Accounting assignments

ACC513 – Managerial Accounting

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ACC513 – Managerial Accounting Course Syllabus

ACC513 – Managerial Accounting Course Syllabus

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Introduction

This course offers a balanced coverage of concepts, methods, and uses of managerial accounting with a strong emphasis on management issues. The principal course objective is to help the MBA student focus on concepts and managerial uses of accounting information, rather than the techniques of cost accounting. This syllabus contains the Lesson Assignments for the above referenced course.

Managerial accounting deals with providing information to individuals inside the organization. This process is driven by the information needs of the individuals involved in the decision process. In contrast, financial accounting deals with preparing general purpose reports for persons outside an organization and is heavily constrained by standard setting, regulatory and tax authorities. Financial accounting statements are also required to be audited by independent accountants.

Managerial accounting information focuses on segments of a business and comes in various forms: 1) qualitative, 2) quantitative, 3) factual, and 4) estimated.

Managers have to make many different types of decisions. Some of these include:

A. Should we expand or contract our business?

B. Should we close a particular store or drop a product line?

C. Should we open a new product line or department?

Every organization has its own individual strategy. The managerial accounting system helps managers implement an organization’s strategy and provide clarity to the decision-making process. The important thing is to recognize that the managerial accounting system needs to be adapted to each organization’s objectives, strategy, and environment.

Much of this course will focus on the managerial decision-making aspects that drive managerial accounting. Students will explore how to use accounting information to solve business problems, with a focus on understanding the business problems to be solved and the real incentives for decisions. Students will learn how to truly use the financial information, rather than simply perfect accounting techniques. Core managerial accounting concepts combine with the latest cutting-edge material that's important to today's managers and decision makers. Numerous realistic examples and application problems help emphasize process improvement and the integration of financial reporting issues for management decision-making. Students will also learn to apply managerial accounting tools to the emerging service sector, government, and nonprofit organizations for ongoing business success.

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Expected Student Learning Outcomes

Upon the successful completion of this course you should be able to:

• Compare and contrast managerial accounting and financial accounting.

• Demonstrate the importance of effective communication between accountants and users of managerial accounting information.

• Explain the concepts of costing and how they relate to profitability analysis.

• Distinguish between resources used and resources supplied and measure unused

resource capacity.

• Explain total quality management and demonstrate how traditional managerial accounting systems require modifications to support total quality management.

• Compare the costs, benefits, and weaknesses of the various cost estimation methods.

• Perform cost-volume-profit analysis and explain the use of financial modeling for profit-

planning purposes.

• Use differential analysis to measure customer profitability.

• Describe the steps of the net present value method for making long-term decisions using discounted cash flows and explain the effect of income taxes on cash flows.

• Demonstrate the use of a budget as a tool for planning and performance evaluation.

• Describe the purpose of the return on investment calculation and identify its

shortcomings.

• Identify controls that can be instituted to prevent financial fraud.

Required Materials Barsky, N. & Catanach, A. (2017). Management accounting: A business planning approach (2/E). San

Diego, CA: Cognella Academic Publishing

ISBN – 978-1-5165-0628-6

Suggestions for getting the most out of this course:

• Read professional journals and periodicals.

• Participate in the course discussion forums and learn from the experience and knowledge of your faculty mentor and fellow students.

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• If possible, form a relationship with someone who works in an area related to your course. Explain that you would like to obtain their insights and perspectives from time to time.

Academic Engagement

Each academic course at William Howard Taft University is assigned a semester unit value equivalent to the commonly accepted and traditionally defined units of academic measurement in accredited institutions. Credit bearing courses are measured by the learning outcomes normally achieved through 45 hours of student work for one semester unit. For example, a course with a value of 3 semester units would require a typical student to commit 135 hours to complete the course requirements.

Lesson Assignments

This course contains a number of lesson assignments. Work through the lessons one at a time. Unless otherwise instructed, you should complete all assignments for a particular lesson in one WORD document. When you complete all of the assignments in a lesson, submit it to the faculty for grading and feedback. Submit only one lesson at a time, completing them in sequence. Continue on to the next lesson but be sure to incorporate any feedback received on previous lessons into your subsequent assignments – if necessary. Format Unless otherwise instructed, Lesson Assignments should be prepared in Microsoft Word® using the Times New Roman font, 12-point, single space, double space between paragraphs. Each page must be numbered, and your last name and student number included on the upper left-hand corner of each page.

Your lesson assignment responses should be evidenced from the course textbook and/or from peer- reviewed sources not more than 5 years old. In general, Wikipedia is not a professionally-reviewed resource and should not be used as an assignment reference. You must cite your references so that readers can verify your conclusions, and easily determine what is your work, and what is paraphrased or taken directly from other sources. Failure to give credit for the work of others in your assignments and writing projects constitutes plagiarism.

