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Transcript of John Wiley & Sons, Inc. © 2005 Chapter 19 Budgetary Planning Prepared by Barbara Muller Arizona...
John Wiley & Sons, Inc. © 2005
Chapter 19Chapter 19
Budgetary Planning
Prepared by Barbara MullerPrepared by Barbara MullerArizona State University WestArizona State University West
Principles of AccountingPrinciples of Accounting
Kimmel Kimmel •• Weygandt Weygandt •• Kieso Kieso
CHAPTER 19BUDGETARY PLANNING
After studying this chapter, you should be able to: Indicate the benefits of budgeting. State the essentials of effective budgeting. Identify the budgets that comprise the
master budget. Describe the sources for preparing the
budgeted income statement. Explain the principal sections of a cash
budget. Indicate the applicability of budgeting in
nonmanufacturing companies.
Budgeting Basics Budget
• formal written statement of management’s plans for a specified future time period, expressed in financial terms
• primary method of communicating agreed-upon objectives throughout the company
• provides historical data on revenues, costs, and expenses
• once adopted, it becomes an important basis for performance evaluation
Benefits of BudgetingSTUDY OBJECTIVE 1
The primary benefits of budgeting include• Requires all levels of management plan ahead
• Provides definite objectives for evaluating performance
• Is an early warning system for potential problems
• Facilitates coordination of activities within the business
• Results in greater management awareness of the entity’s overall operations
• Motivates personnel throughout organization to meet planned objectives
Essentials of Effective BudgetingSTUDY OBJECTIVE 2
Effective budgeting requires• Sound organizational structure where authority and
responsibility for all phases of operations are clearly defined
• Budgets based on research and analysis result in realistic goals
• An effective budget program is accepted by all levels of management
Length of the Budget Period
A budget may be prepared for any period of time Most common budget period is one year Different types of budgets may cover different
time periodso For example, cash may be budgeted monthly, while a plant
expansion budget may cover a 10-year period
A continuous twelve-month budget drops the month just ended and adds a future month
An annual budget may be supplemented by monthly and quarterly budgets
The Budgeting Process
A budget is developed within the framework of a sales forecast
The budgeting process may be informal in small companies; in larger companies a budget committee is often responsible for coordinating the budget process
o Members of the committee often include the president, treasurer, chief accountant (controller), and management personnel from each major area of the company
Flow of Budget Data
Budgeting and Human Behavior
Budgets can be expected to have a strong positive influence on a manager when• Each level of management is invited and encouraged to
participate in developing the budget• Criticism of a manager’s performance is tempered
with advice and assistance• Top management is sensitive to the behavioral
implications of its actions
Budgeting and Long-Range Plans
Budgeting is the achievement of specific short-term goals
Long-range planning identifies and selects strategies to achieve goals and develop policies and plans to implement the strategies
Long-range plans contain less detail than budgets
The Master BudgetSTUDY OBJECTIVE 3
A master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.
It is developed within the framework of a sales forecast.
Components of the Master Budget
Two Classes of Budgets in the Master Budget
Operating budgets• the individual budgets that result in the preparation of
the budgeted income statement
Financial budgets • focus on the cash resources needed to fund expected
operations and planned capital expenditures
Preparing the Operating Budgets:Sales Budget
The sales budget is prepared from the sales forecast• It represents management’s best estimate of sales
revenue for the budget period• Each of the other budgets depends on the sales
budget
Production Budget
The production budget shows the units that must be produced to meet anticipated sales
It is derived from sales budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units)
The required production in units formula is:Desired Ending
Finished Goods Units
Beginning Finished Goods Units
Budgeted Sales Units
Required Production
Units
Direct Materials Budget
Desired Ending Direct
Material Units
Beginning Direct
MaterialsUnits
Direct Materials
Units Required for Production
Required Direct
Materials Purchases
Units
The direct materials budget Shows both the quantity and cost of direct
materials to be purchased It is derived from the direct materials units
required for production (from the production budget) plus the desired change in ending direct materials units
Direct Labor Budget
The direct labor budget •Shows both the quantity of hours and cost of direct labor necessary to meet production requirements•Is critical in maintaining a labor force that can meet expected production
Manufacturing Overhead and Selling and Administrative Budget
Manufacturing overhead budget• Contains expected manufacturing overhead costs
Selling and administrative expense budget• Contains anticipated operating expenses
Both distinguish between fixed and variable costs
Budgeted Income StatementSTUDY OBJECTIVE 4
Budgeted income statement•The important end-product of the operating budgets
•Indicates the expected profitability of operations
•Provides a basis for evaluating company performance
•Prepared from theo Sales budget
o Production budget
o Direct labor budget
o Direct materials purchases budget
o Manufacturing Overhead budget
o Selling and Administrative expense budget
Preparing the Financial BudgetsSTUDY OBJECTIVE 5
Cash budget• Shows anticipated cash flows
• Often considered to be the most important output in preparing financial budgets
• Contains three sectionso Cash receipts
o Cash disbursements
o Financing
Cash Budget
Cash receipts section• Includes expected receipts from the company’s
principal sources of revenue, usually cash sales and collections on credit sales
Cash disbursements section• Includes expected cash payments for direct materials
and labor, taxes, dividends, etc.
Financing section• Shows expected borrowings and repayments of
borrowed funds plus interest
Budgeted Balance Sheet
Budgeted balance sheet A projection of financial position at the end of the
budget period Developed from the budgeted balance sheet for
the preceding year and the budgets for the current year
Budgeting in Non-manufacturing Companies
STUDY OBJECTIVE 6
Budgets are also used by• Merchandisers
• Service enterprises
• Not-for-profit organizations
Desired Ending
Merchandise Inventory
Beginning Merchandise
Inventory
Budgeted Cost of
Goods Sold
Required Merchandise Purchases
Merchandisers Budgets
The major differences between the budgets of a merchandiser and a manufacturer • Merchandisers use a purchases budget instead of a production
budget
• Merchandisers do not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead)
Service Enterprises
In service enterprises the critical factor in budgeting is coordinating professional staff needs with anticipated services
•If a firm is overstaffed• Labor costs will be disproportionately high
• Profits will be lower because of the additional salaries
• Staff turnover will increase because of lack of challenging work
•If an enterprise is understaffed • Revenue may be lost because existing and prospective client needs for
service cannot be met
• Professional staff may seek other jobs because of excessive work loads
Not-for-Profit Organizations
Budgeting is just as important for not-for-profit organizations as for profit-oriented enterprises• In most cases, not-for-profit entities budget on
the basis of cash flows (expenditures and receipts), rather than on a revenue and expense basis
• The starting point in the budgeting process is usually expenditures, not receipts
Let’s ReviewLet’s Review
A sales budget is:A sales budget is:
a.a. derived from the production budget.derived from the production budget.
d.d. Prepared only for credit sales.Prepared only for credit sales.
c.c. Not the starting point for the master Not the starting point for the master budget.budget.
b.b. management’s estimate of sales revenue for management’s estimate of sales revenue for the year.the year.
Let’s ReviewLet’s Review
A sales budget is:A sales budget is:
a.a. derived from the production budget.derived from the production budget.
d.d. Prepared only for credit sales.Prepared only for credit sales.
c.c. Not the starting point for the master Not the starting point for the master budget.budget.
b.b. management’s estimate of sales revenue for management’s estimate of sales revenue for the year.the year.
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Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.