Transcript Chapter Title - University of Montana

Master Budgeting
Chapter 8
ACTG 202 – Principles of
Managerial Accounting
“Good plans shape good decisions. That’s
why good planning helps make elusive
dreams come true.”
-Geoffrey Fische
8-2
Learning Objective 1
Understand why
organizations budget
and the processes they
use to create budgets.
8-3
The Basic Framework of Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activities is known
as budgetary control.
8-4
Difference Between Planning and
Control
Planning –
involves developing
objectives and
preparing various
budgets to achieve
those objectives.
Control –
involves the steps taken
by management to
increase the likelihood that
the objectives set down
while planning are attained
and that all parts of the
organization are working
together toward that goal.
8-5
Responsibility Accounting
Managers should be held
responsible for those items and only those items - that
they can actually control
to a significant extent.
Responsibility accounting
enables organizations to react
quickly to deviations from their
plans and to learn from
feedback.
8-6
Choosing the Budget Period
Operating Budget
2014
2015
Operating budgets ordinarily
cover a one-year period
corresponding to a company’s
fiscal year. Many companies
divide their annual budget
into four quarters.
2016
2017
A continuous budget is a
12-month budget that rolls
forward one month (or quarter)
as the current month (or quarter)
is completed.
8-7
Self-Imposed Budget
Top M an ag em en t
M id d le
M an ag em en t
S u p ervisor
S u p ervisor
M id d le
M an ag em en t
S u p ervisor
S u p ervisor
A self-imposed budget or participative budget is a budget that is
prepared with the full cooperation and participation of managers
at all levels.
8-8
Advantages of Self-Imposed Budgets
1. Individuals at all levels of the organization are viewed as
members of the team whose judgments are valued by top
management.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
3. Motivation is generally higher when individuals participate
in setting their own goals than when the goals are
imposed from above.
4. A manager who is not able to meet a budget imposed
from above can claim that it was unrealistic. Self-imposed
budgets eliminate this excuse.
8-9
Self-Imposed Budgets
Self-imposed budgets should be reviewed
by higher levels of management to
prevent “budgetary slack.”
Most companies issue broad guidelines in
terms of overall profits or sales. Lower
level managers are directed to prepare
budgets that meet those targets.
8-10
Human Factors in Budgeting
The success of a budget program depends on three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based on
meeting budget targets.
8-11
The Master Budget: An Overview
Sales budget
Ending inventory
budget
Direct materials
budget
Production budget
Direct labor
budget
Selling and
administrative
budget
Manufacturing
overhead budget
Cash Budget
Budgeted
income
statement
Budgeted
balance sheet
8-12
Learning Objective 2
Prepare a sales budget,
including a schedule of
expected cash
collections.
8-13
The Sales Budget
• The sales budget is the starting point in
preparing a master budget
• All other steps in the budgeting process
depend on the sales budget
• Most big budgeting problems result from a
poor sales budget
8-14
The Sales Budget
• A sales budget is constructed by
multiplying budgeted unit sales by the
selling price
• Revenue and cash receipts may happen
in different time periods
▫ Both are important
8-15
Learning Objective 3
Prepare a production
budget.
8-16
The Production Budget
Sales
Budget
and
Expected
Cash
Collections
Production
Budget
The production budget must be adequate to
meet budgeted sales and to provide for
the desired ending inventory.
8-17
Calculating Production Needs
Budgeted unit sales
+ Ending inventory requirements
= Total needs
- Beginning inventory
= Required production
8-18
Production Budget Determines Need
for Manufacturing Materials, Labor &
Overhead
Once the production needs are determined
this can be converted into dollar amounts that
need to be spent
The next step is calculating:
Direct materials budget
Direct labor budget
Manufacturing overhead budget
8-19
Learning Objectives 4, 5, and 6
Prepare a direct
materials budget, labor
budget, and
manufacturing overhead
budget
8-20
The Direct Materials Budget
Raw materials needed for production
+ Desired ending inventory of raw materials
= Total raw material needs
- Beginning inventory of raw materials
= Raw materials to be purchased
8-21
The Direct Labor Budget
• To create a direct labor budget we need
▫ Required production (from Production
Budget)
▫ Number of labor hours required per unit
▫ The direct labor rate per hour
Note: if production labor amounts are fixed than
there may be a minimum total labor cost
8-22
Manufacturing Overhead Budget
• A manufacturing overhead budget should
be divided into:
▫ Variable costs, and
▫ Fixed costs
• Which costs are fixed and which are
variable should be reviewed and adjusted
during the budgeting process
8-23
Manufacturing Overhead Budget
• The manufacturing overhead budget is
used to calculate the predetermined
overhead rate
▫ As illustrated in Chapter 3, the
predetermined overhead rate is used to
allocate overhead to products
• Often, some of the fixed overhead costs,
such as depreciation, are noncash items
8-24
Learning Objective 7
Prepare a selling and
administrative expense
budget.
8-25
Selling and Administrative Expense
Budget
• The selling and administrative expense budget lists
the budgeted expenses for areas other than
manufacturing
• In large organizations, this budget would be a
compilation of many smaller, individual budgets
submitted by different departments
• To complete the selling and administrative expense
budget, costs should be divided into variable and
fixed costs
• There may be noncash selling and administrative
expenses such as depreciation
8-26
Learning Objective 8
Prepare a cash budget.
8-27
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the
company will need to borrow money or if it will be able to
repay funds previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.
8-28
Determining the Cash Excess or
Deficiency
Cash balance, beginning
+ Cash receipts
= Total cash available
-
Cash disbursements
=
Excess (def.) of cash available for disbursements
+/- Financing
= Cash balance, ending
8-29
The Budgeted Income Statement
Cash
Budget
Budgeted
Income
Statement
With interest expense from the cash
budget, Royal can prepare the budgeted
income statement.
8-30
Learning Objective 9
Prepare a budgeted
income statement.
8-31
The Budgeted Income Statement
Sales Budget.
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
Cost of goods sold (100,000 @ $4.99)
Gross margin
Selling and administrative expenses
Operating income
Interest expense
Net income
Cash Budget.
$ 1,000,000
499,000
501,000
260,000
241,000
2,000
$ 239,000
Ending Finished
Goods Inventory.
Selling and
Administrative
Expense Budget.
8-32
Steps in Budgeting Process - Summary
1. Sales Budget
2. Production Budget
3. Direct materials, direct labor and
manufacturing overhead budget
4. Selling and administrative expenses
budget
5. Cash budget
6. Budgeted income statement
7. Budgeted balance sheet