AFM102 Chapter Notes - Chapter 9: Income Statement, Finished Good

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lemonbeetle804

16 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Jie Joyce Tian

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Chapter 9

Master Budget: A suary of a opay’s plas i hih speifi targets are set for

sales, production, distribution, administrative, and financing activities; it generally

culminates in a cash budget, a budgeted income statement, and a budgeted balance

sheet.

Bottlenecks: Machines, activities, or processes that limit total output because they are

operating at capacity.

Responsibility Accounting: A system of accountability in which managers are held

responsible for those items of revenue and cost over which they can exert significant

influence, and only those items. Managers are held responsible for differences between

budgeted and actual results.

Continuous or Perpetual Budget: A 12 month budget that rolls forward one month (or

quarter) as the current month (or quarter) is completed.

Participative Budget: A method of preparing budgets in which managers prepare their

o udget estiates. These udget estiates are the reieed y the aager’s

supervisor, and any issues are resolved by mutual agreement, leading to a completed

budget.

Budgetary Slack: The difference between the revenues and expenses a manager

believes can actually be achieved and the amounts included in the budget. Slack will

exist when revenue budgets are intentionally set below expected levels and expense

budgets are set above expected levels.

Budget Committee: A group of key management personnel responsible for overall

policy matters related to the budget program, coordinating the preparation of the

budget, handling disputes related to the budget, and approving the final budget.

Stretch Budget: A budget that is highly difficult to achieve. Attainment of stretch

budgets often requires considerable changes to the way activities are performed.

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Document Summary

Master budget: a su(cid:373)(cid:373)ary of a (cid:272)o(cid:373)pa(cid:374)y"s pla(cid:374)s i(cid:374) (cid:449)hi(cid:272)h spe(cid:272)ifi(cid:272) targets are set for sales, production, distribution, administrative, and financing activities; it generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. Bottlenecks: machines, activities, or processes that limit total output because they are operating at capacity. Responsibility accounting: a system of accountability in which managers are held responsible for those items of revenue and cost over which they can exert significant influence, and only those items. Managers are held responsible for differences between budgeted and actual results. Continuous or perpetual budget: a 12 month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. Participative budget: a method of preparing budgets in which managers prepare their o(cid:449)(cid:374) (cid:271)udget esti(cid:373)ates. These (cid:271)udget esti(cid:373)ates are the(cid:374) re(cid:448)ie(cid:449)ed (cid:271)y the (cid:373)a(cid:374)ager"s supervisor, and any issues are resolved by mutual agreement, leading to a completed budget.

Related Questions

A decentralized organization is one in which:

a. each stockholder is given decision-making authority.

b. only top-level management is given decision-makingauthority.

c. each employee in the organization is given permission to makedecisions about their company.

d. managers at various levels throughout the organization aregiven decision-making authority.

A local chain department store grants each of its store managersthe authority to make buying decisions for their stores. Grantingmanagers this kind of authority is found in which type oforganization?

a. Desegmented

b. Centralized

c. Segmented

d. Decentralized

A local chain electronics store does not allow its store ordistrict managers to make important decisions about their stores.The main role of store managers is to supervise employees and makesure day-to-day transactions run smoothly while district managerssupervise store managers and report profitability data back totop-level management. Not allowing store or district managersdecision-making authority is most likely to be found in which typeof organization?

a. Centralized

b. Desegmented

c. Segmented

d. Decentralized

When a few individuals at the top of an organization retaindecision-making authority, the organization is referred to asa(n):

a. investment center.

b. centralized organization.

c. decentralized organization.

d. profit center.

Which of the following statements regarding the structure oforganizations is false?

a. In a decentralized organization, decision-making authority isconfined to top-level management.

b. Decentralization may make it difficult for managers to shareunique and innovative ideas.

c. When decision-making authority is spread among too manymanagers, managers may become so concerned with their own area ofresponsibility that they lose sight of the company's overallfocus.

d. In a decentralized organization, there may be a lack ofcoordination and communication between segments.

