College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 137

MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES 1. Budgets should start with a top-down strategic plan that
FOR PLANNING & CONTROL guides and integrates the whole company and its
FINANCIAL PLANNING AND BUDGETS individual budgets.
2. Budgeting is a management task, not a mechanical
THE BUDGETING FRAMEWORK bookkeeping task which requires a great deal of
The budgeting process can range from the informal thoughtful planning and input from a broad range of
process undergone by a small firm, to an elaborately managers in a company.
detailed of several months procedure employed by large 3. Budgets are used throughout planning, operating and
firms. The controller of an organization is responsible for control activities.
directing and coordinating the overall budgeting process.
4. Budgets are future oriented and make extensive use of
estimates and forecasts.
Advantages of budgeting:
1. can define specific goals and objectives that can 5. Flexible budgets are based on the actual number of
become benchmarks, or standards of performance, for units produced rather than the budgeted units of
evaluating future performance production.
2. forces communication throughout the organization 6. Zero-based budgets require managers to build budgets
3. forces management to focus on the future and not be from the ground up each year.
distracted by the daily crises in the organization
7. Although we typically think of budgets as being
4. can increase the coordination of organizational
prepared annually, changing expectations often
activities and help facilitate goal congruence
5. can help management identify and deal with potential require that budgets be revised frequently.
bottlenecks or constraints before they become major
problems Behavioral Implications of Budgeting
6. means of allocating resources When budgets are used for both planning and control
purposes, conflicts may be inevitable. If managers are
Role of Budgeting in Management Functions evaluated and compensated according to whether they
Planning–the cornerstone of good management, involves “meet the budget,” they may have incentives to pad the
developing objectives and goals for the organization, as well budget, thus making the targets easier to reach. This may
as the actual preparation of budgets lead to unethical behaviors and is clearly not beneficial for
o relate to organizations long-term goal to its short- the company as a whole. Companies can either take
term activities punitive actions or more positive steps such as assuring
o distribute resources and workloads managers that performance evaluation will be done in a fair
o communicate responsibilities and equitable manner and will include other factors.
o select performance measure Budgetary control-an act of using budgets to control an
o set goals for bonuses and rewards organization’s activity
Budgetary slack–an intentional underestimation of revenues
Plans identify objectives and the actions needed to and/or overestimation of expenses in a budgeting process;
achieve them. Budgets are the quantitative expressions of a technique applied by several operating managers in order
these plans. When used for planning, a budget is a method to report favorable variances
for translating the goals and strategies of an organization into
operational terms. Budget Models
Static Budgeting–costs and expenses are not segregated to
Operating–involves day-to-day decision making which is
fixed and variable components and the budgeted costs,
often facilitated by budgeting
without adjustments to actual capacity, serve as the basis in
Execution: 1) communicate expectations 2)
evaluating actual performance
measure performance and motivate
employees 3) coordinate activities and Flexible Budgeting–costs and expenses are segregated to
allot resources fixed and variable components giving way to the
determination of estimated costs based on actual capacity
Control–involves ensuring that the objectives and goals
Continuous (rolling) Budgeting–a time frame is maintained
developed by the organization are being attained; often
(i.e. 12 months, 6 months, etc.) and when a segment in a
involves a comparison of budgets to actual performance
budgeted time frame expires and is dropped, a new
and the use of budgets for performance evaluation purposes
segment is to be added to maintain the same time frame.
Reporting: 1) communicate budget information 2)
provide continuous feedback 3) support Imposed Budgeting–budgets are prepared by top
operating decisions management with little or no inputs from operating
Reviewing: 1) evaluate performance 2) determine personnel
timeliness 3) find variances and create
solutions 4) compare planned with Participatory Budgeting–budgets are developed through
actual performance joint decision making by top management and operating
personnel
Control is the process of setting standards, receiving Program Budgeting–an approach that relates resource
feedback on actual performance, and taking corrective inputs to service outputs; it generally starts by defining the
action whenever actual performance deviates materially objectives by output results rather than in terms of quantity of
from planned performance. Thus, budgets can be used to input activities
compare actual outcomes with planned outcomes, and
they can steer operations back on course, if necessary. Zero-based Budgeting–activities to be incurred are to be
prioritized based on its order of relevance in line with a
