Management Accounting

-Activity Inventory

A simple list of activities identified

-Activity Attributes

Nonfinancial and financial information items that describe individual activites

-Activity Dictionary

Lists the activities in an organization along with desired attributes

And how is data gathered for an ABC system?

Through interviews, questionnaires, surveys, and observation

-What the cost of an activity is

The resources consumed by that activity

-How it is assigned to the activity

a) if the resource is exclusive to the activity, assign 100% of the costs to it
b) if the resource is split btw. >1 activity, determine a resource driver

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a) what Before-the-fact simplification is

It eliminates the need to identify resource drivers which eliminates the need for much of the detailed implementation interviews

b) the three "steps"

1. calculate total operating cost of a department or process
2. calculate capacity cost rate: total resource cost / practical capacity of resources supplied
3. estimate the time to perform one unit of activity

c) how the activity cost is calculated

capacity cost rate x time to perform one unit of activity x total activity output

= activity rate x total activity output

d) what the abilities of TDABC are

- model updating is easier, e.g. by adjusting the capacity cost rate
- measuring unused capacity (cost of unused capacity = total cost of resources - total resource cost assigned to products)
- time equation (simplified calculation ways)

---> SEE CORNERSTONE 4.7

---> SEE CORNERSTONE 4.7

The benefits of an ABC system shall essentially be captured with a system using a significantly reduced number of drivers

Approximately relevant ABC systems

• Calculate the cost of your activities and use only the most expensive activities for ABC assignment
• Combine the less expensive activity costs into the more expensive ones making fewer categories

---> SEE CORNERSTONE 4.8

Equally Accurate Reduced ABC Systems

Use expected consumption ratios to reduce the number of drivers

---> SEE CORNERSTONE 4.9

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