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Operational BudgetingOperational Budgeting

Chapter 23

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Budgeting: The Basis for Budgeting: The Basis for Planning Planning and Controland Control

Control Steps taken by management to

ensure that objectives are

attained.

Planning Developing objectives for

acquisitionand use of resources.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

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Budget Problems Perceived unfair

or unrealistic goals.

Poor management-employee communications.

Budget Problems Perceived unfair

or unrealistic goals.

Poor management-employee communications.

Solution Reasonable and

achievable budgets.

Employee participation in budgeting process.

Solution Reasonable and

achievable budgets.

Employee participation in budgeting process.

Establishing Budgeted Establishing Budgeted Amounts: Amounts: Behavioral ApproachBehavioral Approach

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The Master BudgetThe Master Budget

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SalesBudget

EstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions

+Forecasts of customer needs from

marketing personnel

Steps in Preparing a Master Steps in Preparing a Master BudgetBudget

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Preparing the Master Budget: Preparing the Master Budget: Manufacturing Cost EstimatesManufacturing Cost Estimates

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The Sales BudgetThe Sales BudgetBob Poole, NTI’s marketing director, is optimistic that demand for the company’s product will continue to grow in 2015. He estimates that sales will reach 8,000 units in the first quarter and 10,000 units in the second quarter. Sales estimates for the third and fourth quarters are 30,000 units and 40,000 units, respectively.

8,000 units to Production Budget

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The Production Budget: The Production Budget: UnitsUnits

Production must be adequate to meet budgeted sales and to provide sufficient ending inventory.

Budgeted product sales in units

+ Desired product units in ending inventory

= Total product units needed

– Product units in beginning inventory

= Product units to produce

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Cost of Goods Manufactured and Sold Budget

The budget estimates for cost of goods sold are computed using the beginning finished goods inventory figure from the beginning balance sheet and information from the production budgets.

BeginningBalanceSheet

ProductionBudget

Information

Cost of Goods Manufactured and

Sold Budget

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Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions.

Fixed items: advertising and sales salaries.

Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices.

Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions.

Fixed items: advertising and sales salaries.

Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices.

Selling and AdministrativeSelling and Administrative(S&A) Expense Budget(S&A) Expense Budget

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The Budgeted Income The Budgeted Income StatementStatement

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Cash Budget EstimatesCash Budget EstimatesThe estimates and data necessary to prepare the cash budget and budgeted balance sheets are called cash budget estimates. These include budgeted disbursements for payables, prepayments, debt service, and taxes. In addition, NTI must budget cash receipts from collection of receivables.

The estimates and data necessary to prepare the cash budget and budgeted balance sheets are called cash budget estimates. These include budgeted disbursements for payables, prepayments, debt service, and taxes. In addition, NTI must budget cash receipts from collection of receivables.

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The Budgeted Balance The Budgeted Balance SheetSheet

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The creation of standards for evaluating performance.

Coordination of activities among all departments within the organization.

Advance warning and assignment of responsibility for conditions that require corrective actions.

Benefits of BudgetingBenefits of Budgeting

BUDGETS

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To a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change

in direct proportion to changes in activity.

Total fixed costs remainunchanged within therelevant range.

FixedVaria

ble

Flexible BudgetingFlexible Budgeting

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Flexible Budgeting Flexible Budgeting Performance ReportPerformance Report

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End of Chapter 23End of Chapter 23