budgetory control bugetory controls

7/30/2019 Budgetory Control bugetory controls

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The Budgeting

Process

Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University

Chapter 21


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Learning Objective

1. Define budgetingand explain its role

in the management cycle.

2. Identify the elements of a master

budget in different types of

organizations and the guidelines for

preparing budgets.

3. Prepare the operating budgets that

support the financial budgets.


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Learning Objective (contd)

4. Prepare a budgeted income

statement, a cash budget, and a

budgeted balance sheet.

5. Describe managements role in budget

implementation.


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The Budgeting Process

Objective 1

Define budgetingand explain its role in the

management cycle


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Budgeting

is the process of identifying, gathering,

summarizing, and communicating

financial and nonfinancial information

about an organization's future activities

Is essential part of the continuous planning

for an organization in order to accomplishlong-term goals


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The Budgeting Process

Budgets

Plans of action based on forecasted

transactions, activities, and events

Are synonymous with managing an

organization

Essential to accomplishing goals in the

strategic plan


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The Budgeting Process (contd)

Budgets are used to

Communicate information

Coordinate activities and resource usage

Motivate employees

Evaluate performance

Manage and account for cash

Establish minimum levels of cash receipts and

expenditures


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The Budgeting Process (contd)

Many forms of budgets

Examples

Cash budget

Focuses on financial information

Shows, among other things, how cash resources will

be allotted to operating, investing, and financing

activities over a future period

Production budget

Focuses on nonfinancial information Shows planned production in units

Identifies activities needed to meet certain

requirements or standards


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Budgeting and Goals

Strategic planning

Process by which management establishes

an organizations long-term goals


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Long-Term Goals

define the strategic direction an

organization will take over

a five- to ten-year period

Are the basis for

Making annual operating plans

Preparing budgets


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Long-Term Goals (contd)

Should take into consideration

Economic and industry forecasts

Employee-management relations

Structure and role of management Organizational capacity

Any other operational and tactical issues facingthe organization

Expected quality of products or services Growth rates

Desired market share


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Long-Term Goals (contd)

Must set specific targets and timetables

Must assign responsibility for achieving

the goals to specific personnel

A range of long-term goals should be

included in the organization's strategic

plan

Should give direction to efforts to achieve

these goals


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Short-Term Goals

Involve every part of an enterprise

Much more detailed than long-term

goals

To formulate an annual operating plan,

long-term goals must be restated in

terms of what needs to be

accomplished during the next year

Short-term goals are the basis of an

organizations operating budgets for the year


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Short-Term Goals (contd)

Organizations controller takes charge of

coordinating the budget process

Designs a complete set of budget-development

directions Timetable with deadlines

Assigns clearly defined responsibilities for carrying

out each part of the budgets development

To specific individuals or management teams The budget may be reviewed and revised during

the year


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Importance of Participation

The key to a successful budget is

participative budgeting

Process in which personnel at all levels of

an organization actively engage in makingdecisions about the budget

Gives a sense of ownership

Helps ensure that departments will attain targets and

stay within the budget


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Importance of Participation (contd)

Participative budgeting depends on jointdecision making

Controller must be able to communicate

and negotiate effectively with people in alllevels of an organization

Senior managers

Formulate organizational long-and short-term goals

Middle managers Supervisors

Responsible for daily operations


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Importance of Participation (contd)

Authoritative budgeting

Senior executives dictate targets

Do not allow middle managers and supervisors a voice in

setting them

Targets may be unrealistic and impossible to attain

Will undermine motivation of managers and supervisors

Cooperation is essential for successful budget

implementation

Senior executives allow controller to developbudget without consulting other managers

Managers may feel budgeting is not a top priority


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Budgeting

and theManagement

Cycle


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Budgeting and the Management Cycle

Planning

Budgeting

Originates in this stage

Helps managers to

Relate the organizations long-term goals to its short-

term activities

Distribute resources and workloads

Communicate responsibilities

Select performance measures

Set goals for bonuses and rewards


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Executing

Budgeting helps managers to

Communicate expectations

Measure performance and motivate employees

Coordinate activities and allot resources


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Reporting


Communicate budget information

Provide continuous feedback

Support operating decisions


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Reviewing


Evaluate performance

Determine timeliness

Find variances and create solutions

Compare planned performance with actual

performance


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Discussion

Q. How are short-term goals related to

strategic planning?

