Managerial Accounting Chapter 8

Budgeting

The act of preparing a budget

Budgetary Control

The use of Budgets to control an organization's activities

Book Budget vs Project

Book has 3 months and quarter total, Project has 4 quarters and Year total

Production Budget

Budgeted Unit Sales Plus desired units of ending finished goods inventory Total needs Less Units of beginning finished goods Required Production in Units

As a practical matter, planning and budgeting mean exactly the same thing

No. Planning and control are different, although related, concepts.

Responsibility Accounting

a system in which a manager is held responsible for those items of revenues and costs—and only those items—that the manager can control to a significant extent. Each line item in the budget is made the responsibility of a manager who is then held responsible for differences between budgeted and actual results.

Advantages of self imposed budgets

1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.

Direct Labor Budget

Required Production in Units * Direct Labor Time per unit = Total Direct Labor-hours needed * Direct Labor Cost per hour = Total Direct Labor Cost

What is a self-imposed budget? what are the benefits of using one? what should one be cautions of?

8-8 A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets. This is in contrast to a budget that is imposed from above. Advantages of a self-imposed budget are: (1) Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued. (2) Budget 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. (3) 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. (4) 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. Caution - Self-imposed budgets do carry with them the risk of budgetary slack. The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack.

Self - Imposed Budget

A budget that is prepared with the full cooperation and participation of managers at all levels

Discuss some of the major benefits of budgeting

Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budgeting process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

Advantages of budgeting

Define goals and objectives think about and plan for the future Means of allocating resources uncover potential bottlenecks Coordinate Activities Communicate plans

Sales Budget

how much you want to sell * price per unit

Planning

involves developing objectives and preparing various budgets to achieve those objectives

Control

involves the steps taken by managements to increase the likelihood that the objectives set down while planning are attained and all the parts of the organization are working together toward that goal

Self imposed budgets

should be reviewed by higher levels of management to prevent budgetary slack