1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL PROFIT PLANNING & BUDGETING STUDENT CHAPTER 9 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South- Western are trademarks used herein under license.

2. Managerial Planning, Control, & Performance Evaluation 2 1.Explain the use of a budget as a tool for planning & performance evaluation. 2.Explain how a budget can affect employee motivation. 3.Compare the 4 types of responsibility centers. 4.Describe the master budget. LEARNING OBJECTIVES Continued

3. Managerial Planning, Control, & Performance Evaluation 3 5.Explain the difference between a flexible budget & a master budget. 6.Describe ethical dilemmas in budgeting. 7.List components of a comprehensive master budget (Appendix 9.1). 8.Describe an incentive model for accurate reporting (Appendix 9.2). LEARNING OBJECTIVES

4. Managerial Planning, Control, & Performance Evaluation 4 CHAPTER GOAL This chapter shows how a short-term operating budget is established & how it fits into the overall plan for achieving organization goals. You will also learn how ethical issues affect the budgeting & performance evaluation process. ☼☼

5. Managerial Planning, Control, & Performance Evaluation 5 BUDGET: Definition Is a plan of the resources needed to carry out tasks & meet financial goals. LO 1

6. Managerial Planning, Control, & Performance Evaluation 6 STRATEGIC PLANNING Companies start the strategic planning process by stating their critical success factors, that is the most important things the company must do for success. Companies build on critical success factors to expand operations. LO 1

7. Managerial Planning, Control, & Performance Evaluation 7 MASTER BUDGET A master budget is part of the overall organization plan for the next year & includes  Organizational goals  Strategic long-range profit plan  Master budget (a tactical short-range profit plan) LO 1

8. Managerial Planning, Control, & Performance Evaluation 8 ORGANIZAITONAL GOALS: Definition Are broad objectives management establishes & employees work to achieve. LO 1

9. Managerial Planning, Control, & Performance Evaluation 9 STRATEGIC LONG-RANGE PROFIT PLAN Any plan that focuses on the intermediate or distant future is stated in broad terms  Cost control  Optimize contribution from existing product lines by holding product cost increases to less than the general rate of inflation  Market share  Maintain market share by providing a level of service & quality comparable to our top competitors LO 1

10. Managerial Planning, Control, & Performance Evaluation 10 PARTICIPATIVE BUDGETING: Definition Is a process of gathering information from lower- & middle-management employees. LO 2

11. Managerial Planning, Control, & Performance Evaluation 11 MOTIVATION Ideally, budgets should motivate people & facilitate their activities. Managers should consider:  What types of behavior does the system motivate?  Is this the desired behavior? LO 2

12. Managerial Planning, Control, & Performance Evaluation 12 RESPONSIBILITY CENTER: Definition Is a division, department responsible for managing a particular group of activities in the organization. LO 3

13. Managerial Planning, Control, & Performance Evaluation 13 RESPONSIBILITY CENTERS: 4 Types  Cost centers  Example: Manufacturing departments  Managers responsible for managing costs  Engineered cost centers: well-established input/output relations  Production departments  Discretionary cost centers: input/output relations not well specified  Research departments  Revenue centers  Example: Marketing departments  Managers responsible for revenues LO 3 Continued

14. Managerial Planning, Control, & Performance Evaluation 14 RESPONSIBILITY CENTERS: 4 Types  Profit centers  Managers responsible for managing costs & revenues  Investment centers  Example: Corporate divisions  Managers responsible for costs, revenues, & assets LO 3

15. Managerial Planning, Control, & Performance Evaluation 15 MASTER BUDGET After organizational goals, strategies, & long-range plans have been developed, work begins on master (static) budget. Budgeting is a process that ties goals, plans, decision making & employee performance evaluations together. LO 4

16. Managerial Planning, Control, & Performance Evaluation 16 SALES BUDGET PRODUCTION BUDGET MARKETING BUDGET ADMINISTRATIVE BUDGETS PROFIT PLANNING BUDGET LO 4 BUDGETPROCESSBUDGETPROCESS

17. Managerial Planning, Control, & Performance Evaluation 17 DEVELOPING SALES BUDGET Forecasting Sales is the heart of the budgeting process and perhaps the most difficult. Information is sought from many sources. LO 4 Sales staff Market researchers Delphi technique Trend analysis Econometric models

18. Managerial Planning, Control, & Performance Evaluation 18 DEVELOPING PRODUCTION BUDGET Production budgets begin with Beginning Inventory (BI). They combine this with estimate of units to be sold & desired Ending Inventory (EI) to estimate production. Units Produced = Units to be sold + Desired EI – Units BI LO 4

19. Managerial Planning, Control, & Performance Evaluation 19 What is a flexible budget? Flexible budgets are used to compute costs that the production department should have incurred for actual units produced. LO 4

20. Managerial Planning, Control, & Performance Evaluation 20 What happens if projected profit is not the desired profit? When projected profit does not meet the desired level, managers will seek ways to improve profits. LO 4 MANAGERS WANT TO KNOW!

21. Managerial Planning, Control, & Performance Evaluation 21 What happens if actual sales & production differ from projected levels? Managers can develop a flexible budget to compare actual with projected levels. LO 5 MANAGERS WANT TO KNOW!

22. Managerial Planning, Control, & Performance Evaluation 22 What do the terms “favorable” & “unfavorable” variance mean? Favorable means the variance will increase profits; unfavorable means the variance will decrease profits. LO 5

23. Overview & Basic Concepts 23 PREVENTING BUDGET MANIPULATION Companies can provide incentives for people to report truthfully & be rewarded for both honest estimates & good performance. In practice, companies pressure employees to achieve continually more difficult targets. LO 6

24. Managerial Planning, Control, & Performance Evaluation 24 CHAPTER 9 THE END