Fluent Essays

For this Assignment, review the Static Budget Report posted in the entry titled Week 2 Assignment. Additionally, you may find valuable information in your course text, especially Exercise 6-3.The Assignment:Part 1: Prepare a performance report using spreadsheet software, such as Excel. Hint: Read the Weekly Briefing and watch the Performance Report video on this topic.Part 2: For the next section of this Assignment, please utilize a word processing software (such as Word) to complete the following:Write a short memo to your supervisor explaining your findings and your recommendations.In your memo, as part of your recommendations, take a position on the following: Do all the variances in this example need to be examined? Why or why not?ReferencesZimmerman, J. L. (2011). Accounting for decision making and control (7th ed.). New York, NY: McGraw-Hill.Chapter 6, “Budgeting” (pp. 229–301)Shastri, K., & Stout, D. E. (2008). Budgeting: Perspectives from the real world. Management Accounting Quarterly, 10(1), 18–25.Laureate Education (Producer). (2014). Performance report [Multimedia file]. Baltimore, MD: Author. http://mym.cdn.laureate-media.com/2dett4d/Walden/W... accounting_for_management_decision_making_week_2_weekly_briefing.pdf accounting_for_decision_making_and_contr.pdf static_budget_report_week_2.docx budgeting_perspectives_from_t__1_.pdf Unformatted Attachment Preview Accounting for Management Decision Making Week 2 Weekly Briefing This week: In terms of the specific Learning Objectives, you will: • • • • • • • Analyze the influence of financial and managerial accounting on decision making • Evaluate forecasts, strategic plans, and budgets on organizations • Analyze stakeholder involvement in budgeting processes • Prepare performance reports • Analyze performance report results • Evaluate variances In terms of the course-level Learning Outcomes, you will: • • • • • Evaluate various accounting measures and their relevance to a wide range of stakeholders Analyze various types of budgets, strategic planning, and forecasting Employ managerial accounting approaches and information to make effective decisions Demonstrate effective communication skills to present accounting information to stakeholders Assess managerial accounting tools and their usefulness to organizational leaders Apply accounting principles ethically and appropriately to personal and professional contexts Budgets A budget is defined as the formal expression of plans, goals, and objectives of management that covers all aspects of operations for a designated time period. (Shim, Siegel, & Shim, 2012) It can be as simple as a handwritten piece of paper for a small one-person company that lists the anticipated revenues for the month followed by the expected bills that must be paid, or it can be elaborate computer-based financial modeling software. Listed below are some commonly used budgeting software products. There are pros and cons to different types of software and each organization needs to find a product that fits its needs. Advisory Board Company. (2013). ActiveStrategy [Computer software]. Retrieved from www.activestrategy.com • • • • • Centage. (2014). Budget Maestro [Computer software]. Retrieved from http://centage.com/Products/Budget-Maestro-Overview.asp Host Analytics. (2014). Host Budget [Computer software]. Retrieved from www.hostanalytics.com Microsoft Dynamics. (2014). FRx Software [Computer software]. Retrieved from www.microsoft.com/en-us/dynamics/products/frx.aspx SAP. (n.d.). Retrieved from www.sap.com SAS Institute. (n.d.). Retrieved from www.sas.com A budget has many benefits. It requires management to formalize goals and define objectives. It is an early warning system for potential problems, facilities the coordination of activities within the organization, keeps management apprised of the overall operations of the organization, and helps to motivate employees to meet the goals set in the budget (Weygandt, Kimmel, & Kieso, 2010). Budgets do have a downside. They are time consuming to prepare, may not use realistic data, may encourage playing the system,” and can cause rifts between departments instead of encouraging sharing of resources (Zimmerman, 2014). If managers pay is based partially on meeting budget goals, there is a strong incentive to distort budgets so they are easier to achieve. If managers know their budgets will be cut if they do not spend their entire allocation (budget lapsing), they may decide to spend the money on unnecessary purchases to preserve the budget amounts for the next budget cycle. Even though there are many benefits to properly prepared budgets, they cannot exist in a vacuum. They require the existence of predictive ability; clear channels of communication, authority, and responsibility; accurate, reliable, and timely financial information; and support from all levels of the organization. (Shim, et al., 2012). Strategic Plans, Budgets, and Forecasts Some people confuse, strategic plans, budgets, and forecasts, but they are not the same. The strategic plan is the vision set by upper management for a period of time which is