Wiley

CMAexcel Learning System

Exam Review 2015
Part 1: Financial Reporting, Planning,
Performance, and Control
Session 3

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 2 Recap
• Section A , Topic 2: Recognition, Measurement,
Valuation, and Disclosure

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 3 Overview
• Section B, Topic 1: Budgeting Concepts
• Section B, Topic 5: Annual Profit Plan and
Supporting Schedules
• Exercise: Preparing Operating Budgets and Pro
Forma Income Statement

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Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Section B: Planning, Budgeting,
and Forecasting
• Topic 1: Strategic Planning
• Topic 2: Budgeting Concepts
• Topic 3: Forecasting Techniques
• Topic 4: Budget Methodologies
• Topic 5: Annual Profit Plan and Supporting Schedules
• Topic 6: Top-Level Planning and Analysis

Part 1, Section B: Planning, Budgeting and Forecasting 4

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Topic 2: Budgeting Concepts
• Reasons for budgeting
• Operations and performance goals
• Characteristics of a successful budget process
• Standard costs
• Resource allocation

Part 1, Section B, Topic 2: Budgeting Concepts 5

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Formal Plan
The process of creating a formal plan and translating goals into
quantitative format is called
a. variance analysis.
b. budgeting.
c. creating pro forma statements.
d. the budget cycle.

Answer: b.

Based on ICMA Part 1, Section B, Topic 2: Budgeting Concepts 6

question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Reasons for Budgeting
• Planning
• Communication
• Monitoring
• Evaluation

Part 1, Section B, Topic 2: Budgeting Concepts 7

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Budget and Control Cycle
Create master budget
and subbudgets.

Obtain feedback and Get manager buy-in.

revise plan.

Analyze current performance

Take corrective action.
versus expectations.

Examine
variations.

Part 1, Section B, Topic 2: Budgeting Concepts 8

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Budget as Planning Tool
K-Co. currently uses its company budget only as a planning tool. Management
has decided also to use budgets for control purposes. To implement this change,
the management accountant must

a. develop forecasting procedures.

b. synchronize the budgeting and accounting system with the organizational
structure.s
c. report daily to operating management any deviations from plan.
d. organize a budget committee.
e. appoint a budget director.
Answer: b.
Control is the process of placing checks and balances on the actions of
those responsible for aspects of a budget. Control also is linked to company
strategy; managers must have incentives to make decisions that benefit the
short-term and long-term strategies. Aligning the budgeting and
accounting system with the organizational structure will help ensure that
budget incentives work toward organizational goals.
Based on ICMA Part 1, Section B, Topic 2: Budgeting Concepts 9
question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Economic Considerations in the
Budgeting Process
Managers should consider all economic factors:
• Organizational objectives
• Relationship between organizational objectives and budgeting
process
• Competition and the company’s differentiating factors
• Effects of competition and marketplace trends
• Organizational risks and the effect on budgeting process
• Organizational opportunities

Part 1, Section B, Topic 2: Budgeting Concepts 10

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Operations and Performance Goals
• Strategic direction provides
Strategic
StrategicDirections
basis for planning support. Directions

• Budgeting facilitates
movement toward goals.

Long-Term
Long-TermPlans Short-Term
and
Plans
Budgets Short-TermPlans
Plans
and Budgets and
andBudgets
Budgets

Part 1, Section B, Topic 2: Budgeting Concepts 11

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Characteristics of Successful Budgeting
The budget must:
• Be aligned with the corporate strategy.
• Be of a length of time that would best suit organization.
• Be separate but flow from strategic planning and forecasting processes.
• Be used to alleviate potential bottlenecks.
• Contain realistic projected numbers.
• Be perceived as a planning, communication, and coordinating tool.
• Be seen as an internal control/motivating tool.
• Be detailed in selling and administrative budgets.
• Achieve buy-in from all levels of management.
• Be approved by a higher authority.
• Be flexible but not easily changed.

Part 1, Section B, Topic 2: Budgeting Concepts 12

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Roles in the Budget Process
Which of the following best describes the role of top management in the
budgeting process?
a. Top management should establish strict goals that must be met when the
budgets are developed.
b. Top management needs to be involved, including using the budget
process to communicate goals.
c. Top management lacks the detailed knowledge of daily operations and
should limit its involvement.
d. Top management should be involved only in the approval process.

