Budgeting for Planning and Control

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
OBJECTIVE
1

• Purposes of Budgeting
• Forces managers to plan.
• Provides information to improve decision making.
• Aids in setting benchmarks for performance
  evaluation.
• Improves communication and coordination.

8-3
4
The Role of Budgeting in Planning and Control
OBJECTIVE
1

• 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

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
Preparing the Operating Budget
OBJECTIVE
2

• The Operating Budget Components

• Cost of goods sold budget
• Marketing expense budget
• Research and development expense budget
• Administrative expense budget
• Budgeted Income Statement

• Sales budget
• Production budget
• Direct materials purchases budget
• Direct labor budget
• Overhead budget
• Ending finished goods inventory budget

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
OBJECTIVE
2

• Understanding Operating Budgets

• 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.

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9
Preparing the Operating Budget
OBJECTIVE
2

• Understanding Operating Budgets

• 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
OBJECTIVE
2

• Understanding Operating Budgets

• 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.

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11
The Role of Todays 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
The Behavioral Dimension of Budgeting
6
OBJECTIVE

• 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