Which of the following is an advantage of decentralization?

a. It allows top-level management who normally work at corporateheadquarters to get involved with the day-to-day decisions thatneed to be made at lower levels.

b. It allows managers to focus on their own area ofresponsibility rather than what is best for the company as awhole.

c. It requires very little as far as manager training costs.

d. It allows decisions to be made in a more timely manner.

Which of the following is not an advantage ofdecentralization?

a. It allows lower-level managers to focus on their ownparticular goals and objectives without having to consider theoverall company's goals and objectives.

b. It allows top-level managers more time to devote tolong-range strategic planning.

c. It permits lower-level managers to gain valuable on-the-jobtraining in order to become better managers.

d. It often creates higher job satisfaction for managers.

Which of the following is often not a disadvantage ofdecentralization?

a. Lack of coordination and communication between segments.

b. Higher training costs for lower-level managers.

c. Lack of company focus as lower-level managers may makedecisions that benefit their own particular segment.

d. Decreased job satisfaction for lower-level managers.

Which of the following is a disadvantage ofdecentralization?

a. Lower training costs for lower-level managers.

b. Less timely decisions are able to be made on a day-to-daybasis.

c. Decreased job satisfaction for lower-level managers.

d. Lack of coordination and communication between segments.

"Responsibility accounting" is the concept that says:

a. managers should be responsible for both revenues and costs oftheir particular segment.

b. managers should be held entirely responsible for allinvestment decisions that impact the particular segment in whichthey are in charge.

c. managers should be held responsible for only those thingsunder their control.

d. managers should never be held entirely responsible for thingsthat happen within the particular segment in which they are incharge.

A budget for a single unit of a product or service is called asa:

a. real cost.

b. fixed cost.

c. total cost.

d. standard cost.

Which of the following statements is true regarding the budgetedcost for direct materials?

a. It must be determined after materials are purchased for theyear.

b. It can not be determined if a company uses a just-in-timeinventory system.

c. It would consist of two components - a standard quantity anda standard price.

d. It would be used on a static budget but not a flexiblebudget.

Variance analysis compares:

a. standard costs and actual costs.

b. static budgets and flexible budgets.

c. product costs and period costs.

d. practical standards and ideal standards.

Which of the following statements is false regarding taskanalysis?

a. It uses actual historical data in the determination ofstandard costs.

b. It emphasizes what it should cost to produce a product ratherthan historical costs.

c. It examines the production process in detail.

d. It may involve the use of engineers.

Task analysis:

a. is used to set standard costs.

b. is used to determine the tasks that production employeesshould complete on a daily basis.

c. is used to evaluate employee performance.

d. emphasizes the historical costs of a product.

A(n) ____ is attainable only when near-perfect conditionsexist.

a. static budget

b. ideal standard

c. flexible budget

d. practical standard

In most companies, machines break down occasionally andemployees are often less than perfect. Which type of standardacknowledges these characteristics when determining the standardcost of a product?

a. Practical standard

b. Ideal standard

c. Efficiency standard

d. Budgeted standard

Hathaway Inc. produces and sells golf umbrellas to localresorts. Hathaway anticipates April to be a busy month with thesale of 2,000 umbrellas. The company has prepared the followingstatic budget for April:

Sales revenue (2,000 units)	$60,000
Variable costs:
Direct materials	6,000
Direct labor	8,000
Overhead	2,500
Fixed costs	6,000
Net operating income	$37,500

During April, Hathaway actually produced and sold 2,300 umbrellas.What should be Hathaway's net operating income in April based on aflexible budget?

a. $35,025

b. $43,125

c. $44,025

d. $37,500

Hoppe Inc. manufactures widgets. Management has determined thateach widget has a standard materials cost of $3.50 when 2.5 ouncesof raw material at a cost of $1.40 per ounce are used. The staticbudget for the month of December showed an estimated production of4,000 widgets in December. During December, 4,300 widgets wereactually produced. The actual cost for each widget was $3.60 when2.25 ounces of raw material at a cost of $1.60 per ounce werepurchased and used. What should be the total direct materials costaccording to Hoppe's flexible budget for December?

