1. The Use of Budgets in Planning and Decision Making
Chapter 9
The Use of Budgets in Planning and Decision Making

2. Introduction
Budgets are plans dealing with the acquisition and use of resources over a specified time period.

3. Introduction Budgets can be in terms of: Monetary or financial Time
Acquisition and use of thousands of materials
Manufacturing of hundreds of products
Attendance at a baseball game

4. The Budget Development Process
Zero-Based Budgets require managers to build budgets from the ground up each year rather than just add a percentage increase to last year’s numbers.
Why shouldn’t I just use 10% more than last year for everything?

5. The Budget Development Process
Budgeting is an integral part of the planning, operating, and control activities of managers.
Planning: Developing objectives and goals
Operating: Day-to-day management decisions
BUDGETING
Control: Insuring that objectives and goals are met, comparing actual to budget

6. The Budget Development Process
The operating cycle focuses on cash; thus, budgeting for cash needs is crucial.
Disbursement of cash for manufacturing costs or purchases of inventory
Cash on hand
Sale of Product
Collection of cash from customers

7. Advantages of Budgeting
The budgeting process forces communication throughout the organization.
2. The budgeting process forces management to focus on the future and not be distracted by daily crises in the organization.

8. Advantages of Budgeting
3. The budgeting process can help management identify and deal with potential bottlenecks or constraints before they become major problems.
4. The budgeting process can increase the coordination of organizational activities and help facilitate goal congruence.
5. The budgeting process can define specific goals and objectives that can become benchmarks, or standards of performance for evaluating future performance.

9. The master budget consists of an interrelated set of budgets
prepared by a business.

10. Budgeting for Sales: Some Ways to Forecast Sales
Anticipated marketing or advertising plans
The impact of new products or changes in product mix on the entire product line
Other factors, such as political and legal events and weather changes.

11. Basic Production Budget
Operating Budgets
Basic Production Budget
Sales forecast (in units)
+ Projected ending inventory
= Projected production needs
- Projected beginning inventory
= Projected production volume

12. Cash Budgets
Many managers consider managing cash flow to be the single most important consideration in running a successful business.

13. Cash Budgets Cash Disbursements Budget- Operating Activities
Cash disbursements include:
Material Purchases for Concentrate
Material Purchases for Bottles
Direct Labor
Manufacturing Overhead
Selling and Administrative Costs

14. Cash Budgets Summary Cash Budget Beginning cash balance
Cash flows from operating activities
Cash receipts
Cash disbursements
Cash flows from investing activities
Equipment purchases
Cash flows from financing activities
Payment of dividends
Interest on long-term debt
Borrowing from line of credit
Repayments of line of credit
Final cash balance

15. What do I do with all of these budgets?
More Budget Topics
Using the budgets, management prepares pro forma (budgeted) financial statements. They are used for internal planning purposes and to provide information to external users, such as a bank, when requesting a loan.
What do I do with all of these budgets?

16. Budgeted Financial Statements
Pro forma statements include:
Cost of Goods Manufactured
Income Statement
Balance Sheet

17. Nonfinancial Budgets
Time Budgets: to plan the number of hours expected to be incurred in each engagement (CPA firm and law offices)
Customer Satisfaction Measures: includes the number of returned or defective items, the number of customer complaints, time waiting to be served

18. Static vs. Flexible Budgets
Static budgets are set at the beginning of the period and remain constant throughout the budget period.
Flexible budgets take differences in cost and revenue due to volume differences out of the analysis by budgeting for labor (and other costs) based on the actual number of units produced.
What if my sales are not what I projected?
I know. I’ll use flexible budgets.

19. The budgeting process is worth the effort.
End of Chapter 9
The budgeting process is worth the effort.