accounting-chapter 8 budgeting

Sales Budget

a detailed schedule showing expected sales expressed in both dollars and units

Planning

involves developing goals and preparing various budgets to achieve those goals

Control

involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change

Top-down budgeting

top management prepares the budget with little or no input from middle and supervisory managers

The sales budget influences:

variable portion of the selling and administrative expense budget and it feeds into the production budget

Budgets are used for two distinct purposes:

planning and control

From a planning standpoint, organizations use budgets to:

1. encourage managers to think about and plan for the future 2. communicate financial goals throughout the organization 3. allocate resources within the organization where they can be used most effectively 4. coordinate the plans and activities of departmental managers 5. uncover potential bottlenecks before they occur

From a control standpoint, organizations compare their budgets to actual results to:

1. improve the efficiency and effectiveness of operations 2. evaluate and reward employees

Many companies choose to involve lower level managers because:

1. it shows respect for their opinions 2. they can provide more accurate estimates with their knowledge of day-to-day operations 3. it increases their motivtion to achieve self-imposed goals 4. it empowers them to take ownership of the budget

Limitations of using self-imposed budgets:

1. lower-level managers may make sub-optimal budgeting estimates if they lack the broad strategic perspective top managers have 2. if the budget is used to reward employees, lower level managers may create too much budgetary slack to ensure their results exceed the plan

Order of budgets

1. sales budget and schedule of cash collections 2. production budget or purchases budget 3. direct materials budget 4. direct labor budget 5. manufacturing overhead buget 6. ending finished goods inventory budget 7. selling and administrative expense budget

Self-imposed/participative budget

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement.

Master budget

A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet.

Budgetary slack

The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals.