2 LEARNING OBJECTIVESDiscuss budgeting & its role in planning, control, & decision making.Define & prepare a master budget, identify its major components, & outline the interrelationships of its various components.Continued
3 LEARNING OBJECTIVESDescribe flexible budgeting, & list the features that a budgetary system should have to encourage managers to engage in goal-congruent behavior.Explain how activity-based budgeting works.
4 LO 1PLANNING: DefinitionLooking ahead to see what actions should be taken to realize particular goals.
5 LO 1CONTROL: DefinitionLooking backward, determining what actually happened & comparing it with previously planned outcomes.
6 Where do budgets fit into planning & control? LO 1Where do budgets fit into planning & control?Budgets are financial plans for the future, identifying objectives & the actions needed to achieve them.
7 ADVANTAGES OF BUDGETING LO 1ADVANTAGES OF BUDGETINGA budgetary system provides the following advantages:Forces managers to planProvides information that can be used to improve decision makingProvides a standard for performance evaluationImproves communication & coordinationimprove decision making
8 MASTER BUDGET: Definition LO 2MASTER BUDGET: DefinitionComprehensive financial plan for organization as a whole.
9 What is a “continuous” budget? LO 2What is a “continuous” budget?A continuous budget is a moving 12-month budget, adding a month as each month expires.moving 12-month budget
10 MASTER BUDGETS: Major Components LO 2MASTER BUDGETS: Major ComponentsOperating budgetDescribes income generating activities of a firmFinancial budgetsDetail inflows & outflows of cashOperatingFinancial
11 OPERATING BUDGETS: Steps in the Process LO 2OPERATING BUDGETS: Steps in the ProcessSales budgetProduction budgetDirect materials purchases budgetDirect labor budgetOverhead budgetSelling & administrative budgetEnding finished goods inventory budgetCost of goods sold budget
12 FORMULAS: Production Units LO 2FORMULAS: Production UnitsExcept for JIT systems, production budgets must meet sales needs & satisfy ending inventory requirements.Units to be produced =Expected unit sales +Units in ending inventory –Units in beginning inventory
13 TEXAS REX, INC.: Direct Materials LO 2TEXAS REX, INC.: Direct MaterialsTexas Rex, Inc., purchases 2 direct materials (DM) for production of its Texas Rex T-shirts: plain T-shirts & ink to produce the dinosaur logo.
14 FORMULAS: Purchases Direct materials (DM) purchased = LO 2FORMULAS: PurchasesDirect materials purchases budget tells amount & cost of raw materials purchased in each period.Direct materials (DM) purchased =DM needed for production +DM desired in ending inventory –DM in beginning inventory
15 How do we determine the cost of finished goods ending inventory? LO 2How do we determine the cost of finished goods ending inventory?Unit cost of finished goods is (per unit) DM + DL + Overhead.
16 How do we project income from the operating budgets? LO 2How do we project income from the operating budgets?Estimate selling & administrative expenses, then transfer all information into projected income statement.
17 FINANCIAL BUDGETS Cash budget Budgeted balance sheet LO 2FINANCIAL BUDGETSCash budgetBudgeted balance sheetBudget for capital expenditures
18 What is the purpose of the cash budget? LO 2What is the purpose of the cash budget?Cash budgets document the need for cash & the ability to repay debt.
20 Why are static budgets not good for performance evaluation? LO 3Why are static budgets not good for performance evaluation?Actual level of activity may differ from the static budget level & misrepresent performance.Actual level of activity may
21 FLEXIBLE BUDGET: Definition LO 3FLEXIBLE BUDGET: DefinitionA budget for expected costs of a range of activity levels.
22 How are budgets related to performance evaluation? LO 3How are budgets related to performance evaluation?Bonuses, salary increases, promotions are based on achieving or beating budget targets.
23 What is participative budgeting? LO 3What is participative budgeting?Participative budgeting involves subordinate managers in setting budget targets to achieve goal congruence.
24 CONTROLLABLE COSTS: Definition LO 3CONTROLLABLE COSTS: DefinitionAre costs whose level a manager can influence
25 ACTIVITY-BASED BUDGETING LO 4ACTIVITY-BASED BUDGETINGActivity-based budgeting fits ABC & ABM systems. Budgets are developed for company activities to show the resources consumed. Can be done as a flexible budget.
26 ACTIVITY FLEXIBLE BUDGET LO 4ACTIVITY FLEXIBLE BUDGETBudget can be developed based on different activity drivers.EXHIBIT 8-10
27 FLEXIBLE PERFORMANCE REPORT LO 4FLEXIBLE PERFORMANCE REPORTPerformance report provides more relevant information when several activity drivers are used.EXHIBIT 8-11