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ACCOUNTING PRINCIPLES Third Canadian Edition Prepared by: Keri Norrie, Camosun College.

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Presentation on theme: "ACCOUNTING PRINCIPLES Third Canadian Edition Prepared by: Keri Norrie, Camosun College."— Presentation transcript:

1 ACCOUNTING PRINCIPLES Third Canadian Edition Prepared by: Keri Norrie, Camosun College

2 BUDGETARY PLANNING CHAPTER 21

3 BUDGETING BASICS A budget is a formal written statement of management’s plans, expressed in financial terms, for a specified future time period. The main benefits of budgeting include: all levels of management must plan ahead and formalize future goals on a recurring basisall levels of management must plan ahead and formalize future goals on a recurring basis provides definite objectives for evaluating performanceprovides definite objectives for evaluating performance creates an early warning system for potential problemscreates an early warning system for potential problems easier to coordinate activities within the businesseasier to coordinate activities within the business greater management awareness of the company’s overall operations and motivates personnel to meet planned objectivesgreater management awareness of the company’s overall operations and motivates personnel to meet planned objectives

4 BUDGETING BASICS Essentials of Effective Budgeting BUDGETING BASICS Essentials of Effective Budgeting 1.Budgeting process Collect past data from each organizational unit of the company as a starting point for developing future budget goals.Collect past data from each organizational unit of the company as a starting point for developing future budget goals. Develop the budget based on a sales forecast that reflects expected industry and economic conditions, with input from sales personnel and top management.Develop the budget based on a sales forecast that reflects expected industry and economic conditions, with input from sales personnel and top management. Assign responsibility for coordinating the budget preparation, usually to a budget committee.Assign responsibility for coordinating the budget preparation, usually to a budget committee.

5 BUDGETING BASICS Essentials of Effective Budgeting BUDGETING BASICS Essentials of Effective Budgeting 2.Budgeting and Human Behaviour Each level of management should be invited to participate in developing the budget.Each level of management should be invited to participate in developing the budget. Agreement should be reached on a budget that management considers fair and achievable.Agreement should be reached on a budget that management considers fair and achievable. The budget should provide the management tool for performance evaluation.The budget should provide the management tool for performance evaluation. 3.Length of the Budget Period The budget period should be long enough to provide an attainable goal under normal business conditions, usually one year.The budget period should be long enough to provide an attainable goal under normal business conditions, usually one year.

6 BUDGETING BASICS Essentials of Effective Budgeting BUDGETING BASICS Essentials of Effective Budgeting 4.Budgeting and Long-Range Planning Budgeting and long-range planning are not the same. Important differences include:Budgeting and long-range planning are not the same. Important differences include:  Time period involved. Budgets are usually prepared for an one year or shorter period while long-range plans cover a period of at least five years.  Emphasis. Achieving specific short-term goals for budgeting compared to developing long-term goals and strategies.  Amount of detail presented. Budgets are very detailed in order to provide a basis for control while long-range plans are considerably less detailed.

7 THE MASTER BUDGET The master budget is a set of interrelated budgets that constitute a plan of action for a specified time period. The master budget contains two classes of budgets: The master budget is a set of interrelated budgets that constitute a plan of action for a specified time period. The master budget contains two classes of budgets: Operating budgets are the individual budgets (sales budget, production budget, direct materials budget, direct labour budget, manufacturing overhead budget, and selling and administrative expenses budget) that result in the preparation of the budgeted income statement.Operating budgets are the individual budgets (sales budget, production budget, direct materials budget, direct labour budget, manufacturing overhead budget, and selling and administrative expenses budget) that result in the preparation of the budgeted income statement. Financial budgets include the capital expenditures budget, the cash budget, and the budgeted balance sheet. These budgets focus primarily on the cash resources needed to fund expected operations and capital expenditures.Financial budgets include the capital expenditures budget, the cash budget, and the budgeted balance sheet. These budgets focus primarily on the cash resources needed to fund expected operations and capital expenditures.

8 ILLUSTRATION 21-1 THE MASTER BUDGET ILLUSTRATION 21-1 THE MASTER BUDGET Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expenses Budget Budgeted Income Statement Capital Expenditures Budget Cash Budget Budgeted Balance Sheet Operating Budgets Financial Budgets The master budget is prepared in sequence, with the operating budgets prepared first, starting with the sales budget. Once the operating budgets are completed, then the financial budgets are prepared.

