1. Introduction to Budgeting

2. Management Accounting Systems
Variance Analysis
Cost Accounting Systems
Budgeting Systems
Transfer Pricing
Performance Measurement Systems

3. Agenda Introduction To Budgeting Budgeting Example: Ross Jewelers
Takeaway

4. Motivation for Budgeting
Costs are driven by Resources
Resources are used by Products
First half of this course
Understand how Resource Costs map into Product Costs
Organizations need to compute Product Costs in advance
Planning and pricing cannot wait till actual costs are realized
Resource acquisition decisions must also be made in advance

5. Budgeting
Budgeting:
Process of developing a forecast of business activities in future periods
Budgets:
Result from the budgeting process
Expressed in financial measures (sales, expenses, income)
Primary uses of budgets:
Planning (e.g., resource acquisition decisions)
Performance measurement: Actual results are compared to budget

6. The Budgeting Process
Run the production or the business model in reverse
Forecast sales
Forecast production volume
Forecast various resource commitments and purchases

7. Budgeting Example Ross Jewelers currently has 10 rings in inventory
Forecast sales for next month is 20 rings
Production target is set for 15 rings (5 rings safety stock)
Producing this volume requires committing to $300 in factory resources
In addition, producing each ring is forecast to
Require $50 in raw material
Require $10 in labor
Budgeted Product Cost = [$300 + ($50 + $10) x 15] ÷ 15 = $80 per ring

8. Budgeting Challenges Key challenge:
Information that is important for developing budgets is spread throughout the organization.
E.g., managers of foreign divisions have superior knowledge about local market trends.
→ Top management can’t prepare budgets by themselves.
What is the best way to collect all the information?
Which employees should make forecasts?
Are employees going to report their “true” forecasts?

9. Takeaway The budgeting process runs the business model in reverse:
Forecast: Sales  Production Volume  Input Resources
Budgets typically have a dual role:
Planning
Performance evaluation
Key challenge:
Information is spread throughout the organization