ACCT CHP 9 Profit Planning

Continuous/Perpetual Budget

-12 month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed -one month is added to the end of the budget as each month 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

Budgets are used for 2 purposes

*1) Planning:* involves developing goals and preparing various budgets to achieve those goals *2) Control:*involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal. - also involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change ***must provide both for a good budgeting system; good planning without effective control is time wasted

Cash Budget

*4 sections:* 1) Cash receipts section lists all cash inflows excluding cash received from financing; 2) Cash disbursements section consists of all cash payments excluding repayments of principal and interest; 3) Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed; and 4) Financing section details the borrowings and repayments projected to take place during the budget period.

Responsibility accounting

- Managers should be held responsible for those items - and only those items - that they can actually control to a significant extent -Responsibility accounting systems enable organizations to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results -The point is to NOT penalize individuals for missing targets -personalizes accounting information by holding individuals responsible for revenues and costs

budget

-A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period -book: a detailed plan for the future that is usually expressed in formal quantitative terms

Expected cash collections

-All sales are on account -Royal's collection pattern is: --70% collected in the month of sale --25% collected in the month following sale --5% uncollectible

What do you need to prepare a direct materials purchase budget?

-Beginning inventory of raw materials -Raw materials required per unit

Which budgets are needed to calculate unit product costs?

-Direct materials budget -Direct labor budget -Manufacturing overhead budget

budgeting

-The act of preparing a budget

Human Factors in Budgeting

-The success of a budget program depends on three important factors: 1) Top management must be enthusiastic and committed to the budget process. 2) Top management must not use the budget to pressure employees or blame them when something goes wrong. 3) Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.

budgetary control

-The use of budgets to control an organization's activities

who should be involved in developing budgets?

-Top managers -Lower level managers

Self-imposed/Participative budget

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

Cash budget

-a detailed plan showing how cash resources will be acquired and used -after this is prepared, the budgeted income statement and budgeted balance sheet can be prepared

How do you calculate required borrowings on a cash budget?

-add desired ending cash balance to the amount of the cash deficiency

The Master Budget

-consists of 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

Manufacturing overhead budget

-lists all costs of production other than direct materials and direct labor

Selling and administrative expense budget

-lists the budgeted expenses for areas other than manufacturing

Production budget

-lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory -based on on # of expected units to be sold ---- Budgeted unit sales +Add desired ending inventory of finished goods =Total needs -Minus beginning inventory of finished goods =Required production

Sales budget again

-multiply budgeted unit sales by the selling price

Choosing the Budget Period

-operating budgets usually cover a 1 year period corresponding to the company's fiscal year; then divide the year into 4 quarters

Direct materials budget

-prepared after the production requirements have been computed -details the raw materials that must be purchased to fulfill the production budget and to provide adequate inventories

Budgetary slack

-setting easily attainable targets

Budgeted income statement

-shows a company's planned net profit and serves as a benchmark against which subsequent company performance can be measured

Direct labor budget

-shows the direct labor hours required to satisfy the production budget -by knowing in advance how much labor time will be needed throughout the budgeted year, the company can develop plans to adjust the labor force as the situation requires -based on the production budget

why should the budgeting process be taken seriously?

-the budget allocates resources to departments -the budget sets the benchmarks used to evaluate departments

Ending finished goods inventory budget

-the cost of unsold units is computed on this

Sales budget

-the first step in the budgeting process is the preparation of a sales budget -this is a detailed schedule showing the expected sales for the budget period -all other parts of the master budget depend on the sales budget -helps determine how many units need to be produced; thus, production budget produced after sales budget

Depreciation

-the most common significant noncash manufacturing overhead cost

Advantages of budgeting

1) Budgets *communicate* management's plans throughout the organization 2) Budgets force managers to *think about and plan* for the future 3) provides a means of *allocating resources* to those parts of the organization where they can be used most effectively 4) can uncover potential *bottlenecks* before they occur 5) *coordinate* the activities of the entire organization by *integrating* the plans of its various parts 6) define goals and objectives that can serve as *benchmarks* for evaluating subsequent performance