Principles of Accounting
Principles of Accounting ACCT 202
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This 5 page Class Notes was uploaded by Troy Bins on Saturday September 12, 2015. The Class Notes belongs to ACCT 202 at West Virginia University taught by Staff in Fall. Since its upload, it has received 7 views. For similar materials see /class/202827/acct-202-west-virginia-university in Accounting at West Virginia University.
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Date Created: 09/12/15
Chapter 10 Budgetary Planning and Control Some things we know The objective of every business is to make money for the owners The role of management is to plan control and measure performance and make decisions aimed at meeting the objective Planning and Control Flaming and control should start with a topdown approach The Board of Directors develops a highlevel business plan aimed at increasing the value of the company over an extended period of time We want our Company to grow by 15 per year for the next 10 years Senior Management develops a strategic plan to meet the business plan We need to expand our existing business vertically and horizontally And maintain a 10 growth rate for our existing operations Subsidia Level Management develops an operating plan to meet the strategic plan What do we have to do this coming year to grow our business by 10 What level of sales will be required What level of production will be required What capital expenditures will be required Can we accomplish the 10 growth through sales volume alone Will we have to reduce xed costs Departmental Level Management prepare budgets based on the parameters determined in the operating plan If the budgets are maintained the operating plan will be achieved which will put us one step closer the meeting the strategic plan which if met will accomplish the business plan established by the Board of Directors which should result in increasing the value of the company and in term result in pro ts for the owners Communication is critical to the success of the Planning process Topdown makes clear the objectives and plans for the company Bottomup identi es resources needed to accomplish the Plan And the potential hurdles that will have to be addressed DeGeorge rmly believes that a bottomup approach to planning and budgeting is the tail wagging the dog It may sound admirable but it is not a good thing Bottomup communication is very important and critical to the success of a business Operating Budgets Driven by an Operating Plan Sales Forecast Budget Quantity and Price 7 based on market analysis amp history Manufacturing 7 Variable Components Based on the Sales Forecast and the formula Beginning Inventory Plus Purchases amp Costs Incurred Goods Available for Sale Less Ending Inventog Cost of Goods Sold Production Forecast budget Variable Cost Forecast budget Purchasing Forecast budget Fixed Cost Budgets Manufacturing and NonManufacturing Zero Based versus incremental approach The zerobased approach requires managers to identify all of the components of their budgets rather than to simply estimate spending as a percentage of the previous years actual spending This is a royal pain in the butt but it forces the managers to evaluate all of their spending and is very useful in the event that budget cuts are required These separate budgets are combined to create a Budgeted Income Statement Capital Budgets Based on the Strategic and Operating Plans and the Operating Budgets the capital budget identifies longterm assets that will be needed in order to achieve the desired level of operating activity in the upcoming year Cash Flow Budgets Using information from the Operating and Capital Budgets the Cash Flow Budget identifies the planned sources and uses of cash This provides the CFO of the company the opportunity to identify and arrange for any additional borrowings and otherwise make financing decisions relating to the upcoming year Flexible versus Static Budgets A static budget is one where the budgeted amounts do not change regardless of changes in the level of operating activities Accordingly the difference between the actual results and the budgeted amounts will include the affect of volume changes as well as efficiency changes A exible budget is one that changes with changing levels of operating activity recognizing that as volume changes the variable costs should also change Accordingly the difference between the actual results and the exible budgeted amounts will represent only the efficiency changes Pros amp Cons In times of increasing business activity the static budget will create the initial appearance that volume sensitive departments are inefficient In times of decreasing business activity the exible budget will mask the fact that the company is having a problem Companies that utilize the budget as a means of attaining desired operating results will generally utilize static budgets Regardless of whether a company uses a static or exible approach to budgeting consideration must be given to the effects of volume on spending and also to the overall profitability of the company When the goal of managers becomes hitting the budgets no more and no less the company may be loosing sight of the company s primary objective Variance Analysis Control and Performance Measurement Budget Variance the difference between actual and budgeted results Favorable Variances MORE PROFIT than expected Actual Revenue gt Budgeted Revenue Or Actual Expense lt Budgeted Expense Unfavorable Variance LESS PROFIT than expected Actual Revenue lt Budgeted Revenue Or Actual Expense gt Budgeted Expense Variance reporting provides for management by exception where managers can focus their time and efforts on problems For xed expenses variance analysis is simply a comparison of budget to actual with focus being paid on the significant favorable and unfavorable variances This is not just a report card but also a planning tool Department Summary Report Reviewed by the VP having Authority over SGampA Department Actual Budget Variance Variance Sales 39000 40000 1000 125 Marketing 19000 20000 1000 500 Human Resources 12000 10000 2000 2000 Accounting 22000 20000 2000 1000 Administration 55 000 50 000 5 000 1000 Total SGampA 147 000 140 000 7 000 Human Resource Department Reviewed by the Departmental Manager Expense Actual Budget Variance Variance Payroll Payroll related expenses Travel amp Entertainment Advertising Postage Total 12000 10000 2000 2000 For Variable Expenses and Sales we need to look at the effect of volume We accomplish this by performing RATEVOLUME Variance Analysis RateVolume Variance analysis is based on the fact the sales dollars are comprised of a sales price per unit rate times units sold volume Total Variable costs are comprised of variable cost per unit rate times units sold volume This is true for both budgeted salesvariable cost and actual salesvariable costs Accordingly the total difference between budgeted sales dollars and actual sales dollars will be comprised of two components The affect of changes in volume Sales Volume Variance The affect of changes in sales price per unit Sales Price Variance Sales Volume Variance Change in Volume times Budgeted Rate Actual Volume 7 Budget Volume X Budgeted Price per unit Sales Price Variance Change in Rate times Actual Volume Actual Price per unit 7 Budgeted Price per unit X Actual Volume Likewise the difference between budgeted variable cost dollars and actual variable costs dollars will be comprised of a volume component and a rate component Variable Cost Volume Variance Change in Volume times Budgeted Rate Budgeted Volume 7 Actual Volume X Budgeted VC per unit Variable Cost Rate Variance Change in Rate times Actual Volume Budgeted VC per unit 7 Actual VC per unit X Actual Volume If computed properly the sum if the two sales variances will equal the difference between actual and budgeted sales dollars and the sum of the two Variable cost variances will equal the difference between actual variable costs and budgeted variable costs In addition the Sales Volume Variance and the VC Volume Variance can be netted to determine the net affect of the change volume on contribution margin pretax profit Rate Volume Variance Analysis is particularly important when a company uses a STATIC budget and manager s performance evaluation is based on adherence to budget This is very common See the Lecture Excel Spreadsheet titled Variance Analysis