needed by the manager to determine
profitability of product lines, division, sales territories
and other segments of a company.
SEGMENT MARGIN represent the margin available
after a segment has covered all of its own costs and the
best gauge of the long-run profitability of a segment.
COST DISTORTION OR CROSS-
SUBSIDIZATION occurs are improperly assigned the
company’s segments.
CHAPTER 10
Variable costing: A tool for Evaluating Management
Performance
Three Inventory costing
1. Absorption Costing
2. Variable Costing
3. Throughput Costing
ABSORPTION COSTING also known as full,
traditional, convention and normal costing ) is a method
of product costing in which all manufacturing, fixed and
variable are treated as product inventoriable costs.
This method is the requirement method for external
reporting, and the reporting in most countries including
the Philippines
VARIABLE COSTING (or direct costing) is a method
of inventory costing in which all variable manufacturing
costs are included as inventoriable costs.
SEGMENT REPORTING prepared on a variable
costing basis produce better evaluations and decisions
than those prepared on an absorption-costing basis.
Fixed expenses are broken down into two categories
DIRECT FIXED EXPENSE are fixed expenses that
are directly traceable to segment.
AVIODABLE FIXED EXPENSES OR TRACEABLE
DIXED EXPENSES are caused by the existence of the
segment itself
COMMON FIXED EXPENSES are jointly by two or
more segments. These expenses persist even if one of
the segments to which they are common is eliminated.
SEGMENT MARGIN the profit contribution each
segment makes toward covering a firms’ common fixed
costs.
SUPER-VARIABLE COSTING is a variable costing
in which direct labor and manufacturing overhead costs
are considered to be fixed. It classifies all direct labor
and manufacturing overhead costs as fixed costs and
only direct materials as a variable product costs.