Citation Machine: http://citationmachine.net/index2.php?start=&reqstyleid=2&newstyle=2&stylebox=2 Citation Machine is an online tool to assist in proper citation of researched information. We recommend APA format, although you may use other approved formats as long as you remain consistent.

Academic Integrity It is the policy of the University that any student found guilty of cheating and/or plagiarism will be subject to immediate dismissal from the University.

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All students are required to sign a Coursework Certification Form for each course. This form is provided as a link in the last lesson of each course. Evaluation (How You Will Be Graded for This Course) Your grade will be influenced by the accuracy of your research and the quality of your writing. The extent of research necessary will vary from assignment to assignment. In most cases, your work product should not simply consist of quoting from the assigned text.

When grading your assignments, the faculty will consider three general components:

1. A demonstrated understanding of the material and the learning objectives.

2. Your ability to articulate, synthesize and analyze the concepts and issues presented in the material.

3. Clear and logical composition supported by examples and appropriate references.

If at any time you desire additional feedback, you should contact your faculty advisor directly via email. Feel free to ask questions about course progress, grades, etc., at any time, and remember that the faculty and administration are interested in helping you learn and succeed.

The final grade for the course is determined by the sum of each of the grades in the Lesson Assignments. Each of the lesson assignments is weighted equally in determining your grade for the course. Total Possible Points = 800 (100 Points per lesson).

Grade GPA Percentage Comments

A 4 90-100 (Outstanding)

A- 3.67 88-89

B+ 3.33 84-87

B 3 80-83 (Satisfactory)

B- 2.67 78-79

C+ 2.33 74-77

C 2 70-73 (Passing but below the standard accepted in graduate study)

C- 1.67 68-69

D+ 1.33 64-67

D 1 60-63 (Does not meet standard for graduate study, coursework must be repeated for credit) D- 0.67 59

F <0.67 58 or below (Failure)

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Faculty Mentors will refer to the following grading rubric when evaluating your assignments:

Excellent

Above

Average

Satisfactory

Needs

Improvement

Unsatisfactory

Understanding of Material and

Lesson Objectives

Demonstrates a thorough

understanding of the material.

Demonstrates an adequate

understanding of material

Responses are generally accurate, but at times lacking

coherence.

Demonstrates a marginal understanding

of the material and lesson objectives.

Provides marginally

complete and/or inaccurate responses

showing little understanding of the

material

Articulation, Synthesis and

Analysis of Concepts

Work is articulated consistent with the

degree level integrating or synthesizing

concepts in an original and

innovative way.

Work demonstrates a solid knowledge of concepts and

theories with some individual analysis

of issues.

Work demonstrates an elementary knowledge of concepts but lacks original thought and

analysis.

Work is primarily paraphrased or quoted directly from the text or

other sources.

Responses demonstrate little or no individual

analysis.

No individual analysis of concepts.

Work is poorly

articulated and/or derived entirely from

the textbook.

Composition, Presentation,

and References

Work presented in a logical and coherent way supported by sound resources.

Citations are

composed in proper format with few or

no errors.

Work presented is

grammatically sound.

Resources are

appropriate and cited in proper format with few

errors.

Work is grammatically

sound with a few minor errors.

Resources may be of

questionable authority, but are

cited in proper format with few errors.

Work contains frequent grammatical errors.

Resources are few, non- existent, or may be of questionable authority.

Frequent errors in

composition, grammar and presentation.

Quoted material is

incorporated without the use of quotation

marks or citation (plagiarism).

Course Completion Requirements

The course will be deemed completed only when all the following has been accomplished:

• You have completed the lesson assignments and they have been received by the University.

• You have completed the Course Certification Form and it has been received by the University.

• You have completed the Course Evaluation Survey.

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Lesson 1 - Strategy & Management Accounting and The Business Value Chain

Introduction

This lesson explains the fundamentals of business strategy and the strategic planning process. Understanding business strategy is essential to helping a business meet the expectations of customers, investors, and other stakeholders. The knowledge also highlights just how important information is to managers in making business decisions. Most importantly, business professionals need a thorough appreciation for what their company or client does: They need to understand the overall strategy of the business.

Managing a business can also be very complex. Today’s businesses continually attempt to manage a variety of competing demands such as creating value for owners, satisfying customers, developing and retaining employees, and complying with regulatory requirements. However, addressing these challenges requires a wealth of timely, meaningful, and relevant information that managers can use in making their daily decisions. Such information is called managerial accounting information. It is the primary focus of this course. Management accounting is that body of knowledge that captures the concepts, theories, tools, and techniques by which company performance data are transformed into information that managers can use to create and execute strategy.