usually not less than three years and may span up to 10 years. It sets broad goals to be achieved during the designated time frame (Schiff, 2008). For example, the strategic plan might call for revenues to increase 5\% per year and expenses to decrease by 7\% per year. There are usually no details given as to how these results will be achieved. The plan is intended to show investors, board members, and other levels of management, the future direction of the organization. The budget gives the details as to how the goals outlined in the strategic plan are to be achieved. It will have input from many levels within the organization, and will give line by line details of expected revenues and expenses that are aligned with the goals defined in the strategic plan. No matter how much care is taken to develop accurate budgets, as the actual numbers come in, there will be differences. Revenues may be less than predicted and expenses may be higher. It is possible that revenues will be greater than expected and the related expenses will also be higher. At this point, forecasts come into play. They use the actual numbers to more accurately predict where the organization is headed. Forecasts do not change the budget, but rather enhance its usefulness as they allow managers to make determinations based on current data. For example, if a department has a monthly budget of $50,000, and has spent $30,000 by the 15th of the month, some decisions will have to be made regarding expenditures for the rest of the month. The forecast data fall between the high-level strategic plan and the very detailed budgets (Schiff, 2008). Performance Reports Once actual data are received, a performance report can be prepared. A fictional company, the Teddy Bear Toy Company, will be used in the following paragraphs to illustrate how you can read and interpret data to prepare a meaningful performance report. Teddy Bear Toys is a small company dedicated to making stuffed teddy bears out of various materials such as flannel, fake fur, and suede. The operations manager has prepared a report on data from the production department. Based on the report, she wants to let the production department manager know that if this situation is not fixed quickly, she will be looking to hold you accountable. Here is the report that you are given. Teddy Bear Toy Company Manufacturing Overhead Static Budget Report For the Month Ended June 20XX You take a look at the report, and at first glance, you think, She is right. That manager is not doing the job. He is not controlling costs. As you think about the report, you realize that the budget called for 25,000 teddy bears to be produced, but in actuality, 30,000 bears were produced. Of course, there will be more costs! You decide to prepare a flexible budget at the 30,000 unit level of activity. First, determine budgeted costs per bear by dividing the budgeted amount for each cost by the budget level of production. Indirect labor: $65,000/25,000 bears = $2.60 per bear. Supplies: $62,500/25,000 bears = $2.50 per bear. Utilities: $47,500/25,000 bears = $1.90 per bear. Next, multiply the per bear amount for each cost by the actual number of bears produced. Indirect labor: $2.60 per bear x 30,000 bears = $78,000 Supplies: $2.50 per bear x 30,000 bears = $75,000 Utilities: $1.90 per bear x 30,000 bears = $57,000 Finally, prepare a performance report for manufacturing overhead for the production department. The manager of the production department is doing a great job of controlling costs. When a flexible budget is used, it is easy to see that the costs are below what is budgeted for a production of 30,000 teddy bears. You need to explain to the operations manager that she should gauge performance against the actual level of activity, not against the static budget numbers. In addition, the production department manager should be complimented for staying within the budget for the actual level of activity. In summary, this week you added the following terms to your accounting vocabulary: budgets, strategic plans, forecasting, static budgets, and flexible budgets. You also learned how to change a static budget into a flexible budget in order to compare actual costs incurred to budgeted costs at the same level of activity. When budgets are prepared carefully and used properly, they can help managers make educated decisions that will help guide the organization toward its goals. References Advisory Board Company. (2013). ActiveStrategy [Computer software]. Retrieved from www.activestrategy.com Centage. (2014). Budget Maestro [Computer software]. Retrieved from http://centage.com/Products/BudgetMaestro-Overview.asp Host Analytics. (2014). Host Budget [Computer software]. Retrieved from www.hostanalytics.com Microsoft Dynamics. (2014). FRx Software [Computer software]. Retrieved from www.microsoft.com/en-us/dynamics/products/frx.aspx SAP. (n.d.). Retrieved from www.sap.com zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page i Seventh Edition Accounting for Decision Making and Control Jerold L. Zimmerman University of Rochester zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page ii To: Conner, Easton, and Jillian ACCOUNTING FOR DECISION MAKING AND CONTROL, SEVENTH EDITION Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Previous editions © 2009, 2006, and 2003. