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WMBA 6050: Accounting for Management Decision Making Week 2 Weekly Briefing
Welcome to Week 2! In Week 1, you were introduced to accounting as the language of business. You looked at various annual reports and compared the contents. You noticed that some items occurred in every annual report. These were the Management Discussions and Analysis (MD&A), the four basic financial statements, the report of the independent auditors, and the notes to the financial statements. You began to build an accounting vocabulary, learned the interrelationship between the four basic financial statements, discussed fraud issues, and studied the difference between financial accounting and managerial accounting. In Week 2, you will continue to build your accounting vocabulary as you study the budgeting aspect of management accounting. This week: In terms of the specific Learning Objectives, you will:
• Analyze the influence of financial and managerial accounting on decision making
• Evaluate forecasts, strategic plans, and budgets on organizations
• Analyze stakeholder involvement in budgeting processes
• Prepare performance reports
• Analyze performance report results
• Evaluate variances
In terms of the course-level Learning Outcomes, you will:
• Evaluate various accounting measures and their relevance to a wide range of stakeholders
• Analyze various types of budgets, strategic planning, and forecasting
• Employ managerial accounting approaches and information to make effective decisions
• Demonstrate effective communication skills to present accounting information to stakeholders
• Assess managerial accounting tools and their usefulness to organizational leaders
• Apply accounting principles ethically and appropriately to personal and professional contexts
Budgets A budget is defined as "the formal expression of plans, goals, and objectives of management that covers all aspects of operations for a designated time period." (Shim, Siegel, & Shim, 2012) It can be as simple as a handwritten piece of paper for a small
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one-person company that lists the anticipated revenues for the month followed by the expected bills that must be paid, or it can be elaborate computer-based financial modeling software. Listed below are some commonly used budgeting software products. There are pros and cons to different types of software and each organization needs to find a product that fits its needs.
• Advisory Board Company. (2013). ActiveStrategy [Computer software]. Retrieved from www.activestrategy.com
• Centage. (2014). Budget Maestro [Computer software]. Retrieved from http://centage.com/Products/Budget-Maestro-Overview.asp
• Host Analytics. (2014). Host Budget [Computer software]. Retrieved from www.hostanalytics.com
• Microsoft Dynamics. (2014). FRx Software [Computer software]. Retrieved from www.microsoft.com/en-us/dynamics/products/frx.aspx
• SAP. (n.d.). Retrieved from www.sap.com
• SAS Institute. (n.d.). Retrieved from www.sas.com A budget has many benefits. It requires management to formalize goals and define objectives. It is an early warning system for potential problems, facilities the coordination of activities within the organization, keeps management apprised of the overall operations of the organization, and helps to motivate employees to meet the goals set in the budget (Weygandt, Kimmel, & Kieso, 2010). Budgets do have a downside. They are time consuming to prepare, may not use realistic data, may encourage "playing the system,” and can cause rifts between departments instead of encouraging sharing of resources (Zimmerman, 2020). If managers' pay is based partially on meeting budget goals, there is a strong incentive to distort budgets so they are easier to achieve. If managers know their budgets will be cut if they do not spend their entire allocation (budget lapsing), they may decide to spend the money on unnecessary purchases to preserve the budget amounts for the next budget cycle. Even though there are many benefits to properly prepared budgets, they cannot exist in a vacuum. They require the existence of predictive ability; clear channels of communication, authority, and responsibility; accurate, reliable, and timely financial information; and support from all levels of the organization. (Shim, et al., 2012)
Strategic Plans, Budgets, and Forecasts Some people confuse, strategic plans, budgets, and forecasts, but they are not the same. The strategic plan is the vision set by upper management for a period of time which is usually not less than three years and may span up to 10 years. It sets broad goals to be achieved during the designated time frame (Schiff, 2008). For example, the strategic plan might call for revenues to increase 5% per year and expenses to decrease by 7% per year. There are usually no details given as to how
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these results will be achieved. The plan is intended to show investors, board members, and other levels of management, the future direction of the organization. The budget gives the details as to how the goals outlined in the strategic plan are to be achieved. It will have input from many levels within the organization, and will give line by line details of expected revenues and expenses that are aligned with the goals defined in the strategic plan. No matter how much care is taken to develop accurate budgets, as the actual numbers come in, there will be differences. Revenues may be less than predicted and expenses may be higher. It is possible that revenues will be greater than expected and the related expenses will also be higher. At this point, forecasts come into play. They use the actual numbers to more accurately predict where the organization is headed. Forecasts do not change the budget, but rather enhance its usefulness as they allow managers to make determinations based on current data. For example, if a department has a monthly budget of $50,000, and has spent $30,000 by the 15th of the month, some decisions will have to be made regarding expenditures for the rest of the month. The forecast data fall between the high-level strategic plan and the very detailed budgets (Schiff, 2008).
