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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 22 1.

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Presentation on theme: "Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 22 1."— Presentation transcript:

1 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 22 1

2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2

3 3

4 4 Learn why managers use budgets Understand the components of the master budget Prepare an operating budget Prepare a financial budget Use sensitivity analysis in budgeting Prepare performance reports for responsibility centers and account for traceable and common shared fixed costs

5 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Learn why & how managers use budgets 1 1 5

6 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6 Build a Plan

7 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Advantages Define goals and objectives Uncover potential bottlenecks Coordinate activities & allocate resources Communicate plans Think about and plan for the future Benchmark for measuring performance and responsibility

8 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Flow of Budget Data from the bottom, from the top, what to watch for Top Down ? Bottom Up?

9 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The success of budgeting depends upon: Commitment to the budget: plan & use The quality of the inputs The way management uses budgeted data. What about new ideas? The success of budgeting depends upon: Commitment to the budget: plan & use The quality of the inputs The way management uses budgeted data. What about new ideas?

10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Most important part of the budgeting system Building manager and employee acceptance of budget How? Managers must support the budget themselves, or no one else will Managers must show employees how budgets can help them achieve better results Employees participate in developing the budget A healthy budget process minimizes slack Slack filled budgets cannot be achieved, are not followed, and waste effort 10

11 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Identifies areas where the actual results differed from the budget 11

12 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Understand the components of the master budget 2 2 12

13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 13 Master budgetthe set of budgeted financial statements and supporting schedules for the entire organization Master budget includes three types of budgets: The operating budget Projects sales revenue, cost of goods sold, and operating expenses The capital expenditures budget The plan for purchasing property, plant, equipment, and other long-term assets The financial budget Cash, Balance Sheet, Statement of Cash Flows Contain projected amounts, not actual amounts

14 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The following are some of the components included in the master budget. a.Budgeted balance sheet b.Sales budget c.Capital expenditures budget d.Budgeted income statement e.Cash budget f.Inventory, purchases, and cost of goods sold budget g.Budgeted statement of cash flows List in order of preparation the items of the master budget. 14 1.______ 2.______ 3.______ 4.______ 5.______ 6.______ 7.______ B F D C E A G

15 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepare an operating budget 3 3 15

16 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. First three components Sales budget Inventory, purchases, and cost of goods sold budget Operating expenses Those feed the budgeted income statement 16

17 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cornerstone of master budget Level of sales drive and feed all other elements Projected sales are calculated as: Average price multiplied by expected units sold 17 a b c e d f ff How important are these numbers?

18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. How to convert your multiple products at different prices into a single product/single price budget. Consider this example: Item A: Sell 35,000@$10 = $350,000 Item B: Sell 15,000@$20 = $300,000 Item C: Sell 50,000@$7 = $350,000 Totals: 100,000 = $1,000,000 What will your sales budget look like?

19 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Or, you could base it on a basket of goods approach, using 1 average customer as your unit of sales: The average customer buys: 1.5 Hot dog 1.5@$3.00 = $4.50 ½ bag o chips 0.5@$1.00 = $0.50 1 beverage 1@$2.50 = $2.50 Revenue per 1 customer = $7.50 What will your sales budget look like?

20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reality vs. wishful thinking Valid sources of data: Market history, trends, anticipation Internal history review & projections Realistic assessment of life cycle position Competition analysis Ask: Are we doing anything to justify our growth?