Success in business at the dawn of the twenty-first century depends on a firm’s ability to manage change. Companies today confront many new challenges including technology innovations, global competition, and increased demand for timely, relevant decision-making information. Collectively, market forces compel businesses to develop adaptive and innovative organizational structures that promote more efficient business processes and closer stakeholder relationships. These changes in the business environment affect all managers, not just executive-level decision-makers. Many routine, often labor-intensive business tasks are now performed by technology. In an age when preparing and distributing data occurs at little or no cost, managers are expected to possess the knowledge, skills, and abilities that allow them to offer insights that contribute to business success.

Chapter 1 discusses the way in which strategic planning helps a company meet the expectations of its customers, investors, and other stakeholders. As we will learn, this process forces managers to evaluate both their current and future business operations. However, such an analysis depends on a keen awareness of what market forces potentially can affect a business. Therefore, chapter 2 discusses several major business forces that are shaping today’s marketplace and their effects on companies and business professionals. This discussion highlights the important roles that business planning and information play in managing change in the twenty-first century. Understanding those roles will allow you to distinguish between the usefulness of data and information for decision- making, and it will give you an appreciation for the analytical abilities needed to transform one into the other.

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Lesson Learning Objectives

By the conclusion of this lesson you should be able to:

• Define and describe a business.

• Identify and describe the stakeholders of a business.

• Explain the relationship between strategy and profitability.

• Describe the strategic planning process and its results.

• Identify barriers to successful strategic planning.

• Identify forces affecting business.

• Define the elements of the customer value imperative.

• Explain the value chain and its components.

• Explain the importance of evaluating company performance.

Reading Study Chapters 1 and 2 of the text. Assignments The follow ing Assignment Questions should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response. Your response must adequately cover the question w ithout being wordy or relying on “yes” or “no” responses.

Short Answer Questions

1. What are four/five characteristics of a good mission statement? Prepare a mission

statement for a video rental store that has these characteristics.

2. What is the implication of strategic planning and analysis for information provided by management accounting systems?

3. List the four dimensions of performance measured on a balanced scorecard. Identify one critical success factor for each dimension for a small auto-repair shop.

4. Describe three to five barriers to successful strategic planning.

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5. List several types of economic data that managers of a computer repair shop that

serves a particular geographic region might find useful to their strategic planning process.

6. Describe the customer value imperative as it relates to a clothing store. Address all three consumer expectations of the customer value imperative.

7. Consider the value chain for a restaurant. Identify one major business activity for each of the five-core business processes. For each activity, specify one important decision the restaurant will have to make.

Professional Development Questions

1. In Chapter 1 of the text (page 32), answer the Mini-Case problem for BestSellers

Bookstore (questions 1 – 5).

2. In Chapter 2 of the text (page 64), answer the Mini-Case problem for Group Consulting Exercise. However, please address the problem from an individual perspective, not a group.

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Lesson 2 – Evaluating Financial Performance and Business Processes & Risk

Introduction Financial statements provide a wealth of information that customers, creditors, investors, managers, employees, regulators, and other stakeholders use to assess a firm’s past and future performance. The four reports that comprise a set of financial statements —the balance sheet, the income statement, the statement of cash flows, and the statement of owners’ equity—summarize the economic transactions affecting a business. However, the quantity of financial information that is available today at little or no cost can be overwhelming or even intimidating. Evaluating a firm’s business operations is often complicated by the complexity of the accounting policies on which financial statements are based. Therefore, financial statement users frequently use ratio analysis to manage this information overload and to capture the big picture of firm performance. This lesson will review financial statement fundamentals, introduce pro forma reporting, and discuss how ratio analysis can provide useful insights into a firm’s business operations. Company managers also need to understand the link between business processes and financial results. To do so, they must understand the variety of risks that can influence the success of their operating activities. In the first two chapters, we discussed business strategy, market forces, and how organizations implement business processes to create value for their stakeholders. Chapter 3 explored the use of financial statements to evaluate company performance. In chapter 4, we explore how business processes influence a company’s financial results and how business risk affects those same processes. We then discuss strategies that companies use to manage business risks.

Lesson Learning Objectives

By the conclusion of this lesson you should be able to:

• Review the purpose of financial statements and their form.

• Describe the use of pro forma financial statements.

• Discuss and illustrate the use of financial ratio analysis.

• Demonstrate the use of financial ratios in evaluating business strategy.

• Define value drivers and explain their usefulness in understanding business processes.

• Identify the resources necessary to support the value chain.

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• Define business risk and describe the uncertainties affecting value creation.

• Discuss how companies identify and manage business risk.

Reading Study Chapters 3 and 4 of the text.

Assignments The follow ing Assignment Questions should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response. Your response must adequately cover the question w ithout being wordy or relying on “yes” or “no” responses.

