ACCT 202 Chapter 23: Budget Planning
long-range planning
-identifies long-term goals, selects strategies to achieve the goals, and develops policies and plans to implement the strategies -management considers anticipated trends in the economic and political environment and how the company should cope with them -data intended more for review of progress toward LT goals -objective is to develop best strategy to max. company's performance over an extended future period
sales budget
-is derived from the sales forecast -prepared first and all other budgets are dependent upon it -represents management's best estimate of sales rev for the budget period -innacurate may adversely affect NI (overly optimistic may result in excessive invs that may have to be sold for less and pessimistic may result in loss of sales rev due to inv shortages)
accountants
-present management's budget goals in fin. terms -translate plans and communicate budget to employees -prepare periodic budget reports that provide basis for measuring performance and comparing actual results with planned objectives
cash reciepts
-section of cash budget that includes expected receipts from the company's principal source(s) of rev -usually cash sales and collections from customers on credit -shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock
cash disbursement
-section of cash budget that shows expect cash payments -including DM, DL, MOH, and S&Admin exps -includes projected payments for income taxes, dividends, investments, and plant assets
financing
-section of cash budget that shows expected borrowings and the repayment of the borrowed funds plus interest -needed when there is a cash deficiency or when cash balance is below management's min required balance
cash budget
-shows anticipated cash flows -most important financial budget -contains 3 sections: cash receipts, cash disbursements, and financing -also contains beg and end cash balances
plan ahead, define objectives, warn, coordinate activities, management awareness, and personnel motivation
6 benefits of budgeting
required production units
budgeted sales units + desired end FG units - beg FG units = ______ for production budget
research and analysis
budgets based on ____ are more likely to result in realistic goals that will contribute to the growth and profitability of a company
service company
critical factor in budgeting is coordinating professional staff needs with anticipated services
structure
effective budgeting depends on sound organizational ____ where authority and responsibility for all phases of operations are clearly defined
management
effectiveness of a budget program is directly related to its acceptance by all levels of ____
total sales
expected unit sales x unit selling price = ____ for sales budget
management
the budget itself and the administration of the budget are entirely _____ responsibilities
budgeted income statement
the important end-product of the operating budgets -indicates the expected profitability of operations for the budget period -provides the basis for evaluating company performance -act as a call to action -is prepared from various operating budgets
planning
the process of establishing company-wide objectives
total DL cost
units to be produced x DL hours per unit x DL cost per hour = _____
past performance
usual starting point from which future budget goals are formulated
output
when expected ____ is used for service companies, it is necessary to determine the expected billings of clients for service performed
input
when expected _____ data is used for service companies, each professional staff member projects his or her billable time; then firm applies rates to billable time to produce expected service revenue
master budget
-a set of interrelated budgets that constitutes a plan of action for a specified time period -contains operating budgets and fin. budgets
motivates personnel
-benefit of budgeting -_____ throughout the organization to meet planned objectives
early warning system
-benefit of budgeting -creates an ______ for potential problems so that management can make changes before things get out of hand
coordination of activities
-benefit of budgeting -facilitates the _____ within the business by correlating goals of each segment with overall company objectives so company can integrate production and sales promotion with expected sales
definite objectives
-benefit of budgeting -provides ____ for evaluating performances at each level of responsibility
plan ahead
-benefit of budgeting -require all levels of management to ____ and to formalize goals on a recurring basis
sales forecast
-the framework for budget development -shows potential sales for the industry and the company's expected share of such sales -consideration of general economic conditions, industry trends, market research studies, anticipated advertising and promotion, previous market share, changes in prices, and technological developments -input of sales personnel and top management also essential
operating budgets
-the individual budgets that result in the preparation of the budgeted income statement -establish goals for the company's sales and production personnel
merchandiser
-uses a merchandise purchases budget instead of a production budget -does not use the man. budgets (DM, DL, MOH)
time period, emphasis, and detail
2 main differences between long-range planning and budgeting
accounting
___ info makes major contributions to budgeting process -from these record companies can obtain historical data on revs, costs, and exps to formulate future budget goals
financial
____ budgets consist of capital expenditure budget, cash budget, and budgeted balance sheet
not-for-profit
