Service Company Master Budget

Document Sample
Service Company Master Budget Powered By Docstoc
					Strategy and the Master Budget
                                              2



         JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
  B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
  ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
  MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.
                                                       3



             Learning Objectives

• Describe the role of budgets in the overall
  management process

• Discuss the importance of strategy and its role in
  the master budgeting process

• Provide an overview of the budgeting process

• Prepare a master budget and explain the
  interrelationships among its supporting schedules
                                                         4


       Learning Objectives (continued)

• Identify unique budgeting characteristics of service
  firms, international firms, and not-for-profit
  organizations

• Understand zero-base, activity-based, and kaizen
  approaches to budgeting

• Discuss the application of integrated budgeting and
  planning tools

• Discuss the role of ethics and behavioral
  considerations in budgeting
                                                            5


              Basic Terminology

A budget:

– is a financial or nonfinancial expression of a plan of
  action for a specified period

– identifies the resources and commitments required to
  achieve the organization’s goals for an upcoming period

Budgeting:

– The process of preparing a budget is called budgeting
                                                            6

             Strategic Goals and
            Long-term Objectives
• The starting point in the budget-preparation process is
  specification of the organization’s strategy

• An organization expresses its strategic goals and long-
  term objectives in its capital and master budgets

• Long-range planning often entails capital budgeting,
  which is a process for evaluating, selecting, and
  financing major projects, such as purchases of new
  factory equipment and construction of a new factory
                                                                  7


                The Master Budget

The master budget:

– Represents the “grand plan of action” for an upcoming
  period

– Translates the organization’s short-term objectives into
  action steps

– Culminates in the preparation of a set of pro-forma financial
  statements
– Communicates to employees and managers alike the
  expectations of top management
– Helps coordinate subunit activities
                                                                8


       The Master Budget (continued)
The master budget is made up of operating and
financial budgets:

– Operating budgets are plans that identify resources
  needed to carry out the budgeted activities, such as
  sales and services or production
   • Operating budgets include production, purchase,
     personnel, and marketing budgets
– Financial budgets identify sources and uses of funds for
  the budgeted operations
   • Financial budgets include the cash budget, budgeted
     statement of cash flows, the budgeted balance sheet, and
     the capital expenditures budget
                                                             9



            The Budgeting Process

• The budget committee is the highest authority in
  an organization for all matters related to the
  budget
• Determination of the budget period:

  – Generally, a fiscal year with sub-period budgets
    prepared for each quarter or month
  – A continuous (rolling) budget is a budget system that
    has a budget for a set number of months, quarters, or
    years at all times–as one period ends another is added
                                                        10


        Preparing Individual Budgets

Three-step process:

(1) Define the “bottom-line” information contained in
    the budget (e.g., sales for the upcoming period)
(2) Determine what this information is a function of
    (e.g., budgeted unit sales, budgeted selling
    price/unit)
(3) Put together information in a user-friendly way
                                               11




            Sales Budget

The sales budget is often referred to as the
cornerstone of the entire master budget

The sales budget has two components:

      – Forecasted sales volume
      – Budgeted selling prices
                                              12



         JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
  B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
  ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
  MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.
                                                                 13


          Sales Budget (continued)

                      Kerry Industrial Company
                            Sales Budget
                 For the Quarter Ended June 30, 2007

                     April       May        June       Quarter
Sales in units       20,000     25,000      35,000      80,000
Selling price
 per unit           x $30       x $30      x $30      x $30
  Total sales     $600,000    $750,000 $1,050,000 $2,400,000
                                                                    14



                     Production Budget

• After the sales budget, we prepare a production
    budget, which shows planned production for a given
    period
•   Budgeted production can be calculated through use of
    the following formula:


     Budgeted         Budgeted         Desired         Beginning
    Production         Sales            Ending         Inventory
    (in units)   =   (in units)   +   Inventory    –   (in units)
                                      (in units)
                                              15



    Production Budget (continued)

Kerry example:
  (1) Beginning inventory (April 1) = 5,000
      units
  (2) Desired ending inventory (April 30th)
      = 30% of the following month’s
      projected unit sales
  (3) The sales budget has total sales for
      May at 25,000 units.
                                                                      16



          Production Budget (continued)

                      Desired ending level at April 30:
                30% x 25,000 units (May sales) = 7,500 units

Budgeted production for April



 22,500     =   20,000     +     7,500       –    5,000



              From the          Inventory from April 1: 5,000 units
            Sales Budget
                                               17

Production Budget
   (continued)

    July sales are budgeted at 40,000 units:
          30% × 40,000 = 12,000 units.




