Professional Documents
Culture Documents
Chapter 9 - Budgeting
Chapter 9 - Budgeting
Budget Preparation
Budgeting
A budget is a detailed plan,
expressed in quantitative terms, that
specifies how resources will be
acquired and used during a given
period of time.
It is a quantified plan of action.
Nature of a Budget
Individual
Long-range
strategic plan
Individual goals
and values
Anticipated
conditions
Individual
beliefs
Master
budget
Strategic
evaluation
Actual period
results
Performance
evaluation
Types of Budgets
Master budget (profit plan)
a comprehensive profit plan that covers all
phases of an organizations operation.
Capital budget
Focuses on the acquisition of long-term assets
Production
Budget
Work in Process
and Finished
Goods
Ending
Inventory
Budget
Direct Materials
Direct
Materials
Budget
Direct
Labor
Budget
Overhead
Budget
Cash Budget
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
Selling and
Administrative
Budget
Budgeted Income
Statement
Sales Forecast
Sales Forecasting the process of
predicting sales of services or goods.
The master budget begins with a sales
forecast. Items to consider in sales
forecasts:
Production Budget
Sales
Budget
m
o
C
pl
ed
t
e
Production
Budget
Forecasting Production
Rearrange the basic inventory formula as follows . . .
Units in
beginning
inventory
Required
+ production
in units
Sales
in
Units
Units in
ending
=
inventory
Sales
in
Units
Units in
ending
inventory
Expected
beginning
inventory
Let
Lets
s prepare
prepare the
the production
production budget.
budget.
Direct-Materials Budget
Direct materials needed for the budget
period can be determined as follows . . .
Required
materials
purchases
Materials
used in
production
Ending
materials
inventory
Beginning
materials
inventory
Direct-Materials Budget
At
At Collegiate
Collegiate Apparel
Apparel 1.5
1.5 yards
yards of
of fabric
fabric are
are
required
required per
per unit
unit of
of product.
product.
Management
Management wants
wants fabric
fabric on
on hand
hand at
at the
the end
end of
of
each
each quarter
quarter to
to be
be 10%
10% of
of next
next quarter
quarters
s raw
raw
materials
materials required.
required. On
On January
January 1
1stst,, 2,100
2,100 yards
yards of
of
fabric
fabric are
are on-hand.
on-hand. During
During the
the first
first quarter
quarter of
of
20x2,
20x2, Collegiate
Collegiate expects
expects 21,000
21,000 yards
yards of
of fabric
fabric to
to
be
be required.
required.
Each
Each yard
yard of
of fabric
fabric cost
cost the
the company
company $2.
$2.
Let
Lets
s prepare
prepare the
the direct
direct materials
materials budget.
budget.
Direct-Materials Budget
Budget Department
Publishes procedures and forms for budget
preparation.
Publishes assumptions for the basis of
budgets.
Facilitate communications among
departments.
Makes analyses and budget
recommendations.
Administers budget revisions.
Analyzes performance against budget.
15-20
Participative Budgeting
Participative Budgeting the use of
input from lower- and middlemanagement employees.
The process is time consuming but
enhances employee motivation and
acceptance of goals.
Budget negotiation is the heart of
budgeting process.
Advantages of Participative
Budgeting
1.
1. Individuals
Individuals at
at all
all levels
levels of
of the
the organization
organization are
are viewed
viewed
as
as members
members of
of the
the team
team whose
whose judgments
judgments are
are valued
valued
by
by top
top management.
management.
2.
2. Budget
Budget estimates
estimates prepared
prepared by
by front-line
front-line managers
managers
are
are often
often more
more accurate
accurate than
than estimates
estimates prepared
prepared by
by
top
top managers.
managers.
3.
3. Motivation
Motivation is
is generally
generally higher
higher when
when individuals
individuals
participate
participate in
in setting
setting their
their own
own goals
goals than
than when
when the
the
goals
goals are
are imposed
imposed from
from above.
above.
4.
4. A
A manager
manager who
who is
is not
not able
able to
to meet
meet aa budget
budget imposed
imposed
from
from above
above can
can claim
claim that
that itit was
was unrealistic.
unrealistic. SelfSelfimposed
imposed budgets
budgets eliminate
eliminate this
this excuse.
excuse.
Ethical Problems in
Budgeting
Much of the information for the budget is provided
by persons whose performance is then
compared with the budget they help develop.
Lets prepare the
sales forecast with a
4% increase, so we
will really look good!
I think sales
will increase by
10% next year.
Critics of Budgeting
Budgeting process is inefficient
Senior managers spend 10% to 20% of
their time on budgeting. Yet, most
suggest that budgeting is not a valuable
use of their time.
Padding
Padding the
the budget
budget means intentionally
underestimating
underestimating revenues
revenues or
or overestimating
overestimating
costs.
costs.
The
The difference
difference between
between the
the revenue
revenue or
or cost
projection
projection that
that aa person
person provides
provides and a
realistic
realistic estimate
estimate of
of the
the revenue
revenue or
or cost
cost is
is
called
called budgetary
budgetary slack.
slack.
A
A solution:
solution: reward
reward managers
managers for
for making
making
accurate
accurate estimates.
estimates.