21 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sketch out your sales budget on paper Units Customers, cases, individual units, basket of goods Average sales price Is credit a factor? 21

22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Budget determines: Cost of goods sold for the budgeted income statement Ending inventory for the budgeted balance sheet Purchases for the cash budget Basic account math equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold Rearrange equation to solve for purchases Cost of goods sold + Ending inventory – Beginning inventory = Purchases 22

23 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost of goods sold is linked to the sales budget numbers Desired ending inventory is driven by future sales needs Desired ending inventory becomes beginning inventory for next period (month, quarter, or year) 23

24 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Percent of sales &/or derived support for dollars Units & subsidiary schedule for manufacturers Ending inventory targets Purchases/production Services company – no ending inventory 24

25 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepared after sales budget and cost of goods sold budget Plans for non-product costs for the period Includes fixed and/or variable expenses Examples: Fixed and variable salaries, commissions Rent Insurance Advertising Miscellaneous 25

26 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 26 Volume drives variable expenses, % or sales, or per unit rate Deriving variable per unit costs is if allocating fixed costs Fixed costs assigned or derived from table, eg depreciation table Income statement, vs. cash paid

27 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Variable costs Driven by sales dollars or units % of sales or per unit rate Support with detail, but not too much detail Fixed costs All non production expenses Include non-cash expenses, eg depreciation Build a depreciation table, not full schedule 27

28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 28

29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 29

30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 30 Example: Greggs Tunes Your choice: Functional vs. Contribution Margin Sales Budget Operating Budget COGS Budget Operating Budget Cash Budget

31 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Greggs Tunes is a merchandiser Contribution format is not required, but it is an option Functional/tradition income statement is more common. Still must included driven costs so they change when you update inputs. Note: Do not include your full manufactured product costs as a purely variable cost. Why not? 31

32 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sketch it out on paper Account names Source of numbers, but dont try to get #s yet Finalize your format and clear it with me What is missing? Where are you going to get it? 32

33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Grippers sells its rock-climbing shoes worldwide. Grippers expects to sell 8,500 pairs of shoes for $180 each in January, and 3,500 pairs of shoes for $190 each in February. All sales are cash only. Prepare the sales budget for January and February. 33 Grippers Sales Budget JanuaryFebruaryTotal Sales price per pair$ 180$ 190 Number of pairs× 8,500 × 3,500 Total sales$1,530,000$665,000$2,195,000

34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Review your results from S22-3. Grippers expects cost of goods sold to average 60% of sales revenue, and the company expects to sell 4,100 pairs of shoes in March for $260 each. Grippers target ending inventory is $10,000 plus 50% of the next months cost of goods sold. Use this information and the sales budget prepared in S22-3 to prepare Grippers inventory, purchases, and cost of goods sold budget for January and February. 34 Grippers Inventory, Purchases, and Cost of Goods Sold Budget JanuaryFebruary Cost of goods sold (0.60 × sales from S 21-3)$ 918,000$ 399,000 + Desired ending inventory ($10,000 + 0.50× Cost of goods sold for next month)209,500329,800 = Total inventory required1,127,500728,800 Beginning inventory (469,000) (209,500) = Purchases$ 658,500$ 519,300

35 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepare a financial budget 4 4 35

36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cash budget Pull cash receipts and payments from each budget Budgeted balance sheet Link each account cell to the source budget Which item will you pull from the income statement? Budgeted statement of cash flows – not required, but okay if you want Project cash flows from operating, investing, and financing activities 36

37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Feeds from the cash collected/paid segments of operating budgets Details how to go from the beginning cash balance to the desired ending balance Four major parts: Cash collections from customers Cash payments for purchases/manufacturing Cash payments for operating expenses Cash payments for capital expenditures Bonus requirement: Put your financing cash flows in it too 37

38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cash collections from customers Build a cash tail onto each budget Cash sales from the sales budget Note: Uncollected sales revenue goes where? 38

39 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Payments for operating expenses Payments during the month of purchaseassume 50% Payments following the month of purchaseassume 50% Demo: help me build one in Excel? 39

40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use the operating expenses budget and payment expectations to compute cash payments for operating expenses Lets assume for this one that expenses are paid when incurred Back out any non-cash depreciation expenses. Help me build Tremonts cash payments for operating expenses! 40

41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 41 8. Gregs plans to purchase a used delivery truck in April for $3,000 cash. 9. Gregs requires a minimum cash balance of $10,000 before financing at the end of each month.