A. Short-term goals define the strategic

direction an organization will take overthe next year. They are determined to

help accomplish the long-term goals that

are established during the strategic

planning process


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The Master Budget

Objective 2

Identify the elements of a master budget in

different types of organizations and the

guidelines for preparing budgets


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The Master Budget

consists of a set of operating budgets

and a set of financial budgets

that detail an

organizations financial plansfor a specific accounting period,

generally a year


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The Master Budget (contd)

Operating budgets Plans used in daily operations

Basis for financial budgets

Financial budgets Projections of financial results for the accounting

period

Include

Budgeted income statement Capital expenditures budget

Cash budget

Budgeted balance sheet


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Process of preparing a master budget is

similar in all three types of organizations

Manufacturing

Retail

Service

The process differs mainly in the kinds

of operating budgets each type of

organization prepares


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Preparation of

a Master

Budget for aManufacturing

Organization


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Preparation

of a Master

Budget for aRetail

Organization

P ti f M t B d t f S i


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Preparation of a Master Budget for a Service

Organization


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Sales budget

Is prepared first

Used to estimate sales volume and revenues

Once developed, other budgets can be

developed

These other budgets will help manage the

organization's resources so that profits can be

generated on sales

In a service organization, the sales budget

is called the service revenue budget


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No standard format for budget

preparation

Procedures vary from organization to

organization

Only universal requirement is that budgets

communicate the appropriate information

to the reader in a clear and understandablemanner


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Managers can improve the quality of budgetsby using the following guidelines

1. Know the purpose of the budget

2. Identify the user group and its information needs

3. Identify sources of accurate, meaningful budget

information

4. Establish a clear format for the budget

5. Use appropriate formulas and calculations toderive quantitative information

6. Revise the budget until it includes all planning

decisions


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Discussion

Q. Which budget must be prepared first?

A. The sales budget. This budget is used to

estimate sales volume and revenues.

Once established, the other budgets canbe developed


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Operating Budgets

Objective 3

Prepare the operating budgets that support

the financial budgets


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Operating Budgets

are a set of budgets that are used in

planning the daily operations of an

organization

Are part of the master budget


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Operating Budgets

Procedures for preparing operating budgetsinclude

Cost behavior analysis

Cost-volume-profit analysis

A product costing method

Organizations that manufacture a variety ofproducts or services may prepare

Separate operating budgets, or One comprehensive budget for each product or

service


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Sales Budget

is a detailed plan,expressed in both units and value,

that identifies the product (or service)

sales expected in an accounting period


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Sales Budget (contd)

Sales mangers use the information to Plan sales- and marketing-related activities

Determine human, physical, and technicalresource needs

Accountants use the information to Determine estimated cash receipts for the cash

budget

To determine the total budgeted sales

Total

BudgetedSales

=Estimated

Selling Priceper Unit

x

Estimated

Sales inUnits


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Selecting the best estimates for selling priceper unit and the sales demand in units can be

difficult

If the organization wants to increase its share inthe market

An estimated selling price below the current selling price

may be needed

If the organization has improved the products

quality by using more expensive materials or

production processes

The estimated selling price may have to be higher than

the current price


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Estimated sales volume is veryimportant

Will affect the level of operating activities

and amount of resources needed foroperations

Managers may use a sales forecast

A projection of sales demand based on ananalysis of internal and external factors


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External factors taken into considerationin a sales forecast include

1. The state of the local and national

economies

2. The state of the industrys economy

3. The nature of the competition and its

sales volume and selling price


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Internal factors include

1. The number of units sold in prior periods

2. The organizations credit policies

3. The organizations collection policies

4. The organizations pricing policies

5. Any new products the organization plans

to introduce to the market

6. The capacity of the organizations

manufacturing facilities


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The Production Budget

is a detailed planshowing the number of units

a company must produce

to meet budgeted salesand inventory levels

Production managers use this information toplan for the materials and human resources

that production activities will require


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The Production Budget (contd)

To prepare a production budget,managers must know

Budgeted number of sales units

From the sales budget

Desired level of ending finished goods

inventory for each period in the budget

year Often stated as a percentage of the next

periods budgeted unit sales


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The Production Budget (contd)

