Budgeting

Responsibility Accounting: Master Budget

This is part one in our responsibility accounting series and we will be discussing types of budgets. So we are going to talk about the master budget here. Master budget is the set of budget financial statements and the supporting schedules for organization and includes three types of budgets. The first one is called the operating budget, the second is the capital expenditures budget and the third is financial budgets. We are going to look at each one of these and what makes up each of these types.

The first one being the operating budget-- the first part of the operating budget, which is also the cornerstone of the master budget, is the sales budget. The sales budget will determine what our sales are going to be; this will forecast what we anticipate our sales to be. It’s where an older company would probably forecast this by looking at past sale levels and in projecting hopefully our sales to increase in coming periods and budget accordingly. However, a new company we may have to do industry research to see where other companies in our industry are so that we have an idea for sales budget needs to be now. Once we determine what we are planning to sell, we need to create our inventory budget and determine how much inventory we plan to have left in our ending inventory. With these numbers, we are able to determine, “Well, if we’re going to sell this much and we want to have a certain amount at the end of the period—how much then do we have to purchase?” So if we have our sales budget and our ending inventory (our sales would be directly related to how much we plan to sell—CGS) then we can determine how much inventory we need to purchase. Then we want to project our operating expenses budget; just like it sounds, we want to determine or project what our operating expenses for our business is going to be. Then we can create our budgeted income statement. Part of this master budget is of course a budget for our budget financial statements, this is the first one: budgeted income statement. So that makes up the first set of budgets, called the operating budget.

The second part of the master budget is the capital expenditures budget, which is really just one part on its own. The capital expenditures budget is what we plan to invest in; capital expenditures are depreciable assets like buildings or equipment. So if you plan to invest in the future and if so — in what way and how much and that will all be part of our capital expenditures budget.

The last set that makes up the master budget is the financial budget. The first part of the financial budget is the cash budget. Cash going in, cash going out—that would be part of this budget. Then with the budgeted income statement and the cash budget, we are able to create our budgeted balance sheet. The last part would be the budgeted statement of cash flows. Note here we have our budgeted income statement, our budgeted balance sheet, and our budgeted statement of cash flows that all make up our master budget. All of these parts work together to make that master budget.

Responsibility Accounting: Sales Budget

This is part two in our responsibility accounting series where we are going to be discussing sales budget. So recall in our prior discussion on the master budget, we discussed that sales budget was the first budget you complete in the master budget process. Because sales budget is the cornerstone of that master budget, it affects so many levels of the master budget-- one being expenses and many other levels. Here is an example of a sales budget, what I want to point out is remember this here is a budget—it is something we anticipate or project will happen. In this case, it’s April through July, so here we have our April, May, June, July, four months. We have our sales types, and notice we have two ways we can make a sale; we have cash and we have credit. You want to keep them separate because think about when they are collected. Cash sales are collected when the sale is made, credit sales can be collected one-two-three or more months after the sale. When we get into our future budgets, for example our cash budget, we would need to know what percent of our sales from credit we anticipate collecting those sales. We typically collect 10% of credit sales the following month and 30% the second month etc. We would need to make those projections when we make our cash budget.

Let’s look at an example:

Grippers expects to sell 4,000 pairs of shoes for $185 each in January, and 3,500 pairs of shoes for $220 each in February. All sales are cash only. Prepare the Sales Budget for January and February.

The first thing I would do is set up my little grid and then set up my months, January and February, and set up my total column. The first thing I need to do is place my sales price per pair. My sales price per pair in January was $185, and in February it was $220. Next thing I need to do is multiply those numbers times the number of pairs I anticipate selling each month. In January I anticipate selling 4000 pairs, and in February I anticipate selling 3500 pairs. For total sales in January $740,000 and in February $770,000. For the entire period, total sales would be $1,510,000. That’s a very simple sales budget, in this particular case all sales were for cash so we didn’t really have to separate out cash and credit sales in this particular instance. If you did need to do that, you can simply take the sales and say 60% is cash and 40% is credit, you would separate those out for each month.