Performance Reports Once actual data are received, a performance report can be prepared. A fictional company, the Teddy Bear Toy Company, will be used in the following paragraphs to illustrate how you can read and interpret data to prepare a meaningful performance report. Teddy Bear Toys is a small company dedicated to making stuffed teddy bears out of various materials such as flannel, fake fur, and suede. The operations manager has prepared a report on data from the production department. Based on the report, she wants to let the production department manager know that if this situation is not fixed quickly, she will be looking to hold you accountable. Here is the report that you are given.
Teddy Bear Toy Company Manufacturing Overhead Static Budget Report
For the Month Ended June 20XX
Budget Actual Variance (U or F)
Number of teddy bears produced 25,000 30,000 5,000F
Indirect labor $ 65,000 $ 78,000 $13,000U
Supplies $ 62,500 $ 73,750 $11,250U
Utilities $ 47,500 $ 56,250 $ 8,750U $175,000 $208,000 $33,000U
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You take a look at the report, and at first glance, you think, "She is right. That manager is not doing the job. He is not controlling costs." As you think about the report, you realize that the budget called for 25,000 teddy bears to be produced, but in actuality, 30,000 bears were produced. Of course, there will be more costs! You decide to prepare a flexible budget at the 30,000 unit level of activity. First, determine budgeted costs per bear by dividing the budgeted amount for each cost by the budget level of production.
Indirect labor: $65,000/25,000 bears = $2.60 per bear. Supplies: $62,500/25,000 bears = $2.50 per bear. Utilities: $47,500/25,000 bears = $1.90 per bear.
Next, multiply the per bear amount for each cost by the actual number of bears produced.
Indirect labor: $2.60 per bear x 30,000 bears = $78,000 Supplies: $2.50 per bear x 30,000 bears = $75,000 Utilities: $1.90 per bear x 30,000 bears = $57,000
Finally, prepare a performance report for manufacturing overhead for the production department.
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Teddy Bear Toy Company
Performance Report—Production Department
For the Month ended June 20XX
I II III IV V
Budget Actual Variance
(at 30,000) Variance
Manufacturing Overhead Costs
Indirect labor $ 65,000 $ 78,000 $ 13,000 U $ 78,000 $ -
Supplies $ 62,500 $ 73,750 $ 11,250
$ 75,000 $ 1,250
Utilities $ 47,500 $ 56,250 $ 8,750
$ 57,000 $ 750
Total $175,000 $208,000 $ 33,000 U $ 210,000 $ 2,000
The manager of the production department is doing a great job of controlling costs. When a flexible budget is used, it is easy to see that the costs are below what is budgeted for a production of 30,000 teddy bears. You need to explain to the operations manager that she should gauge performance against the actual level of activity, not against the static budget numbers. In addition, the production department manager should be complimented for staying within the budget for the actual level of activity. In summary, this week you added the following terms to your accounting vocabulary: budgets, strategic plans, forecasting, static budgets, and flexible budgets. You also learned how to change a static budget into a flexible budget in order to compare actual costs incurred to budgeted costs at the same level of activity. When budgets are prepared carefully and used properly, they can help managers make educated decisions that will help guide the organization toward its goals.
References Advisory Board Company. (2013). ActiveStrategy [Computer software]. Retrieved from
www.activestrategy.com Centage. (2014). Budget Maestro [Computer software]. Retrieved from
http://centage.com/Products/Budget-Maestro-Overview.asp Host Analytics. (2014). Host Budget [Computer software]. Retrieved from
www.hostanalytics.com Microsoft Dynamics. (2014). FRx Software [Computer software]. Retrieved from
www.microsoft.com/en-us/dynamics/products/frx.aspx SAP. (n.d.). Retrieved from www.sap.com
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SAS Institute. (n.d.). Retrieved from www.sas.com
Schiff, C. S. (2008, August). Requirements for budgeting, planning and forecasting. DM Review, (18)8, 26–27.
Shim, J. K, Siegel, J. G., & Shim, A. I. (2012) Budgeting basics and beyond (4th ed.).
Hoboken, NJ: John Wiley & Sons. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010) Managerial accounting: Tools for
decision making (5th ed.). Hoboken, NJ: John Wiley & Sons. Zimmerman, J. (2020). Accounting for decision making and control (10th ed.). McGraw-