42 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 42 Your beginning cash balance? Zero Your cash collections & payments All cash tails from all budgets Include capital asset purchases Borrowing Beginning to end

43 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 43 Your beginning cash balance? Zero Operating cash inflow/outflows Your cash collections & payments All cash tails from all budgets Investing cash flows Include capital asset purchases Financing cash flows All borrowing and repayment and related interest. Where go: Interest expense & accrued interest? Beginning to end All owner investment, all dividends

44 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 44 Cash budget ending balance Inventory, Production, and COGS budget, unsold inventory COGS sub-schedule and operating expense sub-schedule Purchase, COGS budget & Maybe Operating expense budget Operating expense budget Cash budget Sales budget Cash budget COGS sub-schedule and operating expense sub-schedule Income statement Where did these numbers come from? What must these numbers do when inputs are changed on other budget elements?

45 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 45

46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Refer to the Grippers sales budget that you prepared in S22-3. Now assume that Grippers sales are collected as follows: November sales totaled $400,000 and December sales were $425,000. 50% in the month of the sale 30% in the month after the sale 18% two months after the sale 2% never collected Prepare a schedule for the budgeted cash collections for January and February. Round answers to the nearest dollar. 46

47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Grippers Budgeted Cash Collections from Customers JanuaryFebruary Cash sales (50% of current month )$ 765,000$ 332,500 Collection of sales: 30% of prior month credit sales127,500459,000 18% of sales two months ago 72,000 76,500 Total cash collections$ 964,500$ 868,000 47

48 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Refer to the Grippers inventory, purchases, and cost of goods sold budget your prepared in S22-4. Assume Grippers pays for inventory purchases 50% in the month of purchase and 50% in the month after purchase. Prepare a schedule for the budgeted cash payments for purchases for January and February. 48 Grippers Budgeted Cash Payments for Purchases JanuaryFebruary 50% of last month$ 293,250$ 329,250 50% of current month329,250259,650 Total cash payments$ 622,500$ 588,900

49 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Grippers has $12,500 in cash on hand on January 1. Refer to S22-5 and S22-6 for cash collections and cash payment information. Assume Grippers has cash payment for operating expenses including salaries of $50,000 plus 1% of sales, all paid in the month of sale. The company requires a minimum cash balance of $10,000. Prepare a cash budget for January and February. Will Grippers need to borrow cash by the end of February? 49

50 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Grippers Cash Budget January and February 2012 JanuaryFebruary Beginning cash balance$ 12,500$ 402,300 Cash collections from customers1,077,600827,400 Cash available1,090,1001,229,700 Cash payments Purchases of inventory622,500588,900 Operating expenses65,30056,650 Total cash payments687,800645,550 Ending cash balance402,300584,150 Less: Minimum cash balance desired(10,000) Cash excess (deficiency)$ 392,300$ 574,150 50

51 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use sensitivity analysis in budgeting 5 5 51

52 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 52

53 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Individual operating units roll up budgets to prepare company-wide budget Budget management software is used Often part of Enterprise Resource Planning (ERP) system Allows management to conduct sensitivity analysis on unit data Managers can spend less time compiling and summarizing data and more time analyzing it 53

54 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Technology makes it more cost-effective for managers to: Conduct sensitivity analysis on their own units budget Combine individual unit budgets to create the companywide master budget Master budget models the companys planned activities Must support key strategies 54

55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Monte Car Low Auto Dealership Example Note, there are formatting differences that were done according to the student groups preferences. Note how budgets link together Lets do the break even case and best case using goal-seek 55