Short Answer Questions

1. The manager of Tacorama provided the following data from its financial statements

for 20X1: On December 31 20X1 Inventory $ 8,000 Current assets $24,000 Total assets $80,000 Current liabilities $4,000 Total liabilities $20,000 For the year ended December 31 Sales revenue $200,000 Net income $6,000 Compute the following ratios for 20X1: Asset turnover Financial leverage Return on assets Return on equity Profit margin Current ratio Quick ratio

2. Bowler Makers Company reported $50,000 in net income last year. Some of its financial ratios for that year are as follows: Return on assets 20% Return on equity 25% Asset turnover 2.0

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Based on the data provided, compute the following: Total assets Total equity Total liabilities Net sales Profit margin Financial leverage

3. Black and Blue Inc. reported $60,000 in net income last year. Some of its financial ratios for that year are as follows: Return on assets 15% Return on equity 24% Profit margin 8% Based on the data provided, compute the following: Total assets Total equity Total liabilities Net sales Asset turnover Debt to equity ratio

4. Kwiken-Kwiker Company had $70,000 in accounts receivable at the end of last year. Some of its financial ratios for that year are as follows: Return on assets 15.0% Assets turnover 3.5 Receivables turnover 11.0 Financial leverage 2.0 Based on the data provided, compute the following: Net sales Total assets Net income Total equity Return on equity Debt to equity

5. Bowler Makers Company reported $75,000 in net income last year. Some of its financial ratios for that year are as follows: Return on assets 12% Return on equity 15% Asset turnover 2.5 Based on the data provided, compute the following: Total assets Total equity Total liabilities Net sales Profit margin Financial leverage

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6. Black and Blue Inc. reported $45,000 in net income last year. Some of its

financial ratios for that year are as follows: Return on assets 12% Return on equity 36% Profit margin 3% Based on the data provided, compute the following: Total assets Total equity Total liabilities Net sales Asset turnover Debt to equity ratio

7. Kwiken-Kwiker Company had $900,000 in sales last year. Some of its financial ratios for that year are as follows: Assets turnover 1.5 Profit margin 7.0% Financial leverage 1.2 Based on the data provided, compute the following: Net income Total assets Return on assets Total equity Return on equity Debt to equity

Professional Development Question

In Chapter 4 of the text (page 128), answer the Mini-Case problem for Keystone Academy (items 1 – 9).

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Lesson 3 – Planning Profitable Operations and Forecasting Tools & Techniques

Introduction As discussed in Chapter 4, businesses create value for their customers by designing efficient and effective business processes. To create value for investors, managers must generate profits. This lesson introduces the concept of profit planning and presents the fundamental tools and techniques needed to transform sales price and cost data into the insights necessary to build a profit plan. These techniques help managers plan and monitor business operations, allocate scarce resources, and manage expenses. This lesson specifically identifies the relationship between business processes and a firm’s cost structure. Future lessons will demonstrate how these tools can be applied to profit-plan development and performance evaluation. Managers in all businesses need to plan effectively so that they will have the necessary human, physical, and financial capital to execute strategy. As managers convert these resources into financial results, they are particularly interested in the cost of their business operations. To create value for investors, managers must generate profits. As discussed in Chapter 3, profits occur when firms generate enough revenue to cover operating costs. The traditional income statement classifies costs by type or purpose, like cost of sales or operating expenses, to inform users about the business function that generates each major expense. However, to effectively plan business operations, managers also need to understand cost behavior—specifically, how costs react to changes in business activity. Understanding cost behavior allows managers to forecast future profits and evaluate the results expected from their decisions. Additionally, the lesson will also present the fundamental tools managers need to develop credible profit projections. The profit-planning tools introduced in this lesson can depend on a variety of assumptions and estimates. We build on that discussion and illustrates how managers use statistical techniques to forecast. Forecasting supplies data that can be used in breakeven analysis and provides the foundation for developing credible and meaningful budgets and business plan projections. The lesson concludes with a brief discussion of qualitative factors that managers must also consider when making business decisions. In coming chapters, we will apply these tools to budget development and performance evaluation.

Lesson Learning Objectives

By the conclusion of this lesson you should be able to:

• Describe the primary types of cost behaviors.

• Define the relevant range and a firm’s total cost function. • Describe cost-volume-profit (CVP) analysis and explain its usefulness.

• Demonstrate the use of breakeven analysis.

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• Identify strategies that companies use to lower their breakeven points.

• Demonstrate the importance of sales forecasting.

• Describe the role of cost drivers in estimating costs.

• Demonstrate the use of graphical and statistical forecasting techniques.

• Demonstrate the use of cost estimates in cost-volume-profit (CVP) analysis.

• Discuss qualitative factors that affect costs.

Reading Study Chapters 5 and 6 of the text.

Assignments The follow ing Assignment Questions should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response. Your response must adequately cover the question w ithout being wordy or relying on “yes” or “no” responses.

