Copyright © 2017 by AccountingTools, Inc All rights reserved Published by AccountingTools, Inc., Centennial, Colorado No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher Requests to the Publisher for permission should be addressed to Steven M Bragg, 6727 E Fremont Place, Centennial, CO 80112 Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For more information www.accountingtools.com about AccountingTools® ISBN-13: 978-1-938910-89-0 Printed in the United States of America products, visit our Web site at Table of Contents Chapter - Introduction to Budgeting The Advantages of Budgeting The Disadvantages of Budgeting Capital Budgeting Problems The Command and Control System Behavioral Impacts Bureaucratic Support Information Sharing Chapter - Cost-Volume-Profit Analysis Contribution Margin Contribution Margin Income Statement Breakeven Point Margin of Safety Cost-Volume-Profit Analysis Sales Mix Chapter - The System of Budgets The System of Budgets Operating Decisions Impacting the System of Budgets The Reasons for Budget Iterations The Number of Budget Scenarios Chapter - The Revenue Budget Overview of the Revenue Budget The Detailed Revenue Budget Responsibility for Revenue Information Sources of Revenue Information The Impact of Pacing on the Revenue Budget The Inherent Variability of the Revenue Budget Chapter - The Ending Finished Goods Inventory Budget Ending Inventory Assumptions Impact of Changes in Ending Inventory The Ending Finished Goods Inventory Budget Chapter - The Production Budget The Production Budget Other Production Budget Issues Budgeting for Multiple Products Chapter - The Direct Materials Budget The Direct Materials Budget (Roll up Method) The Direct Materials Budget (Historical Method) The Direct Materials Budget (80/20 Method) Anomalies in the Direct Materials Budget The Role of the Direct Materials Budget Chapter - The Direct Labor Budget The Direct Labor Budget (Traditional Method) The Direct Labor Budget (Crewing Method) The Direct Labor Budget for Manufacturing Cells The Cost of Direct Labor Anomalies in the Direct Labor Budget Chapter - The Manufacturing Overhead Budget The Manufacturing Overhead Budget Overhead Allocation between Periods Additional Issues Chapter 10 - The Cost of Goods Sold Budget The Cost of Goods Sold Budget Chapter 11 - The Sales and Marketing Budget Types and Timing of Sales and Marketing Expenses Structure of the Sales and Marketing Budget Sources of Sales and Marketing Expense Information Analysis of the Sales and Marketing Budget Diminishing Returns Analysis Sales and Marketing Pacing The Impact of Bottlenecks on the Sales and Marketing Budget Sales and Marketing Metrics Chapter 12 - The Research and Development Budget General Funding for Research and Development Research and Development Funding Decisions Expected Commercial Value Project Risk Project Selection Issues The Project Failure Rate Structure of the Research and Development Budget Ongoing Project Analysis Research and Development Measurements Treatment of Cancelled Projects Chapter 13 - The Administration Budget The Administration Budget Cost Variability in the Administration Budget Allocation of Administration Expenses Service-Based Costing Chapter 14 - The Capital Budget Overview of Capital Budgeting Capacity Expansion Strategy Capacity Reduction Strategy Risk Levels Additional Risk Factors for International Investments Bottleneck Analysis Net Present Value Analysis The Payback Method Capital Budget Proposal Analysis The Outsourcing Decision The Capital Budgeting Application Form The Post Installation Review The Lease versus Buy Decision Capital Budgeting with Minimal Cash Chapter 15 - The Compensation Budget The Compensation Budget The Treatment of Hourly Pay and Overtime The Benefits Budget The Headcount Budget The Link between Budgets and Bonus Compensation Chapter 16 - The Master Budget The Budgeted Income Statement Components of the Budgeted Balance Sheet Accounts Receivable Inventory Fixed Assets The Financing Budget The Budgeted Balance Sheet Accompanying Documentation Chapter 17 - Nonprofit Budgeting The Revenue Budget The Management and Administration Budget The Fundraising Budget Program and Grant Budgets Chapter 18 - Flexible Budgeting The Flexible Budget The Flexible Budget Variance Advantages of Flexible Budgeting Disadvantages of Flexible Budgeting Chapter 19 - Cost Variability Mixed Costs Labor-Based Fixed Costs Costs Based on Purchase Quantities Costs Based on Production Batch Sizing Cost Based on Step Costs Time-Based Costs Experience-Based Costs Incorporating Cost Variability into Reports Chapter 20 - The Zero-Base Budget Incremental Budgeting Overview of Zero-Base Budgeting The Zero-Base Budgeting Process Step - Develop Decision Packages Step - Rank Decision Packages Advantages of Zero-Base Budgeting Problems with Zero-Base Budgeting Conditional Budgeting Chapter 21 - Operating