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The Budgeting Process

The Budgeting Process. 24. The Budgeting Process. OBJECTIVE 1: Define budgeting, and explain budget basics. The Budgeting Process. Explain how budgeting helps managers match an organization’s goals with its resources. The Budgeting Process. Advantages of budgeting

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The Budgeting Process

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  1. The Budgeting Process 24

  2. The Budgeting Process OBJECTIVE 1: Define budgeting, and explain budget basics.

  3. The Budgeting Process • Explain how budgeting helps managers match an organization’s goals with its resources.

  4. The Budgeting Process • Advantages of budgeting • Budgets foster organizational communication. • Budgets ensure a focus both on future events and on resolving day-to-day issues.

  5. The Budgeting Process • Advantages of budgeting (cont.) • Budgets assign resources and the responsibility to use them wisely to managers who are held accountable for their results. • Budgets can identify potential constraints before they become problems.

  6. The Budgeting Process • Advantages of budgeting (cont.) • Budgets facilitate congruence between organizational and personal goals. • Budgets define organizational goals and objectives numerically, against which actual performance results can be evaluated.

  7. The Budgeting Process • Budgeting and goals • Strategic planning is the process by which management establishes an organization’s long-term goals. • Examples of long-term goals: increase market share by a specific amount • An annual operating plan restates long-term goals in terms of what an organization needs to accomplish during the next year.

  8. The Budgeting Process • Budgeting and goals (cont.) • The short-term goals identified in an annual operating plan are the basis of an organization’s operating budgets for the year.

  9. The Budgeting Process • Budgeting basics • Budget authority • Budget and budget line associated with a specific role or job in an organization. • Managers must explain or take correction action for any deviations between budget and actual results • Concept of responsibility accounting holds managers accountable for only those budget items they actually control.

  10. The Budgeting Process • Budgeting basics (cont.) • Participation • Participative budgeting is a process in which personnel at all levels of an organization actively engage in making decisions about the budget.

  11. The Budgeting Process • Budgeting basics (cont.) • Budget period • Static budgets are prepared once a year do not change during the annual budget period. • A continuous budget is a 12-month forward rolling budget that summarizes budgets for the next 12 months and is continuously reviews and revised during the year.

  12. The Budgeting Process • Budgeting basics (cont.) • Budget approach • Traditional budgets requires managers to justify only budget changes over the past year. • Zero-based budgeting requires every budget to be justified annually, not just the changes.

  13. The Budgeting Process • Budgeting basics (cont.) • Budget implementation • A budget committee made up of top management has overall responsibility for budget implementation. • Successful budget implementation depends on two factors: • Clear communication of performance expectations and budget targets to all key personnel • The support of top management

  14. The Master Budget OBJECTIVE 2: Identify the elements of a master budget in different types of organizations and the guidelines for preparing budgets.

  15. Figure 1: Preparation of a Master Budget for a Manufacturing Organization

  16. Figure 2: Preparation of a Master Budget for a Retail Organization

  17. Figure 3: Preparation of a Master Budget for a Service Organization

  18. The Master Budget • A master budget consists of a set of operating budgets and a set of financial budgets that detail an organization’s financial plans for an accounting period. • Operating budgets are plans used in daily operations and are the basis for preparing the financial budgets.

  19. The Master Budget • Financial budgets are projections of financial results for an accounting period. They include the following: • A budgeted income statement • A capital expenditures budget • A cash budget • A budgeted balance sheet

  20. The Master Budget • A master budget provides the information needed to match long-term goals to short-term activities and to plan the resources needed to ensure an organization’s profitability and liquidity. • The process of preparing a master budget in manufacturing, retail, and service organizations differs mainly in the kinds of operating budgets that each type of organization prepares.

  21. The Master Budget • Figures 1 through 3 show the different operating budgets of manufacturing, retail, and service organizations.

  22. The Master Budget • Guidelines for preparing budgets are • Understand the purpose of the budget. • Identify the user group and its information needs. • Identify sources of accurate, meaningful budget information.

  23. The Master Budget • Guidelines for preparing budgets are (cont.) • Establish a clear format for the budget. • Use appropriate formulas and calculations to derive the quantitative information. • Revise the budget until it includes all planning decisions.

  24. Operating Budgets OBJECTIVE 3: Prepare the operating budgets that support the financial budgets.

  25. Exhibit 1: Sales Budget

  26. Exhibit 2: Production Budget

  27. Exhibit 3: Direct Materials Purchases Budget

  28. Exhibit 4: Direct Labor Budget

  29. Exhibit 5: Overhead Budget

  30. Exhibit 6: Selling and Administrative Expense Budget

  31. Exhibit 7: Cost of Goods Manufactured Budget

  32. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. • Sales budget: a detailed plan identifying the sales expected during an accounting period. • Production budget: a detailed pan showing the number of units that a company must produce to meet budgeted sales and inventory needs.

  33. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. (cont.) • Direct materials purchase budget: detailed plan that identifies the quantity of purchases required to meet budgeted production and inventory needs and the costs associated with those purchases. • Calculate each period’s total production needs in units of direct materials.

  34. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. (cont.) • Direct materials purchase budget: detailed plan that identifies the quantity of purchases required to meet budgeted production and inventory needs and the costs associated with those purchases. • Determine the quantity of direct materials to be purchased during each accounting period in the budget

  35. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. (cont.) • Direct materials purchase budget: detailed plan that identifies the quantity of purchases required to meet budgeted production and inventory needs and the costs associated with those purchases. • Calculate the cost of the direct materials purchases by multiplying the total number of unit purchases by the direct materials cost.

  36. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. (cont.) • A direct labor budget is a detailed plan that estimates the direct labor hours needed during an accounting period and the associated costs. • Estimate the total direct labor hours by multiplying the estimated direct labor hours per unit by the anticipated units of production • Calculate the total budgeted direct labor cost by multiplying the estimated total direct labor hours by the estimated direct labor cost per hour.

  37. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. (cont.) • An overhead budget is a detailed plan of anticipated manufacturing costs, other than direct materials and direct labor costs, that must be incurred to meet budgeted production needs. • A selling and administrative expense budget is a detailed plan of operating expenses, other than those related to production, that are needed to support sales and overall operations during an accounting period.

  38. Operating Budgets • Operating budgets are interrelated and a sales budget is always prepared first. (cont.) • A cost of goods manufactured budget is a detailed plan that summarizes the estimated costs of production during an accounting period. • Exhibits 1 through 7 show each of the operating budgets is prepared.

  39. Financial Budgets OBJECTIVE 4: Prepare a budgeted income statement, a cash budget, and a budgeted balance sheet.

  40. Exhibit 8: Budgeted Income Statement

  41. Table 1: Elements of a Cash Budget

  42. Exhibit 9: Schedule of Expected Cash Collections from Customers

  43. Exhibit 10: Schedule of Expected Cash Payments for Direct Materials

  44. Exhibit 11: Cash Budget

  45. Exhibit 11: Cash Budget

  46. Exhibit 12 Budgeted Balance Sheet

  47. Exhibit 12 Budgeted Balance Sheet

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