Short Answer Questions

1. Oingo Inc. sells its product for $60.00. Its variable cost per unit is $48.00. Fixed costs total $30,000. How many units does the company need to sell to breakeven? What are the total sales in dollars at the breakeven point? How many units does the company need to sell to earn a profit of $120,000?

2. Pimpton Plows sells its product for $50. Its variable cost per unit is $19.00. Fixed costs total $434,000. How many units does the company need to sell to breakeven? What are the total sales in dollars at the breakeven point? How many units does the company need to sell to earn a profit of $155,000?

3. Big City Orchestra, Inc. produces a five-concert series every year. Its concert hall has 3,300 seats, all of which sell for $40 per ticket per concert. Variable costs are estimated to be $2 per ticket, related to printing, promotions, and mailings. Fixed costs, including salaries and operating expenses, total $427,500 per year. The orchestra averages 70% attendance per concert. What is the breakeven point in dollars of ticket sales?

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What is the breakeven point in tickets per concert? What is the expected total sales in dollars and units (tickets)? What is the projected net income at its expected sales level? What is the orchestra’s safety margin in sales dollars and tickets? How many tickets would need to be sold this year in order to earn enough profits to enable the orchestra to purchase a new pipe organ that costs $96,900? What would average attendance need to be to achieve this?

4. Husky and Starch Books provided the following information: Average selling price per book $25 Average variable cost per book $13 Monthly fixed costs $6,000 Compute the following: What is Husky and Starch’s contribution margin per unit in dollars? What is Husky and Starch’s contribution margin ratio? How many books must Husky and Starch sell to breakeven? How many books must Husky and Starch sell to earn $9,000 per month?

5. Last year, Leeky’s Pizza Ovens sold its ovens at a price of $800 each. The variable expenses for each oven were $500 and the annual fixed expenses totaled $270,000. Leeky’s Pizza Ovens had targeted a profit of $300,000 for the year but fell substantially short of that goal because product demand shifted resulting in sales of only 1,600 ovens. Leeky’s president assigned a management committee to analyze the situation and develop alternative courses of action for the coming year. The following three alternatives were presented to the president, but only one can be selected: Alternative A: Reduce the selling price by $70. The marketing department forecasts that with the lower price, 2,400 ovens could be sold during the year. Alternative B: Lower variable expenses per unit by $25 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $50 and sales of 2,100 ovens for the year are forecast. Alternative C: Cut fixed expenses by $50,000 and lower the selling price by 5 percent. Sales of 2,000 ovens would be expected for the year. If no changes are made to the selling price and cost behavior is unchanged, estimate the number of ovens that must be sold during the year to break even. If no changes are made to the selling price and cost behavior is unchanged, estimate the number of ovens that must be sold during the year to attain the target profit of $300,000. Determine which of the alternatives Leeky’s Pizza Ovens’ president should select to maximize profit.

6. David’s DVD Repair Company wants to open a repair shop in a suburb of a major metropolitan area. The industry association estimates that 30% of DVD players are repaired by similar service companies and that the average owner spends $80 per DVD player on repairs each year. The available commerce data indicates that there are 50,000 DVD players in the metropolitan service area. Three other competitors exist within a 25 mile radius of the proposed business location. Based on a consumer survey, the owner believes that he can capture 20% of the market in the first year of operation.

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Based on this data, address the following requirements: What is the potential number of DVD players likely to be commercially repaired during one year? How much revenue can David’s DVD Repair Company expect to generate in its first year of operations?

7. The Party Place Company wants to open a dining hall for group meetings and banquets. A survey of businesses and organizations within a 30 mile radius indicates that the Party Place can expect to provide meeting facilities to 0.75 groups per day for 360 days of the year. On average during the year, 50% of all groups would be expected to want basic food service and 30% are expected to want premium food service. Groups pay a facility rental fee of $80 per meeting. If the group requests basic food service, the facilities fee is reduced by one-half. No facilities fee is charged for groups that request premium food service. Basic food service is provided at a cost of $10 per plate and premium food service is provided at $25 per plate. Groups that request basic food service are expected to average 50 people per group. Groups that request premium food service are expected to average 30 people per group. Based on this data, address the following requirements: What is the number of groups that are expected to want premium food service, basic food service, and no food service during one year? How much revenue can the Party Place expect to generate during its first year of operations?

8. Mr. Fixits wants to open a lawn mower repair shop in a suburb of a major metropolitan area. The industry association estimates that 40% of mowers are repaired by similar service companies and that the average owner spends $150 per mower on maintenance each year. The census and local chamber of commerce data indicate that there are 35,000 mowers in the county. Seven other competitors exist within a 25 mile radius of the proposed business location. Based on a consumer survey, Mr. Fixit’s owners believe that they can capture 8% of the market in the first year of operation. Based on this data, address the following requirements: What is the potential number of lawn mowers likely to be repaired in one year? What is the total potential mower repair revenue available in the market in one year? How much revenue can Mr. Fixit expect to generate during its first year of operation?