Basic Concepts defined goal in the coming period without regard to past
experiences or present condition
MYRA T. MIRAFLORES, CPA Page 1 of 5
 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Life-cycle Budgeting–costing is done over the entire life span 4. Anticipated price changes in both purchasing costs
of a product starting from its period of conception (e.g. and sales prices
research and development), to infancy (e.g. product 5. Anticipated marketing or advertising plans
introduction), growth (e.g. acceptance), expansion, up to 6. The impact of new products or changes in product mix
maturity (or decline); it includes all costs expected to be on the entire product line
incurred in the research and development, design, 7. Other factors, such as political and legal events and
commercial production, marketing, channels of distribution, weather changes
customer services, and post-sales services of a product to
All the remaining budgets and the decisions that are
determine the most strategic price for market dominance,
made based on their forecasts are dependent upon this
saturation or influence
estimate of sales. It is important to estimate sales with as
much accuracy as possible. A small error in a sales forecast
Static vs. Flexible Budgets
can cause larger errors in other budgets that depend on the
1. Static budgets are set at the beginning of the period
sales forecast.
and remain constant. They are useful for planning and
operating purposes, but can be problematic when
Multiple Choice
used for control. Control requires the comparison of 1. These statements are proper to the budgeting process
actual outcomes with desired outcomes. When static except
budgets are used and actual sales are different from a. It is a part of management’s responsibility to plan
budgeted sales, a comparison is inaccurate. the use of its resources.
2. Flexible budgets take differences in cost due to volume b. Actual results need not be compared with plan,
differences out of the analysis by budgeting based on since the process ends after the budget is
approved.
actual production. They can be accurately used for
c. It is a tool to orchestrate the various functions of
control purposes because any differences in cost operations in a business.
caused by differences in volume of production have d. The involvement of various levels of individuals in
been removed. the company is necessary to gain acceptance
and attain its goals.
The Budget Committee (Management Committee or 2. The starting point in the preparation of an annual as well
Executive Committee)–primarily responsible in developing as monthly master budget prepared by the Budget
and institutionalizing budgetary systems and processes; Committee is the
consists of key functional and process executives such as the a. Cash budget
finance manager, production manager, human resource b. Balance sheet budget
manager, purchasing manager, quality control manager, c. Production budget
information resource manager, design and engineering d. Sales budget
manager, logistics manager and others 3. Budgetary slack can best be described as
a. the elimination of certain expenses to enhance
Budget Manual–a detailed set of information and guidelines budgeted income.
about the budgetary process; includes 1)statement of b. the planned overestimation of budgeted expenses.
budgetary purpose and its desired results 2) a listing of c. a plug number used to achieve a preset level of
specific budgetary activities to be performed 3) a calendar operating income.
of scheduled budgetary activities 4) sample budgetary d. the planned underestimation of budgeted
forms, and 5) original, revised and approved budgets expenses.
Master Budget–the comprehensive set of budgets, 4. In a master budget plan, sales forecast is under
budgetary schedules and pro forma organizational financial a. Financial budget
statements, the components of which are as follows: b. Performance budget
c. Operating budget
Operating Budgets Financial Budgets d. Capital budget
Sales Budget Balance Sheet Budget 5. Which of the following is normally included in the
Inventory Budget Statement of Cash Flows Budget financial budget of firm?
Production Budget Statement of Changes in OE Budg a. Direct materials budget
Materials Purchases Bud. Schedules of rec./pay., acc./def. b. Budgeted balance sheet
Direct Labor Budget c. Selling expenses budget
Factory Overhead Budget d. Sales budget
Selling and Administrative Budget 6. Which one of the following items is the last schedule to
Income Statement be prepared in the normal budget preparation
process?
Budgeting for Sales a. Cost of goods sold budget
1. All organizations require the forecasting of future sales b. Selling expense budget
volume and the preparation of a sales budget. c. Manufacturing overhead budget
2. The sales forecast and the sales budget are the starting d. Cash budget
points in the preparation of production budgets for
manufacturing companies.
EXERCISE: DEVELOPING A MASTER BUDGET
The Majesty Corporation is preparing budgets for the quarter
Factors in Forecasting Sales ending September 30. Budgeted sales for the next five
1. Historical data, such as sales trend, competitors, and months are:
the industry July 2,000 units
2. General economic trends or factors, such as inflation August 5,000 units
rates, interest rates, population growth, and personal September 3,000 units
spending levels October 2,500 units
3. Regional and local factors expected to affect sales November 1,500 units
MYRA T. MIRAFLORES, CPA Page 2 of 5
 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

