Chapter 23-1 Prepared by Dan R. Ward Suzanne P. Ward University of Louisiana at Lafayette.
Download ReportTranscript Chapter 23-1 Prepared by Dan R. Ward Suzanne P. Ward University of Louisiana at Lafayette.
Chapter 23-1 Prepared by Dan R. Ward Suzanne P. Ward University of Louisiana at Lafayette
Chapter
23
Budgetary Planning
Chapter 23-2 Accounting Principles, Ninth Edition
Chapter 23-3
Study Objectives
1.
2.
3.
4.
5.
6.
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 non manufacturing companies.
Chapter 23-4
Preview of Chapter
Budgeting is critical to financial well-being Use budgets in planning and controlling operations Specific focus is on how budgeting is used as a
planning tool
by management.
Budgetary Planning
Budgeting Basics
Budgeting and accounting Benefits Essentials of effective budgeting Length of budget period Budgeting process Budgeting and human behavior Budgeting and long range planning The master budget
Chapter 23-5 Preparing the Operating Budgets
Sales Production Direct materials Direct labor Manufacturing overhead Selling and administrative expense Budgeted income statement
Preparing the Financial Budgets
Cash Budgeted balance sheet
Budgeting in Non Manufacturing Companies
Merchandisers Service Not-for-profit
Budgeting Basics
Budget
A formal written statement of management’s plans for a specified future time period, expressed in financial terms Primary way to communicate agreed-upon objectives to all parts of the company Promotes efficiency
Control device
- important basis for performance evaluation once adopted
Chapter 23-6
Chapter 23-7
Budgeting Basics – Role of Accounting
Historical accounting data on revenues, costs, and expenses help in formulating future budgets Accountants normally responsible for presenting
management’s
budgeting goals in
financial terms
The budget and its administration are, however,
entirely management’s responsibility
Chapter 23-8
Budgeting Basics - Benefits
Requires all levels of management to
plan ahead
and formalize goals on a recurring basis Provides
definite objectives
for evaluating performance at each level of responsibility Creates an problems
early warning system
for potential
SO 1: Indicate the benefits of budgeting.
Chapter 23-9
Budgeting Basics - Benefits
Facilitates business
coordination of activities
within the Results in
greater management awareness
of the entity’s overall operations and the impact of external factors
Motivates personnel
throughout organization to meet planned objectives
SO 1: Indicate the benefits of budgeting.
Chapter 23-10
Budgeting Basics - Benefits
A budget is an
aid
to management
not a substitute
for management.
SO 1: Indicate the benefits of budgeting.
Budgeting Basics - Benefits
Review Question
Which of the following is
not
a benefit of budgeting?
a. Management can plan ahead.
b. An early warning system is provided for potential problems. c. It enables disciplinary action to be taken at every level of responsibility.
d. The coordination of activities is facilitated.
Chapter 23-11
SO 1: Indicate the benefits of budgeting.
Chapter 23-12
Effective Budgeting
Depends on a
sound organizational structure
authority and responsibility for all phases of operations clearly defined with Based on
research and analysis
with realistic goals
Accepted by all levels of management SO 2: State the essentials of effective budgeting.
Chapter 23-13
The Budget Period
May be prepared for Most common -
periods
any period of time
one year
Supplement with monthly and quarterly budgets Different budgets may
cover different time
Long enough
to provide an attainable goal and minimize seasonal or cyclical fluctuations
Short enough
for reliable estimates
Continuous twelve-month budget
Drop the month just ended and add a future month Keeps management planning a full year ahead
SO 2: State the essentials of effective budgeting.
Chapter 23-14
The Budgeting Process
Base budget goals on past performance Collect data from organizational units Begin several months before end of current year Develop budget within the framework of a
sales forecast
Shows potential industry sales Shows company’s expected share
SO 2: State the essentials of effective budgeting.