a. $14,000

b. $15,480

c. $14,400

d. $15,050

Violetta Inc. manufactures plastic storage boxes. Management hasdetermined that each medium-sized box has a standard materials costof $1.20 when 4 pounds of raw material at a cost of $.30 per poundare used. The static budget for the month of March showed anestimated production of 15,000 boxes in March. During March, 17,000boxes were actually produced. The actual cost for each box was$1.56 when 3.9 pounds of raw material at a cost of $.40 per poundwere purchased and used. What should be the total direct materialscost according to Violetta's flexible budget for March?

a. $26,520

b. $23,400

c. $18,000

d. $20,400

HOME CARE Scenario Type of care provided Scenario Question 1 Question 2 Care in this capacity can range from a short-term to long-term based upon the changing needs of the patient. Patient age can range from pediatric to elderly. Care can be provided in the patientâs private home, group home, or assisted living setting. Medical homes fall into this category and are a new focus of Accountable Care Organizations through the Affordable Care Act of 2010. Review your current budget. Taking this information into account, what are some strategies you would use to identify resources to focus on improving efficiency and meeting customer expectations during this time? What do you see as the biggest financial issues of your organization? Hint: You are a nonprofit organizationâso look at your means of funding and the relationship this has on your ability to treat patients and hire new staff. How will you address this financial issue? In home care, a patient is visited at home by a nurse or nursing assistants with activities of daily living (ADL), wound care, IV therapy, etc. These organizations can be nonprofit or for-profit. A physician supervises the care with the assistance of RNs or LPNs and certified nursing assistants (CNAs). You are a new administrator for a home health agency that is a national nonprofit organization that serves the surrounding Phoenix community. The agency has been recognized for the delivery of on-time quality services for a number of years. It is known to employ only the top staff within the community, but in recent months staffing numbers have dropped dramatically and you, as the agencyâs administrator, have found yourself in a position where your facility is short staffed. You are unable to admit any additional patients unless you are able to have your staff work over time. Budget Considerations Operational Budget â This budget focuses on a broader view of the total operations of the organization in which all departments are reviewed for both their income potential and the costs associated with the work activities used to generate projected revenues. Each department will have its own budget for the managers to follow and on which to base the activities of the department in order to meet its contribution to the total revenues and the associated costs of the organization. Dietary Services â This is a departmental budget focused on the costs and potential reimbursement for the organization. The operation is overseen by a dietitian or nutritionist who is responsible for supplying the nutritional needs of the patients within their care. This department may utilize the services of several consultants or contract this service to an outside organization. Medical Supplies â This budget is focused specifically on the requirement-based services being delivered by the hospital professional, which are often referred to as nondurable disposable items. This budget includes specific items for the surgeon or professional performing the services. These may include such things as oxygen supplies, diabetic supplies, ostomy supplies, bandages, and related supportive items. These items are generally manufactured for one-time use. They are not reused due the inability to sterilize them. The items that are reusable are classified under capital assets and have a use-time identified with the specific piece of equipment. Human Resources â This budget indicates the finances needed to support the organizationâs objectives, from a personnel perspective. Full-time equivalent (FTE) calculations are used to project the personnel budget. These individuals could include nonskilled labors to professional licensed physicians and various job descriptions within the categories. In addition to listing the FTEs, the associated benefits of the FTEs would be projected within this department for each FTE within the organization. This will generally include line items for consultants and temporary positions based on the needs of the organization. Departmental Costs â This budget focuses on the specific department and its overall needs, costs, and potential revenue in relation to the overall goals of the organizationâs strategic plan. The managerâs primary responsibility is to monitor the operational efficiency of the department, including all areas that directly impact and support the generating of revenue for the organization. Managers may be required to present an analysis of the weekly or monthly operational analysis to the Chief Financial Officer of the organization or a lead manager. Vendor/External Suppliers â Health service organizations have special needs and may require certain external items and/or services. Most organizations have projected budgets to include the purchase of supplies and services for outside contractors (vendors) who specialize in installation, monitoring, and the repair of specialized equipment or technology being utilized by the specific health care delivery system. Maintenance/Facility Operations â This departmental budget focuses on the overall upkeep of the building and the related equipment and machines to provide a safe and comfortable environment for both the patients and workers. This budget includes all FTEs and may also include line items for consultants and outside sources based on needs of the facility.

