Chapter 7 – Cost Information for Pricing and Product

							                  Chapter 11 – Using Budgets to Achieve Organizational Objectives

Why do we budget?

Budget = Quantitative expression of a plan of action


    I.      BUDGETING
            a. Purposes of budgets
                   i. Planning
                         1. Identify organizational objectives and short-term goals
                         2. Develop long-term strategy and short-term plans
                         3. Develop master budget
                  ii. Control
                         1. Measure and assess performance against budget (investigate variations
                             from the plan)
                         2. Reevaluate objectives, goals, strategy, and plans
                 iii. Communication
                         1. Frame of reference / spells out expectations
                 iv. Coordination
                         1. People working towards a common goal

            b. Variances – differences between planned and actual costs (more to come in Chapter 12)

            c. Forecasts are needed for determining Levels of resources
                   i. Flexible resources
                  ii. Capital budgeting - Capacity related




    II.     Master Budget
            a. Operating Budgets
                          1. Sales Plan
                          2. Production Plan
                          3. Materials Purchasing Plan
                          4. Labor Hiring and Training Plan
                          5. Capital spending plan
                          6. Administrative and Discretionary Spending Plan
            b. Financial Budgets
                          1. Statement of Expected Cash Flows
                          2. Projected Balance Sheet
                          3. Projected Income Statement

                                      a. Proforma statements (projected balance sheet and projected
                                         income statement)




Chapter 11– Using Budgets to Achieve Organizational Objectives                     Page 1 of 4
    III.     What is the starting point for the budget and why?



Sales forecasting – is the process of predicting sales of services or goods

Can use
             -   Past sales levels and trends
             -   General economic trends
             -   Economic trends in the company’s industry
             -   Other factors that affect sales in the industry
             -   Political and legal events
             -   Pricing policy of the company
             -   Planned advertising and product promotion
             -   Expected actions of competitors
             -   New products (of company or other firms)
             -   Market research studies

Budgets are directly assignable out of the master budget


Sales
Production
Materials Purchases

Beg. Inv.                Used

 Added

Ending Inv.


Production                Sales (units)
                          + Desired Ending Inv. of Finished Goods
                          Total Needs
                          - Beginning Inv. of Finished Goods
                          Production

Purchases                 RM for Production
                          + Desired Ending Inventory of Raw Materials
                          Total Needs
                          - Beginning Inv. of Raw Materials
                          Purchases

***Budgets are only as good as its underlying assumptions



Chapter 11– Using Budgets to Achieve Organizational Objectives                Page 2 of 4
    IV.     Aggregate Planning = Compares the production plan with the amount of available
            productive capacity; this comparison assesses the feasibility of the proposed production
            plan
            a. Production plan
            b. Spending plan
                    i. Discretionary spending = actual sales and production do not drive the amount
                       spent rather senior management does
            c. Choosing capacity levels
                    i. Flexible resources
                   ii. Capacity resources – intermediate term
                  iii. Capacity resources – long-term
            d. Handling infeasible production plans
            e. What drives planning
                          1. Demand
                          2. Capacity chosen
                          3. Production output




    V.      Comparing Actual and Planned Results
            a. Using the projected results
                    i. ID broad resource requirements
                   ii. ID potential problems
                  iii. Compare projected operating and financial results
            b. Understanding the Cash Flow Statement
                    i. Cash inflows
                   ii. Cash outflows
                  iii. Results of financing operations
            c. Budgeting in Service
                    i. Services can’t be inventoried
            d. Budgeting in Not-for-profits (NFP)
                    i. Appropriations
            e. Periodic budget (annual budget) – takes less time
            f. Continuous budgeting (rolling budget) – add a period (i.e., a month or quarter) as one is
               dropped – continuously thinking about planning, assessing and thinking strategically
            g. Controlling discretionary expenditures
                    i. Incremental budgeting – based on last period / history
                   ii. Zero-based budgeting – justify everything
                  iii. Project funding (also program funding) – in between incremental and zero-based
                  iv. Activity Based Budgeting – based on ABC




Chapter 11– Using Budgets to Achieve Organizational Objectives                   Page 3 of 4
    VI.     Managing the budgeting process
            a. Budget team
            b. Budget director – usually the controller
            c. Budget committee



    VII.    Behavioral Aspects to Budgeting
            a. Human factor
            b. Designing the budgeting process
                    i. Authoritative budgeting
                   ii. Participative budgeting
                  iii. Consultative budgeting
                           1. Stretch targets / stretch goals
            c. Influencing the budgeting process
                    i. Games people play - Budgeting games
                   ii. Budgetary slack (padding the budget)




Homework for Chapter 11

Questions – 1, 4, 6, 7, 10, 14, 21, 22, 25, 29
Exercises – 30, 33, 34, 44, 45
Problems – 46, 47, 48, 50, 57, 60




Chapter 11– Using Budgets to Achieve Organizational Objectives   Page 4 of 4