56 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Maplehaven Sporting Goods Store has the following sales budget: Suppose June sales are expected to be $80,000 rather than $64,000. 56 Riverbed Sporting Goods Store Sales Budget April - July AprilMayJuneJuly April-July Total Cash sales, 80%$40,800$64,000$51,200$40,800 Credit sales, 20% 10,200 16,000 12,800 10,200 Total sales, 100%$51,000$80,000$64,000$51,000$246,000 Riverbed Sporting Goods Store Revised Sales Budget April - July AprilMayJuneJuly April-July Total Cash sales, 80%$40,800$64,000 $40,800 Credit sales, 20% 10,200 16,000 10,200 Total sales, 100%$51,000$80,000 $51,000$262,000

57 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepare performance reports for responsibility centers and account for traceable and common shared fixed costs 6 6 57

58 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. How do we know where responsibility lies without an army of middle managers? We separate the business into segments, then measure the performance of each segment separately. Do it right and you get a useful picture of each segments performance. Do it wrong and you make some really silly (expensive!) mistakes.

59 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A segment is any partition of an organization about which a manager seeks to manage costs, revenues, or investment. A segment can be... An Individual Store A Sales Person A Market Territory

60 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost Center A segment whose manager has control over costs, but not over revenues nor investment funds. Eg: distribution center

61 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds. Eg: retail store operations management

62 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds. Eg: store manager

63 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets. Eg: New business development Corporate Headquarters

64 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Responsibility Center Responsibility Center Cost Center Cost Center Profit Center Profit Center Investment Center Investment Center Once we have the segments settled, we know where responsibility lies.

65 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reporting on Segments We have to consider a few principles of responsibility accounting first: A segment should be measured on what it controls. Cost center = costs Profit center = costs and sales Investment center costs, sales, assets Super, but which costs?

66 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Traceable Costs arise because of the existence of a particular segment Do include traceable fixed costs in segment analysis. Traceable and Common Costs Fixed Costs Common A cost that supports more than one segment and would not go away if any particular segment were eliminated. Dont allocate common costs in segment analysis.

67 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Traceable costs would disappear over time if the segment itself disappeared. Outsourcing solar panel manufacturing means…. …..Manufacturing division manager.

68 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Common costs arise because of overall operation of the company and are not due to the existence of a particular segment. No manufacturing segment costs…. We still have a company president. IM NOT

69 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Traceable and Common Costs Fixed Costs TraceableCommon Allocating costs to people responsible for them makes evaluation of segments possible. Arbitrarily allocating common costs makes for a less meaningful segment evaluation.

70 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Our approach to segment reporting uses the contribution format. This line is different somehow from earlier chapters….

71 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Our approach to segment reporting uses the contribution format. Division (Segment) margin is My Divisions contribution to corporate profits. Division (Segment) margin is My Divisions contribution to corporate profits. I am responsible for it. I should be measured by it.

72 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Lets see how the Weedban and Greengrow divisions fit into the company evaluation for Royal Lawncare

73 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

74

75 What do these two stacks of figures already tell us?

76 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. What does Traceable mean, and why are these fixed costs in here?

77 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Do we have everything we need to evaluate the profitability of these two segments?

78 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Why are common costs treated differently than traceable fixed costs?

79 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

80 Allocating common fixed costs to the segments those fixed costs support is a recipe for disaster

81 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Note fixed cost treatment here in the proper case

82 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. These fixed costs are allocated using a fair share argument, that every division needs to cover their arbitrarily designated share of overhead. How different is our perception of performance now?

83 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Segment 1 Segment 3 Segment 4 Failure to trace costs directly Arbitrarily dividing common costs among segments Inappropriate allocation base Segment 2

84 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Costs assigned to a segment should include all costs attributable to that segment from the companys entire value chain. Product Customer R&D Design Production Marketing Distribution Service Business Functions Making Up The Value Chain Subliminal message: Hey, this is using my activity based costing knowledge, cool !

