Welcome to Module 5:
Cost Control
PGP-28: Term II
MANAGEMENT
ACCOUNTING
Session 13
COST AND
Master Budgets and
Responsibility Reporting
Chapter 6 of the Textbook.
By being possessive, you make the other person feel wanted
By being over-possessive, you make the other person feel wasted!
Be positively possessive but not obsessively possessive!!
1
Budget Defined
A budget is the management’s plan of action for a future period.
Though it is a quantitative expression, it also considers nonfinancial aspects and
serves as a road map for the company to follow in an upcoming period.
It is strategic – in the sense, it flows from the corporate goals and transcends
different levels.
Budgets Help Managers….
Communicate directions and goals to different departments of a company to
help them coordinate the actions they must pursue to satisfy customers and
succeed in the marketplace.
Motivate employees to achieve their goals.
Evaluate performance by measuring financial results against planned objectives,
activities, and timelines to learn about potential problems.
Incentivize employees for their achieved results.
Master Budget
The master budget is not one single document. It is a collection of different
operating and financial plans for a specified period:
◦ Operating budgets deal with how to best use the limited resources of an
organization (the operating budget).
◦ Financial budgets deal with how to obtain the funds to acquire those
resources (the financial budget).
Operating Budget Steps
1. Sales revenues budget
2. Production budget
3. Direct materials usage and purchases budgets
4. Direct manufacturing labor costs budget
5. Manufacturing overhead costs budget
6. Ending inventories budget
7. Cost of goods sold budget
8. Nonmanufacturing costs budget
9. Budgeted income statement
Basic Financial Budget Steps
1. Capital expenditures budget.
2. Cash budget.
3. Budgeted balance sheet.
4. Budgeted statement of cash flows.
Financial Planning:
Sensitivity analysis
Financial planning models are mathematical representations of the relationships
among operating activities, financing activities and other factors that affect the
master budget.
Sensitivity analysis is a “what-if” technique that examines how a result will
change if the original predicted data are not achieved or if an underlying
assumption changes.
Responsibility Reporting
▪Reporting from different centers of responsibility in organizations.
Cost centers
Revenue centers
Profit centers
Investment centers
▪Controllability is the key to providing performance information via responsibility
reporting
However, in practice, exceptions exist.
Responsibility centers are made accountable for costs beyond their control.
Operating Budgets
Application Exercise -1 (AE-1):
Operating budget:
Solution for AE-1:
Production budget:
Budgeted sales quantity: 29,000 pool cues
Add: Desired closing inventory: 2,800 pool cues
Required quantity 31,800
Less: Existing opening inventory 1,200
Production quantity 30,600 pool cues
Production cost budget:
Direct materials = 30,600 × $3 = $91,800;
Direct manufacturing labor = 30,600 × $5 = $153,000;
Manufacturing overhead = 30,600 × $0.83 = $25,398
Operating budget
Application Exercise-2 (AE-2):
2. The following information pertains to the January operating budget for Murphy Corporation, a
retailer:
Budgeted sales are $308,000 for January
Collections of sales are 60% in the month of sale and 40% the next month
Expected merchandise purchases total $154,000 in January over 230 orders
Budgeted purchase order processing costs $ $200 per order
Marketing costs are $13,600 each month
Distribution costs are $25,000 each month
Administrative costs are $10,500 each month
For January, budgeted gross and net margins are ________.
A) $58,900 and $108,000
B) $154,000 and $58,900
C)$108,000 and $58,900
D) None of the above
Operating budget
Solution to Application Exercise-2 (AE-2):
Budgeted Sales $308,000
Less: Expected purchase costs $154,000
Purchase order processing
230 orders * $200 per order 46,000 $200,000
Gross Margin $108,000
Less: Marketing 13,600
Distribution 25,000
Administration 10,500 $ 49,100
Net Margin 58,900
Operating budget
Application Exercise-3 (AE-3):
Christy Enterprises reports the year-end information from 2023-24 as follows:
Sales (100,000 units) $500,000
Less: Cost of goods sold 300,000
Gross profit 200,000
Operating expenses (includes $20,000 of Depreciation) 120,000
Net income $ 80,000
Christy is developing the 2024-25 budget. In 2024-25 the company would like to increase selling prices by
10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is
expected to increase to 62%. Other than depreciation, all operating costs are variable.
Required:
Prepare a budgeted income statement for 2024-25.
Operating budget
Solution to Application Exercise-3 (AE-3):
Christy Enterprises
Budgeted Income Statement
For the Year 2024-25
Sales (95,000 × $5.50) $522,500
Cost of goods sold (sales × 62%) 323,950
Gross profit 198,550
Less: Operating expenses [($1.00 × 95,000] + $20,000) 115,000
Net income $ 83,550
