Using Budgets to Achieve Organizational Objectives.ppt

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					                       Using Budgets to Achieve
                       Organizational Objectives


                                                       Chapter 10

 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 1
                                           What is a budget?
           A       budget is a quantitative expression of the cash
                 inflows and outflows that sheds light on whether a
                 financial plan will meet corporate objectives.
            It     is important to consider cost behaviour when
                 budgeting:
                 - flexible costs (change with volume)
                 - committed costs (constant when under capacity)
                 - discretionary costs (R&D, advertising etc.)


 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 2
                                       Budgeting Purposes
           Role of Budgeting – Planning and Control
           1. Facilitates communication of the firm’s short-term
              goals to everyone in the organization.
           2. Enables the coordination of the firm’s activities to
              ensure that all departments understand their
              respective contributions.
           3. Enables the firms to later compare actual results to
              budgeted results (performance evaluation).


 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 3
                               Elements of Budgeting
            Budgeting       involves forecasting the demand
                 for four types of resources:
           1  Flexible resources that generate flexible costs (i.e. cost of
              direct materials)
           2 Intermediate-term capacity resources that generate
              capacity-related costs (i.e. rental storage space on
              quarterly/semi-annual basis)
           3. Resources that enhance the potential of the organization’s
              strategy (i.e. discretionary costs such as R&D, advertising,
              employee training)
           3 Long-term capacity resources that generate capacity-
              related costs (i.e. planning construction of a facility)
 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 4
                                  Master Budget Outputs
            The     master budget includes two sets of
                 outputs:


                                               The operating budgets


                                                         The projected
                                                        financial results
 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 5
                Elements of Budgeting (E10-3)
                                                            1. Organization Goals                             3. Capital Spending Plan


                                                                   2. Sales Plan


           4. Inventory Policy                                 5. Production Plan                            6. Productive Capacity


                                                             8. Labour Hiring                              9. Admin. and Discretionary
   7. Materials Purchasing Plan
                                                                and Training Plan                             Spending Plan



                                                    10. Expected Financial Results


                    11. Statement of Expected                                                12. Projected Financial
                        Cash Flows                                                           Statements


 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young                        10 - 6
                                         Operating Budgets
            Operating      budgets typically consist of six
                 operating plans:
           1     The sales plan identifies the planned level
                 of sales for each product (box 2).
           2     The capital spending plan specifies the
                 long-term capital investments (box 3).
           3     The production plan schedules all required
                 production activities (box 5).

 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 7
                                         Operating Budgets
           4     The materials purchasing plan schedules
                 all required purchasing activities (box 7).
           5     The labour hiring and training plan
                 specifies the number of people to hire, train,
                 or release (box 8).
           6     The administrative and discretionary
                 spending plan includes admin., R&D, and
                 advertising (box 9).


 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 8
                        Projected Financial Results
            Planners      usually present the projected
                 financial results in three forms:
                   – A statement of projected cash flows (identifies
                     when to borrow or invest short-term cash
                     shortage or excess, respectively)
                   – The projected balance sheet
                   – The projected income statement
            These     are called the pro-forma financial
                 statements (means provided in advance)
 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 9
                                 The Budgeting Process
           A  demand forecast is the estimate of the market
             demand, or sales potential, for a product given the
             specific product price.
            This forecast drives the budgeting process.
            The production plan identifies the intended
             production during the budget period:
             - Planners use the inventory policy along with
                 the sales plan to develop the production plan
             - Notice that planned production is the
                 minimum of demand and capacity

 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 10
                                       The Financial Plans
            After     planners develop operating plans,
                 they can prepare projected financial
                 statements to summarize their impact.
            For     planning purposes, firms rely on the
                 Statement of Cash Flows to summarize the
                 impact on cash of the various budgets.



 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 11
                    The Statement of Cash Flows

                             Projected Statement of Cash Flows
                           Cash inflows from sales and collections
                                 of accounts receivable
                           Cash outflows for:
                             – Short-term flexible resources
                             – Intermediate-term committed
                               resources
                             – Long-term committed resources
                           Results of financing operations

 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 12
                Comparing Actual and Planned
                          Results
            Basic               Variance analysis
                   – An actual revenue/cost is compared to target (or
                     budget) revenue/cost to identify the difference, or
                     variance
                            » Budgeted amount = budgeted price/cost x budgeted quantity
                            » Actual amount = actual price/cost x actual quantity


            Omit     page 470 (starting with “First-Level
                 Variances) through page 482


 2004 Prentice Hall Business Publishing Management Accounting, 4/E, Atkinson, Banker, Kaplan, and Young   10 - 13

				
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