1. John Wiley & Sons, Inc. © 2005 Chapter 19 Budgetary Planning Prepared by Barbara Muller Arizona State University West Principles of Accounting Kimmel Weygandt Kieso

2. CHAPTER 19 BUDGETARY PLANNING After studying this chapter, you should be able to: Indicate the benefits of budgeting. State the essentials of effective budgeting. Identify the budgets that comprise the master budget. Describe the sources for preparing the budgeted income statement. Explain the principal sections of a cash budget. Indicate the applicability of budgeting in nonmanufacturing companies.

3. Budgeting Basics  Budget formal written statement of management’s plans for a specified future time period, expressed in financial terms primary method of communicating agreed-upon objectives throughout the company provides historical data on revenues, costs, and expenses once adopted, it becomes an important basis for performance evaluation

4. Benefits of Budgeting STUDY OBJECTIVE 1  The primary benefits of budgeting include Requires all levels of management plan ahead Provides definite objectives for evaluating performance Is an early warning system for potential problems Facilitates coordination of activities within the business Results in greater management awareness of the entity’s overall operations Motivates personnel throughout organization to meet planned objectives

5. Essentials of Effective Budgeting STUDY OBJECTIVE 2  Effective budgeting requires Sound organizational structure where authority and responsibility for all phases of operations are clearly defined Budgets based on research and analysis result in realistic goals An effective budget program is accepted by all levels of management

6. Length of the Budget Period  A budget may be prepared for any period of time  Most common budget period is one year  Different types of budgets may cover different time periods oFor example, cash may be budgeted monthly, while a plant expansion budget may cover a 10-year period  A continuous twelve-month budget drops the month just ended and adds a future month  An annual budget may be supplemented by monthly and quarterly budgets

7. The Budgeting Process  A budget is developed within the framework of a sales forecast  The budgeting process may be informal in small companies; in larger companies a budget committee is often responsible for coordinating the budget process oMembers of the committee often include the president, treasurer, chief accountant (controller), and management personnel from each major area of the company

8. Flow of Budget Data

9. Budgeting and Human Behavior  Budgets can be expected to have a strong positive influence on a manager when Each level of management is invited and encouraged to participate in developing the budget Criticism of a manager’s performance is tempered with advice and assistance Top management is sensitive to the behavioral implications of its actions

10. Budgeting and Long-Range Plans  Budgeting is the achievement of specific short- term goals  Long-range planning identifies and selects strategies to achieve goals and develop policies and plans to implement the strategies  Long-range plans contain less detail than budgets

11. The Master Budget STUDY OBJECTIVE 3  A master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. It is developed within the framework of a sales forecast.

12. Components of the Master Budget

13. Two Classes of Budgets in the Master Budget  Operating budgets the individual budgets that result in the preparation of the budgeted income statement  Financial budgets focus on the cash resources needed to fund expected operations and planned capital expenditures

14. Preparing the Operating Budgets: Sales Budget  The sales budget is prepared from the sales forecast It represents management’s best estimate of sales revenue for the budget period Each of the other budgets depends on the sales budget

15. Production Budget  The production budget shows the units that must be produced to meet anticipated sales  It is derived from sales budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units)  The required production in units formula is: Desired Ending Finished Goods Units Beginning Finished Goods Units Budgeted Sales Units Required Production Units

16. Direct Materials Budget Desired Ending Direct Material Units Beginning Direct Materials Units Direct Materials Units Required for Production Required Direct Materials Purchases Units  The direct materials budget  Shows both the quantity and cost of direct materials to be purchased  It is derived from the direct materials units required for production (from the production budget) plus the desired change in ending direct materials units

17. Direct Labor Budget  The direct labor budget Shows both the quantity of hours and cost of direct labor necessary to meet production requirements Is critical in maintaining a labor force that can meet expected production

18. Manufacturing Overhead and Selling and Administrative Budget  Manufacturing overhead budget Contains expected manufacturing overhead costs  Selling and administrative expense budget Contains anticipated operating expenses  Both distinguish between fixed and variable costs

19. Budgeted Income Statement STUDY OBJECTIVE 4  Budgeted income statement The important end-product of the operating budgets Indicates the expected profitability of operations Provides a basis for evaluating company performance Prepared from the o Sales budget o Production budget o Direct labor budget o Direct materials purchases budget o Manufacturing Overhead budget o Selling and Administrative expense budget

20. Preparing the Financial Budgets STUDY OBJECTIVE 5  Cash budget Shows anticipated cash flows Often considered to be the most important output in preparing financial budgets Contains three sections oCash receipts oCash disbursements oFinancing

21. Cash Budget  Cash receipts section Includes expected receipts from the company’s principal sources of revenue, usually cash sales and collections on credit sales  Cash disbursements section Includes expected cash payments for direct materials and labor, taxes, dividends, etc.  Financing section Shows expected borrowings and repayments of borrowed funds plus interest

22. Budgeted Balance Sheet Budgeted balance sheet  A projection of financial position at the end of the budget period  Developed from the budgeted balance sheet for the preceding year and the budgets for the current year

23. Budgeting in Non-manufacturing Companies STUDY OBJECTIVE 6 Budgets are also used by Merchandisers Service enterprises Not-for-profit organizations

24. Desired Ending Merchandise Inventory Beginning Merchandise Inventory Budgeted Cost of Goods Sold Required Merchandise Purchases Merchandisers Budgets  The major differences between the budgets of a merchandiser and a manufacturer Merchandisers use a purchases budget instead of a production budget Merchandisers do not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead)

25. Service Enterprises In service enterprises the critical factor in budgeting is coordinating professional staff needs with anticipated services If a firm is overstaffed Labor costs will be disproportionately high Profits will be lower because of the additional salaries Staff turnover will increase because of lack of challenging work If an enterprise is understaffed Revenue may be lost because existing and prospective client needs for service cannot be met Professional staff may seek other jobs because of excessive work loads

26. Not-for-Profit Organizations  Budgeting is just as important for not-for-profit organizations as for profit-oriented enterprises In most cases, not-for-profit entities budget on the basis of cash flows (expenditures and receipts), rather than on a revenue and expense basis The starting point in the budgeting process is usually expenditures, not receipts

27. Let’s Review A sales budget is: a. derived from the production budget. d. Prepared only for credit sales. c. Not the starting point for the master budget. b. management’s estimate of sales revenue for the year.

28. Let’s Review A sales budget is: a. derived from the production budget. d. Prepared only for credit sales. c. Not the starting point for the master budget. b. management’s estimate of sales revenue for the year.

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