To determine the production needs foran accounting period

Total

ProductionUnits

=

Budgeted

Sales inUnits

+

Desired Units of

Ending FinishedGoods Inventory

Desired Units of

Beginning FinishedGoods Inventory


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Production Budget


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The Direct Materials Purchases Budget

is a detailed plan that identifiesthe quantity of purchases required

to meet budgeted production

and inventory needs and the costsassociated with those purchases



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(contd)

Purchasing department

Uses information to plan purchases of

direct materials

Accountants

Use information to estimate cash payments

to suppliers



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(contd)

To prepare a direct materials purchasesbudget managers must know

What production needs will be in the nextaccounting period

Provided in the production budget

Desired level of direct materials inventory for eachperiod

Per unit cost of direct materials

Desired level of ending direct materials inventory Usually stated as a percentage of the next periods

production



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(contd)

Steps to prepare a direct materialspurchasing budget

1. Calculate each periods total production needs in

units of direct materials

2. Determine the total number of units of directmaterials to be purchased during each

accounting period in the budget

3. Calculate the cost of the direct materials

purchases

Total Unitsof Direct

Materials toBe Purchased

=

Total Production

Needs in Units ofDirect Materials

+

Desired Unitsof Ending

Direct MaterialsInventory

Desired Unitsof Beginning

Direct MaterialsInventory

Di t M t i l P h B d t


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Direct Materials Purchases Budget

Th Di t L b B d t


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The Direct Labor Budget

is a detailed plan that estimatesthe direct labor hours needed

in an accounting period

and the associated costs

Th Di t L b B d t ( td)


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The Direct Labor Budget (contd)

Production managers use estimated direct laborhours to plan

How many employees will be required during the period

The hours each employee will work

Accountants use estimated direct labor costs to plan For cash payments to workers

Human resource managers use information on thedirect labor budget to

Decide whether to hire new employees

Reduce the existing work force

Train employees

Prepare schedules of employee fringe benefits

Th Di t L b B d t ( td)


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The Direct Labor Budget (contd)

Steps in preparing a direct labor budget

1. Estimate the total direct labor hours

Multiply estimated direct labor hours per

unit by the anticipated units of production

2. Calculate the total budgeted direct labor

cost

Total BudgetedDirect Labor Cost

= Estimated TotalDirect Labor Hours

xEstimated Direct

Labor Cost per Hour

Di t L b B d t


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Direct Labor Budget

Th M f t i O h d B d t


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The Manufacturing Overhead Budget

is a detailed planof anticipated manufacturing costs,

other than direct materials

and direct labor costs,that must be incurred to

meet budgeted production needs

Th M f t i O h d B d t ( td)


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The Manufacturing Overhead Budget (contd)

Two purposes

1. Integrate the overhead cost budgets

developed by managers of production

and production-related departments2. Group information for the calculation of

manufacturing overhead rates for the

forthcoming accounting period

Th M f t i O h d B d t ( td)


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The Manufacturing Overhead Budget (contd)

Presentation of information is flexible

Grouping by activities is useful for

organizations using activity-based

costing

Man fact ring O erhead B dget


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Manufacturing Overhead Budget

The Selling and Administrative Expense


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g p

Budget

is a detailed planof operating expenses,

other than those related to production,that are needed to support sales

and overall operationsin an accounting period

Accountants use this budget to estimate cashpayments for products or services used innonproduction-related activities

Selling and Administrative Expense Budget


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Selling and Administrative Expense Budget

The Cost of Goods Manufactured Budget


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The Cost of Goods Manufactured Budget

is a detailed plan that summarizes theestimated costs of production in an

accounting period

Sources of information Direct materials, direct labor, and manufacturing

overhead budgets

Cost of Goods Manufactured Budget


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Cost of Goods Manufactured Budget

Note that most companies anticipate some work in processat the beginning or end of a period covered by the budget

Discussion


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Discussion

Q. What are the sources of informationfor preparing the cost of goods

manufactured budget?

