Accounting 202: Chapter 23

Form for cash budget:

- Beginning cash balance - Add: Cash Receipts - Total avliable cash - less: cash disbursements - excess (deficinecy) of cash - Financing - Edning cash balance

Form for budgeted merchandise

- Budgeted cost of goods sold: sales $ x % of sales - add: desired ending merchandise: next months $ x ending inventory % - Total: add together - Less: beginning merchandise- budgeted cost x ending inventory % - required merchandies: subtract toal-beginning merch.

Components of the Master Budget: Goes in the order presented

- Operating Budgets: 1. Sales budget 2. production budget 3. direct materials, direct labor, and manufacturing overhead budget 4. Selling and administrative expense budget 5. budgeted income statement - Financial Budgets: 6. Capital expenditure, cash, and budgeted balance sheet balance

problem is a service company is overstaffed:

- disproportionately higher labor costs - lower profits due to additional salaries - increases staff turnover due to lack of challenging work

Under Budgeting and Accounting they have:

- historical accounting data on revenues, costs, and expenses to help formulate future budgets - accountants normally responsible for presenting managements budgeting goals in financial terms - The budget and its administration are the responsibility of management

Not for Profit organizations

- just as important as or profit oriented company - budget process differs from profits oriented company - budget on the basis for cash flows (expenditures and receipts) not on a revenue and expense basis - starting point is usually expenditures, not receipts - management task is to find receipts needed to support planned expenditures - budget must be followed, overspending often illegal

Problems if a service company is understaffed:

- lost revenue because existing and future client needs for services cannot be met - loss of professional staff due to excessive workloads

2. Emphasis

1. Budgeting focuses on achieving short-term goals, such as meeting annual profit objectives 2. Long range planning: identifies long-term goals, select strategies to achieve those goals, and develops policies and plans to implement the strategies - considers anticipated trens in the economic and political enviorment and how the company should cope with them

3. Amount of detail presented

1. Budgets; can be very detailed. 2. Long-range plans contain considerably less detail - intended more for review of progress toward long-term goals than as a basis of control for achieving specific results

Sales Budget

1. The first budget prepared derived from the sales forecast - management 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 - prepared by 2 or 4 quarters in a year

Budgeting Process

1. base budget goals on past performance - collect data from organizational units - begin several months before end or current year 2. Develop budget within the framework of sales forecast - shows potential industry sales - shows company's expected share 3. Factors considered in sales forecasting: - general economic conditions, industry trends, market research studies, anticipated advertising and promotion, previous market share, price changes, technical development

Disadvantages of participative budgeting:

1. can be time consuming and costly 2. can foster budgetary "gaming" through budgetary stack

Advantages of Participative Budget

1. more accurate budget estimates because lower level managers have more detailed knowledge of their area 2. tendency to perceive process as fair due to involvement of lower level management

Contains two classes of budgets:

1. operating budgets 2. financial budgets

In a cash budget you must:

1. prepare in sequence 2. ending cash balance for one period is the beginning cash balance for the next 3. data obtained from other budgets and form management 4. often prepared for the year on a monthly basis 5. contributes to more effectively cash management 6. shows managers the need for additional financing before actual need arises 7. indicates when excess cash will be available

Benefits of Budgeting:

1. requires all levels of management to plan ahead 2. provides definite objectives for evaluating performance 3. creates an early warning system for potential problems 4. facilities coordination of activities within the business 5. results in greater management awareness of the entity's overall operations 6. it motivates personnel throughout organization to meet planned objectives

Length of budget period

1. the budget may be prepared for any period of time - most common- one year - supplement with monthly and quarterly budgets 2. different budgets may cover different time periods *many companies use continous 12-month budgets

Equation for sales budget:

Expected unit sales x unit selling price = total sales

length of budget is ______ enough to provide an attainable goal and minmize seasonal or cylical fluctuations

Long

Form for Cash disbursement section:

Purchases / Quarters Accounts pay. - price given 1st quarter - amount x % in quarter and amount x % in following quarter 2nd quarter - amount x % in quarter and amount x % in following quarter 3rd quarter - amount x % in quarter and amount x % in following quarter 4th quarter - amount x % in quarter total payments - add up the quarters

Form for sales budget:

Quarters and year or six months Expected units sales: units for each quarter unit selling price: price for each unit total sales: multiply expected x selling

Form for Cash Receipts:

Sales / quarters Accounts Rec. - price given 1st quarter - amount x % in quarter and amount x % in following quarter 2nd quarter - amount x % in quarter and amount x % in following quarter 3rd quarter - amount x % in quarter and amount x % in following quarter 4th quarter - amount x % in quarter Total collection - add up all the amounts in the quarters

length of budget is _____ enough for reliable estimates

Short

1. Time period involved

The maximum length of a budget is usually one year, and budgets are often prepared for shorter periods of time, such as month or a quarter. - for a long range, it is usually a period of at least 5 years

Budgeting & long-range planning

Three basic differences: 1. time period involved (budgetary - usually 1 year) (long range - 5 years) 2. emphasis 3. detail presented

Budget

a formal written statement of management plans for a specified future time period, expressed in financial terms - primary method of communicating- agreed upon objectives throughout the organization - promotes efficenetly

To determine budgeted merchandise purchases formula:

budget cost of goods sold + desired ending merchandise inventory - beginning merchandising inventory = required merchandising production

Equation for production budget

budget sales units + desired ending finished goods units - beginning finished goods units = required production units

2. Financial Budgets

capital expenditures budget, cash budget, and budgeted balance sheet - focus primarily on cash needs to fund operations and capital expenditures

Service Companies

critical factor in budgeting is coordinating professional staff needs with anticipated services

Essentials of effective budgeting

depends on a sound organization structure with authority & responsibility for all phases of operations clearly defined - based on research and analysis with realistic goals - accepted by all levels of management

Participative budgeting

each level of management should be invited to participate - may inspire higher levels of performance or discourage additional effort -depends on how budget developed and administrated

3. Financing section

expected borrowing of repayments of borrowed funds plus interest

2. Cash disbursement section

expected cash payments for direct materials, direct labor, MOH, and selling & administrative expenses

Control device

important basis for performance evaluation once adopted

1. Cash Receipts

includes 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

1. Operating budgets

individual budgets that result in the preparation of the budgeted income statement - establish goals for sales and production personnel

Budgetary Slack

managers intentionally under estimate budgeted revenues or over estimate budgeted expenses in order to make it easier to schieve budgetary goald

Overall goal

produce budget considered fair and achievable by managers while still meeting corporate goals

Form for production budget:

quarter and year or six months Expected unit sales: units given add: desired ending FG units: units from 2nd quarter x % of need with an ending inventory Total required units: add expected and desired Less: beginning FG units: % of estimated first quarter and then copy the desired ending for the rest Required production units: subtract total units - beginning FG units

The master budget

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

Cash Budget

shows anticipated cash flows - often considered to be the most important output in preparing financial budgets - contains 3 sections: 1. cash receipts 2. cash disbursement 3. financing - shows the beginning and ending cash balances

Budgeted merchandise

shows estimated cost of goods to be purchased to meet expected sales

Production Budget

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

Merchnadiser: Sales budget

the starting point and a key factor in developing the master budget - uses a purchase budget instead of a production budget - does not use the manufacturing budgets

Primary objective of long-range planning

to develop the best strategy to maximize the company's performance over an extended furture period

To find excess (deficiency):

total avaliable cash - total disbursement