Chapter 9
Unit Product Costs
needed to determine COGS on the income statement and to value ending inventory
Master budget
# of budgets that together form an integrated business plan. Communicates managements plans throughout the organization, allocates resources, coordinates activities. # of separate but interdependent budgets that formally lay out the firms sales productions and financial goals. Communicates in a cash budget, budgeted income statement, and budgeted balance sheet
The success of a budget program depends upon three important factors:
1. Top management must be enthusiastic and committed to the budget process, otherwise nobody will take it seriously. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. This breeds hostility and mistrust rather than cooperative and coordinated efforts. 3. Highly achievable budget targets are usually preferred (rather than "stretch budget" targets) when managers are rewarded based on meeting budget targets.
Perpetual/Continuous budgets
12 month budget that rolls forward one month or quarter as the current month or quarter is completed. Keeps managers focused on the future at least 1 year ahead.
The Budget Committee
A standing committee responsible for overall policy relating to the budget program, coordinating the preparation of the budget, resolving disputes related to the budget, and for approving the final budget. May consist of the president and vice president in charge of various function such as sales, production, purchasing, and the controller
The cash excess or deficiency section of the cash budget
Beginning cash balance + receipts = Total Cash available - cash disbursements
Self-imposed or participative budget
Budget prepared with the full cooperation and participation of management at all levels. Useful if the budget will be used to evaluate managerial performance. Gets operational management involved in the budget process and to clearly state their goals and expectations.
Advantages of Budgeting
Budgets communicate management's plans throughout the organization. Budgets force managers to think about and plan for the future. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budget process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.
Budget
Detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period . Once the budget is established, actual spending is compared to the budget to make sure the plan is being followed
Sales Budget
Detailed schedule showing the expected sales for budget period. Accuracy here is the key to the entire budget process, all the other parts depend on it. Based on firms sales forecast. Helps determine how many units need to be produced.
The financing section of the cash budget
Details the borrowings and repayments projected to take place during the budget period. Also lists the interest payments that will be due on money borrowed.
Budgeted Balance Sheet
Developed Using data from the balance sheet from the beginning of the budget period and data contained in the various schedules. Some data is taken from the firms previous end of year balance sheet
Four major advantages of self-imposed budgets
First, individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. Second, budget estimates prepared by front-line managers (who have intimate knowledge of day-to-day operations) are often more accurate than estimates prepared by top managers. Third, motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Fourth, 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.
4th Quarter
For the DM budget, The desired ending raw materials for the year is the same as the desired ending raw materials inventory for the _______
Initial flow of budget data in self-imposed budget
From lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare their own budget estimate and submit them to the next higher level of management. Estimates are reviewed and consolidated as they move through the organization.
Planning
Involves developing objectives and preparing various budgets to achieve those objectives
The MAN OH Budget
Lists all costs of production other than DM and DL. Some of the overhead costs are not cash outflows, so the total budgeted MAN OH costs must be adjusted to determine the cash disbursements for MAN OH. A typical non-cash MAN OH cost is depreciation which is deducted from the total budgeted MAN OH cost to determine the amount of cash disbursements.
The Receipts Section of the cash budget
Lists all the cash inflows except from financing
The Selling and administrative Expense Budget
Lists the budgeted expenses for areas other than manufacturing. Would be a compilation of many smaller budgets submitted by dept heads in a large company. Divided into fixed and variable cost components
Limitation of the self-imposed budget
Lower level management may allow too much budgetary slack: They will submit a budget that is easy to attain, they build slack into the budget
Responsibility Accounting
Managers should be held responsible for these items, and only those items, that they can actually control to a significant extent. Enable the firm 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 info by holding individuals responsible for revenues and costs.
Purpose of the budget
Motivate ppl and to coordinate there efforts, this purpose is undermined if management becomes preoccupied with the technical aspects, or if the budget is used in a rigid and inflexible manner to control people
Schedule of Expected Cash Disbursements
Needed to prepare the overall cash budget. Disbursements for raw materials or merchandise purchases consist of payments for purchases on account in prior periods plus any payments for purchases in the current budget period
The Budgeted Income Statement
One of the key schedules in the budget process. Shows the firms planned profits and serves as a benchmark against which subsequent firm performance can be measured
Operating Budget
Ordinarily cover a 1 year period corresponding to a firms fiscal year. Many firms divide their annual budget into 4 quarters.
The 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 for adequate inventories. The first line contains the required production in each quarter, which is taken directly from the production budget. The amounts listed under the year column are not always the sum of the quarterly amounts.
Direct Labor Budget
Shows the direct labor hours required to satisfy thr production budget. By knowing in advance how much labor time will be needed throughout the budget year, the firm can develop plans to adjust the labor force as the situation requires. The first line of consists of the required production for each quarter taken directly from the production budget.
Profit Planning
Steps taken by businesses to achieve their planned levels of profits. Accomplished by preparing a # of budgets
The disbursements section of the cash budget
Summerizes all cash payments that are planned for the period
Budgeting
The act of preparing a budget
Beginning raw materials inventory for the 1st quarter
The beginning raw materials inventory for the year is the same as the ___________
A budgeted income statement and a budgeted balance sheet
The last step of the process is to prepare
Ending finished goods inventory budget
The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ____________. These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget
Control
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
be effective
To _______ good budget system must provide for both planning and control. Good planning without effective control is time wasted.
Budgetary control
Use of budgets to control an organizations activities.
The cash budget
__________ is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the __________. Created by combining the data from the production budgets, sales budgets, and the selling and administrative budget.
Budget Matters
allocate resources, the budget process determines which departments get more or less resources. Sets the benchmarks used to evaluate management and their departments
The production budget
prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Used to determine the budget for manufacturing costs including the DM, DL, and MAN OH budgets. Must be adequate to meet budgeted sales and to provide for the desired ending inventory.
