Management Accounting

Budget

• Quantitative plans for the future (set goals, strategic missions, decision making...)
• Stated in either physical (no. of units...) or financial (£,$...) terms or both 

Control

Process of setting standards, receiving feedback on actual performance (comparison) and taking corrective action

• Forces managers to plan
• Provides resource information to improve decision making
• It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent evaluation of performance
• Improves communication and coordination

Budget Director

Works under the direction of the budget committee; ususally the controller or someone who reports to the controller

Budget Committee

Responsible for
-Reviewing the budget
-Providing policy guidelines and budgetary goals
-Resolving differences
-Approving the final budget
-Monitoring the actual performance

Master Budget
Financial plan for the year made up of various individual departmental and activity budgets (The yearly budgets are broken down into quarterly and monthly budgets)

• Operating Budgets: Concerned with the income generating activities (sales, production, finished goods inventories...) -> The ultimate outcome is a pro forma or budgeted income statement
• Financial Budgets: Concerned with the in- and outflows of cash and with financial position -> expected financial position is shown in a budgeted, or pro forma, balance sheet

Continuous (rolling) Budget
A moving 12-month budget. As one month ends, an additional month in the future is added so that the company always has a 12-month plan on hand. Proponents of continuous budgeting maintain that it forces managers to plan ahead constantly. 

Historical Data

For example, last year’s direct materials costs may give the production manager a good feel for potential materi-
als costs for next year. Still, historical data alone cannot tell a company what to expect in the future

Forecasting Data

• Sales Forecast
  Basis for the sales budget, which, in turn, is the basis for all of the other operating budgets and most of the financial budgets. It is usually the responsibility of the Marketing Department.

• Other Forecast
  Forecasting costs and cash-related items. E.g. forecasting commodity prices and hedging with futures to smooth out price fluctuations

1. Sales Budget
2. Production Budget
3. Direct Materials Purchase Budget
4. Direct Labor Budget
5. Overhead Budget
6. Ending Finished Goods Inventory Budget
7. Cost of Goods Sold Budget
8. Marketing Expense Budget
9. Research and Development Expense Budget
10. Administrative Expense Budget
11. Budgeted Income Statement

Sales Budget
Describes expected sales for each product in units and dollars

Operating Budget
Describes how many units must be produced in order to meet sales needs and satisfy ending inventory requirements

Units to be produced=
Unit sales
+ Desired Units in ending inventory
- Units in beginning inventory

Direct Materials Purchases Budget
Based on the amount of materials needed for production and the inventories of direct materials

Purchases=
Expected Usage
+ Desired ending inventory of direct materials
- Beginning inventory of direct materials

---> SEE CORNERSTONE 8.1, 8.2, 8.3 (Print-Version)

Direct Labor Budget
Shows the total direct lavor hours and direct labor cost needed for the number of units in the production budget

Overhead Budget
Shows the expected cost of all indirect manufacturing items

Ending Finished Goods Inventory Budget
Supplies information for the BS and serves as an input for the Cost of Goods Sold Budet

---> SEE CORNERSTONES 8.4, 8.5, 8.6 (Print-Version)
 

Cost of Goods Sold Budget
Used in peparing the budgeted income statement. It shows the budgeted manufacturing costs used to make the units that are expected to be sold

Marketing Expense Budget
Outlines planned expenditures for selling and distribution activities.  As  with  overhead, marketing expenses can be broken into  fixed and variable components. Such items as sales commissions, freight, and supplies vary with sales activity. Salaries of the marketing staff, depreciation on office equipment, and advertising are  fixed expenses

Administrative Expense Budget
Consists of estimated expenditures for the overall organization and operation of the company. Most administrative expenses are fixed with respect to sales. They include salaries, depreciation on the headquarters building and equipment, legal and auditing fees, and so on

---> SEE CORNERSTONE 8.7, 8.8, 8.9 (Print-Version)

Additional Operating Budgets: e.g. Research and Development Expense Budget
Contains planned expenditures for a separate department devoted to new product research and development

Budgeted Income Statement
Culmination of the operating budget

---> SEE CORNERSTONE 8.10 (Print-Version)

The Capital Expenditures Budget
Fnancial plan outlining the expected acquisition of long-term assets; typically covers a number of years

The Cash Budget
Detailed plan that shows all expected sources and uses of cash.
5 main sections:
   1. Total Cash Available
   2. Cash Disbursements
   3. Cash Excess or Deficiency
   4. Financing
   5. Cash Balance

---> SEE CORNERSTONE 8.11, 8.12 (Print-Version)

The Budgeted Balance Sheet
Represents the culmination of the financial events of the coming year and shows management where the company is expected to be at the end of the year

The budgeted statement of cash flows

1. Department-oriented and does not recognize the interdependencies among departments
2. Static, not dynamic
   Static Budget: developed for a single level of activity, rest of budgets are built around it (e.g. around sales)
   Incremental Approach: current budget based on last year's amount as adjusted for inflation (incorporate last year’s inefficiencies into the current budget)
   Alternative: Zero-base budgeting: prior year's budgeted level is not taken for granted. Existing operations are analyzed, and continuance of the activity or operation must be justified on the basis of its need or usefulness to the organization
3. Result-, not process-oriented
   Managers concentrate on resources and may fail to see the link btw. resources and input. In a period of change, managers may not realize that previously acceptable ways of doing things no longer work

