6.9. Preparing operational budget (final steps)

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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, it's been quite a long journey

in this example of preparing the operating budget and we're almost done.

In this episode, we will complete our work.

We have just something else to do before we will enjoy reaching this goal.

So, this is preparing operating budget results.

First of all, we have schedule seven,

which is cost of goods sold.

Now here, this table is prepared on the following basis,

we take all the previous schedules that are relevant to this calculation,

here I put them specifically,

and then we put the corresponding dollar contributions.

So, we have, for cost of goods sold

we must calculate the beginning finished goods inventory,

direct materials used, direct manufacturing labor,

manufacturing overhead, then all that adds to the cost of goods manufactured,

then we arrive at cost of goods available for

sale is this plus cost of goods manufactured.

We subtract the end-finished goods inventory and that leads us to cost of goods sold.

Now, where do we take them?

Beginning FGI comes from panel D3, just put the number.

Then direct materials used,

this is schedule 3A, 1,053.

Direct manufacturing labor, schedule 4,

774, manufacturing overhead, we've just seen it,

1,032, and that gives us the cost of goods manufactured which is 2,859,200.

Now, so this is what we manufactured,

but for sale there is available,

not only this, but also beginning finished goods inventory.

Again, we use FIFO,

so the total cost of goods available for sale is 2,916,800.

And from that, we have to subtract the cost of unfinished goods inventory.

Now, we understand why we were torturing

ourselves with these calculations in the schedule 6B.

That was the number on the previous page of flip chart, 405,600.

And that gives us a very important component,

cost of goods sold which is 2,511,200.

Again, so far so good.

Like I said, we need just one more supporting schedule and this is schedule eight,

because now we go to other non-production costs.

Again, here, we have copied everything from schedule D6.

And there was a variable part and fixed part.

So we see R&D, marketing, distribution, customer service,

and G and A, and that's broken down in the variable and fixed part.

The important piece for us is not only $920,000,

the total, but also this part of 500,000.

Because there was one more assumption made up there that we haven't used so far

and we will not actually be using that for the income statement,

but it may be used for some other components of the master budget.

This is the rate per revenue dollar.

Because the assumption went that variable non-production costs,

are variable with respect to revenue dollars.

So, you take this number 500,000,

you divide that by the total revenue of 3,840,000 and you get the rate

of 13 cents per each dollar of revenues.

So, if we would have had another amount of revenues and we would be charged

with the goal of finding the proper variable non-production costs,

we would have taken the new amount and we would have multiplied that by 13 cents and that

would have given us the number instead of this.

So, finally, again, my congratulations.

I flip over the page and we arrive at the budget of the income statement.

Again, this table is structured in a very easy way.

We have schedule, and then dollar amounts and positions here.

Revenue comes from schedule one,

3,840,000, well recognized thing.

Cost of goods sold, again,

from this very episode schedule seven, 2,511,600.

That gives us gross margin of 1,328,400.

Now, from this gross margin,

we have to subtract operating costs.

And here, I will flip back for a moment.

So, we go back to the schedule eight,

but that was more detailed,

that was broken down by variable and fixed.

Now, we lump them together.

R&D, marketing, distribution, customer service, and G&A.

So, we add the corresponding numbers and we say that R&D is 140,

marketing 210, distribution 105,

customer service 63, and then G&A 402.

So, clearly, the sum is $920,000.

All of them come from schedule eight.

So, we have gross margin,

we subtract all costs,

and then we arrive at the operating income of 408,400.

Well, congratulations.

Now, let me briefly remind you of what we have done here.

Because that was half of this week,

the core part of this week.

So, the important thing is to keep in mind that we started out

with some important inputs and assumptions.

And then, we made

some supporting schedules and these schedules were sort of built up one on the other.

So, we could hardly skip one and jump over to the next one because we would

use not only the information from the data but also the information from the schedules,

by that time we have come up with.

And that step by step in a straightforward but sort of cumbersome way,

that has led us to this number.

Now, you can imagine that this is

just the interim stop in preparation of the master budget.

We would have dealt with

some other and many schedules that are not so easy to follow compared with these ones.

So, the preparation of the master budget is a much more challenging task,

but the methodology of that is the same.

Now, we do not pursue the goal of becoming the experts in preparation of budgets.

So, we now see how budgets contribute to the final bottom line numbers.

And at the very end of this week,

and at the end of this course,

we will study the idea of responsibility accounting,

how budgets contribute to the promotion of efficiency at a company,

or in a project,

in its planning, implementation, and the bottom line.

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