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Chapter 6: Problem 12

Describe how nonoutput-based cost drivers can be incorporated into budgeting.

Short Answer

Expert verified
Incorporate nonoutput-based cost drivers by identifying, measuring their impact on costs, integrating them into the budget, and monitoring changes.

Step by step solution

01

Understanding Nonoutput-Based Cost Drivers

First, we need to understand what nonoutput-based cost drivers are. These are factors that influence costs in a business other than the volume of output produced. Examples include the number of setups, quality inspections, or the diversity of products offered. These cost drivers can significantly impact budgeting as they contribute to overhead costs that don't directly correlate with production output levels.
02

Identify Relevant Nonoutput-Based Cost Drivers

In this step, identify the specific nonoutput-based cost drivers relevant to your business operations. This could involve activities such as equipment maintenance, changes in product complexity, or regulatory compliance demands. Understanding which activities drive costs helps in accurately forecasting expenses in the budget.
03

Measure Cost Impact

For each identified nonoutput-based cost driver, assess its impact on costs. This involves quantifying how changes in the cost driver (e.g., more frequent setups or varied product lines) affect overall operational costs. Collecting historical data can help determine these relationships and the cost impact of each driver.
04

Incorporate into Budget

Once each nonoutput-based cost driver's impact is measured, integrate this into the budget planning process. Allocate funds for these drivers based on their expected levels in the upcoming period. This allows for a more comprehensive budget that includes all relevant indirect costs.
05

Monitor and Adjust

After incorporation into the budget, continuously monitor the actual impact of these nonoutput-based cost drivers during the budget period. Comparing actual versus budgeted figures allows for adjustments, helping fine-tune predictions and the budget allocation process in future periods.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Nonoutput-Based Cost Drivers
In the realm of budgeting, nonoutput-based cost drivers represent the elements that influence costs regardless of the quantity of output produced. These factors shape the costs within a business in ways that are distinct from mere production volume. Nonoutput-based cost drivers consist of elements such as the number of machinery setups, quality checks performed, or the range of different products a company offers.
  • Such cost drivers don't translate directly with the number of units produced but can still significantly impact the overall budget.
  • These drivers necessitate careful consideration because they contribute to overhead costs, which are indirect expenses that don鈥檛 fluctuate directly with production levels.
Recognizing and evaluating these drivers enables businesses to anticipate costs more accurately, leading to more effective budgeting strategies.
Budget Planning
Creating a budget that accurately mirrors an organization's financial needs involves the careful integration of various cost drivers. During budget planning, it is crucial to consider both direct and indirect costs to ensure that all aspects of the business operations are adequately funded. Nonoutput-based cost drivers need to be identified and evaluated to predict their financial impact effectively.
  • This process helps in defining the funds needed for non-production-related activities, such as equipment maintenance or regulatory compliance.
  • Incorporating these drivers into budget planning means allocating the correct resources to maintain operations efficiently and reduce unexpected expenses.
A thorough understanding of how each nonoutput-based cost driver contributes to the financial plan is essential for crafting a well-rounded and responsive budget.
Overhead Costs
Overhead costs encompass all indirect expenses incurred during regular business operations. These costs are not directly tied to the creation of products or services but are vital for running a business smoothly. Nonoutput-based cost drivers significantly influence overhead costs.
  • They include expenses such as office supplies, utility costs, and payroll services that sustain daily business activities.
  • Many overhead costs result from nonoutput-based cost drivers, like arranging additional training sessions or expanding the research and development team.
Understanding these expenses helps businesses allocate their resources efficiently to cover all essential overhead costs, ensuring seamless operational continuity.
Budget Monitoring
After establishing a budget that considers nonoutput-based cost drivers, monitoring and adjusting are vital steps in maintaining financial health. Budget monitoring involves comparing actual expenditures with budgeted figures, allowing businesses to track their financial performance diligently.
  • This step is crucial for identifying discrepancies between what was planned and what is happening in real time.
  • Adjustments can then be made to the budget allocations based on this comparison, ensuring resources remain accurately distributed.
Continuous monitoring promotes a more flexible approach to budgeting, enabling businesses to adapt to changes and manage costs effectively over time.

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Most popular questions from this chapter

DryPool T-Shirt Factory manufactures plain white and solid colored T-shirts. Inputs include the following: $$\begin{array}{lllc} & \text { Price } & \text { Quantity } & \text { cost per unit of output } \\ \hline \text { Fabric } & \$ 6 \text { per yard } & 1 \text { yard per unit } & \text { S6 per unit } \\ \text { Labor } & \$ 12 \text { per DMLH } & 0.25 \text { DMLH per unit } & \text { S3 per unit } \end{array}$$ Additionally, the colored T-shirts require 3 ounces of dye per shirt at a cost of \(\$ 0.20\) per ounce. The shirts sell for \(\$ 15\) each for white and \(\$ 20\) each for colors. The company expects to sell 12,000 white \(T\) -shirts and 60,000 colored T-shirts uniformly over the year. DryPool has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs \(\$ 1.00\) per ounce. The company would still need three ounces of dye per shirt. DryPool is reluctant to change because of the increase in costs (and decrease in profit) but the Environmental Protection Agency has threatened to fine them \(\$ 102,000\) if they continue to use the harmful but less expensive dye. 1\. Given the preceding information, would DryPool be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.) 2\. Assume DryPool chooses to be environmentally responsible regardless of cost, and it switchs to the new dye. The production manager suggests trying Kaizen costing. If DryPool can reduce fabric and labor costs each by \(1 \%\) per month, how close will it be at the end of 12 months to the gross profit it would have earned before switching to the more expensive dye? (Round to the nearest dollar for calculating cost reductions) 3\. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan?

Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.

Define master budget.

Consider each of the following independent situations for Anderson Forklifts. Anderson manufactures and sells forklifts. The company also contracts to service both its own and other brands of forklifts. Anderson has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair forklifts) and 10 service vans. The service technicians drive to customer sites to service the forklifts. Anderson owns the vans, pays for the gas, and supplies forklift parts, but the technicians own their own tools. 1\. In the manufacturing plant the production manager is not happy with the engines that the purchasing manager has been purchasing. In May the production manager stops requesting engines from the supply warehouse, and starts purchasing them directly from a different engine manufacturer. Actual materials costs in May are higher than budgeted. 2\. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not figured into the budget. 3\. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the driver has been driving the van for personal use. 4\. At Bigstore Warehouse, one of Anderson's forklift service customers, the service people are only called in for emergencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer. 5\. Anderson's service technicians are paid an hourly wage, with overtime pay if they exceed 40 hours per week, excluding driving time. Fred Snert, one of the technicians, frequently exceeds 40 hours per week. Service customers are happy with Fred's work, but the service manager talks to him constantly about working more quickly. Fred's overtime causes the actual costs of service to exceed the budget almost every month. 6\. The cost of gasoline has increased by \(50 \%\) this year, which caused the actual gasoline costs to greatly exceed the budgeted costs for the service vans. For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest what might be done to solve the problem or to improve the situation.

Outline the steps in preparing an operating budget.
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