Chapter 21: Budgeting Planning

Operating budgets

are used as the basis for the preparation of the budgeted income statement.

.Financial budgets

focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.

Long-range planning

identifies long-term goals, selects strategies to achieve these goals, and develops policies and plans to implement the strategies.

The Master budget

is a set of interrelated budgets that constitutes a plan of action for a specified time period.

• Accountants

o normally responsible for presenting management's budgeting goals in financial terms. • The budget and its administration are the responsibility of management

• Historical accounting data

o on revenues, costs, and expenses help in formulating future budgets.

Sales Forecast

shows potential sales for the industry and a company's expected share of such sales.

The Budgeting Process

• Base budget goals on past performance o Collect data from organizational units. o Begin several months before end of current year. • Develop budget within the framework of a sales forecast. o Shows potential industry sales. o Shows company's expected share. • Factors considered in sales forecasting o General economic conditions o Industry trends o Market research studies o Anticipated advertising and promotion o Previous market share o Price changes o Technological developments

Service Companies

• Critical factor in budgeting is coordinating professional staff needs with anticipated services. • Problems if overstaffed: o Disproportionately high labor costs. o Lower profits due to additional salaries. o Increased staff turnover due to lack of challenging work. • Problems if understaffed: o Lost revenues because existing and future client needs for services cannot be met. o Loss of professional staff due to excessive work loads.

Essentials of Effective Budgeting

• Depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined. • Based on research and analysis with realistic goals. • Accepted by all levels of management.

Budgeted Balance Sheet

• Developed from the budged balance sheet for the preceding year and the budgets for the current year

Participative Budgeting

• Each level of management should be invited to participate. o May inspire higher levels of performance or discourage additional effort. o Depends on how budget developed and administered • Advantages: o More accurate budget estimates because lower level managers have more detailed knowledge of their area. o Tendency to perceive process as fair due to involvement of lower level management. • Overall goal o produce budget considered fair and achievable by managers while still meeting corporate goals. • Disadvantages o Can be time consuming and costly o Can foster budgetary "gaming" through budgetary slack

Financing Section

• Expected borrowings and repayments of borrowed funds plus interest.

Cash Disbursements Section

• Expected cash payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses.

Cash Receipts Section

• Expected receipts from the principal sources of revenue. • Expected interest and dividends receipts, proceeds from planned sales of investments, plant assets, and the company's capital stock.

Sales Budget

• First budget prepared. • Derived from the sales forecast. o Management's best estimate of sales revenue for the budget period. • Every other budget depends on the sales budget. • Prepared by multiplying expected unit sales volume for each product times anticipated unit selling price.

Budgeted Income Statement

• Important end-product of the operating budgets. • Indicates expected profitability of operations. • Provides a basis for evaluating company performance. • Prepared from the operating budgets: o Sales o DM o DL o MOH o Selling & Administrative Expenses

Not-for-Profit Organizations

• Just as important as for profit-oriented company. • Budget process differs from profit-oriented company. • Budget on the basis of cash flows (expenditures and receipts), not on a revenue and expense basis. • Starting point o usually expenditures, not receipts. • Management's task o to find receipts needed to support planned expenditures. • Budget must be followed, overspending often illegal.

Length of Budget Period

• May be prepared for any period of time. o Most commo - one year. o Supplement with monthly and quarterly budgets. o Different budgets may cover different time periods. • Long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations. • Short enough for reliable estimates.

Selling and Administrative Expense Budget

• Projection of anticipated operating expenses • Distinguished between fixed and variable costs

Direct Materials Budget

• Required DM Units to be purchased = DM Units Required for Production + Desired End. DM Units - Beg. DM Units • Shows both the quantity and cost of direct materials to be purchased. • Budgeted cost of direct materials to be purchased = required units of direct materials x anticipated cost per unit. • Inadequate inventories could result in temporary shutdowns of production.

Merchandisers

• Required Merchandise Inv. = Budgeted COGS + Desired End. Merch. Inv. - Beg. Merch. Inv. • Sales Budget: o starting point and key factor in developing the master budget. • Use a purchases budget instead of a production budget. • Does not use the manufacturing budgets (direct materials, direct labor, manufacturing overhead).

Production Budget

• Required Production Units = Budgeted Sales Units + Desired Ending Finished Goods Units - Beginning Finished Goods Units • Shows units that must be produced to meet anticipated sales. • Derived from sales budget plus the desired change in ending finished goods inventory. • Essential to have a realistic estimate of ending inventory.

Primary benefits of budgeting

• Requires all levels of management to plan ahead. • Provides definite objectives for evaluating performance. • Creates an early warning system for potential problems. • Facilitates coordination of activities within the business. • Results in greater management awareness of the entity's overall operations. • It motivates personnel throughout organization to meet planned objectives.

The Master Budget

• Set of interrelated budgets o that constitutes a plan of action for a specified time period. • Contains two classes of budgets: o Operating budgets. Individual budgets that result in the preparation of the budgeted income statement establish goals for sales and production personnel. o Financial budgets. The capital expenditures budget, the cash budget, and the budgeted balance sheet focus primarily on cash needs to fund operations and capital expenditures.

Cash Budget

• Shows anticipated cash flows. • Often considered to be the most important output in preparing financial budgets. • Contains three sections: o Cash Receipts o Cash Disbursements o Financing • Shows beginning and ending cash balances. • Additional info o Must prepare in sequence. o Ending cash balance of one period is the beginning cash balance for the next. o Data obtained from other budgets and from management. o Often prepared for the year on a monthly basis. o Contributes to more effective cash management. o Shows managers the need for additional financing before actual need arises. o Indicates when excess cash will be available.

MOH Budget

• Shows the expected manufacturing overhead costs for the budget period. • Distinguishes between fixed and variable overhead costs.

Budgeting and Long-Range Planning

• Three basic differences o Time period involved Budgeting is short-term usually one year Long range planning - at least five years o Emphasis o Details presented

Direct Labor Budget

• Total DL Cost = Units to be produced x DL Hours per unit x DL Cost per Hour • Shows both the quantity of hours and cost of direct labor necessary to meet production requirements. • Critical in maintaining a labor force that can meet expected production.

Budget

• a formal written statement of management's plans for a specified future time period, expressed in financial terms. o Primary method of communicating agreed-upon objectives throughout the organization. o Promotes efficiency. o Control device important basis for performance evaluation once adopted.

Participative budgeting approach.

Lower-level managers are more likely to perceive results as fair and achievable under a ______