Revenue 2011 2012 2013

Donations 50,000 55,000 75,200

Grants and Foundations 100,000 80,500 125,780

Government Grants 947,280 878,000 695,120

Interest Expense 6,050 8,000 10,000

Total 1,103,330 1,021,500 906,100

Expenses 2011 2012 2013

Health Center 2,482,845 2,558,265 2,668,951

Administrative Staff 100,000 110,000 125,000

Professional Staff 80,000 100,000 150,000

Family/Youth Services 214,888 210,987 230,985

General Management/Admin140,000 152,000 159,000

Total 3,017,733 3,131,252 3,333,936

Budget Spreadsheet

Venture Volunteers for troubles teens is a not-for-profit entity that provides counselling services to troubles teens and adolescents. While the majority of its funding comes from government, the group also participates in a variety of fundraising activities. To manage the fundraising activities and administer the various programs, there is an executive director, two accounting staff, and several youth counsellors. All staff are salaried and the payroll is processed biweekly. Employees are not paid overtime, but rather they use "flex" time to compensate for overtime. As a result, it is unusual for the payroll to change from pay period to pay period. All of the staff are on direct deposit, so no payroll cheques are issued. The responsibility for the payroll is split between the two accounting staff, Maddie and Ricardo. Maddie is responsible for preparing and posting the payroll while Ricardo is responsible for processing infrequent items such as staff terminations and administering the benefits program. The actual payroll processing is outsourced to a payroll service provider, Paystab Inc. Paystab processes the direct debit payments to employees abd the remittance of all with-holding taxes.

Maddie maintains a spreadsheet listing employees with the approved pay rates. This is maintained in Excel and is password protected. The spreadsheet is sent to Paystab Inc., and it processes the payroll. Only Maddie and Ricardo have access to the spreadsheet and only Ricardo can add or remove employees. Paystab provides Maddie with the payroll register that details the individual pay amounts and totals. Based on this report, Maddie prepares the journal entry for posting to the general ledger. This is reviewed by Ricardo for accuracy, and for unusual amounts and significant fluctuations. Every quarter he prints a copy of the payroll master file and reviews it to ensure only actual employees are listed. He initials a copy of this master file to document this review.

When new staff are hired, they are provided with a new employee package. This package includes a signed offer letter, all tax and medical forms, a confidentiality package, an ethics statement, and a job description. These forms are maintained in an employee personnel file and stored in locked cabinets in the accounting area. Ricardo will update the employee master file when the employee begins work.

Maddie is notified of any staff terminations by the employee's manager. This is done via e-mail. No change can be made to the employee payroll file unless it is provided in writing and the organization deems e-mails adequate. There is a staff "leaving" checklist that needs to be completed and one of the requirements is to remove the employee from the payroll. Once completed, this is filed in the employee's personnel file.

All salary changes are requested by the departmental managers and sent to the executive director for approval. Once approved, an official letter is signed by the executive director and maintained in the employee's personnel file. Ricardo is provided with a copy so he can update the employee's salary in the master file.

Required:

Identify eight strengths of the payroll process at Venture Volunteers. For each strength identify what the test of that control could be.

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AFM102 Chapter Notes - Chapter 9: Income Statement, Finished Good

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