9. The Beejue Theatre has 12 screens on which first-run movies are presented 365 days out of the year. Each movie is shown an average of 5 times per day. The number of seats for each screen varies, with an average of 400 seats per screen. Ticket prices average $9 per seat. The overall average occupancy rate per movie is 15%. Compute the total possible tickets that could be sold assuming 100% occupancy. Compute the estimated total customer demand (number of movie seats sold) for each year. Compute the estimated total revenues for one fiscal year. If management wanted to generate $18,000,000 in annual revenues, what would the average occupancy percentage rate need to be?

10. Acme Brick Company estimated its annual total cost function to be: Y = $320,000 + 2.56x

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Assuming that Y represents total cost and x equals the number of units sold, use this equation to answer the following questions: What is the firm’s total fixed cost? What is the firm’s variable cost per unit? Compute total costs if the firm sells 10,000 units. Compute total costs if the firm sells 30,000 units.

Professional Development Questions

1. In Chapter 5 of the text (page 160), answer the Mini-Case problem for Keystone Academy (items 1 – 9).

2. In Chapter 6 of the text (page 197), answer the Mini-Case problem for Top Flight Airlines (items a-i).

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Lesson 4 – Budgeting Fundamentals and Analyzing & Using Budgets

Introduction As noted in lesson 1, financial projections are an integral part of a company’s strategic plan. The previous lesson introduced the fundamentals of profit planning and business forecasting, respectively. This lesson shows how managers use these techniques in the formal budgeting process. This lesson also describes the advantages and limitations of the budgeting process. Knowing how to budget helps managers effectively plan and execute their company’s business strategies. In coming chapters, we will explore how managers use budgets to make business decisions and evaluate company performance.

A budget is a financial plan for the future operations of a business. Budgets provide interested stakeholders with a numerical picture of the company’s strategic plan that details how managers intend to allocate and use financial, physical, and human capital in the coming fiscal periods. Budgets typically include a detailed balance sheet, income statement, and statement of cash flows. The lesson continues with a focus on how managers actually use budgets to monitor and control business operations. The lesson extends our discussion of business planning by discussing how nonfinancial data can enhance a manager’s understanding of financial results, thus improving decision making. It begins by discussing how managers evaluate the reasonableness or credibility of their budgets. The lesson then illustrates how flexible budgets can be used to accommodate changes in sales forecasts or cost projections. The lesson concludes by demonstrating how managers evaluate operating results that differ from budgeted expectations. Such insight is critical to effectively evaluate performance and plan for future periods. Ultimately, the usefulness of the entire budget depends on its credibility, which depends on the validity of each underlying assumption. To assess a budget’s credibility, managers must evaluate each underlying assumption and its impact on projected outcomes.

Lesson Learning Objectives

By the conclusion of this lesson you should be able to:

• Describe budgeting and its potential benefits.

• Define the master budget and discuss its components. • Illustrate the development of the operating budget.

• Demonstrate the creation of the cash flow and capital use budgets. • Discuss the preparation of pro forma financial statements. • Demonstrate how budget credibility can be assessed.

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• Illustrate the development of flexible budgets.

• Discuss how financial statement variances are computed and interpreted.

• Explain the use of revenue variance analysis.

• Demonstrate the use of cost variance analysis.

Reading Study Chapters 7 and 8 of the text.

Assignments The follow ing Assignment Questions should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response. Your response must adequately cover the question w ithout being wordy or relying on “yes” or “no” responses.

Short Answer Questions

1. Arnold’s Purse Company expects sales in the fourth quarter of 20X1 as follows:

October $ 350,000 November $ 520,000 December $ 440,000 Historical data shows that the company collects 75% of its sales in the month of sale and 25% in the month following the sale. On October 1, 20X2, accounts receivable related to third quarter sales totaled $70,000, which is expected to be collected in October. Prepare a schedule of cash receipts for each month in the fourth quarter. What amount of accounts receivable will be outstanding on December 31?

2. Fillmore Groceries expects to make inventory purchases in the first quarter of 20X2 as follows: January $450,000 February $390,000 March $510,000 Historical data shows that the company pays for 65% of its purchases in the month of purchase and the remaining balance in the month following the purchase. On January 1, 20X2, the company owed $120,000 for 20X1 purchases. Prepare a schedule of cash payments for January, February, and March. What amount of accounts payable will be outstanding on March 31?

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3. Based on a recent market analysis, Baby’s Clothing Palace expects the following quarterly demand

(number of customers): 4.