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0 ISBN MHID 978-0-07-813672-6 0-07-813672-5 Vice President & Editor-in-Chief: Brent Gordon Vice President of EDP: Sesha Bolisetty Editorial Director: Stewart Mattson Sponsoring Editor: Dick Hercher Marketing Manager: Sankha Basu Editorial Coordinator: Rebecca Mann Project Manager: Erin Melloy Design Coordinator: Brenda A. Rolwes Cover Designer: Studio Montage, St. Louis, Missouri Production Supervisor: Sue Culbertson Media Project Manager: Balaji Sundararaman Compositor: MPS Limited, A Macmillan Company Typeface: 10/12 Times New Roman Printer: R. R. Donnelley-Willard All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Zimmerman, Jerold L., 1947Accounting for decision making and control / Jerold L. Zimmerman.—7th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-07-813672-6 (acid-free paper) ISBN-10: 0-07-813672-5 (acid-free paper) 1. Managerial accounting. I. Title. HF5657.4.Z55 2010 658.1511—dc22 2009049120 www.mhhe.com zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page iii About the Author Jerold L. Zimmerman Jerold Zimmerman is Ronald L. Bittner Professor at the William E. Simon Graduate School of Business, University of Rochester. He holds an undergraduate degree from the University of Colorado, Boulder, and a doctorate from the University of California, Berkeley. While at Rochester, Dr. Zimmerman has taught a variety of courses spanning accounting, finance, and economics. Accounting courses include nonprofit accounting, intermediate accounting, accounting theory, and managerial accounting. A deeper appreciation of the challenges of managing a complex organization was acquired by spending four years as Deputy Dean of the Simon School. Professor Zimmerman publishes widely in accounting on topics as diverse as cost allocations, Sarbanes-Oxley Act, disclosure, financial accounting theory, capital markets, and executive compensation. His paper “The Costs and Benefits of Cost Allocations” won the American Accounting Association’s Competitive Manuscript Contest. He is recognized for developing Positive Accounting Theory. This work, co-authored with colleague Ross Watts, at the Massachusetts Institute of Technology, received the American Institute of Certified Public Accountants’ Notable Contribution to the Accounting Literature Award for “Towards a Positive Theory of the Determination of Accounting Standards” and “The Demand for and Supply of Accounting Theories: The Market for Excuses.” Both papers appeared in the Accounting Review. Professors Watts and Zimmerman are also co-authors of the highly cited textbook Positive Accounting Theory (Prentice Hall, 1986). More recently, Professors Watts and Zimmerman received the 2004 American Accounting Association Seminal Contribution to the Literature award. Professor Zimmerman’s textbooks also include: Managerial Economics and Organizational Architecture with Clifford Smith and James Brickley, 5th ed. (McGraw-Hill/Irwin, 2009); and Management Accounting: Analysis and Interpretation with Cheryl McWatters and Dale Morse (Pearson Education Limited UK, 2008). He is a founding editor of the Journal of Accounting and Economics, published by North-Holland. This scientific journal is one of the most highly referenced accounting publications. He and his wife Dodie have two daughters, Daneille and Amy. Jerry has been known to occasionally engage friends and colleagues in an amicable diversion on the links. iii zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page iv Preface During their professional careers, managers in all organizations, profit and nonprofit, interact with their accounting systems. Sometimes managers use the accounting system to acquire information for decision making. At other times, the accounting system measures performance and thereby influences their behavior. The accounting system is both a source of information for decision making and part of the organization’s control mechanisms— thus, the title of the book, Accounting for Decision Making and Control. The purpose of this book is to provide students and managers with an understanding and appreciation of the strengths and limitations of an organization’s accounting system, thereby allowing them to be more intelligent users of these systems. This book provides a framework for thinking about accounting systems and a basis for analyzing proposed changes to these systems. The text demonstrates that managerial accounting is an integral part of the firm’s organizational architecture, not just an isolated set of computational topics. Distinguishing Features Conceptual Framework This book differs from other managerial accounting texts in several ways. The most important difference is that it offers a conceptual framework for the study of managerial accounting. This book relies on opportunity cost and organizational architecture as the underlying framework to organize the