6.8. Preparing operational budget (3)

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Core Concepts of Accounting – Numbers and People

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Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

7 classificações

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, we proceed.

We're steps in preparing Operating Budget.

And now, we will deal with direct manufacturing labor,

cost and then later with manufacturing overhead.

Now, we start out with schedule four,

which is the Direct Manufacturing Labor.

Now, from here, we will be able to come up with a very important cost allocation rate.

But, we start in a simple way.

So, we have two kinds of spare parts r and hd.

Yes and here, units from schedule to 7,000 and 1,200.

Direct manufacturing labor in hours,

three and four, when multiplied get 21,000 and 4,800.

The rate is the same of 30 per hour.

These numbers that add up to seven seven four.

These are the costs of direct manufacturing labor.

The total number of hours here is 25,800.

That's an important number that we'll use in just a moment.

From here, we are done with the components of direct costs.

We dealt with direct materials and we dealt with direct manufacturing labor.

Now, it's time to go ahead and start analyzing our indirect costs.

We start with manufacturing overhead.

Again, in our initial data,

in panel D5, we had this laid down.

Here, I will not redo that.

You can easily go back to that part,

I will not flip over many of these pages.

But, our schedule five in a compressed form will look like this.

We have variable costs of 670 and fixed of 362,

and the total manufacturing overhead of $1,000,032.

Now, the key story is that total manufacturing overhead

is allocated based on the cost allocation base which is direct manufacturing labor.

So, we take this amount of hours used and this is the cost.

By dividing this by that we get the cost allocation rate of $40 per hour.

That means that for any batch,

any part, any piece,

we will allocate the corresponding amount of

manufacturing overhead based on the amount of direct labor going into this.

To illustrate that, we'll flip over and go to ending inventory budget,

named schedule six A,

unit cost of Finished Goods Inventory.

Now, again, this is a very simple table that consists of,

this is R and HD,

and we have inputs.

Inputs are material one and kilograms and the amount is $88.

Material two and kilograms $50.

Direct material labor, three the rate is 30, so it's 90.

So, the first three lines of that,

we could have easily done earlier.

But, now, we have the four very important line because this is manufacturing overhead

allocated to these pieces.

Namely, we know that the rate is $40 per hour.

So, we take the same base of three hours to produce R,

then multiply by this rate and I would say that,

four any R, goes 120 of manufacturing overhead.

By the same token,

on any HD, we allocate about 60.

That leads to the total unit costs of 348 and 456.

The interesting observation that you can easily make if

you look back on your computer screen or the handouts,

you would see that these numbers we've already seen before in an indirect form.

Namely, in our schedule or better to say in our panel D3,

we saw the ending inventories in dollars and that was

34,800 for 100 pieces.

Then, another amount for 50 of the remainder of HD.

So, that is important to see consistency.

These numbers are the same as shown up in D three.

For example, we would like to redo all these,

to change the inputs,

and then to re-prepare,

redo all these things;

then, you have to make sure that you're redoing would be consistent with

the previous page calculation of cost allocation rate

and corresponding unit cost of finished goods inventory.

So far, so good.

Now, we go to schedule six

B which is Ending Inventory of both direct materials and finished goods.

Here, we put some numbers and physical amounts namely material one.

So, this is 9,000 from panel D four and then 3,000 from the same panel.

Costs stay the same,

eight and 10 and these other numbers,

the total of 102.

What is more important for us,

this is the ending,

in terms of a finished goods.

Now, we have R and HD from D three.

This is you'll have a 150.

Then here, we multiply by the unit cost

that we have just calculated on the previous page of this flip chart.

That leads us to 382,800, and 22,800.

Together, that gives us this blue number.

The total cost of any inventory are 405,600.

Again, you can say, well,

some of these numbers don't seem to be directly applicable to certain things,

but there is someone who is also overseeing the finished goods inventory.

For these people, it's very important to know these costs because

if they just do a physical check and if something doesn't,

in effect, meet here, that might be a problem.

So, all these pieces of information are

important to a different extent with respect to different people.

But, there are some people for whom this information is

very important in a very direct way.

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