without a Budget Alternatives to the Budget Forecasting without a Budget Capital Budgeting Goal Setting without a Budget Strategy without a Budget Management Guidelines The Role of Senior Management Corporate Staff Roles Board Approvals Compensation without a Budget Controls without a Budget Behavioral Norms Profit Knowledge Information Exchange Hiring, Promotions, and Continuity Customer Ownership Service Center Pricing Accounting Reports Transfer Pricing Investor Relations Implementation of the No-Budget Environment Chapter 22 - The Rolling Forecast The Rolling Forecast Process The Rolling Forecast Format Continuous Budgeting Chapter 23 - Budgeting Procedures Procedure – Formulation of the Budget Procedure – Issue Budget Variance Reports Procedure – Subsequent Account Changes Chapter 24 - Budgeting Efficiencies Budget Model Efficiencies Spreadsheet Error Checking Verification Opportunities Simplification Opportunities Simplification over Time Budgeting Process Efficiencies Participative Budgeting Chapter 25 - Budget Reporting General Reporting Format Revenue Reporting Selling Price Variance Sales Volume Variance Overview of Cost of Goods Sold Variance Reporting The Purchase Price Variance Material Yield Variance Labor Rate Variance Labor Efficiency Variance Variable Overhead Spending Variance Variable Overhead Efficiency Variance Fixed Overhead Spending Variance Problems with Variance Analysis Which Variances to Report L Labor routing A document showing the work steps required to complete the manufacture of a product, including the time required for each work step Line-item budget A budget in which expenditures are allocated to specific line items in the budget, and managers are not allowed to shift funds among these line items without permission Long term budget A budget that covers a period of more than one year M Manufacturing overhead budget A document that itemizes the cost of manufacturing overhead during a budget period Master budget The budgeted financial statements derived from all other supporting schedules in a budget process The master budget may contain just an income statement, or may include a balance sheet Material requirements planning A computer-driven production methodology that uses bills of material, inventory records, and a production schedule to forecast and order materials, so that those materials needed for scheduled production are available in the correct quantities and on the correct dates N Net present value analysis A discounted cash flow methodology that uses a required rate of return (usually an entity’s cost of capital) to determine the present value of a stream of future cash flows, resulting in a net positive or negative value O Overhead The cost to support a company’s production process Examples of overhead are rent for the production facility or the cost of product warehousing P Participative budgeting A budgeting process under which those people impacted by a budget are involved in the budget creation process Payback method A capital budgeting analysis method that calculates the amount of time it will take to recoup the investment in a capital asset, with no regard for the time value of money Piece rate pay A pay method used to pay employees based on the number of units of production completed To calculate wages under this method, multiply the rate paid per unit of production by the number of units completed in the work week Profit center A business unit or department within a company, for which both revenues and expenses are recorded This results in a separate financial statement for each such entity, which reveals a net income or loss Production budget A document that derives the planned number of units of production during a budget period, based on forecasted unit sales, planned ending inventory levels, and beginning inventory levels The budget is stated in units Program The type of service provided by a nonprofit R Research and development budget A document that itemizes the expenditures related to research and development activities for an entity during a budget period Responsibility accounting A reporting system that compiles revenue, cost, and profit information at the level of those individual managers most directly responsible for them Restricted funds An allocation of funds that is assigned to a specific purpose Revenue budget A summarization of expected sales levels over a budget period, which may alternatively be categorized by product, region, salesperson, or some other category Most other parts of a corporate budget are based on it Rolling budget A budget that is continually updated to add a new budget period as the most recent budget period is completed Rolling forecast A forecast of key revenue, expense, and cash flow information to which a new period is added as soon as the most recent period has been completed S Sales and marketing budget A document that itemizes the