Horngren’s Cost Accounting: A Managerial
Emphasis
Ninth Canadian Edition
Chapter 6
Master Budget and
Responsibility Accounting
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6-1
Learning Objectives
1. Distinguish the long-term from the short-term benefits
of budgets (pro forma financial statements).
2. Prepare a master operating budget and all
supporting budgets or schedules.
3. Prepare a cash budget.
4. Contrast responsibility and controllability.
5. Appendix 6A: Distinguish among sensitivity analysis,
Kaizen budgeting and activity-based budgeting.
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6-2
Web Questions
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1
Exercise 6-17 (book/static)
2
Exercise 6-19 (book/static)
3
Exercise 6-20 (book/static)
4
Exercise 6-22 (book/static)
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6-3
Homework from Chapter 2/3
1
Exercise 2-24 (book/static)
2
Problem 2-33 (book/static)
3
Problem 2-37 (book/static)
4
CLC 2-39 (book/static)
5
Exercise 3-20 (book/static)
6
Exercise 3-21 (book/static
7
Exercise 3-23 (book/static)
8
Problem 3-38 (book/static)
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Budgets
• A quantitative expression of a proposed (future)
plan of action by management for a for a set time
period and…
• An aid to coordinating what needs to be done to
implement that plan
• Master budget summarizes all financial and nonfinancial plans into a single document
• Reported according to ASPE/IFRS standards and
supported by non-financial schedules
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Budgeting Cycle – 4 Steps
1. Manager and accountants plan the performance
of the organization and sub-units
2. Provide a frame of reference against which
results can be compared
3. Investigate variations and implement corrective
actions as necessary
4. Plan again, based on feedback from changed
conditions and actual performance
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Advantages of Budgets
• Compel planning and monitoring of the
implementation of plans.
• Provide reliable performance assessment criteria.
• Promote communication and coordination within
the organization.
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Operating & Strategic Performance
Assessment
Exhibit 6-1 Strategic Analysis in the Formulation of Long-Run and Short-Run Budgets
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Components of Master Budgets (1 of 2)
• Operating Budget
– The set of budgets in the value chain business
functions
– Excludes financing and taxes
– Leads to the pro-forma (budgeted) income statement
• Financial Budget
– The set of budgets that comprise the capital budget,
cash budget, budgeted balance sheet and the
budgeted cash flow statement
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Components of Master Budgets (2 of 2)
• Cash Budget
– Schedule of expected cash receipts and disbursements
– Includes financing requirements – timing of borrowings
and repayments, interest expense
– Predicts cash position for specific level of activity
– Provides information (inputs) to the pro-forma income
statement and balance sheet
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Overview of the Master Budget
Exhibit 6-2 Overview of the Master Budget for Halifax Engineering
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Basic Operating Budget Steps (1 of 2)
1. Prepare the revenue budget.
2. Prepare the production budget (in units).
3. Prepare the direct materials usage budget and
direct materials purchases budget.
4. Prepare the direct manufacturing labour budget.
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Basic Operating Budget Steps (2 of 2)
5. Prepare the manufacturing overhead costs
budget.
6. Prepare the ending inventories budget.
7. Prepare the cost of goods sold budget.
8. Prepare the operating expense (period cost)
budget.
9. Prepare the budgeted income statement.
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Basic Financial Budget Steps
Based on the operating budgets:
1. Prepare the capital expenditures budget.
2. Prepare the cash budget.
3. Prepare the budgeted balance sheet.
4. Prepare the budgeted statement of cash flows.
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Halifax Engineering Page 179
Halifax Engineering is a machine shop that uses skilled labour and metal alloys to manufacture two types
of aircraft replacement parts—Regular and Heavy-Duty. Halifax managers are ready to prepare a master
budget for the year 2022. To keep our illustration manageable for clarifying basic relationships, we make
the following assumptions:
1.
The only source of revenue is sales of the two parts. Non-sales-related revenue, such as interest
income, is assumed to be zero.
2.
Work-in-process inventory is negligible and is ignored. Ending inventory is a planned quantity, not a
remainder.
3.
Direct materials inventory and finished goods inventory are costed using the first-in, first-out (FIFO)
method.
4.
Unit costs of direct materials purchased and finished goods sold remain unchanged throughout the
budget year (2022).
5.
Variable production (inventoriable) costs are variable with respect to direct manufacturing labourhours. Variable nonproduction (period) costs vary with respect to revenue. These simplifying
assumptions are made to keep our example relatively straightforward.
6.
For calculating inventoriable costs, all manufacturing costs (fixed and variable) are assigned using
direct manufacturing labour-hours as the cost allocation base.
7.
After carefully examining all relevant factors, the executives of Halifax Engineering forecast the
following for 2022:
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Budgeting Standards
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All direct manufacturing costs are variable with respect to the units
of output produced. Additional information regarding the year 2022
is as follows:
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The following supporting budget schedules will be prepared when developing
Halifax’s budgeted income statement:
1. Revenue budget.
2. Production budget (in units).
3. Direct materials usage budget and direct materials purchases budget.
4. Direct manufacturing labour budget.
5. Manufacturing overhead budget (which includes manufacturing plant and
equipment depreciation, an expense that is also included in the cost of goods
sold budget).
