Chapter 9: Budgetary Planning

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Essentials of Effective Budgeting

Budget: a formal written statement of management's plans for a specified future time period, expressed in financial terms.

Control Device - important basis for performance evaluation once adopted

Better control of organization's costs and coordination of organization's activities

Budgeting and 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 the responsibility of management.

Benefits of Budgeting

Primary benefits of budgeting:

Requires all levels of management to plan ahead.

Provides definite objectives for evaluating performance.

Creates an early warning system for potential problems.

Facilitates coordination of activities within the business.

Results in greater management awareness of the entity's overall operations.

It motivated personnel throughout the organization to meet planned objectives.

Budgeting and Human Behavior

Participate Budgeting: each level of management should be invited to participate. 'Bottom-to-top' approach.

Advantages:

More accurate budget estimates because lower level managers have more detailed knowledge of their area.

Tendency to perceive process as fair due to involvement of lower level management.

Disadvantages:

Can be time consuming and costly.

Can foster budgetary "gaming" through budgetary slack.

Make use of the clack plan for lower revenues to get a better bonus.

Sales Budget

First budget prepared.

Derived from the sales forecast.

Sales Budget Format: YR1

Expected Units Sales 200

x Unit Selling Price 2

Total Sales 400

Production Budget

Shows units that must be produced to meet anticipated sales.

Derived from sales budgets plus the desired change in ending finished goods inventory.

Budgeted Sales Unites + Desired Ending FG - Beg FG = Required Production Units.

Production Budget Format:

Expected Unit Sales

Add: Desired ending FG units

Less: Beg FG units

Required production units/Units to be produced

Direct Materials Budget

Shows both the quantity and cost of direct materials to be purchased.

DM required for production + Desired ending DM - Beg DM = Required DM to be purchased.

Direct Materials Budget Format:

Units to be produced

x Direct Materials per unit

Total Pounds needed for production

Add: Desired ending DM (pounds)

Total Materials required

Less: Beg DM

DM purchases

Cost per pound

Total cost of DM purchases

Direct Labor Budget

Units to be produced * DL Time per unit * DL cost per Hour = Total DL cost

Direct Labor Budget Format:

Units to be produced

DL time (hours per unit)

Total required DL hours

DL cost per hour

Total direct labor cost

Manufacturing Overhead Budget

Distinguishes between fixed and variable overhead costs.

Manufacturing Overhead Budget Format:

Variable costs:

Total variable costs

Fixed Costs:

Total Fixed Costs

Total Manufacturing Costs (VC+FC)

DL Hours/Total required DL hours

MOH rate per direct labor hour (Total MOH / DL hours)

Selling and Administrative Expense Budget Format:

Variable Expenses

Fixed Expenses

Total Selling and Admin Expenses (VC+FC)

Cash Budget

Shows anticipated cash flows.

Often considered to be the most important output in preparing financial budgets.

Shows beginning and ending cash balances.

Contains three sections:

Cash receipts.

Cash Disbursements.

Financing.

Cash Receipts Section:

Expected receipts from the principal sources of revenue.

Expected interest and dividends receipts, proceeds from planned sales of investments, plant assets, and the company's capital stock.

Cash Disbursements Section:

Expected cash payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses.

Financing Section:

Expected borrowings and repayments of borrowed funds plus interest.

Important for:

Contributes o more effective cash management.

Shows managers the need for additional financing before actual need arises.

Indicates when excess cash will be available.