A. Direct materials budget

Direct labor budget

Manufacturing overhead budget

Financial Budgets


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Financial Budgets

Objective 4

Prepare a budgeted income statement, a

cash budget, and a budgeted balance

sheet

Financial Budgets


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Financial Budgets

are projections of financial resultsfor an accounting period

Include

Budgeted income statement

Capital expenditures budget

Cash budget

Budgeted balance sheet

The Budgeted Income Statement


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The Budgeted Income Statement

projects an organizations net incomein an accounting period

based on revenues and expenses

estimated for that period

Budgeted Income Statement


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Budgeted Income Statement

The Capital Expenditures Budget


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The Capital Expenditures Budget

. is a detailed plan outlining theanticipated amount and timing of

capital outlays for long-term assets


The Capital Expenditures Budget (contd)


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The Capital Expenditures Budget (cont d)

Managers rely on information in acapital expenditures budget when

making decisions about such matters as

Buying equipment

Building a new plant

Purchasing and installing a materials

handling systemAcquiring another business

The Cash Budget


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The Cash Budget

is a projection of the cashan organization will receive

and the cash it will pay out


Summarizes the cash flow prospects of all

transactions considered in the master budget

The Cash Budget (contd)


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The Cash Budget (cont d)

Information it provides enablesmanagers to plan for

Short-term loans when the cash balance is

low Short-term investments when the cash

balance is high


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Excludes some planned noncashtransactions

Depreciation expense

Issuance and receipt of stock dividends Uncollectible accounts expense

Gains and losses on sales of assets

May also exclude

Deferred taxes

Accrued interest



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To calculate the estimated ending cashbalance

Estimated

EndingCash Balance

=

Total

EstimatedCash Receipts

Total

EstimatedCash Payments

+

Estimated

BeginningCash Balance



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Sources for estimating cash receipts Sales budget


Cash budgets from previous periods

Cash collection records and analyses of

collection trends

Records pertaining to notes, stocks, andbonds



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Sources for estimating cash payments Operating budgets


Capital expenditures budget

Previous years financial statements

Loan records



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Supporting schedules Schedule of expected cash collections

from customers

Schedule of expected cash payments fordirect materials

Cash budget

Schedule of Expected Cash Collections from

C t


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Customers

Schedule of Expected Cash Payments for

Di t M t i l


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Direct Materials

Cash Budget


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Cash Budget



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Organizations may maintain a minimum cashbalance

To cover unusual expenditures

If the ending cash balance on the cash

budget Falls below the minimum level required

Short-term borrowing may be necessary

Is significantly larger than the minimum levelrequired

May invest excess in short-term securities to generateadditional income

The Budgeted Balance Sheet


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The Budgeted Balance Sheet

projects an organizationsfinancial position

at the end of an accounting period

Uses all estimated data compiled in the

course of preparing a master budget

Is the final step in that process

Budgeted Balance Sheet


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Budgeted Balance Sheet

Discussion


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Discussion

Q. How is the ending cash balanceestimated?

A. Subtract total estimated cash payments

from total estimated cash receipts, then,add the estimated beginning cash

balance

Budget Implementation


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g p

Objective 5 Describe managements role in budget

implementation

Budget Implementation


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g p

Budget committee Oversees each stage in the master budget

preparation

Decides any departmental disputes thatmight arise in the process

Gives final approval to the budget

Budget Implementation (contd)


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g p ( )

Budget committee members Controller

Has overall responsibility for budget

implementation President

Vice presidents

The make-up of the committee ensures that the

budgeting process has a companywide perspective



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g p ( )

A master budget may go through manyrevisions after approval

Budget committee monitors the progress

the company is making in attaining budgettargets

Using periodic reports from department

managers



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g p ( )

Successful budget implementationdepends on two factors

1. Clear communication

2. Support of top management Middle- and lower-level managers must see

that top management supports the budget

and encourages its implementation

Discussion


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Q. What two factors are necessary forsuccessful budget implementation?

A. Clear communication and support of top

management

Time for Review


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1. Define budgetingand explain its rolein the management cycle

2. Identify the elements of a master

budget in different types oforganizations and the guidelines for

preparing budgets

3. Prepare the operating budgets thatsupport the financial budgets

And Finally


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4. Prepare a budgeted incomestatement, a cash budget, and a

budgeted balance sheet

5. Describe managements role in budgetimplementation

budgetory control bugetory controls

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