1. Chapter 21 The Budgeting Process
Belverd E. Needles, Jr.
Marian Powers
Sherry K. Mills
Henry R. Anderson
Multimedia Slides by:
Dr. Paul J. Robertson
New Mexico State University
Steve Leask

2. The Budgeting Process OBJECTIVE 1
Define budgeting and explain its role in the management cycle.

3. The Budgeting Process Budgeting is the process of: Identifying
Gathering
Summarizing
Communicating
financial and nonfinancial information about an organization’s future activities.

4. The Budgeting Process
Budgets are updated to accommodate management’s needs for performance evaluation in some settings such as JIT or TQM environments.
The budgeting process provides managers with the opportunity to carefully match the goals of the organization with the resources necessary to accomplish those goals.

5. The Management Cycle
Managers use the budgeting process throughout the management cycle to help:
Plan
Execute
Review
Report
the organization’s financing, investing, and operating activities.

6. Budgeting and the Management Cycle
Relate the organization’s long-term
goals to its short-term activities
Distribute resources and workloads
Communicate responsibilities
Select performance measures
Set goals for bonuses and rewards
Communicate budget information
Provide continuous feedback
Calculate variances
Evaluate performance
Determine timeliness
Create solutions for continuous improvement
Communicate expectations
Challenge & motivate others
Coordinate activities
Recognize problems

7. The Planning Stage
Budgeting pertains especially to the planning stage.
Budgets are tied to long-range and short-range plans to meet success factors related to quality, cost, and time.

8. The Planning Stage
Budget information is used to communicate responsibilities to individuals who are accountable for a particular segment of the organization.
Performance measures are carefully selected to motivate individuals or teams to achieve targeted goals.

9. The Executing Stage
During the executing stage, managers use budget information for:
Communication.
Benchmarking.
Problem recognition.

10. The Reviewing Stage In the reviewing stage, managers:
Calculate variances.
Evaluate performance.
Review timeliness.
Create solutions for continuous improvement.

11. The Reporting Stage
In the reporting stage, budgets serve as a reference point for many reports, such as performance reports that support bonuses and promotions.

12. Basic Principles of Budgeting
OBJECTIVE 2
Explain the basic principles of budgeting.

13. Discussion
Q. What are the five groups of effective budgeting principles?
A. 1. Long-range goals.
2. Short-range goals and strategies.
3. Human responsibilities & interaction.
4. Budget housekeeping.
5. Budget follow-up.

14. The Master Budget OBJECTIVE 3
Describe the master budget process for different types of organizations, and list the guidelines for preparing budgets.

15. The Master Budget
The master budget is a set of budgets that consolidate an organization’s financial information into budgeted financial statements for a future period of time. They include a:
Budgeted income statement.
Budgeted balance sheet.
Cash budget.
Capital expenditure budget.

16. Manufacturing Organizations
The operating budgets for a manufacturing organization include budgets for:
Sales.
Production.
Direct materials purchases.
Direct labor.
Manufacturing overhead.
Cost of goods manufactured.
Selling and administrative expenses.

17. Retail Organizations
The operating budgets for retail organizations include the:
Sales budget.
Purchases budget.
Cost of goods sold budget.
Selling and administrative budget.

18. Preparation of a Master Budget for a Retail Organization
Sales Budget
Purchases Budget
Operating
Budgets
Selling and
Administrative
Expense Budget
Cost of Goods
Sold Budget
Budgeted
Income Statement
Cash Budget
Budgeted
Balance Sheet
Financial
Budgets
Capital
Expenditures Budget

19. Service Organizations
The operating budgets for service organizations include:
Service revenue.
Labor.
Services overhead.
Selling and administrative budget.

20. Preparation of a Master Budget for a Service Organization
Service Revenue
Operating
Budgets
Labor Budget
Services
Overhead
Budget
Selling and
Administrative
Expense Budget
Budgeted
Income Statement
Budgeted
Balance
Sheet
Cash Budget
Financial
Budgets
Capital
Expenditures Budget

21. The Operating Budgets OBJECTIVE 4
Prepare a budgeted income statement and supporting operating budgets.

22. The Master Budget A master budget consists of the:
Detailed operating budgets.
Budgeted income statement.
Capital expenditures budget.
Budgeted balance sheet.

23. The Operating Budgets Detailed operating budgets include the:
Sales budget (in units and dollars).
Production budget (in units).
Direct materials purchased budget (in units and dollars).
Direct labor budget (in hours and dollars).
Manufacturing overhead budget.
Selling and administrative expense budget.

24. Sales Budget Hi-Flyer Company Sales Budget
For the Year Ended December 31, 20x1
Quarter 1 2 3 4
Year
Sales in Units
10,000
30,000
40,000
90,000
x Selling Price
per Unit $
Total Sales
$ 50,000
$150,000
$200,000
$450,000

25. Production Budget Hi-Flyer Company Production Budget
For the Year Ended December 31, 20x1
Quarter 1 2 3 4
Year
Sales in Units
10,000
30,000
40,000
90,000
Add Desired Units of Ending
Finished Goods Inventory
3,000
1,000
4,000
1,500
Desired Total Units
13,000
31,000
14,000
41,500
91,500
Less Desired Units of
Beginning Finished Goods
Inventory
Total Production Units
12,000
28,000
37,500
90,500

26. Direct Labor Budget Hi-Flyer Company Direct Labor Budget
For the Year Ended December 31, 20x1
Quarter 1 2 3 4
Year
Total Production Units
12,000
28,000
13,000
37,500
90,500
x Direct Labor Hours
per Unit .1
Total Direct Labor Hours
1,200
2,800
1,300
3,750
9,050
x Direct Labor Cost
per Hour $
$ 7,200
$16,800
$ 7,800
$22,500
$54,300

27. OBJECTIVE 5 Prepare a cash budget.
Cash Budgeting
OBJECTIVE 5 Prepare a cash budget.

28. The Cash Budget
A cash budget is a projection over a period of time of:
Beginning cash.
Cash receipts.
Cash payments.
Ending cash.

29. Elements of a Cash Budget
Activities
Cash Receipts From
Cash Payments For
Operating
Cash sales
Cash collections on
credit cards
Purchases of direct materials
Purchases of operating supplies
Direct labor
Manufacturing overhead
expenses
Selling expenses
Administrative expenses
Investing
Sale of investments
Sale of long-term assets
Interest income from investments
Cash dividends from investments
Purchase of investments
Purchase of long-term assets
Financing
Loan proceeds
Proceeds from sale of stock
Proceeds from sale of bonds
Loan repayment
Interest expense
Cash dividends to stockholders

30. Discussion
Q. What two factors are needed for the successful implementation of a budget?
A. 1. Communication.
2. Support.

31. Responsibility Accounting
OBJECTIVE 7
Define responsibility accounting and discuss its relation to responsibility centers.

32. Responsibility Accounting
Responsibility accounting is an information system that does the following:
1. Classifies financial data according to areas of responsibility.
2. Reports only controllable cost and revenue information for managers.

33. Responsibility Centers
Responsibility centers include:
Cost centers.
Profit centers.
Investment centers.
Responsibility accounting focuses on the reporting, not on the recording, of information.

34. Responsibility Centers
A profit center is a responsibility center whose manager is responsible for both revenues and costs, and for the resulting profits.
An investment center is a responsibility center whose manager is responsible for profit generation and makes significant decisions about the assets that the center uses.

35. The Organizational Chart
The corporate organization chart determines the flow of reports.