                             30% of June’s
                             budgeted sales
                                                               18




           Direct Materials Budgets


The direct materials usage budget:

– Shows the amount (and cost) of direct materials
  required for budgeted production
– The last line of the production budget = first line of the
  direct materials usage budget
                                                              19


          Direct Materials Budgets
                 (continued)

The direct materials purchases budget:

– Contains budgeted purchases, in units and dollars, of
  direct materials for the upcoming period
– Is needed to complete the direct materials usage budget
  (i.e., provides unit cost data)
– Is a function of: materials required for production (from
  materials usage budget), target ending inventory of
  materials, beginning-of-period materials inventory,
  budgeted purchase price per unit of raw material
                              20


Materials Purchases Budget:
      Kerry Company
                                                              21


                 Direct Labor Budget

• Enables the personnel department to plan for hiring &
  repositioning of employees, based on production needs

• Is prepared for each class (type) of labor, e.g., skilled
  and semi-skilled

• Is a function of:
   – Budgeted output (from production budget)
   – Standard labor hours per unit of output
   – Standard wage rate per hour
                                                            22




     Direct Labor Budget (continued)


• Kerry uses 0.5 hours of semiskilled labor and 0.2 hours
 of skilled labor per unit @ standard wage rates of $8
 and $12 per hour, respectively
                                              23



         JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
  B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
  ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
  MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.
                                                                   24

            Direct Labor Budget: Kerry
                     Company
  Each unit of output requires 0.5 hours of semi-skilled labor
  @ $8.00/hour, and 0.2 hours of skilled labor @ $12.00/hour




22,500 × 0.5 × $8.00 = $90,000   22,500 × 0.2 × $12.00 = $54,000
                                                    25



        Cost of Goods Manufactured
              & CGS Budgets

• The cost of goods manufactured and CGS
  budgets are prepared after the factory overhead
  budget is prepared

• The income statement budget and the balance
  sheet use information from this budget
                                            26

             Kerry Company:
Cost of Goods Manufactured & CGS Budgets,
                April 2007
                                                             27



  Selling & Administrative Expense Budget

The selling and general administrative expenses
budget is now prepared:

  – This budget includes all the planned expenditures for
    selling and general administrative activities
  – Many of the expenses included in this budget are
    considered discretionary and are a likely place for
    spending cuts
  – Managers must be careful not to focus solely on short-
    term affects when making cuts in these areas (e.g.,
    customer-service expenditures)
                                             28
Kerry Company--Cash Receipts Budget: April
                  2007
                                                        29



                Cash Budget

The cash budget brings together the cash
effects of all budgeted activities--to ensure
that the firm has adequate cash on hand:
 – This budget generally has three sections:
    – Cash available
    – Cash disbursements, and
    – Financing
 – Preparation of this budget involves careful review
   of all other budgets to identify cash inflows and
   outflows
                                        30
Kerry Company—Cash Budget: April 2007
                                                               31



            Budgeted I/S and B/S

The budgeted income statement (I/S) and
budgeted balance sheet (B/S) can then be
prepared using all the aforementioned budgets:

  – The budgeted I/S describes the expected operating
    income for the upcoming period

  – The budgeted B/S, the last budget in the budget-
    preparation process, incorporates the effects of all
    operations and cash flows during the budget period and
    shows projected ending balances in asset, liability, and
    equity accounts
                                                               32


      Budgeting in Service Companies
• These firms have different operating characteristics,
  operating environments, and considerations than
  those of manufacturing and merchandising firms

• Service firms are different due to the absence of
  production or merchandise purchase budgets and
  their ancillary budgets–the focus of the budgeting
  process must be personnel planning:
      – Does the firm have sufficient staff and resources to
        provide the expected level of service output in the
        upcoming period?
      – Do staff members have the appropriate skills?
                                                               33