analysis. Opportunity cost is the conceptual foundation underlying decision making. While accounting-based costs are not opportunity costs, in some circumstances accounting costs provide a starting point to estimate opportunity costs. Organizational architecture provides the conceptual foundation to understand how accounting is employed as part of the organization’s control mechanism. These two concepts, opportunity costs and organizational architecture, provide the framework and illustrate the trade-offs created when accounting systems serve both functions: decision making and control. Trade-Offs This text emphasizes that there is no “free lunch”; improving an accounting system’s decision-making ability often reduces its effectiveness as a control device. Likewise, using an accounting system as a control mechanism usually comes at the expense of using the system for decision making. Most texts discuss the importance of deriving different estimates of costs for different purposes. Existing books do a good job illustrating how accounting costs developed for one purpose, such as inventory valuation, cannot be used without adjustment for other purposes, such as a make-or-buy decision. However, these books often leave the impression that one accounting system can be used for multiple purposes as long as the users make the appropriate adjustments in the data. What existing texts do not emphasize is the trade-off between designing the accounting system for decision making and designing it for control. For example, activity-based costing presumably improves the accounting system’s ability for decision making (pricing and product design), but existing texts do not address what activity-based costing gives up in terms of control. Accounting for Decision Making and Control emphasizes the trade-offs managers confront in an organization’s accounting system. iv zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page v Preface v Economic Darwinism A central theme throughout this book is economic Darwinism, which simply implies that accounting systems that survive in competitive industries must be yielding benefits that are at least as large as their costs. While newer accounting innovations such as the balanced scorecard are described, the text also indicates through a series of company histories that many elements of today’s modern costing systems can be traced back to much earlier times. It is useful to understand that today’s managers are struggling with the same accounting issues as their predecessors, because today’s students will also be struggling with the same problems. These problems continue to exist because they involve making trade-offs, usually between systems for decision making (e.g., product pricing and make-or-buy decisions) versus control (e.g., performance evaluation). Accounting systems differ across firms and change as firms’ circumstances change. Today’s students will be making these trade-offs in the future. The current rage in managerial accounting texts is to present the latest, most up-to-date accounting system innovations. While recent innovations are important to discuss, they should be placed in their proper perspective. Traditional absorption costing systems have survived the test of time for hundreds of years. Accounting system innovations are new, not necessarily better. We certainly do not know if they will survive. Logical Sequence Another meaningful distinction between this text and other books in the field is that the chapters in this text build on one another. The first four chapters develop the opportunity cost and organization theory foundation for the course. The remaining chapters apply the foundation to analyzing specific topics such as budgets and standard costs. Most of the controversy in product costing involves apportioning overhead. Before absorption, variable, and activity-based costing are described, an earlier chapter provides a general analysis of cost allocation. This analysis is applied in later chapters as the analytic framework for choosing among the various product costing schemes. Other books emphasize a modular, flexible approach that allows instructors to devise their own sequence to the material, with the result that these courses often appear as a series of unrelated, disjointed topics without any underlying cohesive framework. This book has 14 chapters, compared with the usual 18–25. Instead of dividing a topic such as cost allocation into three small chapters, most topics are covered in one or at most two unified chapters. End-of-Chapter Material The end-of-chapter problem material is an integral part of any text, and especially important in Accounting for Decision Making and Control. The problems and cases are drawn from actual company applications described by former students based on their work experience. Many problems require students to develop critical thinking skills and to write short essays after preparing their numerical analyses. Good problems get students excited about the material and generate lively class discussions. Some problems do not have a si ... Purchase answer to see full attachment