9 ILLUSTRATION 21-2 PREPARING THE OPERATING BUDGETS Sales Budget ILLUSTRATION 21-2 PREPARING THE OPERATING BUDGETS Sales Budget sales budget The sales budget is the first budget prepared and is derived from the sales forecast. Each of the other budgets depends on the sales budget. The sales budget is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price. The sales budget for the Wei Corporation is as follows:

10 Per sales budget ILLUSTRATION 21-4 PREPARING THE OPERATING BUDGETS Production Budget ILLUSTRATION 21-4 PREPARING THE OPERATING BUDGETS Production Budget production budget The production budget shows the units that must be produced to meet anticipated sales. The production budget for the Wei Corporation is as follows:

11 from production budget ILLUSTRATION 21-6 PREPARING THE OPERATING BUDGETS Direct Materials Budget ILLUSTRATION 21-6 PREPARING THE OPERATING BUDGETS Direct Materials Budget direct materials budget The direct materials budget contains both the quantity and cost of direct materials to be purchased. The direct materials budget for the Wei Corporation is as follows:

12 ILLUSTRATION 21-7 PREPARING THE OPERATING BUDGETS Direct Labour Budget ILLUSTRATION 21-7 PREPARING THE OPERATING BUDGETS Direct Labour Budget The direct labour budget contains the quantity (hours) and cost of direct labour necessary to meet production requirements, based on the production budget. Wei Corporation’s budget is as follows:

13 ILLUSTRATION 21-8 PREPARING THE OPERATING BUDGETS Manufacturing Overhead Budget ILLUSTRATION 21-8 PREPARING THE OPERATING BUDGETS Manufacturing Overhead Budget manufacturing overhead budget The manufacturing overhead budget shows expected fixed and variable overhead costs. Manufacturing overhead rate per unit = $246,400/ 15,400 units (illustration 21-4) = $16.00

14 ILLUSTRATION 21-9 PREPARING THE OPERATING BUDGETS Selling and Administrative Expenses ILLUSTRATION 21-9 PREPARING THE OPERATING BUDGETS Selling and Administrative Expenses selling and administrative expenses budget The selling and administrative expenses budget shows expected fixed and variable selling and administrative costs. The fixed expenses, such as amortization, property taxes, and office salaries, would be detailed on the budget.

15 ILLUSTRATION PREPARING THE OPERATING BUDGETS Budgeted Income Statement ILLUSTRATION PREPARING THE OPERATING BUDGETS Budgeted Income Statement budgeted income statement The budgeted income statement is the important end product in preparing operating budgets. It is prepared from the previous budgets. To calculate cost of goods sold, it is first necessary to determine the total unit cost of producing one Kitchenmate, the product sold by Wei Corporation:

16 ILLUSTRATION PREPARING THE OPERATING BUDGETS Budgeted Income Statement ILLUSTRATION PREPARING THE OPERATING BUDGETS Budgeted Income Statement Cost of goods sold can then be determined by multiplying the units sold by the unit cost. All data for the statement are obtained from the operating budgets except: bad debts expense, interest expense, and income taxes. (From sales budget) (15,000 x $44)

17 ILLUSTRATION PREPARING THE FINANCIAL BUDGETS Capital Expenditures Budget ILLUSTRATION PREPARING THE FINANCIAL BUDGETS Capital Expenditures Budget capital expenditures budget The capital expenditures budget details: sale of property, plant, and equipmentthe cash anticipated to be received from the sale of property, plant, and equipment and, purchasing additional property, plant, and equipmentthe cash to be spent on purchasing additional property, plant, and equipment. As cash is affected, this budget must be prepared before the cash budget. Amortization on the new forklift was included in the manufacturing overhead budget (illustration 21-8).

18 ILLUSTRATION PREPARING THE FINANCIAL BUDGETS Cash Budget ILLUSTRATION PREPARING THE FINANCIAL BUDGETS Cash Budget The cash budget shows anticipated cash flows. It is the most important budget when preparing financial budgets due to the vital importance of cash to a company. The financing section shows expected borrowings and the repayment of the borrowed funds plus interest. It is needed when there is a cash deficiency or the cash balance is below the minimum required balance.

19 ILLUSTRATION PREPARING THE FINANCIAL BUDGETS Budgeted Balance Sheet ILLUSTRATION PREPARING THE FINANCIAL BUDGETS Budgeted Balance Sheet budgeted balance sheet The budgeted balance sheet is a projection of financial position at the end of the budget period.

20 BUDGETING IN NONMANUFACTURING COMPANIES As in manufacturing operations, the sales budget is the starting point in the development of the master budget for a merchandising company. The major differences between the two companies’ master budgets are that a merchandiser: As in manufacturing operations, the sales budget is the starting point in the development of the master budget for a merchandising company. The major differences between the two companies’ master budgets are that a merchandiser: uses a merchandise purchases budget instead of a production budget and,uses a merchandise purchases budget instead of a production budget and, does not use the manufacturing budgets (direct materials, direct labour, and manufacturing overhead).does not use the manufacturing budgets (direct materials, direct labour, and manufacturing overhead).

21 BUDGETING IN NONMANUFACTURING COMPANIES In service companies such as a public accounting firm, a law office, or a medical practice, the critical factor in budgeting is coordinating professional staff needs with anticipated services. The goal is to be neither overstaffed nor understaffed.In service companies such as a public accounting firm, a law office, or a medical practice, the critical factor in budgeting is coordinating professional staff needs with anticipated services. The goal is to be neither overstaffed nor understaffed. Budgeting is important for not-for-profit organizations but the budget process is significantly different. Usually they budget on the basis of cash flows (expenditures and receipts) rather than on a revenue and expense basis.Budgeting is important for not-for-profit organizations but the budget process is significantly different. Usually they budget on the basis of cash flows (expenditures and receipts) rather than on a revenue and expense basis.

22 COPYRIGHT Copyright © 2004 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.


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