85 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A system for evaluating the performance of each responsibility center and its manager A responsibility center is the part of the organization for which a particular manager is responsible Is a part of the organization for which a manager has decision-making authority and accountability Four types: Cost center Revenue center Profit center Investment center Decentralization highlights the need for reports on individual segments 85

86 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 86 Goal is to control cost Goal is to increase revenues Goal is to increase profits Goal is to increase ROI, EVA, & residual income

87 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 87

88 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Performance reports compare budgeted and actual amounts Reporting at all levels: Division (investment centers) Product lines (profit centers) Production (cost centers) Sales (revenue centers) Management by exception Shows variances between actual and budgeted amounts 88

89 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Departments that provide services to multiple departments or divisions for the company Usually do not generate revenues Similar to the shared production overhead Nonproduction related service departments Examples: Payroll and Human Resources Accounting Copying/Graphic Services Physical Plant (repairs and maintenance) Advertising (companywide, not specific products) Mail and Shipping Services Shared Facilities (meeting rooms used by various departments) Legal Services Travel Booking Services 89

90 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Costs directly associated with an individual product, division, or business segment Would disappear if the company discontinued the product, division or segment Assigning traceable fixed costs Splitting the cost equally–not fair Based on use of the services–fair Small users charged less Larger users charged more Identify cost drivers (ABC costing) suitable for assigning traceable service department charges Common service departments listed on next slide 90

91 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 91

92 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Traceable service costs = $30,000 Base is number of orders $30,000 / $400,000 equals $0.075 cost per order 92

93 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. $30,000 / $400,000 equals $0.075 cost per order Apply to divisions based upon number of orders The DVD division can further split the traceable cost between Excel DVDs and Specialty DVDs $10,500 - $3,500 known untraceable = $7,000 Calculate a cost per order as ($7,000/140,000) = $0.05 93

94 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Show the results of the segment or division for which a particular manager is responsible 94

95 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A budgeted income statement shows estimated amounts, whereas the income statement shows actual results. Managers use budgets to develop strategies (overall business goals) and to create plans and follow actions that enable them to achieve those goals. They also review results against the goals (control), often using a performance report that compares budgeted amounts to actual amounts. 95

96 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The master budget is the set of budgeted financial statements and supporting schedules for the entire organization. It contains the operating budget, the capital expenditures budget, and the financial budget. There are many budgets that compose each of the three types. Each budget provides a portion of the plan that maps the companys planned direction and goals for a period of time. 96

97 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The first three components of the operating budget include the sales budget; the inventory, purchases, and cost of goods sold budget; and the operating expenses budget. The sales budget depicts the breakdown of sales based on the terms of collection. The inventory, purchases, and cost of goods sold budget aids in planning for adequate inventory to meet sales (COGS) and for inventory purchases. The operating expenses budget captures the planned variable and fixed operating expenses necessary for normal operations. The three budgets help to form the budgeted income statement. Together these form the operational budget that depicts the companys operational strategy for a period of time. 97

98 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The cash budget details how the business expects to go from the beginning cash balance to the desired ending balance each period. The cash budget has four major partscash collections from customers, cash payments for purchases, cash payments for operating expenses, and cash payments for capital expenditures. The results of these budgets are combined to form the cash budget. After preparing the cash budget, the rest of the financial statement budgets are prepared, including the budgeted balance sheet and budgeted statement of cash flows. These budgets depict the financial plan that implements the strategic goals of the company. 98

99 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sensitivity budgeting was once a time-consuming task. Now, with technology, modifying the budget assumptions is easy. Individual managers can easily modify the budgets of their specific units, and that data is automatically updated in the companywide budget plans. Being able to modify this data easily allows managers to be more responsive to business changes and plan better; thus, better, more timely decisions that benefit the company may be made. 99

100 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Responsibility centers are parts of the company for which managers have decision-making authority and accountability. Responsibility accounting is performance reporting for those responsibility centers. There are four types of responsibility centerscost centers, revenue centers, profit centers, and investment centers. Traceable fixed costs are those costs that would disappear if a company quit making a particular product or discontinued a division or segment. Common fixed costs (untraceable) are those costs that arent traceable to a specific product, division, or segment. 100

101 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 101

102 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 102 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


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