Static Budgets
Example for static budget: master budget. Master budget amounts, while vital for planning, are less useful for control. The reasonis that the anticipated level of activity rarely equals the actual level of activity

Flexible Budgets
Total budgeted production costs increase as output increases (also "variable budget"). Flexible budget variances are generated by comparing budgeted costs for the actual level of activity with actual costs for the same level

---> SEE CORNERSTONE 8.13 AND 8.14 (Print-Version)

Many firms have found that product diversity requires a richer set of drivers to describe their cost structure

• Activity-based budgeting begins with output and then determines the resources necessary to create that output
• It works backward from activities and their drivers to the underlying cost
• It can be extended to include feature costing: that assigns costs to activities and products or services based on the product's or service's features (e.g. clients with few bills or many bills...)

picture: the three budgeting approaches

• Budgets are often used to judge the actual performance of managers
• The alignment of managerial and organizational goals is often referred to as "goal congruence"
• Dysfunctional behavior involves individual behavior that is in basic conflict with the goals of the organization (managerial slack)

Characteristics of a good budgetary system

1. Frequent feedback on performance
2. Monetary and nonmonetary incentives
3. Paricipative budgeting
4. Realistic standards
5. Controllability of costs
6. Multiple measures of performance

- external users

- e.g. financial statements

-> Follows rules and conventions set by the regulators and standard setters. Companies have to become comparable.

- internal users

- a) Costing out services, products, and other objects of interest to management
  b) planning and control (forward-looking and checking if target is achieved)
  c) decision making

-> criteria and formats are set internally (e.g. they decide for themselves how they account for inventory because some specific information might be needed....)

Cost Accounting information system (satisfies objective 1, costing out services, products, and other objects of interest to management)

- Assigns costs to individual products and services

- Assists external financial reporting

- Conforms to the rules and conventions set by regulators and standard setters

Operational Control information system (satisfies objective 2, planning and control)

- provides accurate and timely feedback concerning the performance of managers and others

- concerned with what activities should be performed and assessing how well they are performed

- increases profit by increasing customer value

- purely internal

1. Global Competition 

2. Growth of the Service Industry (and thus increased competition)

3. Advances in Information Technology (computers to control operations, ERP systems, e-commerce...)

4. Advances in the Manufacturing Environment (e.g. theory of constraints, just-in-time manufacturing, lean manufacturing, computer-integrated manufacturing...)

5. Customer Orientation

6. New Product Development (demand for more sophisticated cost mgmt procedures such as target costing and activity-based management)

7. Toal Quality Management (Continuous improvement and elimination of waste)

8. Time as a competitive element (correlation between cost and time; decrease non-value-added time)

9. Efficiency (cost is a critical measure of efficiency)

Line Position

Position with direct responsibility for the basic objectives of an organization (e.g. production manager)

Staff Position

Position that is supportive in nature and has only indirect responsibility for the basic objectives of an organization (e.g. cost accountant or HR manager)

Controller (Chief Accounting Officer)

- Supervises all accounting departments

- Participates in planning, controlling, and decision making activities

- Responsible for both internal and external accounting requirements

Treasurer

- Responsible for finance function

- Raises capital, manages cash, investment, and Investor Relations

- In charge of credit and collections as well as insurance

Planning

- detailed formulation of future actions to achieve a particular end

- requires setting objectives and identifying methods to achieve those objectives

Controlling

- a managerial activity of monitoring a plan’s implementation and taking corrective action

- achieved with the use of feedback

Continuous Improvement

- relentless pursuit of improvement in the delivery of value to customer

- required to remain competitive or to establish a competitive advantage

Decision Making

- process of choosing among competing alternatives

(An information system is designed to provide information to people in the company who
might need it)

Inputs:

FINACC: Well-specified economic events
CMGMT: Set by management

Processes:

FINACC: Rules and conventions established by the SEC, FASB, IASB...
CMGMT: Not bound by externally imposed criteria

Outputs:

FINACC: Financial statements for external users
CMGMT: Information for 3 broad objectives:

                1. Costing out services, products, and other objects of interest to management
                2. Planning and control
                3. Decision making

Value Chain

The set of activities required to design, develop, produce, market, deliver, and provide post-sales service for the products and services sold to customers

Cost

Cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit (e.g. workers in the assembly line)

Expenses

Expired (used up) costs that are deducted from revenues to calculate income (e.g. salaries, they are gone after)

Loss

Cost that expires without producing any revenue benefits (e.g. cost of uninsured inventory destroyed by a flood)

Assets

Unexpired costs that appear on the balance sheet (e.g. machines)

-> The main difference between a cost being classified as an expense or as an asset is timing!!

Cost Objects

- Things for which costs are measured and assigned (here, acuraccy is crucial!)

- Includes products, customers, departments, projects, activities, etc.

Traceability

Ability to assign a cost directly to a cost object in an economically feasible way by means of a causal relationship

a) Direct Tracing

Process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object. Direct tracing is most often accomplished by physical observation.

b) Driver Tracing

Use of drivers to assign costs to cost objects (e.g. machine hours)
(Drivers are factors that cause changes in resource usage, activity usage, costs, and revenue. They can be observed and measure a cost object’s resource consumption)

- Indirect costs cannot be traced to cost objects

- Assignment of indirect costs (e.g. lighting of a plant) is called allocation 
(Since no causal relationship exists, allocating indirect costs is based on convenience or some assumed linkage... not very accurate but e.g. required for external reporting)