Answer: b.
Top management ultimately is responsible for its budgets, and its primary
means of exercising this responsibility is to ensure that all levels of
management understand and support the budget and the overall budget
control process. Budgets play a role in measuring performance against
established goals.
Based on ICMA Part 1, Section B, Topic 2: Budgeting Concepts 13
question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Budget Issues
• Responsibility center or SBU (strategic business unit— segment
for which a manager is given authority)
Costs
Revenue
Investment decisions

• Budget slack
Extra money in budget to accommodate unexpected
Budgeting to fail
Cumulative for sublevels leads to inaccurate master budget

Part 1, Section B, Topic 2: Budgeting Concepts 14

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Budget Slack
During which budget step would it be most likely that budget
slack would be removed?
d. Revision
c. Review and
Approval

b. Negotiation
a. Proposal

Answer: b.

Based on ICMA Part 1, Section B, Topic 2: Budgeting Concepts 15

question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Cost Standards

Set by: Based on:

• Management (authoritative) • Ideal standards

or or
• All involved parties (participative) • Reasonably attainable standards

Part 1, Section B, Topic 2: Budgeting Concepts 16

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Standard Costs for Direct Materials (DM) and
Labor (DL)

Standard Cost for DM and DL = # of Units of Input per Unit of Output

× Standard Cost per Unit of Input

Standard Units of Input per Standard Cost Standard

Type Unit of Output per Unit Cost
DM 8 $ 4 $32
DL 0.5 $12 $ 6
Total $38

Part 1, Section B, Topic 2: Budgeting Concepts 17

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Determining Standard Costs
To determine standard costs, you must evaluate:

Direct materials Direct labor

• Quality • Ideal standards
• Quantity • Product complexity
• Supply chain costs • Personnel skill levels
• Type and condition of equipment
• Nature of manufacturing process

Part 1, Section B, Topic 2: Budgeting Concepts 18

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Sources for Standard Setting
What are the advantages and limitations?

Source Advantages Limitations

Activity analysis Thorough Expensive
Historical data Inexpensive Less reliable
Market expectations Realistic price May be difficult to
maintain high standards
Benchmarking Can support May discourage using new
continuous process
improvement

Part 1, Section B, Topic 2: Budgeting Concepts 19

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Basis for a Master Budget

A master budget is a plan based on strategy for controlling resources over

a specific period.

• Strategy: SWOT Internal External

• Long-term plan
Positive Strengths Opportunities
5 to 10 years
Capital budget
Negative Weaknesses Threats
• Short-term objectives

Part 1, Section B, Topic 2: Budgeting Concepts 20

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Master Budget Components

Company strategy (e.g., increase sales by 25%)

Supported by long-term objective:

Become #1 in market share
Support
Long-range plan: Capital budget:
Move into a new market Build new plant on West Coast

Short-run objective:
Hire sales people on West Coast

Master budget: Controls:

Fund increased sales staffing Ensure that sales goals are met

Operations:
Hire, train, and evaluate sales
results

Part 1, Section B, Topic 2: Budgeting Concepts 21

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Master Budget Components
Match the following master budget components to the
appropriate descriptions:
I. Uses pro forma data to predict the end result of operations.
II. Helps firms to identify and acquire production resources.
III. Prevents long-term goals from being neglected.
a. Operating budget
b. Financial budget

Answer: I = b, II = a, III = b

Based on ICMA Part 1, Section B, Topic 2: Budgeting Concepts 22

question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Topic 5: Annual Profit Plan and
Supporting Schedules
• Operating budgets
• Financial budgets

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 23

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Master Budget

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 24

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Operating Budgets
• Sales forecast
Accuracy of sales forecast affects all other budgets
• Sales budget
• Production/inventory budget
• Direct materials budget
• Direct labor budget
• Overhead budget
• Cost of goods sold budget
• Selling and administrative expense budget
• Pro forma income statement

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 25

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Sales Budget
Sales budget defines capacity needed.

Sales Budget

Sales in units 158,000 (a)

Selling price per unit $148
Total sales $23,384,000 (b)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 26

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Production/Inventory Budget

• Plan for acquiring Production Budget

resources Budgeted sales in units 158,000 (a)
• Plan to meet sales goals Add: Desired ending inventory of
• Plan to maintain specified finished goods (units)
16,000
inventory levels Total units needed 174,000
Less: Beginning inventory of finished
goods (units)
14,000
Budgeted production in units 160,000 (c)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 27

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: AA Models’ Production Plan

AA Models has the following production plan (in units):

January 10,000 February 8,000 March 9,000 April 12,000
Each unit contains 3 pounds of raw material; desired raw material ending inventory
each month is 120% of the next month’s production + 500 pounds (Beginning
inventory meets this requirement.)
How much raw material should AA purchase in March?
a. 27,000 pounds
b. 32,900 pounds
c. 37,800 pounds
d. 43,700 pounds
Answer: c.
At the end of February, the desired raw material ending inventory is [(9,000 units x 3 lbs./unit
× 1.2) + 500 lbs.] = 32,900 lbs. Therefore, this is March’s beginning inventory, less raw material
lbs. used in production for March (9,000 units × 3 lbs. /unit) = 27,000 lbs.; 32,900 lbs. – 27,000
lbs. = 5,900 lbs. in inventory. March’s ending inventory goal is [(12,000 units × 3 lbs./unit × 1.2)
+ 500 lbs.] = 43,700 lbs.; 43,700 lbs. – 5,900 lbs. current inventory = 37,800 lbs. needed to
purchase to meet ending inventory goal.

