Cost Accounting (14th Edition)

DECISION POINTS 205
Stylistic Furniture
Budgeted Income Statement
For the Year Ending December 31, 2012
Revenues Schedule 1 $36,860,000
Cost of goods sold Schedule 7 ƒ24,440,000
Gross margin 12,420,000
Operating costs
Product design Schedule 8 $1,024,000
Marketing costs Schedule 8 3,725,900
Distribution costs Schedule 8 ƒ3,876,000 ƒƒ8,625,900
Operating income
$ƒ3,794,100
Decision Points
The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a
key question related to a learning objective. The guidelines are the answer to that question.
Decision
1. What is the master budget
and why is it useful?
2. When should a company
prepare budgets? What
are the advantages of
preparing budgets?
3. What is the operating budget
and what are its components?
4. How can managers plan for
changes in the assumptions
underlying the budget?
Guidelines
The master budget summarizes the financial projections of all the company’s
budgets. It expresses management’s operating and financing plans—the formalized
outline of the company’s financial objectives and how they will be attained.
Budgets are tools that, by themselves, are neither good nor bad. Budgets are useful
when administered skillfully.
Budgets should be prepared when their expected benefits exceed their
expected costs. The advantages of budgets include the following: (a) they
compel strategic analysis and planning, (b) they promote coordination and
communication among subunits of the company, (c) they provide a framework
for judging performance and facilitating learning, and (d) they motivate
managers and other employees.
The operating budget is the budgeted income statement and its supporting
budget schedules. The starting point for the operating budget is generally the
revenues budget. The following supporting schedules are derived from the revenues
budget and the activities needed to support the revenues budget: production
budget, direct material usage budget, direct material purchases budget,
direct manufacturing labor cost budget, manufacturing overhead costs budget,
ending inventories budget, cost of goods sold budget, R&D/product design cost
budget, marketing cost budget, distribution cost budget, and customer-service
cost budget.
Managers can use financial planning models—mathematical statements of the
relationships among operating activities, financing activities, and other factors
that affect the budget. These models make it possible for management to conduct
what-if (sensitivity) analysis of the effects that changes in the original predicted
data or changes in underlying assumptions would have on the master
budget and to develop plans to respond to changed conditions.