Chester & Wayne Complete:Case 6B (Chester & Wayne) In this case, you have been provided financial information about the company in order to create a cash budget. Management is seeking advice or clarif
This week we will:
Summarize a position on the process of budgeting.
Describe the major characteristics and conditions of a standard cost system.
Illustrate the basic format and calculation sequences necessary for preparation of budgets and supporting schedules.
Construct recommendations for cost control decisions.
Introduction
For Week Four, the focus will be on cost control through budgeting and standard cost systems. There are various forms of budgeting that are utilized within a business or organization. The choice of budget is dependent the budgeting needs, such as planning or cost management. Standard costs are incorporated into the creation and analysis of budget data.
BUDGETS - Profit planning is all about budgets. If you think budgeting is an annual exercise, you are probably wrong in many companies. In J&J, we did 5 budgets per year. We were on a calendar year end, so we did an original budget in September/October. We prepared a March update, with 1 month actual and 11 months forecasted, a May revision, with 3 months actual and 9 months forecasted, the August update, which was 6 month actual and 6 months forecasted, and the November estimate, with 9 months actual and 3 months forecasted. J&J wanted to stay on top of what profits they could plan for when discussing the future with the analysts.
Budgets start with the sales forecast. This is what the sales group thinks they can sell. It drives everything, from production, to purchasing, to capital spending, to research and development. The numbers here are vital to the integrity of the budget. The expense budget is not much different than in any year, except for changes. Forecasting changes means looking at headcount, facility upgrades and moves, utility increases, new offices, and everything else that comprises what your organization spends. And always, your budget should follow your strategic plan…you only want to allocate resources to things that move you towards achieving your plan.
Flexible budgets are budgets that vary with output. So if we were originally scheduled to produce 1,000 units in March, and instead we produce 800, we should spend less, at least with our variable expenses. If we produce 1,300, we should have more variable costs. We want to look at this to see, based on what we achieved, what should we have spent.
Performance analysis is looking at the differences (called variances) between what we actually did, and what we said we would do. Some variances are on variable costs and some are on fixed costs. All are important. They help explain where we may have gone wrong (or right) and maybe who is ultimately responsible. Think about it this way; your original budget has a sales forecast of 100,000 units. At the end of the year, you have sold 90,000 units. Chances are, you overspent on some expense categories. Is that your fault, or the sales groups’ fault? If they said they can sell 100,000 units, and then don’t, they have a problem.
READING
Chapter 6: Budgeting for Operations Management
Chapter 7: Cost Control through Standard Costs
TED. (Producer). (2009, February). Arthur Benjamin: Teach statistics before calculus! [Video file]. Retrieved from http://www.ted.com/talks/arthur_benjamin_s_formula_for_changing_math_education
DISCUSSIONS
Budgeting Comments
(Exercise 6-13 – Revised) Select one of the following quotes from the text to discuss. Clearly state whether you either agree or disagree with the comment and support your opinion with at least one scholarly resource. Include in your response an explanation of the major purposes of budgeting. Your initial post should be 200-250 words.
"One major criticism of budgeting is that it is used as a ‘cost reduction’ tool rather than a ‘cost control’ tool. The objective of the budget is to control costs at an efficient level of operation."
"There are generally three benefits from allowing employees to participate in developing the budget: (1) Employees tend to accept the budget as their own plan of action. (2) Participation tends to increase morale among employees and toward management. (3) Employee cohesiveness is increased, and productivity will also increase if dictated by the group norm."
"Even though budgets are quantitative tools, considerable emotion is connected to budgeting. The individual in control often sees the budget as a means of getting things done. People being controlled often have feelings of anxiety because their success and promotion are tied directly to the budget."
Standard Cost System
Using Chapter 7 of your text as a reference, define a standard cost and explain what constitutes the components of a standard cost. Describe the advantages and disadvantages of a standard cost system and explain under what circumstances a standard cost system is most effective. Your initial post should be 200-250 words.