        Budgeting in International Firms and
         Not-for-Profit (NFP) Organizations
• International firms face additional challenges due to
  cultural and language differences, dissimilar political and
  legal environments, fluctuating monetary and exchange
  rates, and discrepancies in inflation rates of different
  countries
• NFPs have no single bottom-line that serves as a
  verifiable goal in budgeting; there is no clear standard by
  which to measure performance
   – The budget shows estimated revenues and planned
     activities–the budget must show the organization can at
     least break-even
                                                             34


    Alternative Budgeting Approaches


Zero-base budgeting (ZZB) is a budgeting process
that requires managers to prepare budgets from a
zero base

– This type of budgeting allows no activities or functions
  to be included in the budget unless managers can
  justify their needs
– In-depth reviews and analyses of all budget items make
  managers aware of activities and functions that have
  outlived their usefulness
– Can be a difficult and time-consuming process
                                                                35

  Alternative Budgeting Approaches (continued)

• Activity-based budgeting (ABB) is a budgeting
  process based on activities and cost drivers of
  operations:
  – Starts with the budgeted output and segregates costs
    required for the budgeted output into homogeneous cost
    pools
  – Can be a simple extension of a firm’s ABC system
• Kaizen (Continuous improvement) budgeting:
  – Incorporates continuous improvement expectations into the
    budgets
  – Promotes active engagement in reforming and altering
    business practices and processes
                                                               36


         Behavioral Issues in Budgeting
• Budgetary slack, or padding the budget, is the practice
  of managers knowingly including a higher amount of
  expenditures or a lower amount of revenue in a budget
• Spending the budget is another issue; managers often
  feel if they do not use all the resources they receive,
  next year’s budget may be cut

• Goal congruence is a term that refers to the degree of
  consistency between goals of the firm, its subunits, and
  its employees
      – Involving employees in the budgeting process fosters
        goal congruence
                                                                     37

          Behavioral Issues in Budgeting
                   (continued)
• Difficulty level of the budget target?
   – An easy budget may fail to encourage employees to give their
     best efforts, while a very difficult target can be discourage
     managers from even trying
   – A “highly achievable target” is suggested with incentives for
     exceeding the budgeted figures
• Authoritative or participative budgeting?
   – Top-down budgeting is referred to as authoritative
     budgeting
   – Bottom-up budgeting is referred to as participative
     budgeting
   – Effective budgeting processes often combine the two types
                                                              38


                      Summary
• A budget is a financial or nonfinancial expression of an
  organization’s plan of action for a specified period; it
  identifies the resources and commitments required to
  achieve the organization’s goals for the period
  identified

• Strategy is the starting point in preparing its plans and
  budgets

• The “grand plan of action” for an upcoming period is
  the organization’s Master Budget
                                                             39

         Chapter Summary (continued)
Components of a master budget for a manufacturing
firm include:
–   Sales budget
–   Production budget
–   Direct materials usage budget
–   Direct materials purchases budget
–   Direct labor budget
–   Factory overhead budget
–   Budgeted cost of goods manufactured/cost of goods sold
    budgets
–   Selling and general administrative expenses budget
–   Cash receipts budget
–   Cash budget
–   Budgeted income statement (I/S), and
–   Budgeted balance sheet (B/S)
                                                         40




             Summary (continued)

• Service companies, international firms, and not-for-
  profit (NFP) firms have different operating
  characteristics, operating environments, and
  considerations than those of manufacturing and
  merchandising firms

• ZBB, ABB, and kaizen are three alternative
  approaches to budgeting that can improve budgeting
  effectiveness
                                                          41




         Summary (continued)

Budgets are only as effective as those responsible
for their preparation and implementation

– Managers must be aware of the potential for
  budgetary slack and “budget spending”
– Participative budgeting often increases motivation in
  employees
                                              42



         JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
  B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
  ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
  MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
  KARACHI, PAKISTAN.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:760
posted:8/11/2011
language:English
pages:42
Description: Service Company Master Budget document sample