The selling price is P10 per unit. Limitations: costly; product costing does not conform with
GAAP
Prepare the following: ABC is applicable to organizations with products or services
1. Sales budget that
2. Production budget ✓ vary significantly in volume, have diversified activities
and complexity of operations
The management at Majesty Corporation wants ending
✓ relatively high overhead costs
inventory to be equal to 20% of the following month’s
✓ have undergone major technological or design
budgeted sales in units. On June 30, 400 units were on
change
hand.
3. Direct materials budget and its cash disbursement ABC provides cost information on indirect costs with the use
budget of activity drivers. Specifically, it is a method of allocating
At Majesty Corporation, five pounds of materials are indirect factory overhead, indirect selling and indirect
required per unit of product. Management wants administrative expenses.
materials on hand at the end of each month equal to
10% of the following month’s production. On June 30, Cost object–the item for which managers want cost
1,300 pounds of material are on hand. Material cost is information
P0.40 per pound. One-half of a month’s purchases is
Activity driver–measure the capacity of an activity and its
paid for in the month of purchase; the other half is paid
output
in the following month. The June 30 accounts payable
Examples:
balance is P1,200.
✓ materials handling may be measured by the number of
4. Direct labor budget and its cash disbursement budget moves
At Majesty Corporation, each unit of product requires ✓ shipping goods may be measured by units sold
0.05 hours (3 minutes) of direct labor. In exchange for ✓ laundering hospital linen may be measured by the
the “no layoff” policy, workers agree to a wage rate of pounds of laundry
P10 per hour regardless of the hours worked (NO Cost drivers per production event (cost pool):
overtime pay). Unit-level direct labor hours, machine hours
5. Factory overhead budget and its cash disbursement Batch-level material moves, set-up hours, number of
budget orders, tooling hours, inspection hours,
machine realignment and cleaning,
At Majesty Corporation, manufacturing overhead is scheduling
applied to units of product on the basis of direct labor Production-level design hours, testing hours, advertising,
hours. The variable manufacturing overhead rate is P20 prototyping
per direct labor hour. Fixed manufacturing overhead is Facility-level number of personnel, area occupied,
P5,000 per month and includes P2,000 of noncash costs kilowatt hours, life in years, maintenance
(primarily depreciation of plant assets). hours
6. Ending finished goods inventory budget The ABC Process
7. Selling and administrative budget 1. Set-up the ABC System
At Majesty Corporation, the selling and administrative 2. Identify the resource drivers
expenses budget is divided into variable and fixed 3. Identify the activity drivers
components. The variable selling and administrative 4. Group similar or homogenous activities (specific activity
expenses are P0.50 per unit sold. Fixed selling and driver)
administrative expenses are P7,000 per month. The fixed 5. Estimate costs based on their cost-driver or activity-
selling and administrative expenses include P1,000 in driver
costs – primarily depreciation – that are not cash
outflows of the current month. Let us recall that:
8. Cash collection budget Under a traditional costing, cost behavior is assumed to be
All sales are on account. Majesty’s collection pattern is: described by unit-based drivers only.
70% collected in the month of sale, 25% collected in the
month following sale, 5% uncollectible. The June 30 Under activity-based costing, both unit and non-unit-based
accounts receivable balance of P3,000* will be drivers are used, thus, provides much richer view of cost
collected in full. behavior.
9. Cash budget
The beginning cash balance for June 30 is P35,000.
Dividend declared and paid are: P1,500, P1,700 and
P2,000 for the month of July, August and September,
respectively.

