Budgetary Planning by 8d7gUqg


									                  AC222 Chapter 23 Budgetary Planning
                          Professor Outline

As you read this chapter, pay particular attention to terms and illustrations
presented to you in the text. From your study of this chapter, you should
be able to

   1.   Indicate the benefits of budgeting
   2.   State the essentials of effective budgeting
   3.   Identify the budgets that comprise the master budget
   4.   Describe the sources for preparing the budgeted income statement
   5.   Explain the principal sections of a cash budget
   6.   Indicate the applicability of budgeting in non-manufacturing

Budgeting Basics

    A budget is a formal written statement of management's plans for a
    specified time period, expressed in financial terms. The role of
    accounting during the budgeting process is to (a) provide historical
    data on revenues, costs, and expenses, (b) express management's plans
    in financial terms, and (c) prepare periodic budget reports. Budgets are
    an important tool in strategic planning, control, and evaluation.

Benefits of Budgeting
   The primary benefits of budgeting are as follows:
   a. It requires all levels of management to plan ahead.
   b. It provides definite objectives for evaluating performance.
   c. It creates an early warning system for potential problems.
   d. It facilitates the coordination of activities within the business.
   e. It results in greater management awareness of the entity's overall
   f. It motivates personnel throughout the organization.
Essentials of Effective Budgeting

   In order to be effective management tools, budgets must be based upon:
   a. A sound organizational structure in which authority and
       responsibility are clearly defined.
   b. Research and analysis to determine the feasibility of new
       products, services, and operating techniques.
   c. Management acceptance which is enhanced when all levels of
       management participate in the preparation of the budget, and the
       budget has the support of top management.

   The most common budget period is one year. A continuous twelve-
   month budget results from dropping the month just ended and adding a
   future month. The annual budget is often supplemented by monthly
   and quarterly budgets.

   The responsibility for coordinating the preparation of the budget is
   assigned to a budget committee. The budget committee usually
   includes the president, treasurer, chief accountant (controller), and
   management personnel from each major area of the company.

   A budget can have a significant effect on human behavior. A budget
   may have a strong positive influence on a manager when:
   a. Each level of management is invited and encouraged to participate
      in developing the budget.
   b. Criticism of a manager's performance is tempered with advice and
   c. Top management is sensitive to the behavioral implications of its

   Long-range planning involves the selection of strategies to achieve
   long-term goals and the development of policies and plans to
   implement the strategies. Long-range plans contain considerably less
   detail than budgets.
The Master Budget

   The 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 which shows potential sales for the
   industry and the company's expected share of such sales.

   There are two classes of budgets in the master budget.
   a. Operating budgets include the individual budgets that result in the
      preparation of the budgeted income statement.
   b. Financial budgets focus primarily on the cash resources needed to
      fund expected operations and planned capital expenditures.

   The sales budget is the first budget prepared. It is derived from the
   sales forecast, and it represents management's best estimate of sales
   revenue for the budget period. It is prepared by multiplying the
   expected unit sales volume for each product by its anticipated unit
   selling price.

   The production budget shows the units that must be produced to meet
   anticipated sales. It is derived from the budgeted sales units plus the
   desired ending finished goods units less the beginning finished goods

   The direct materials budget contains both the quantity and cost of
   direct materials to be purchased. It is derived from the direct materials
   units required for production plus the desired ending direct materials
   units less the beginning direct materials units.

   The direct labor budget contains the quantity (hours) and cost of direct
   labor necessary to meet production requirements. The direct labor
   budget is critical in maintaining a labor force that can meet expected
   levels of production.

   The manufacturing overhead budget shows the expected
   manufacturing overhead costs. The selling and administrative
   expense budget projects anticipated operating expenses. Both budgets
   distinguish between fixed and variable costs.
Budgeted Income Statement

    The budgeted income statement is the important end-product of the
    operating budgets. This budget indicates the expected profitability of
    operations and it provides a basis for evaluating company performance.
    a. The budget is prepared from the budgets described earlier
    b. For example, to find cost of goods sold, it is necessary to determine
       the total unit cost of a finished product using the direct materials,
       direct labor, and manufacturing overhead budgets.

Cash Budget

    The cash budget shows anticipated cash flows. It contains three
    sections (cash receipts, cash disbursements, and financing) and the
    beginning and ending cash balances. Data for preparing this budget are
    obtained from the other budgets.

Budgeted Balance Sheet

    The budgeted balance sheet is a projection of financial position at the
    end of the budget period. It is developed from the budgeted balance
    sheet for the preceding year and the budgets for the current year.

Budgeting in Nonmanufacturing Companies

    The major differences in the master budget of a merchandiser and a
    manufacturer are that a merchandiser (a) uses a merchandise
    purchases budget instead of a production budget and (b) does not use
    the manufacturing budgets (direct materials, direct labor, and
    manufacturing overhead).

    In service enterprises, the critical factor in budgeting is coordinating
    professional staff needs with anticipated services. Budget data for
    service revenue may be obtained from expected output or expected

    In the budget process for non-profit organizations, the emphasis is on
    cash flows rather than on a revenue and expense basis. For
    governmental units, the budget must be strictly followed and
    overspending is often illegal.

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