The Budgeting Process
Factors considered in Sales Forecasting:
General economic conditions Industry trends Market research studies Anticipated advertising and promotion Previous market share Price changes Technological developments
Chapter 23-15
SO 2: State the essentials of effective budgeting.
Chapter 23-16
Budgeting and Human Behavior
Participative Budgeting
May inspire higher levels of performance or discourage additional effort Depends on how budget developed and administered Invite each level of management to participate
This “bottom-to-top” approach is called Participative Budgeting SO 2: State the essentials of effective budgeting.
Participative Budgeting
Chapter 23-17 Advantages:
More accurate budget estimates
level managers have more detailed knowledge of their area because lower
Tendency to perceive process as fair
involvement of lower level management due to
Overall goal
- produce a budget considered fair and achievable by managers while still meeting corporate goals Risk of unreliable budgets greater when they are
“top-down”
SO 2: State the essentials of effective budgeting.
Participative Budgeting
Disadvantages:
Can be
time consuming
and
costly
Can foster budgetary “gaming” through
budgetary slack:
situation where managers
intentionally
underestimate budgeted revenues or overestimate budgeted expenses so that budget goals are easier to meet
Chapter 23-18
SO 2: State the essentials of effective budgeting.
Participative Budgeting
Illustration 23-1 Flow of budget data from lower management to top levels Chapter 23-19
SO 2: State the essentials of effective budgeting.
Budgeting Versus Long Range Planning
Three basic differences between Budgeting and Long Range Planning: Time period involved Emphasis Detail presented Time period: Budgeting is short-term – usually one year Long range planning - at least five years Chapter 23-20
SO 2: State the essentials of effective budgeting.
Effective Budgeting
Review Question
The essentials of effective budgeting do
not
include: a. Top-down budgeting.
b. Management acceptance. c. Research and analysis.
d. Sound organizational structure.
Chapter 23-21
SO 2: State the essentials of effective budgeting.
Chapter 23-22
The Master Budget
A set of interrelated budgets that constitutes a plan of action for a specified time period Contains two classes of budgets:
Operating budgets:
Individual budgets that result in the preparation of the budgeted income statement – establish goals for sales and production personnel
Financial budgets:
The capital expenditures budget, the cash budget, and the budgeted balance sheet – focus primarily on cash needs to fund operations and capital expenditures
SO 3: Identify the budgets that comprise the master budget.
The Master Budget - Components
Illustration 23-2 Chapter 23-23
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Sales Budget
Chapter 23-24
First budget prepared Derived from the sales forecast Management’s
best estimate
for the budget period of sales revenue Every other budget depends on the sales budget Prepared by multiplying
expected unit sales volume for each product times anticipated unit selling price SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Sales Budget
Example – Hayes Company
Expected sales volume: 3,000 units in the first quarter with 500-unit increments for each following quarter Sales price: $60 per unit
Illustration 23-3 Chapter 23-25
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Production Budget
Shows the
units that must be produced
anticipated sales to meet Derived from sales budget plus the desired change in ending finished goods (ending finished goods less the beginning finished goods units) Required production in units formula:
Illustration 23-4 Chapter 23-26
Essential to have a realistic estimate of ending inventory
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Production Budget
Example – Hayes Company
Hayes Co. believes it can meet future sales needs with an ending inventory of 20% of next quarter’s sales
Illustration 23-5 Chapter 23-27
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Direct Materials Budget
Shows both the
quantity
materials to be purchased and
cost
of direct Derived from the direct materials units required for production (from the production budget) plus the desired change in ending direct materials units
Illustration 23-6 Chapter 23-28
Budgeted cost of direct materials to be purchased = required units of direct materials X anticipated cost per unit SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Direct Materials Budget
Example – Hayes Company