Let’s give you a chance to look at one:

Mountaineer sells its rock-climbing shoes worldwide. Mountaineers expects to sell 4,000 pairs of shoes for $165 each in January, and 2,000 pairs of shoes for $220 each in February. All sales are cash only. Prepare the Sales Budget for January and February.

Set up your grid and you set up your months, January and February, and your total column. Sales price per pair is $165 in January and $220 in February. The next line is the number of pairs you anticipate selling, 4000 in $440,000. Total sales for the period of $1,100,000. 

Responsibility Accounting: Inventory, Purchases, Cost of Goods Sold budget

This is the third part in our responsibility accounting series. We’re going to be looking at inventory, purchases, and cost-of-goods-sold budget. So in our discussion we’re going to combine these budgets into one so instead of having a separate inventories, purchases, and CGS budgets, we’re going to have one “inventories, purchases, and CGS budgets”. So in demonstrating this, I’m going to use our good old-fashioned T accounts. So because most of us are familiar with that and we know where things go, and we can see this nice pretty picture as opposed to memorizing this form down here at the bottom. So we’re just going to kind of throw in some things on this T account that we already know. For example, we know the beginning inventory and assets carries a debit balance. Beginning inventory we would know because that would come from the prior period’s ending inventory. We would also be able to figure out our cost of goods sold for the next period because that would be a direct result of our sales budget we created in the prior lecture.  And of course we would decide what we want our ending inventory to be, so how much inventory so would we want to have leftover at the end of the period? So once we have these three numbers: Beginning is a given number, and of course cost of goods sold at the end would be estimated, we can then calculate what purchases would be. So remember, beginning plus purchases has to cover the cost of goods sold plus the ending because CGS plus ending is that total inventory that’s required that must be covered again by beginning plus purchases. So hopefully that was a good visual for you of what we’re going to be looking at in this section.  So look at the form of the bottom, you can see it’s basically what we just discussed. We start with our CGS, we’re going to add our desired ending inventory, so that’s going to give us our total inventory required. If you subtract out your beginning inventory, which comes from last period’s ending, that’s going to give you the amount that you need to purchase to make that happen.  So one thing to point out before we move on is to remember that ending from the prior period is going to be the next period beginning inventory…so that’s where that comes from.

Process Costing

PROCESS COSTING 

PROCESS COSTING VERSUS JOB COSTING

This will be our first video in the process cost series discussing the differences between top costing and process costing. Let us first talk about job costing. As we have talked before in job costing, we can have three different job costing accounts: Job 100, Job 101, Job 102; and each of those jobs will have a certain amount of product cost. Direct material, direct labor, and overhead are what make up our product cost. Once we have completed those jobs, they move into finished goods, we simply sell the job, and it becomes cost of goods sold. Now if you look at this into t-accounts, we see materials move to work in process. Labor (whether it be direct or indirect) are credited to wages payable and are applied to work in process. Remember, our materials and our labor are a direct cost—they are directly traceable to a job. Overhead is applied to work in process, the sum allocation rate we have created based on estimates in a cost driver. Then once the job is completed, it moves from work in process with a credit to finished goods with a debit. Then we sell the good, credit finished goods, debit cost of goods sold. So in job costing, we can’t have individual work in process account for every job, whereas in process costing we will have a work in process account for process that a product may have to go through. So remember, process costing is when we continually produce the exact same product over and over; for example, number two pencils. In this scenario, let’s say we are creating Jelly Belly jellybeans. So the first process the jelly bean has to go through is the center, we have to create the center of the product first. In the centers process, we are going to need a certain amount of direct materials, a certain amount of direct labor, and a certain amount of manufacturing overhead. Then once the center of the jelly belly is complete, the center is then transferred to the shells process. In the shells process we need additional materials, labor and overhead because it’s likely that we have different labor (different people) completing the shells process than were completing the centers process. So we have different labor, we probably have different types of materials and it may be in a different building altogether. Then once the shells have been added to the jelly belly, they must be packaged. The shelled JellyBellies would be moved to packaging, where we would likely need more materials, labor and overhead. Then once it goes through the final process, it is transferred into finished goods, where it waits to be sold, and once it is costed as costs of goods sold. If we look at this process in T accounts we find again where our materials move into each process as they’re needed. Labor moves into each process as it is needed and overhead is applied to each process as it is needed. Once the product gets through the final process, it moves into finished goods and waits to be sold, then it moves into cost of goods sold.