various expenditures for the sales and marketing functions during a budget period It may be structured by expense type, territory, or (in rare cases) by customer Sales discount A reduction in the price of a product or service that is offered by the seller, in exchange for early payment by a buyer An example of a sales discount is for the buyer to take a 1% discount in exchange for paying within 10 days of the invoice date, rather than the normal 30 days Short term budget A budget that covers a period of up to one year Semi-variable cost A cost containing elements of both fixed and variable costs Spoilage The production of goods that cannot be sold at normal prices, due to damage Normal spoilage is the amount of damage that naturally arises during a production process, while abnormal spoilage exceeds the normal or expected rate of spoilage Start-up cost A cost that is only incurred when a project or product is initially created or launched Static budget A budget that is completed prior to the budget periods being forecasted, and which is fixed for the entire period covered by the budget, with no changes based on actual activity Step cost A cost that does not change steadily, but rather at discrete points It is fixed within certain boundaries, outside of which it will change Sunk cost A cost that an entity has incurred, and which it can no longer recover by any means Do not consider a sunk cost when making a decision to continue investing in an ongoing project, since this cost cannot be recovered T Target costing A process of determining the price point at which a new product can be sold, assuming a certain feature set, which is used in conjunction with a target profit to arrive at a target cost at which a product must be designed Throughput Revenues minus totally variable expenses Transfer price The price at which one part of an entity sells a product or service to another part of the same entity There are a number of transfer pricing methods, such as using the market price, or a negotiated price, or cost plus margin Transfer pricing is used to avoid paying income taxes in hightax regions, and so is a significant focus of government auditing activities V Variable cost A cost that varies in response to activity volume An example is the cost of materials used to manufacture a product Variance analysis The difference between actual and planned behavior W Wage base limit The maximum amount of wages paid in a calendar year to which the social security tax applies The social security tax is not applied to wages above the wage base limit Z Zero-base budgeting A budgeting system that requires managers to justify all of their budgeted expenditures, rather than just the incremental changes to the budget used in the preceding year Thus, the manager is assumed to have an expenditure base line of zero Index Accounts payable budgeting 145 Accounts payable days 145 Accounts receivable budgeting 139 Accrued liabilities budgeting 147 Administration budget Cost variability of 103 Overview 101 Administration expense allocation 104 Advertising expense 74 Advertising expense report 87 Balance sheet Budget 151 Budgeted 138 Base pay budget 129 Behavioral impact of budgeting Behavioral norms 204 Benefits budget 132 Bill of materials 51 Block budget 229 Bonus compensation Basis of calculation 134 Linkage to budget 134 Bottlenecks Analysis of 113 Impact on budget 26 Sales and marketing 83 Bottom-up model 28 Breakeven point 12 Budget Administration 101 Alternatives to 191 Board approval of 201 Capital 107 Compensation 128 Cost of goods sold 71 Definition of Direct labor 59 Direct materials 51 Ending inventory 40 Financing 149 Flexible 161 Manufacturing overhead 66 Pre-loading 231 Production 46 Research and development 89 Revenue 30 Sales and marketing 74 Sample 254 Scenarios, number of 27 Zero-base 179 Budget documentation 153 Budget model Simplification 229 Verification 228 Budgetary slack Budgeting Advantages of Bureaucracy Controls 250 Disadvantages of Procedures 220 Calendar of activities 222 Capacity reduction strategy 110 Capital budgeting Application form 120 Overview of 107 Post installation review 123 Problems with Proposal 117 Without a budget 194 Cash budgeting 148 Cash repatriation 25 Command and control system Commission plans 75 Committed cost 172 Compensation budget 128 Compensation calculation 201 Conditional budgeting 189 Continuous budgeting 218 Contribution income statement 11 Contribution margin 9, 99 Controls Budget integration 251 Budgeting 250 With no budget 204 Corporate allocation 24 Corporate budget 24 Cost of goods sold budget 71 Cost per sales call 86 Cost variability in reports 174 Cost-volume-profit analysis 16 Credit terms, impact on budget 26 Crewing method 61 Customer profitability 85 Customer turnover 85 Days of inventory on hand 142 Days sales outstanding 139 Decision packages 180 Diminishing returns analysis 81 Direct