Key component in budgeting process – desired ending inventory An ending inventory of 10% of next quarter’s production requirements is sufficient The manufacturing of each unit requires 2 pounds of raw materials at an expected price of $4 per pound
Chapter 23-29
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Direct Materials Budget
Example – Hayes Company Illustration 23-7 Chapter 23-30
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Direct Labor Budget
Shows both the
quantity of hours and cost of direct labor
necessary to meet production requirements Critical in maintaining a labor force that can
meet expected production
Total direct labor cost formula:
Illustration 23-8 Chapter 23-31
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Direct Labor Budget
Example – Hayes Company
Direct labor hours from the production budget Two hours of direct labor required for each unit Anticipated hourly wage rate $10
Illustration 23-8 Chapter 23-32
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Manufacturing Overhead
Chapter 23-33
Shows the expected manufacturing overhead costs for the budget period Distinguishes between overhead costs
fixed
and
variable
Example – Hayes Company
Fixed cost amounts are assumed Expected variable costs per direct labor hour: indirect materials: $1.00
indirect labor: $1.40
utilities: $0.40
maintenance: $0.20
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Manufacturing Overhead
Illustration 23-10 Chapter 23-34
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Selling and Administrative
Projection of anticipated operating expenses Distinguishes between
fixed
and
variable
costs
Chapter 23-35 Example – Hayes Company
Fixed cost amounts are assumed Expected variable costs per unit sold (from sales budget): sales commissions: $3.00
freight-out: $1.00
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Selling and Administrative
Illustration 23-11 Chapter 23-36
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Sales Budget
Review Question
A sales budget is: a. Derived from the production budget.
b. Management’s best estimate of sales revenue for the year. c. Not the starting point for the master budget.
d. Prepared only for credit sales.
Chapter 23-37
SO 3: Identify the budgets that comprise the master budget.
Operating Budgets: Budgeted Income Statement
Important
end-product of the operating budgets
Indicates
expected profitability
of operations Provides a
basis for evaluating
company performance Prepared from the operating budgets Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget
Chapter 23-38
SO 4: Describe the sources for preparing the budgeted income statement.
Operating Budgets: Budgeted Income Statement
Example – Hayes Company
To find cost of goods sold: First, determine the unit cost of one Kitchen-mate
Illustration 23-12
Second, determine Cost of Goods Sold by multiplying units sold times unit cost: 15,000 units X $44 = $660,000
Chapter 23-39
SO 4: Describe the sources for preparing the budgeted income statement.
Operating Budgets: Budgeted Income Statement
Illustration 23-13 Chapter 23-40
Additional estimated data for budgeted income statement: Interest Expense - $100 Income Taxes - $12,000
SO 4: Describe the sources for preparing the budgeted income statement.
Operating Budgets: Budgeted Income Statement
Review Question
Each of the following budgets is used in preparing the budgeted income statement
except
the: a. Sales budget.
b. Selling and administrative budget. c. Capital expenditure budget.
d. Direct labor budget.
Chapter 23-41
SO 4: Describe the sources for preparing the budgeted income statement.
Chapter 23-42
Financial Budgets: Cash Budget
Shows
anticipated
cash flows Often considered to be the
most important output in preparing financial budgets
Contains three sections: Cash Receipts Cash Disbursements Financing Shows beginning and ending cash balances
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Basic Format Illustration 23-14 Chapter 23-43
SO 5: Explain the principal sections of a cash budget.
Chapter 23-44
Financial Budgets: Cash Budget
Cash Receipts Section
Includes expected receipts from the and capital stock
principal sources
of revenue – usually cash sales and collections on credit sales Shows expected interest and dividends receipts as well as proceeds from planned sales of investments, plant assets,
Cash Disbursements Section
Includes
expected cash payments
for direct materials and labor, taxes, dividends, plant assets, etc.
Financing Section
Shows
expected borrowings and repayments
funds plus interest of borrowed
SO 5: Explain the principal sections of a cash budget.