First quarter 1,100 Second quarter 1,500 Third quarter 2,200 Fourth quarter 3,800 The typical customer spends $60 per visit at the store. Management estimates that clothing accounts for 75% of each customer’s bill. The other 25% results from toy sales. Clothing costs the company 60% of its selling price, while toys cost only 40% of their selling price. Based on these data, prepare the following: A quarterly sales forecast A quarterly contribution margin forecast

5. Terry Simpson is considering investing in screen printing equipment and opening a retail business that specializes in customized T-shirts. The screen-printing equipment will cost $12,000 to purchase and set up. It is expected to have a useful life of six years and will need to be overhauled in year 4 at a cost of about $4,000. At the end of six years, it is expected to be worthless. T-shirts will sell for $19 each and the average cost of buying the T-shirts and printing them is expected to be $12 each. Terry estimates that customers will buy 50 T-shirts per day, 24 days per month for 12 months. Furthermore, monthly operating costs excluding Terry’s salary are expected to total $5,000 per month. In order to do the work necessary to make this business succeed, Terry would have to leave a job that pays $36,000 per year. What is the expected annual sales? What is the expected annual net cash inflow from operations including Terry’s salary and excluding equipment purchase and overhaul? What is the net present value of the screen-printing equipment if Terry must earn a 15% return on the investment in the equipment?

6. Arklahoma Bedding Company sells deluxe king size mattresses for $400 per set. The variable cost per set is $150. The company incurs $2,300,000 of fixed costs per year. The company expects to sell 20,000 sets of mattresses in the coming year. Based on this data, prepare a static budget for the coming year. Holding all other factors constant, how would net income differ from the static budget if fixed costs were 10% higher than expected? Holding all other factors constant, how would net income differ from the static budget if variable costs were 10% higher than expected?

7. Ye Olde Recipe Shoppe sells recipe boxes. Management has prepared the following projections for its business for 20X5: Budgeted average price per box $ 16 Budgeted variable costs per box $ 7 Budgeted annual fixed costs $ 360,000 Prepare a flexible budget for sales of 50,000 boxes and 60,000 boxes, respectively.

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Professional Development Questions

1. In Chapter 7 of the text (page 240), answer the Mini-Case problem for Sweet 16 Donut Shop.

2. In Chapter 8 of the text (page 280), answer the Mini-Case problem for University Backpacks (Part I).

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Lesson 5 –Performance Evaluation & Decision Making and Analyzing Costs at the Customer & Process Level

Introduction Previous lessons’ chapters illustrated how managers use profit planning and forecasting techniques to manage business processes. While those chapters focused on planning for the future, this lesson shows how companies evaluate performance at the end of a fiscal period. It begins by reviewing the most common financial performance evaluation techniques in use today and discusses their benefits and limitations. Then it illustrates how the balanced scorecard approach (BSA) introduced in earlier chapters uses financial and nonfinancial performance data to improve decision making as managers work toward achieving their organization’s strategy.

However, fixing problems may not always be as easy as finding them. In fact, developing solutions frequently requires more detailed product or service cost information than the aggregate data commonly reported in most financial statements and other performance reports. Companies increasingly want to know how profitable specific customers are or how much these patrons are costing them. Therefore, in this lesson, we introduce the terminology, tools, and structure needed to more fully evaluate the profitability of a company’s product or service. To evaluate whether a product or service is profitable, companies must be able to completely and accurately assess the costs incurred in producing and/or delivering it to the customer. The difficulty of assessing product or service costs varies with the type of business a company pursues.

If a company is a merchandising firm, it buys completed inventory items from suppliers; it then sells those items to customers. For example, national chains like Target and Wal-Mart purchase the goods on their shelves from a variety of wholesale suppliers. Determining their product cost (both in the aggregate and individually) is relatively easy. It consists of the inventory item’s purchase cost including shipping charges less any returns, allowances, and pricing discounts. However, for firm’s that make products for resale to customers, product costing can be very complex. These manufacturing firms convert raw materials into finished goods that then are sold to consumers. Assigning raw material resources to the individual items created increases the complexity of product costing.

Service firms, such as hospitals, attorneys, and landscaping service providers, also often find it difficult to determine unit cost of their products because of the variety of resource inputs used to provide a service. Therefore, the rest of this chapter will address the tools and techniques manufacturers and service providers use to assess and assign costs to the products they create or services they deliver.

Lesson Learning Objectives

By the conclusion of this lesson you should be able to:

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• Explain the purpose and benefits of performance evaluation.

• Define and explain the use of responsibility centers.

• Demonstrate how firms evaluate responsibility center performance.

• Illustrate the use of cost-benefit analysis for business decision making. • Describe and illustrate the use of the balanced scorecard for performance measurement and

evaluation.

• Identify the types of costs firms incur when producing goods or services. • Describe the flow of production costs in a manufacturing firm.

• Explain the traditional method of overhead allocation. • Illustrate how activity-based costing is used in assigning overhead.

• Discuss two systems used to measure the cost of products or services.

