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Budgeting for Planning and Control

Budgeting for Planning and Control. 8. CHAPTER. The Role of Budgeting in Planning and Control. OBJECTIVE. 1. Budgets Quantitative plans for the future Can be stated in either physical or financial terms or both Control

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Budgeting for Planning and Control

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  1. Budgeting for Planning and Control 8 CHAPTER

  2. The Role of Budgeting in Planning and Control OBJECTIVE 1 • Budgets • Quantitative plans for the future • Can be stated in either physical or financial terms or both • Control • The process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates significantly from planned performance • Budgets can be used to compare actual outcomes with planned outcomes and they can steer operations back on course, if necessary

  3. The Role of Budgeting in Planning and Control Purposes of Budgeting Forces managers to plan. Provides information to improve decision making. Aids in setting benchmarks for performance evaluation. Improves communication and coordination. OBJECTIVE 1 8-3

  4. The Role of Budgeting in Planning and Control Master Budget A comprehensive financial plan for the year made up of individual department and activity budgets Operating budgets are concerned with income generating activities Financial budgets are concerned with inflows and outflows of cash and with financial position OBJECTIVE 1 8-4

  5. The Role of Budgeting in Planning and Control OBJECTIVE 1 The data used to create the budget come from many sources • The sales forecast is the basis for the sales budget – which is the basis for all of the other operating budgets and most of the financial budgets

  6. Sales budget Production budget Direct materials purchases budget Direct labor budget Overhead budget Ending finished goods inventory budget Cost of goods sold budget Marketing expense budget Research and development expense budget Administrative expense budget Budgeted Income Statement Preparing the Operating Budget OBJECTIVE 2 The Operating Budget Components

  7. Preparing the Operating Budget OBJECTIVE 2 Understanding Operating Budgets • Sales Budget: the projection that describes expected sales for each product in units and dollars. • Production Budget: describes the number of units that must be produced in order to meet sales needs and satisfy ending inventory requirements • Basic equation: Units to be produced = Desired units in ending inventory + unit sales – units in beginning inventory

  8. Preparing the Operating Budget Understanding Operating Budgets OBJECTIVE 2 • Direct Materials Purchases Budget: based on the amount of materials needed for production and the inventories of direct materials • Once expected usage is computed, purchases can be computed by: Purchases = Desired ending inventory of direct materials + Expected usage – Beginning inventory of direct materials • Direct Labor Budget: shows the total direct labor hours and the total direct labor cost needs for the number of units to be produced • The average wage rate should be used in the direct labor budget. 8-8

  9. Preparing the Operating Budget Understanding Operating Budgets OBJECTIVE 2 • Overhead Budget: shows the expected cost of all indirect manufacturing items • Ending Finished Goods Inventory Budget: supplies information needed for the balance sheet and also serves as an important input for the preparation of the cost of goods sold budget • Cost of Goods Sold Budget: used in preparing the budgeted income statement • Marketing Expense Budget: outlines planned expenditures for selling and distribution activities 8-9

  10. Preparing the Operating Budget Understanding Operating Budgets OBJECTIVE 2 • Administrative Expense Budget: consists of estimated expenditures for the overall organization and operation of the company • Research and Development Expense Budget: contains planned expenditures for a separate department devoted to new product research and development • Budgeted Income Statement: With the completion of the above budgets, an estimate of operating income can be completed. • Operating income is not equal to net income – to be equal, interest expense and taxes must be subtracted from operating income. 8-10

  11. The Role of Today’s Cost and Management Accountant 3 OBJECTIVE The Controller The Treasurer Collection of cash Monitoring of cash payments Monitors cash availability Short-term investments Short and long-term borrowing Issuing of capital stock • Financial reports • SEC reporting • Tax planning and reporting • Performance reporting • Internal auditing • Budgeting • Accounting systems and internal controls

  12. Characteristics of a Good Budgetary System Frequent Feedback on Performance Monetary and Nonmonetary Incentives Participative Budgeting Realistic Standards Controllability of Costs Multiple Measures of Performance The Behavioral Dimension of Budgeting 6 OBJECTIVE

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