Chapter 9 Notes A budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time Budgeting systems are the procedures to develop a budget and have five primary purposes Planning- quantify a plan of action Facilitating communication and coordination- pulls together the plans of each manager in an organization Allocating resources- one means of allocating resources among competing uses Controlling profit and operations- serves as a useful benchmark with which actual results can be compared Evaluating performance and providing incentives A master budget or profit plan is a comprehensive set of budgets covering all phases of an organization?s operations for a specified period of time Budgeted financial statements (pro forma financial statements) show how the organization?s financial statements will appear at a specific time if operations proceed according to plan Include a budgeted income statement, budgeted balance sheet, and a budgeted statement of cash flows A capital budget is a plan for the acquisition of capital assets, such as buildings and equipment A financial budget is a plan that shows how the organization will acquire its financial resources, such as though the issuance of stock of incurrence of debt Rolling budgets are continually updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed Also called revolving budgets or continuous budgets The starting point for any master budget is a sales revenue budget based on a sales forecast for services or goods Sales forecasting combines information from many different sources Generally sales level the prior year A slight inaccuracy coming at the beginning of the budgeting process will throw off all other schedules comprising the master budget Based on the sales budget, a company develops a set of operational budgets that specify how its operations will be carried out to meet the demand for its goods or services Manufacturing companies make a production budget and use that to develop the budget for the direct materials, direct labor, and overhead required Merchandising firms make a budget for merchandise purchases and develop budgets for labor, overhead, and selling and administrative expenses Service industry firms develops a set of budgets that show how the demand for those services will be met Every business prepares a cash budget which shows expected cash receipts as a result of selling goods or services, and planned cash disbursements to pay the bills incurred by the firm Nonprofit organizations differ slightly No sales budget because they provide services free of charge Begin budgeting process with a budget that shows the level of services to be provided Prepare budgeted showing their anticipated funding Activity-based costing (ABC) uses a two-stage cost-assignment process Overhead costs are assigned to cost pools that represent the most significant activities constituting the production process and appropriate cost drivers are identified for each pool Overhead costs are allocated from each activity cost pool to cost objects in proportion to the amount of activity consumed Under the ABC concepts to budgeting process yields activity-based budgeting (ABB) First step is to specify the products or services to be produced and the customers to be served Then activities that are necessary to produce these products and services are determined The resources necessary to perform the specified activities are quantified ABB is ABC backwards Sales budget is projected sales in units multiplied by the sales price to determine sales revenue The production budget shows the number of units of services or goods that are to be produced during a budget period Sales in units + desired ending inventory of finished goods = total units required Total units required ? expected beginning inventory of finished goods = units to be produced Direct-materials budget shows the number of units and the cost of material to be purchased and used during a budget period Raw material required for production + desired ending inventory of raw material = total raw material required Total raw material required ? expected beginning inventory of raw material = raw material to be purchased The direct-labor budget shows the number of hours and the cost of direct labor to be used during the budget period Units to be produced x direct-labor required per unit (hours) = total direct-labor hours required Total direct-labor hours required x direct-labor cost per house = total direct-labor cost Manufacturing-overhead budget shows the cost of overhead expected to be incurred in the production process during the budget period Total overhead ? depreciation = total cash disbursements for overhead The selling, general, and administrative (SG&A) expense budget shows the planned amounts of expenditures for selling, general, and administrative expenses during the budget period The cash receipts budget details the expected cash collections during a budget period The cash disbursements budget details the expected cash payments during a budget period The cash budget detailed the expected cash receipts and disbursements during a budget year The budgeted schedule of cost of goods manufactured and sold details the direct material, direct-labor, and manufacturing-overhead costs to be incurred, and showing the cost of the goods to be sold during the budget period The budgeted income statement shows the expected revenue and expenses for the budget period, assuming that planned operations are carried out The budgeted statement of cash flows provides information about the expected sources and uses of cash for operating activities, investing activities, and financing activities during a particular period of time The budgeted balance sheet shows the expected end-of-period balances for the company?s assets, liabilities, and owner?s equity, assuming that planned operations are carried out Start with the beginning balance sheet projected of the budget year and then adjust each account balance for the changes expected during the year One way to cope with uncertainty is to supplement the budgeting process with a financial planning model, which is a set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determined the overall results of an organization?s activities Larger organizations use a formal process to collect data and prepare the master budget versus small organizations that use more of an informal process Large organizations designate a budget director or chief budget officer Prepares a budget manual that states who is responsible for providing various types of information, when the information is required, and what form the information is to take A budget committee often is appointed to advise the budget director during the preparation of the budget E-budgeting is a budgeting tool based over the internet that stands for both electronic and enterprise-wide Used in global companies The human reactions to the budgeting process can have considerable influence on an organization?s overall effectiveness The sales forecast relies on market research and analysis by market research staff but also incorporates the projections of sales personnel If a manager?s performance is based on whether sales budget for the territory is exceed, the incentive is to give a conservative, our cautiously law, sales estimate Sales that are exceeded will look better than sales not met When a supervisor provides a departmental cost projection for budgetary purposes, there is an incentive to overestimate costs Padding the budget- underestimating the revenue of overestimating costs The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue cost is called budgetary slack ?Beat the budget?, cope with uncertainty, cut in the resource-allocation process are the main reasons why padding can occur To avoid these problems, you can avoid relying on the budget as a negative evaluation tool and if managers are given incentives to provide accurate projections Participative budgeting is to involve employees throughout an organization in the budgetary process Too much participation and discussion can lead to vacillation and delay also people involved can disagree and budget padding can be severe
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