6.5. Operational budget – the data (2)

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Do curso por Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

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Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

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Curso 3 de 5 em Specialization Understanding Modern Finance

Whenever the word “accounting” is pronounced, it is immediately associated with the need to memorize endless boring numbers. However, it is the common financial statements that contain important information that provides inputs for valuation of investment projects. The only challenge is how to properly extract them. Accounting and finance are indeed intertwined. Sometimes people that are not experienced in the area even mix them up. But most often emphasis in accounting is on numbers. Still, the deep understanding of key accounting concepts helps reveal the interests and actions of people behind these numbers. And the human dimension of accounting adds invaluable insight in the potential of successful project implementation. This Course discusses core ideas and concepts of both financial and managerial accounting. It by no means pretends to be comprehensive to any extent. But, being rather an accounting overview, it focuses on the issues that are most relevant and important for effective valuation of investment projects. The learners will gain insight into the essence of accounting. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. To pursue a career in accounting, a more detailed study is strongly recommended.

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Budgets and Responsibility Accounting. Accounting and Valuation – Final Conclusions

Week 6, the final week of the Course, is devoted to the discussion of budgets and responsibility accounting as powerful tools of improving efficiency and quality of managerial decision making. A comprehensive example of preparing the operational budget will help reveal the interdependence of different areas of management in the budgeting process. We will also discuss responsibility accounting in some more detail to follow relationships between decision makers, processes, and results – or, as we call it, numbers and people. We will comment on some major trends in approaching budgeting in the fast changing, uncertain, and complex world. Finally, we summarize the contribution of accounting to the valuation of investment projects. As a result, you will be able to successfully apply the obtained knowledge and skills well beyond accounting, but in any financial and managerial area.

6.1. Budgets – an overview. The budgeting cycle11:23

6.2. Budgets, planning and project management13:20

6.3. The master budget – an idea6:23

6.4. Operational budget – the data (1)13:09

6.5. Operational budget – the data (2)5:22

6.6. Preparing operational budget (1)3:16

6.7. Preparing operational budget (2)6:58

6.8. Preparing operational budget (3)6:40

6.9. Preparing operational budget (final steps)7:44

6.10. Budgeting and responsibility accounting16:57

6.11. Changes in budgeting – major trends8:01

6.12. Accounting and valuation – final conclusions7:13

Conheça os instrutores

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Well, in the previous episode we just started to put together some data for

the preparation of the operating budget.

And now we have to proceed with the data for

manufacturing overhead, that is prepared on this table.

So we break this down in variable and fixed.

And here you see supplies, indirect manufacturing labor, fringe costs,

power, maintenance.

And for fixed you go for depreciation, property taxes,

insurance, supervision, power, and maintenance.

So you see that variable costs, they amount to $670,000,

and then fixed for 362, and the total is $1,032,000.

So this is a given, so later when we will deal with these numbers,

we will go back to this schedule D5, D stands here for data.

But, so that is part of that because

this is manufacturing overhead.

Now here, we have other non-production costs that are also important here,

and those are also variable fixed.

And here we break them down in categories R&D,

marketing distribution, customer service, and G&A.

And there's a variable part here, and there is a fixed part.

And you can see that this is half a million, 420, and the total of $920,000.

So again, this will be later taken as an input for

one of the final schedules before putting together the budget and income statement.

And that is the data that has been collected, analyzed,

and put together by the management of this company.

So we take that as a given, again, in reality, for example, we study a project.

Then we might be involved in

the gathering information then breaking down categories so

we may stay behind this table in schedule D6.

So that is what we so far have done, and now,

the final part of this preparatory piece is, what is required.

Required, we have to prepare,

The budgeted, Income statement.

That will be our goal.

Now for this goal, we will come up with supporting budgets.

Supporting budgets or schedules.

And those will include first, revenue.

Then production,

Then direct materials,

use, and purchase.

Because part of that we take from the beginning balance of the inventory, but

then the major part we purchase.

Then the next thing is direct manufacturing labor.

And again that was an important cost allocation base, as we mentioned before.

Then the next thing is the manufacturing overhead.

That was shown up in the previous pages of this flip chart in the episode.

Then finally we have target and inventory.

And that goes for both raw materials and finished goods,

because we made the simplifying assumption, we ignore work in progress.

Then we will come up with other costs, so

basically first cost of goods sold and

then other non-production costs.

And that will be mostly from D6.

So as long as we're done with all of these things, we will complete the task.

So you can see that even for the budget, the income statement,

it's quite a long path.

And what we will do in the episodes to follow, we will go step by step.

And we'll see how, slowly but surely, we convert the data and

our assumptions into the budgets for all these pieces.

And then later they will be put together to come up with a budgeted income

statement.

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