ACTIVITY-BASED COSTING (ABC) AND ACTIVITY-BASED

MANAGEMENT (ABM)
ACTIVITY-BASED COSTING (ABC)
-the major source of information for activity-based
management

Advantages: accuracy; better cost information (more

precise, reliable, and informative); continuous improvement
(better cost control and more efficient operations)

MYRA T. MIRAFLORES, CPA Page 3 of 5

 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Computing the Overhead Rate (3) the activity enables other activities to be
performed.
Traditional Costing determining whether or not a discretionary activity is
OH Rate = Budgeted FOH value-added
Traditional Base -more of an art than a science and depends on
Traditional Base: DLH, machine hours, number of units subjective judgment
produced, direct labor in peso
Activity-Based Costing non-value-added activities (manufacturing): scheduling,
moving, waiting, inspecting and storing
OH Rate = Budgeted FOH
Cost Driver 3. performance measurement (assessing activity
performance)
ACTIVITY-BASED MANAGEMENT (ABM) -measures are both financial and nonfinancial
Activity-based management is more comprehensive -major dimensions:
than an ABC system. ABM adds a process view to the cost a. efficiency-relationship of activity outputs to activity
view of ABC. ABM is anchored on the importance of inputs
processes in achieving organizational goals through b. quality-doing the activity right the first time it is
continuous improvement. Processes are composed of performed
activities that are tied-up to specific objectives. Thus, c. time-longer time usually mean resource
improving processes for the attainment of these objectives consumption and less ability to respond to
requires improving the ways of accomplishing related customer demand
activities. Contrary to the traditional approach, ABM focuses
on managing these activities, instead of costs, as an Financial Measures of Activity Efficiency
effective control measure. The ABM concept has two (1) value-added and non-value added activity costs
dimensions: cost and process. (2) trends in activity costs
cost dimension (3) kaizen standard setting
(4) benchmarking
-provides cost information about resources, activities, and (5) activity flexible budgeting
cost objects of interests such as products, customers, (6) activity capacity management
suppliers, and distribution channels
Objective: improving the accuracy of cost assignments Overall Objective of ABM: To improve a firm’s profitability
ABC is the main source of cost information needed in ABM. by
process dimension 1. improving decision making through providing
accurate cost information (ABC)
-provides information about what activities are performed,
2. reducing costs through encouraging and
why they are performed, and how well they are performed
supporting continuous improvement efforts (PVA)
-provides the means to pursue and measure continuous
improvement
Objective: cost reduction Multiple Choice
To understand how the process view connects with 1. A base used to allocate the cost of products, customers
continuous improvement, a more explicit understanding of or other final cost objects is a(n)
process value analysis is needed. a. resource driver
b. final cost object
PROCESS VALUE ANALYSIS (PVA) c. activity driver
-fundamental to activity-based responsibility accounting d. none of the above
-focuses on accountability for activities rather than costs 2. Examples of unit-level activity drivers include:
-emphasizes the maximization of systemwide performance a. number of batches and material moves
instead of individual performance b. square footage occupied
c. number of products and design changes
Concerned with the following: d. units of output and direct labor hours
1. driver analysis (defining root causes) 3. Examples of batch-level costs are:
✓ what factors cause activities to be performed a. portions of electricity and indirect materials
✓ what causes activity costs to change b. salaries of schedulers and setup personnel
c. salaries of designers and programmers
2. activity analysis (identifying, describing and assessing d. depreciation and insurance on buildings
value content) 4. Examples of activities at the product-level of costs
✓ what activities are performed include:
✓ how many people perform the activities a. scheduling, setting up and moving
✓ time and resources required to perform the b. designing, changing and advertising
activities c. heating, lighting and security
✓ value of the activities to the organization d. cutting, painting and packaging
(classifying activities into value-added or non- 5. Plant-level costs are costs that
value-added) a. are incurred to support the number of different
products produced.
value-added activities-those activities that contribute to b. are incurred to sustain the capacity at a
customer value or help meet an organization’s needs, or production site.
both c. inevitably increase whenever a unit is produced.
✓ activities that comply with legal mandates d. are caused by the number of batches produced
✓ discretionary activity that meets all three of the and sold.
following conditions: 6. Traditional costing systems are characterized by their
(1) the activity produces a change of state, use of which of the following measures as bases for
(2) the change of state was not achievable by allocating overhead to output
preceding activities, and a. unit-level drivers
MYRA T. MIRAFLORES, CPA Page 4 of 5
 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

b. product-level drivers
c. batch-level drivers
d. plant-level drivers
e. none of the above
7. Activity-based management (ABM) is
a. a costing system in which multiple overhead cost
pools are allocated using bases that include one
or more nonvolume related factors
b. a based used to allocate the cost of a resource to
the different activities using it
c. the use of information obtained from ABC to make
improvement in the firm
d. a base used to allocate the cost of an activity to
products and customers

EXERCISES
ABC vs. Traditional Costing
Kai Company has two products with the following
information:
Product X Product Y
Direct materials P10.00 P20.00
Direct labor 20.00 30.00
Units produced 8,000 2,000
Machine hours 16,400 3,600
Inspection hours 300 2,700
Inspection cost, P4,500,000
Inspection costs are classified as indirect costs and to be
allocated between products A and B. Traditionally the
company uses machine hours to allocate indirect costs.
Based on a cause-and-effect study, the cost driver of
inspection costs is the number of inspection hours.
Required:
1. Factory overhead rate using traditional costing
2. Factory overhead rate using activity-based costing
3. Assuming no other indirect costs, determine the
following for each product:
a. unit cost under the traditional costing method
b. unit cost under the activity-based costing
method
c. difference in unit costs under the traditional
costing and activity-based costing methods
d. effects of the mis-costing under the traditional
costing system

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