Chapter 23-45
Financial Budgets: Cash Budget
Must prepare in sequence Ending cash balance of one period is the beginning cash balance for the next Data obtained from other budgets and from management Often prepared for the year on a monthly basis
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Example – Hayes Company Assumptions
January 1, 2010 cash balance:
$38,000
Sales:
collect 60% in quarter sold; 40% in next quarter; collect December 31, 2009 Accounts Receivable in Quarter 1
Expected sale of short term investments:
$2,000 in Quarter 1
Direct Materials:
pay 50% in quarter purchased; 50% in next pay December 31, 2009 Accounts Payable in Quarter 1
Direct Labor:
pay 100% in quarter incurred
Manufacturing Overhead and Selling/Administrative Expenses:
pay (except depreciation) in quarter incurred
Expected purchase of truck:
$10,000 cash in Quarter 2
Estimated annual income taxes:
Equal payment each quarter
Loans:
Pay in earliest quarter with sufficient cash (i.e., cash on hand exceeds the $15,000 minimum required balance)
Chapter 23-46
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Example – Hayes Company Illustration 23-15
Usually prepare schedule of collections from customers
Chapter 23-47
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Example – Hayes Company Illustration 23-16
Prepare schedule of cash payments for direct materials Now prepare the Cash Budget based on the assumptions and preceding schedules
Chapter 23-48
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Illustration 23-17 Chapter 23-49
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Contributes to more effective cash management Shows managers the need for additional financing before actual need arises Indicates when excess cash will be available
Chapter 23-50
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Budgeted Balance Sheet
A projection of financial position at the
end of the budgeted period
Developed from the budgeted balance sheet for the preceding year and the budgets for the current year
Chapter 23-51
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Budgeted Balance Sheet
Example – Hayes Company Illustration 23-18 Chapter 23-52
Additional data:
SO 5: Explain the principal sections of a cash budget.
Financial Budgets: Cash Budget
Review Question
Expected direct materials purchases in Read Company are $70,000 in the first quarter and $90,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are:
Chapter 23-53
a. $96,000 b. $90,000 c. $78,000 d. $72,000
SO 5: Explain the principal sections of a cash budget.
Chapter 23-54
Budgeting: Merchandisers Sales Budget
: starting point and key factor in developing the master budget Use a
purchases budget
budget instead of a production Does
not
use the manufacturing budgets (direct materials, direct labor, manufacturing overhead) To determine budgeted merchandise purchases:
SO 6: Indicate the applicability of budgeting in non-manufacturing companies.
Budgeting: Merchandisers
Example – Lima Company Illustration 23-20
Budgeted sales for July $300,000 and for August $320,000 Cost of Goods Sold: 70% of sales Desired ending inventory: 30% of next month’s Cost of Goods Sold
Chapter 23-55
SO 6: Indicate the applicability of budgeting in non manufacturing companies.
Budgeting: Service Companies
Chapter 23-56
Critical factor in budgeting is
coordinating professional staff needs with anticipated services
Problems if
overstaffed
: Disproportionately high labor costs Lower profits due to additional salaries Increased staff turnover due to lack of challenging work Problems if loads
understaffed
: Lost revenues because existing and future client needs for services cannot be met Loss of professional staff due to excessive work
SO 6: Indicate the applicability of budgeting in non-manufacturing companies.
Budgeting: Not-for-Profit Companies
Chapter 23-57
Just as important as for profit-oriented company However, budget process differs significantly from that of a profit-oriented company Budget on the basis of cash flows The starting point is usually expenditures , not receipts Management’s task is to find receipts needed to support planned expenditures Budget must be strictly followed, overspending often illegal (expenditures and receipts), not on a revenue and expense basis
SO 6: Indicate the applicability of budgeting in non-manufacturing companies.
Budgeting: Merchandisers
Review Question
The budget for a merchandiser differs from a budget for a manufacturer because: a. A merchandise purchases budget replaces the production budget.
b. The manufacturing budgets are not applicable. c. None of the above.
d. Both (a) and (b) above
Chapter 23-58
SO 6: Indicate the applicability of budgeting in non-manufacturing companies.
Chapter 23-59
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