_______ entities budget on the basis of cash flows (expenditures and receipts) rather than on a revenue and expense basis -starting point usually expenditures -management task is to find the receipts needed to support the planned expenditures
cash budget
a _____ contributes to more effective cash management and shows managers when additional financing is necessary well before the actual need arises
emphasis
a difference between budgeting and long-range planning -b/c budgeting is short term goals like annual profit objectives while long-range planning is long term goals and strategies to achieve them and policies and plans to implement the strategies
detail
a difference between budgeting and long-range planning -budgets are very planned and long-range plans are not so much --long range plans intended for review of progress toward LT goals instead of basis of control for achieving specific results
budget
a formal written statement of management's plans for a specified future time period, expressed in financial terms -represents the primary method of communicating agreed-upon objectives throughout the organization -once adopted, it becomes an important basis for evaluating performance -promotes efficiency and serves as a deterrent to waste and inefficiency
budgeted balance sheet
a projection of financial position at the end of the budget period -developed from the budgeted balance sheet for the proceeding year and the budgets for the current year
end inv
a realistic estimate of ____ is essential in scheduling production requirements -excessive in one quarter may lead to cutbacks in production and employee layoffs in a subsequent quarter -inadequate may result in added costs for overtime work or in lost sales
income statement
all data for the ____ come from the individual operating budgets except for estimated interest expense and estimated income taxes
cash budget
beg cash balance + cash receipts = total available cash - cash disbursements = excess of available cash over cash disbursements + financing = end cash balance
1 year
budget period can be any length of time, but usually ____ -length influencers are type of budget, nature of organization, need for periodic appraisal, and prevailing business conditions
required merchandise purchase
budgeted COGS + desired end merch inv - beg merch inv = ____
sales
company first creates operating budgets, which starts with ___ budget, then does fin. budgets
DL budget
contains the quantity (hours) and costs of the DL necessary to meet production requirements
budget
is an aid to management, not a substitute
sales budget
is prepared by multiplying expected unit sales volume for each product by its anticipated unit selling price
5 years
long-range planning usually encompasses a period of at least ____
budgeting slack
occurs when managers intentionally underestimate budgeted revs or overestimate budgeted exps in order to make it easier to achieve budgetary goals -to minimize, higher level managers must review and question budget projections
time period
one difference between budgeting and long-range planning is ____ involved
reach agreement
overall goal of participative budgeting is to ____ on a budget that the managers consider fair and achievable but which also meets the corporate goals set by top management
selling and administrative expense budget
projects anticipated selling and administrative expenses for the budget period -classifies expenses as either variable or fixed
production budget
provides the basis for the budgeted costs for each manu, cost element
control
role of budgeting is a ____ device
output, input
service companies can obtain budget data for service revenue from expected ____ or expected ____
DM budget
shows both the quantity and cost of DM to be purchased
merchandise purchases budget
shows the estimated cost of goods to be purchased to meet expected sales
MOH budget
shows the expected MOH costs for the budget period -distinguished between variable and fixed overhead costs
production budget
shows the number of units of a product to produce to meet anticipated sales demand
continuous budgeting
-12 month budgeting -drop the month just ended and add a future month -keeps management planning a full year ahead
management awareness
-benefit of budgeting -results in greater _____ of the entity's overall operations and the impact on operations of external factors like economic trends
participative budgeting
-bottom-to-top approach -says that each level of management should be invited to help develop budget -benefit is that lower level managers have more detailed knowledge of their specific area and can provide more accurate budgetary estimates and when lower-level managers participate, they are more likely to perceive the resulting budget as fair
cash budget
-data prepared in sequence -end balance for one period becomes beg balance for next period -get info from management and other budgets -prepared for the year on a monthly basis
financial budgets
-focus on cash resources needed to fund expected operations and planned capital expenditures -include the capital expenditure budget, cash budget, and budgeted balance sheet
budget committee
-formal; for larger companies -has responsibility for coordinating the preparation of the budget -includes president, treasurer, chief accountant (controller), and management personnel from each major area of company (sales, production, research) -serves as review board where managers can defend their budget goals and requests (differences reviewed and modified and reconciled)
participative budgeting
-give and take of it is time-consuming and more costly -top-down approach = budget is developed by top management and then dictated to lower -can foster budgetary gaming through budgetary slack
production
DL hours are determined from the _____ budget
required DM units to be purchased
DM units required for production + desired end DM units - beg DM units = _____ for DM budget
