Chapter 9

The success of a budget program is determined by

The way a budget is developed.

Cash Budget

-A detailed plan showing how cash resources will be acquired and used

Typical budgeting process(not right)

-Top managers initiate the budgeting process by issuing profit targets -Top managers initiate the budgeting process by issuing profit targets -Targets set by top managers may be unrealistically high or may allow too much slack -If the targets are too high and employees know they are unrealistic, motivation will suffer -If the targets allow too much slack, waste will occur. -Top managers should be cautious about imposing inflexible targets from above.

Ending finished goods inventory budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet.

Manufacturing overhead budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.

Merchandising Budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.

Selling and administrative expense budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period Divided into variable and fixed cost

Responsibility Accounting

A manager should be held responsible for those items—and only those items—that the manager can actually control to a significant extent.

Sales Budget is calculated by

Budgeted unit sales X selling price.

Direct Labor Budget formula

Computed by multiplying the number of units to be produced in that quarter by the number of direct labor-hours required to make a unit.

Budget

Detailed plan for the future expressed in formal quantitative terms

Planning

Developing goals and preparing budgets to complete those goals

Control

Gathering feedback to ensure that the plan is being properly executed as circumstances change

Budget is used for

Planing and control must have both t be effective

Self-imposed budget/ Participative budget

Prepared with the full cooperation and participation of managers at all levels.

The Budgeted Income Statement

The budgeted income statement is one of the key schedules in the budget process. It shows the company's planned profit and serves as a benchmark against which subsequent company performance can be measured.

Cash Budget Sections

The receipts section-lists all of the cash inflows, except from financing, expected during the budget period The disbursements section-summarizes all cash payments that are planned for the budget period The cash excess or deficiency section-If a cash deficiency exists during any budget period, the company will need to borrow funds. If there is a cash excess during any budget period The financing section-borrowings and repayments projected to take place during the budget period and lists interest payments that will be due on money borrowed

Budget Committee

Usually responsible for overall policy relating to the budget program and for coordinating the preparation of the budget itself.

What is the first step in a master budget

sales budget

Continuous/ Perpetual budget

- 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. -In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. -This approach keeps managers focused at least one year ahead so that they do not become too narrowly focused on short-term results.

Normal operating Budgets

- Cover a one-year period corresponding to the company's fiscal year. Many companies divide their budget year into four quarters. -The first quarter is then subdivided into months, and monthly budgets are developed. -This approach has the advantage of requiring periodic review and reappraisal of budget data throughout the year.

Reasons for Responsibility Accounting System

- Make sure that nothing "falls through the cracks," that the organization reacts quickly and appropriately to deviations from its plans, and that the organization learns from the feedback it gets by comparing budgeted goals to actual results. -The point is not to penalize individuals for missing targets.

Direct materials Budget

-A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. -The first line in the direct materials budget contains the required production for each quarter, which is taken directly from the production budget

Production Budget

-A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs. -Influenced by the desired level of the ending inventory.

Direct Labor Budget

-A detailed plan that shows the direct labor-hours required to fulfill the production budget -Company can develop plans to adjust the labor force as the situation requires

Master Budget

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

Human factors in Budgeting

-Budgeting is hard work, and if top management is not enthusiastic about and committed to the budget program, then it is unlikely that anyone else in the organization will be either. -Often used negatively as a pressure device to control people

Advantages of budgeting

-Communicate management's plans throughout organization -Force mangers to think about and plan for the future -Allocates resources to parts where can be used most effectively -Uncover bottlenecks -Coordinate activities of an entire organization by integrating plans of its various parts -Defines goals objectives that serve as benchmarks

Sales Budget

-Detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process. -Helps determine how many units need to be produced.

Self-imposed budgets have a number of advantages:

-Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management. -Estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations. -Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Self-imposed budgets create commitment. -A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. With a self-imposed budget, this excuse is not available.

Self-imposed budgets disadvantages:

-Lower-level managers may allow too much budgetary slack. Because the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain (i.e., the manager will build slack into the budget). -Budgets prepared by lower-level managers should be scrutinized by higher levels of management. -Could result in suboptimal performance

In successful budget programs

-Managers actively participate in preparing their own budgets -Employees that are penalized will have resentment

Cash budget includes

-Manufacturing costs including the direct materials budget direct labor budget manufacturing overhead budget

Master budget parts

-Sales Budget -Production budget(manufacturing co) Merchandising budget(merchandising) -Direct materials budget -Direct Labor Budget - Manufacturing overhead budget -Ending finished goods inventory budget -Selling and administrative expense budget Cash budget

Budget committee is composed of

-The president -Vice presidents in charge of various functions such as sales, production, and purchasing -The controller