PROCESS COSTING & EQUIVALENT UNITS

This is the second video in our process costing series, we’ll actual be looking at the computation of equivalent units. So the three things we need to know when we’re using process costing, we’ll call these the building blocks of process costing: the first one is the fact that we’re not going to distinguish between all three product costs, which are direct materials, direct labor, and overhead. In process costing, we really separate the three into two categories, the first one being direct materials, the second category being conversion cost. And recall that conversion costs are made up of your direct labor and your manufacturing overhead. We’ll also need to know the idea of equivalent units, which we’re going to talk about here in a second, as well as the inventory flow assumption that we’re considering. We’re going to focus on the weighted average inventory flow assumption for a couple reasons. Number one, it is the easiest to use. Companies in the real world mainly use it. First in first out is a little more complicated, so it can be a little more costly…and the difference in the results between the two are very negligible. The only difference is how beginning inventory gets treated. So let’s first look at the computation of equivalent units. So here I’ve given us a timeline to look at and we can see that we’re looking at golf balls. And also, we need to know in process costing, typically we think of conversion cost as being added evenly throughout the process of the product. So as we can see here in blue, the conversion costs are added evenly throughout this process from beginning until the product is 100% complete. And if we look at materials, we have two different kinds of materials: rubber, which is added at the very beginning of the process; then we have packaging which is added at the very end of the process. And we notice that the golf balls are 80% complete, or 5,000 of them are 80% complete at the end of the period that we are discussing. So what we see here is that if rubber is added at the very beginning of the process, then they’re all completed as to rubber. Rubber won’t be added any more during the process. However, packaging isn’t added until the very end of the process, so what we can derive from this information is that we have 5,000 equivalent units as to rubber because rubber has been completely added at the very beginning of the process. Packaging, however, is not added until the end of the process. If we’re only 80% through the process, then none of the packaging has been added therefore we have no equivalent units as to packaging materials. And we need to also compute equivalent units as to conversion costs. Well if conversion costs are added evenly throughout the process and we have 5,000 golf balls that were started but not yet finished, and they’re 80% complete, then 80% of 5,000 golf balls…we’ve got an equivalent of 4,000 that have been completed with the amount of costs that have been added.

So let’s look at an example that isn’t really a product or job, but colleges and universities use the equivalent unit concept to describe the number of faculty as well as the number of students. The University of GA has about 2,000 full-time faculty and 400 part-time faculty. Assume the following:

1.     A full-time faculty member teaches six courses per year.

2.     100 part-time faculty teach three courses per year

3.     300 part-time faculty teach two courses per year

What is the “full-time equivalent” faculty – the number of equivalent units of faculty?

So push pause on your player, see if you can come up with the full-time equivalent faculty number for these three statistics here. So the first thing you would see is that a full-time faculty is a full-time faculty. So 2,000 teach 6/6 classes, making them full-time faculty. In number 2, we have 100 part-time faculty that teach 3 courses per year, which is actually half of a full-time faculty. So in number 2 we have 100 that teach 3/6 courses, because 6 would be a full-time faculty, so of the 100, those 100 half-time faculty equate to 50 full-time faculty. So in number three, those 300 that teach 2 courses per year equate to 100 full-time faculty. So our full-time equivalent faculty of the 2400 total faculty is 2,150.