Reading Study Chapters 9 and 10 of the text.

Assignments The follow ing Assignment Questions should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response. Your response must adequately cover the question w ithout being wordy or relying on “yes” or “no” responses.

Short Answer Questions

1. Movie Magic typically sells DVDs for $15 each. The DVDs cost Movie Magic $7 each. Assume that

Movie Magic is approached by a new regional day care company that would like to make a one- time purchase of 500 DVDs. Since the day care company provides entertainment for its client children, it requires a wide selection of movies. Suppose that the day care company offers to pay $12 per DVD. Assuming that the sale of DVDs will not interfere with sales to other customers, should Movie Magic accept the offer even though the selling price is below its normal price? What will be the impact on net income if the offer is accepted?

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2. Cyclorama makes and sells Power-Speed bicycles for $400 each. The cost of making bicycles

includes variable costs of $150 per bicycle and fixed costs of $300,000 per year. Cyclorama has been approached by the state police agency about making a one-time purchase of 200 bicycles and has offered to pay Cyclorama $280 apiece for them. Assuming that the company has time to make the bicycles without incurring any additional costs, should Cyclorama accept the offer even though the selling price is below its normal price? What will be the impact on net income if the offer is accepted?

3. In addition to flowers and plants, Fannie’s Florist sells candy bouquets. Fannie currently buys candy bouquets from a local distributor for $8 each and sells the bouquets for $10 each. She sells 300 candy bouquets per month for eight months of the year, 500 bouquets per month for three months, and about 1,000 bouquets during February around Valentine’s Day. Her daughter has suggested that they could produce their own candy bouquets. After investigating the costs, they discovered that candy will cost them an average of $1 per candy bouquet. In addition, it will cost about $3 per candy bouquet to pay people to assemble the candy bouquet. Also, it will cost $2,000 per month to rent a building to store and produce the candy bouquets. What is the annual net cost of buying candy bouquets from the distributor? What is the annual net cost of making the candy bouquets themselves? Should Fannie’s Florist produce or buy the candy bouquets? Are the selling price and total revenue received from customers relevant to this decision?

4. Purple Cow Company has three business segments: Jersey, Angus, and Brahma. Each segment had the following assets and generated the following margins last year: Jersey Angus Brahma Segment assets $100,000 $150,000 $300,000 Segment margin $ 45,000 $ 60,000 $102,000 Compute ROI for each segment If the interest rate used to determine the segment financing charge is 20%, what is the residual income for each segment? Which segment performed the best; the worst?

5. The president of Sheffield’s Shoes forecasts the company will incur $1,560,000 of manufacturing overhead in the coming year. The company also expects the following results for its operations in the coming year: Direct labor hours 192,000 Direct labor cost $ 2,400,000 Machine hours 60,000 Compute overhead allocation rates based on the following bases: Direct labor hours Direct labor dollars Machine hours If the company decides to use direct labor hours as its basis for overhead allocation, how much overhead would be allocated to a product that requires 5,000 hours of direct labor?

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6. Sydney Corp. reported the following data about its production process for the current month:

Cost of beginning work in process $ 90,000 Total manufacturing cost $ 560,000 Units completed 36,000 Units in process (20%) complete 20,000 Compute the equivalent units of production for the month. Compute the average cost per equivalent unit.

7. Boxcar Electronics uses the same machinery to produce multiple products. Total overhead cost for the company is $1,800,000. 72,000 direct labor hours were used during the year. The following additional information was found in the company’s records:

Product A All Other Products Total Units produced 3,500 659,000 662,500 Direct material cost $ 50,000 $ 4,450,000 $ 4,500,000 Direct labor cost $ 12,000 $ 488,000 $ 500,000 Machine hours 16,500 733,500 750,000 Direct labor hours 2,200 69,800 72,000 Engineering changes per year 5 295 300 Production set-ups 30 2,470 2,500

Given the technological nature of these products, the company periodically modifies the products to meet customer-specific needs. Engineering overhead costs incurred to make these product changes total $480,000 per year. Each production run also requires a unique set-up for each product. Total set-up charges of $420,000 are included in manufacturing overhead. Other major activities, their total overhead costs, and related cost drivers are purchasing $315,000, material costs; production, $585,000, direct labor hours. Calculate the cost of Product A using the traditional method of overhead allocation. Estimate the product’s overhead cost per unit using each of the following four possible allocation bases: Direct material cost Direct labor cost Machine hours Direct labor hours Calculate the total cost and unit cost of Product A using activity-based costing.

Professional Development Questions

1. In Chapter 9 of the text (page 322), answer the Mini-Case problem for Huskerhenge Pizza Company (questions 1 – 5).

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2. In Chapter 10 of the text (page 354), answer the Mini-Case problem for Keystone Academy (Part 3) (questions 1-3).