Based on ICMA Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 28
question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Direct Materials Usage Budget
• Specifies AA Models Direct Materials Usage Budget
material Production requirement 160,000 (c)
components Budgeted production (units)
Pounds of clay per unit of product ×3
• Specifies cost of
Total pounds of clay required 480,000 (d)
components Cost per pound × $14 (e)
Cost of clay to be used in production $6,720,000 (f)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 29

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Direct Materials Purchase Budget

• Specifies AA Models Direct Materials Purchase Budget

purchases of Total direct materials needed in production
material (units) 480,000 (d)
components Add: Desired ending inventory (units) 48,000
• Specifies cost of Total direct materials required (units) 528,000
purchases of Less: Direct materials beginning inventory 40,000
finished goods Direct materials purchases 488,000
Purchase price per unit $14 (e)
Total cost for direct materials purchases $6,832,000 (g)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 30

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Direct Labor Budget
• Plan production AA Models Direct Labor Budget
processes to smooth out Budgeted production (units) 160,000 (c)
production Direct labor hours required per unit × 0.4
• Prepared by production
Direct labor hours needed 64,000 (h)
manager and human
Hourly rate × $13
resources
Total wages for direct labor $832,000 (i)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 31

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Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Factory Overhead Budget
• Includes all other AA Models Factory Overhead Budget
Rate per DLH*
production costs
Total direct labor hours 64,000 (h)
• Two sections Variable factory overhead Per unit Total
Variable costs Supplies $0.18 $11,520
Fixed costs Other 5.50 352,000
Total variable factory overhead $5.68 363,520
* DLH = Direct labor Fixed factory overhead
hours Depreciation 35,000
Plant insurance 1,200
Indirect labor 128,000
Salary supervision 34,000
Total fixed factory overhead 198,200
Total factory overhead $561,720 (j)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 32

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Cost of Goods Sold Budget
• Also known as AA Models Cost of Goods Sold Budget
cost of goods Beginning finished goods inventory, Jan. 1 $786,360
manufactured and Direct materials used $6,720,000 (f)
sold budget Direct labor 832,000 (i)
• Summary of Manufacturing overhead 561,720 (j)
production costs Cost of goods manufactured 8,113,720
(direct materials, 8,900,080
Cost of goods available for sale
direct labor, and
Less: Ending finished goods inventory 811,360
overhead budgets)
Cost of goods sold $8,088,720 (k)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 33

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Selling and Administrative Expense Budget
• Nonmanufacturing AA Models Selling and Administrative
expenses Expense Budget
• Nonoperating income Research/design $348,000
may be included here Marketing 972,000
• Sales-related expenses Shipping 510,000
included here because
Product support 330,000
they are period costs (not
part of production) Administration 680,400

Total $2,840,400 (l)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 34

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Pro Forma Income Statement
Expected income based on AA Models Pro Forma Income Statement
budget Sales $23,384,000 (b)
• Interest payment of Less: Cost of goods sold 8,088,720 (k)
$400,000 Gross margin 15,295,280
• Tax rate of 35% Less: S&A* expenses 2,840,400 (l)
*S&A = Selling and Operating income 12,454,880
administrative
Less: Interest $400,000
Earnings before taxes 12,054,880
Less: Taxes 4,219,208
Net income $7,835,672

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 35

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 3 Exercise
Preparing Operating Budgets and Pro Forma
Income Statement
Section B, Topic 5: Annual Profit Plan and Supporting
Schedules

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 36

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Session 3 Wrap-Up
Content covered in Session 3
• Section B, Topic 2: Budgeting Concepts
• Section B, Topic 5: Annual Profit Plan and Supporting Schedules
• Exercise: Preparing Operating Budgets and Pro Forma Income
Statement

Content to be covered in Session 4

• Section B, Topic 5: Annual Profit Plan and Supporting Schedule,
continued
• Exercise: Preparing a Cash Budget
• Comprehensive Problem
• Section A, Topic 4: Budget Methodologies
• Section A, Topic 6: Top-Level Planning and Analysis
Part 1: Financial Planning, Performance and Control 37
Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.