Accounting ch.7

Manufacturing Overhead Budget

The predetermined overhead allocation rate is used to allocate the indirect overhead costs. total estimated overhead costs/ total estimated quantity of the overhead allocation base

Why Do Managers Use Budgets?

•A budget is a financial plan that managers use to coordinate a business's activities. •Managers use budgets to: •Develop strategies. •Plan and budget for specific actions to achieve goals. •Implement the plan. •Take corrective action.

Static and Flexible Budgets

•A static budget is a budget prepared for only one level of sales volume. •A flexible budget is a budget prepared for various levels of sales volume.

Budgeting Procedures

•Budgeting procedures vary from company to company. •Budgeting should include input from all levels within the organization. •Budgeting usually begins several months before the beginning of the budget period. •To achieve the benefit of motivating employees, the budget should include input from all levels of the company. •A participative budget is a budgeting process where those individuals who are directly impacted by a budget are involved in the development of the budget. •These budgets tend to be achievable because those directly impacted by the budget help to create the plan.

Budgeting Objectives

•Budgeting requires managers to plan for the company's future. •The budget coordinates a company's activities. •A budget provides a benchmark that motivates employees and helps managers evaluate performance. •Benchmarking• is the practice of comparing a company with its prior performance or with best practices from other companies.

Cash Payments

•Capital expenditures •Product costs: •Direct materials purchases •Direct labor costs •Manufacturing overhead costs •Selling and administrative expenses

Budgeting and Human Behavior

•Managers must: •Support the budget •Show employees how budgets can help them achieve better results •Require that employees participate in developing the budget •Budgetary games: •Budgetary slack occurs when managers intentionally understate expected revenues or overstate expected expenses. •Spend it or lose it.

What Are the Different Types of Budgets?

•Some companies will use the previous year's results to create a budget and modify for expected changes. •Managers must only justify changes to budget from the previous year's actual results. •Budgets can also be developed using a zero-based budget where all revenues and expenses must be justified for each new period. •The previous year's actual results are ignored under this approach.

Cash Budget

•The cash budget pulls information from the other budgets previously prepared. •The cash budget has three sections: •Cash receipts •Cash payments •Short-term financing

Selling and Administrative Expense Budget

•The cost accountant works with the office and sales managers to develop the selling and administrative expense budget. •The selling and administrative expense budget estimates the selling and administrative expenses needed to meet the company's projected sales. •Cost behavior is also considered for this budget, with costs designated as variable or fixed.

Cost of Goods Sold Budget

•The cost of goods sold budget estimates the cost of goods sold based on the company's projected sales.

How Are Financial Budgets Prepared for a Manufacturing Company?

•The financial budgets include the cash budget and the budgeted financial statements: •Budgeted income statement •Budgeted balance sheet •Budgeted statement of cash flows

Sales Budget

•The forecast of sales revenue is the cornerstone of the master budget.

How Are Operating Budgets Prepared for a Manufacturing Company?

•The master budget includes the following budgets: •Sales budget •Production budget •Direct materials budget •Direct labor budget •Manufacturing overhead budget •Cost of goods sold budget •Selling and administrative budget

Master Budgets

•The master budget is the set of budgeted financial statements and supporting schedules for the entire organization. •The capital expenditures budget presents the company's plan for purchasing long-term assets. •A financial budget includes the cash budget and the budgeted financial statements. •The cash budget details how the business expects to go from the beginning cash balance to the ending cash balances.

Production Budget

•The production budget is the basis for product costs budgets, direct materials budget, direct labor budgets, and manufacturing overhead budgets.

Capital Expenditures Budget

•The purchase of long-term assets is part of a strategic plan. •Capital expenditures are purchases of long-term assets, such as: •Delivery trucks •Computer systems •Office furniture •Manufacturing equipment

Data Analytics in Accounting

•The use of technology and data analytics can be an important part of a company's budgeting process. •For example, Anheuser-Busch uses data analytics to: • Help with sales forecasting and financial planning •Drive growth and operational efficiency •Establish budgets and monitor them against actual results

How Can Information Technology Be Used in the Budgeting Process?

•To conduct sensitivity analysis •To combine individual unit budgets to create the companywide master budget •Technology can make it more cost effective to combine individual unit budgets to create the companywide master budget. •Companies use budget-management software to combine the budget data from multiple segments for financial statements. •Managers spend less time compiling and summarizing data and more time analyzing and making decisions to ensure that the budget leads the company to achieve its key strategic goals.