6. Ending inventory budget.
7. Cost of goods sold (COGS) budget.
8. Other (nonproduction) costs budget.
While specific budget details differ among organizations, the sequence of events
outlined below is common for developing a budgeted income statement.
Beginning with the revenue budget, each budget is developed in logical fashion.
In most cases, computer software speeds the budget calculations.
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Preparing a Master Operating Budget
SCHEDULE 1: Revenue budget. The revenue
budget (Schedule 1) is the usual starting point for
budgeting. The reason is that production (and
hence costs) and inventory levels generally depend
on the forecasted level of revenue.
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SCHEDULE 2: Production budget (in units).
After revenue is budgeted, the production budget (Schedule
2) can be prepared. The total finished goods units to be
produced depends on planned sales and expected changes
in inventory levels:
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Exercise 6-17 (book/static)
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6-17 (15 min.)
Sales budget, service setting.
1.
McGrath & Sons
Radon Tests
Lead Tests
2021
Volume
11,000
15,200
At 2021
Selling Prices
$250
$200
Expected 2022
Change in Volume
+10%
−10%
Expected 2022
Volume
12,100
13,680
McGrath & Sons Sales Budget
For the Year Ended December 31, 2022
Radon Tests
Lead Tests
Selling Price
$250
$200
Units Sold
12,100
13,680
Total Revenue
$3,025,000
2,736,000
$5,761,000
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2.
McGrath & Sons
Radon Tests
Lead Tests
2021
Volume
11,000
15,200
Planned 2022
Selling Prices
$250
$190
Expected 2022
Change in Volume
+10%
−5%
Expected 2022
Volume
12,100
14,440
McGrath & Sons Sales Budget
For the Year Ended December 31, 2022
Radon Tests
Lead Tests
Selling Price
$250
$190
Units Sold
12,100
14,440
Total Revenue
$3,025,000
2,743,600
$5,768,600
Expected revenue of $5,768,600 at the new 2022 prices are greater than the expected 2022
revenue of $5,761,000 if the prices are unchanged. So, if the goal is to maximize sales
revenue and if Jim McGrath’s forecasts are reliable, the company should lower its price for
a lead test in 2022.
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SCHEDULE 3: Direct materials usage
budget and direct materials purchases budget.
The decision on the quantity of each type of output unit
produced (Schedule 2) provides the data required to
calculate the quantities of direct materials used. Information
from purchasing will provide the cost data to produce
Schedule 3A.
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SCHEDULE 3B
SCHEDULE 3B computes the budget for direct materials purchases,
which depends on the budgeted direct materials to be used, the
beginning inventory of direct materials, and the target ending inventory of
direct materials:
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6-19
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SCHEDULE 4: Direct manufacturing labour
budget
These costs depend on wage rates, production methods,
and hiring plans. The computations of budgeted direct
manufacturing labour costs appear in Schedule 4.
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SCHEDULE 5: Manufacturing overhead
budget.
The total of these costs depends on how individual overhead
costs vary with the assumed cost allocation base, direct
manufacturing labour-hours. The calculations of budgeted
manufacturing overhead costs appear in Schedule 5.
Notice that manufacturing equipment and plant depreciation
has been transferred from the schedule of Manufacturing
Overhead Costs and included in this budget. This means
some depreciation expense is included in the Cost of Goods
Sold (COGS) budget and is allocated to each unit of output.
The remaining depreciation, if any, of nonproduction longterm assets is included in fixed non-inventoriable or period
costs, a separate schedule.
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SCHEDULE 6: Ending inventory budget.
Schedule 6A shows the computation of unit costs for the two products.
These unit costs are used to calculate the costs of target ending
inventories of direct materials and finished goods in Schedule 6B.
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SCHEDULE 7: Cost of goods sold budget. :
The information from Schedules 1 to 6 leads to Schedule 7
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SCHEDULE 8:
Other (nonproduction) costs budget. Schedules 2 to 7 cover budgeting
for Halifax’s production area of the value chain. For brevity, other areas
of the value chain are combined into a single schedule.
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SCHEDULE 9: Budgeted income statement.
Schedules 1, 7, and 8 provide the necessary information to complete the
budgeted operating income statement, shown in Exhibit 6-3. Of course,
more details could be included in the income statement and then fewer
supporting schedules would be prepared.
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Organizational Structure and Responsibility
• Organizational structure — the arrangement of
centres of responsibility within an entity
• Responsibility centre — center—a part, segment,
or subunit of an organization whose manager is
accountable for a specified set of activities
• Responsibility accounting — a system that
measures the plans (by budgets) and actions (by
actual results) of each responsibility centre
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Types of Responsibility Centres
• Cost centre:
– Accountable for costs only
• Revenue centre:
– Accountable for revenues only
• Profit centre:
– Accountable for revenues and costs
• Investment centre:
– Accountable for investments, revenues, and costs
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Responsibility Versus Controllability
• Responsibility accounting
– Focuses on information sharing, not in laying blame on
a particular manager
– Measures the plans (budgets) and actions (actual
results) of each responsibility centre
• Controllability
– The degree of authority that a manager has over costs,
revenues, or other items in question
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