labor budget Anomalies 63 Crewing method 61 For manufacturing cells 62 Traditional method 59 Direct labor, cost of 63 Direct mail effectiveness 86 Direct materials budget 80/20 method 55 Anomalies 56 Historical method 53 Role of 57 Roll up method 51 Discretionary cost 172 Ending inventory budget Assumptions 40 Changes in 42 Equity budgeting 147 Expected commercial value 90 Experience curve 173 Facilities budget 24 Facility analysis 118 Federal unemployment tax budget 129 Field sales reporting 87 Financing budget 149 Financing, impact on budget 27 Fixed assets budgeting 144 Fixed overhead spending variance 245 Flexible budget Advantages of 163 Disadvantages of 164 Overview of 161 Fundraising budget 159 Fundraising classification 158 Gaming the system Goal setting 196 Headcount budget 133 Hourly pay, budgeted 131 Income taxes payable 147 Incremental budgeting 178 Information sharing Information transparency 205 International risks 112 Inventory Budgeting 142 Stockpiling 143 Inventory record accuracy 40 Investor relations 209 Labor efficiency 61 Labor efficiency variance 242 Labor rate variance 241 Labor routing 60 Labor-based fixed costs 168 Learning curve 172 Lease versus buy decision 124 Management and administration 157 Manufacturing cells 62 Manufacturing overhead budget Detailed allocations 70 Fixed and variable format 69 Overhead allocation 68 Overview 66 Manufacturing resources planning 40 Margin of safety 15 Material yield variance 240 Medicare budget 129 Metrics Project failure rate 94 Research and development 99 Sales and marketing 84 Metrics analysis 27 Mixed costs 166 Monument elimination 118 Net present value analysis 113 No budget Compensation calculation 201 Controls 204 Corporate staff role in 200 Customer ownership 206 Goal setting 196, 197 Hiring policy 205 Management guidelines 198 Overview of 191 Reporting 207 Senior management role in 198 Service center pricing 207 Transfer pricing 209 Notes payable budgeting 147 Operating decisions, impact on budget 25 Other assets budgeting 147 Outsourcing decision 119 Overhead allocation 68 Overtime, budgeted 131 Pacing 27, 37, 82 Participative budgeting 231 Payback method 116 Payroll tax summary 128 Post installation review 123 Prediction market 194 Pre-load the budget 231 Prepaid expenses budgeting 146 Price decreases, impact on budget 25 Price increases, impact on budget 25 Procedures Account changes 223 Budgeting 220 Report issuance 223 Product life cycles 40 Product versions, number of 41 Production batch costs 170 Production budget Issues 47 Layout 46 With multiple products 49 Profit per customer 85 Programs 160 Project failure rate 94 Promotions expense 74, 75 Purchase price variance 238 Purchase quantity cost basis 169 Rate variance 237 Ratios budget page 24 Reports Budget versus actual 233 Cost of goods sold 237 Revenue variances 235 Trend line 234 Variance discussion 235 Research and development budget At department level 97 At project level 97 Funding decisions 90 General funding 89 Metrics 99 Ongoing project analysis 98 Project selection issues 93 Structure of 96 Treatment of cancelled projects 100 Responsibility reporting system 252 Revenue budget By contract 32 By product line 32 By sales territory 31 Master 33 Nonprofit 155 Overview 30 Responsibility for 34 Sources of information 35 Variability of 38 Risk analysis 91 Risk levels 110 Rolling forecast Format 215 Overview of 193 Process 213 Revision level 214 Sales and marketing budget Analysis of 79 By customer 77 By expense type 75 By territory 76 Expense types 74 Responsibility for 79 Sales cycle 82 Sales mix 18 Sales per person 82 Sales per salesperson 84 Sales volume variance 236 Seasonal sales 41 Selling price variance 235 Service center pricing 207 Social security budget 129 Spreadsheet error checking 225 Static budget 161 Stock levels, impact on budget 26 Sunk cost 172 System of budgets 20, 23, 24 Target costing 94 Time-based costs 171 Top-down model 28 Transfer pricing 209 Use it or lose it issue Useful life extension 118 Variable overhead efficiency variance 244 Variable overhead spending variance 243 Variance analysis problems 246 Volume variance 238 Working capital reduction 41 Zero-base budget Advantages of 187 Decision packages 180 Disadvantages of 188 Income statement 186 Overview of 179 Process 180 ... Rate Variance Labor Efficiency Variance Variable Overhead Spending Variance Variable Overhead Efficiency Variance Fixed Overhead Spending Variance Problems with Variance Analysis Which Variances... Financial Analysis Financial Forecasting and Modeling Fixed Asset Accounting Foreign Currency Accounting Fraud Examination Fraud Schemes GAAP Guidebook Governmental Accounting Health Care Accounting... employees and using contractors to avoid headcount targets Unethical behavior is a poison that can spread through an organization rapidly; unsullied managers may leave, while the remainder engages