Budgeting

Budgeting involves:

1. establishing specific goals 2. executing plans to achieve the goals 3. periodically comparing actual results with the goals

Zero-based budgeting

- requires managers to estimate sales, production, and other operating data as though operations are being started for the first time

Variances from standard for factory overhead

- result from: - actual variable factory overhead cost greater or less than budgeted variable factory overhead for actual production - actual production at a level above or below 100% of normal capacity

Flexible budget

- show the expected results of a responsibility center for several activity levels - a series of static budgets for different levels of activity

Static budget

- shows the expected results of a responsibility center for only one activity level - the budget does not change even if the activity changes - use by many service companies and for some administrative functions of manufacturing companies - disadvantage: they do not adjust for changes in revenues and expenses that occur as volumes change

Capital expenditures budget

- summarizes plans for acquiring fixed assets - such expenditures are necessary as machinery and other fixed assets wear out or become obsolete - purchasing additional fixed assets may be necessary to meet increasing demand for the company's product

Factory overhead account

- temporary clearing account

Budgeting systems

- the budgetary period for operating activities normally includes the fiscal year of a company - a variation of fiscal-year budgeting, called continuous budgeting, maintains a 12 month projection into the future

Estimated cash payments

- to estimate cash payments for manufacturing costs, a schedule of payments for manufacturing costs is prepared

Budget padding

Budgetary slack

Budgeting affects the following managerial functions:

planning: involves setting goals to guide decisions and help motivate employees directing: involves decisions and actions to achieve budgeted goals controlling: involves comparing actual performance against the budgeted goals

Cost of goods sold budget

- prepared by integrating: - direct materials purchases budget - direct labor cost budget - factory overhead cost budget

Budgeted income statement

- prepared by integrating: - sales budget - cost of goods sold budget - selling and administrative expenses budget

Responsibility center

- a budgetary unit of a company - each responsibility center is led by a manager who has the authority and responsibility for achieving the center's budgeted goals

Feedback

- as time passes, the actual performance of a responsibility center can be compared against the budgeted goals - this provides prompt feedback to managers and employees about their performance - if necessary, responsibility centers can use such feedback to adjust their activities in the future

Controllable variance

- based on variable costs

Sales budget

- begins by estimating the quantity of sales - once sales quantities are estimated, the expected sales revenue can be determined by multiplying the volume by the expected unit sales price - the prior year's sales quantities are revised for such factors as the following: - backlog of unfilled sales orders - planned advertising and promotion - productive capacity - projected pricing changes - findings of market research studies - expected industry and general economic conditions

Total manufacturing cost variance

- direct materials cost variance: DM price variance, DM quantity variance - direct labor cost variance: DL rate variance, DL time variance - factory overhead cost variance: variable factory overhead (controllable variable), fixed factory volume variance AQ x AP | AQ x SP | SQ x SP

Factory overhead cost budget

- estimates the cost for each item of factory overhead needed to support budgeted production

Direct labor cost budget

- estimates the direct labor hours and related costs needed to support budgeted production

Cash budget

- estimates the expected receipts (inflows) and payments (outflows) of cash for a period of time

Production budget

- estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels

Direct materials purchases budget

- estimates the quantities of direct materials to be purchased to support the budgeted production and desired inventory levels

Human behavior and budgeting

- human behavior problems can arise in the budgeting process - the budgeted goals are set too tight, which are very hard or impossible to achieve - this may have a negative effect on the company achieving its goals OR - the budgeted goals are set too loose, which are very easy to achieve - budget padding= budgetary slack OR - the budgeted goals conflict with the objectives of the company and employees - goal conflict occurs when employees' or managers' self-interest differs from the company's goals

Master budget

- integrated set of operating, investing, and financing budgets for a period of time

Non-financial performance measures

- inventory turnover - on-time delivery - elapsed time between a customer order and product delivery - customer preference rankings compared to competitors - response time to a service call - employee satisfaction - etc

Selling and administrative expenses budget

- normally supported by departmental schedules - sales budget is often used as the starting point for this budget

Standards

- performance benchmarks - setting standards: requires joint efforts of accountants, engineers, and other management personnel - types of standards: theoretical or ideal (world record) standards - currently attainable standards (normal standards) - reviewing and revising standards: should be revised when they no longer reflect operating conditions they intended to measure

Budgets

- play an important role for organizations of all sizes and forms - ex: budgets are used in managing the operations of government agencies, churches, hospitals, small businesses, and manufacturing companies

Budgeted balance sheet

- prepared based on the operating, financing, and investing budgets of the master budget - similar to a normal balance sheet except that estimated amounts are used