Class Notes CH21

CHAPTER 21
Budgetary Planning
LEARNING OBJECTIVES
1.
INDICATE THE BENEFITS OF BUDGETING.
2.
STATE THE ESSENTIALS OF EFFECTIVE BUDGETING.
3.
IDENTIFY THE BUDGETS THAT COMPRISE THE

MASTER BUDGET.
4.
DESCRIBE THE SOURCES FOR PREPARING THE BUDGETED

INCOME STATEMENT.
5.
EXPLAIN THE PRINCIPAL SECTIONS OF A CASH BUDGET.
6.
INDICATE THE APPLICABILITY OF BUDGETING IN

NONMANUFACTURING COMPANIES.
Copyright 2013 John Wiley & Sons, Inc.Kimmel, Accounting, 5/e, Instructors Manual(For Instructor Use Only)
21-1
CHAPTER REVIEW
Budgeting Basics
1.
(L.O. 1) A budget is a formal written statement of managements plans for a specified time
period, expressed in financial terms.
2.
The role of accounting during the budgeting process is to present managements budgeting goals
in financial terms. Accountants translate managements plans and communicate the budget to
employees throughout the company. However, at all times the budget itself, and the administration
of the budget are entirely management responsibilities.
Benefits of Budgeting
3.
The primary benefits of budgeting are as follows:

a. It requires all levels of management to plan ahead.
b. It provides definite objectives for evaluating performance.
c. It creates an early warning system for potential problems.
d. It facilitates the coordination of activities within the business.
e. It results in greater management awareness of the entitys overall operations.
f. It motivates personnel throughout the organization.
Essentials of Effective Budgeting

4.
(L.O. 2) In order to be effective management tools, budgets must be based upon

a. A sound organizational structure in which authority and responsibility are clearly defined.
b. Research and analysis to determine the feasibility of new products, services, and operating
techniques.
c. Management acceptance of the budget is directly related to the effectiveness of the budget
program.
5.
The most common budget period is one year. A continuous twelve-month budget results from
dropping the month just ended and adding a future month. The annual budget is often
supplemented by monthly and quarterly budgets.
6.
The responsibility for coordinating the preparation of the budget is assigned to a budget
committee. The budget committee usually includes the president, treasurer, chief accountant
(controller), and management personnel from each major area of the company.
7.
A budget can have a significant impact on human behavior. A budget may have a strong positive
influence on a manager when
a. Each level of management is invited and encouraged to participate in developing the budget.
b. Criticism of a managers performance is tempered with advice and assistance.
21-2
8.
Long-range planning involves the selection of strategies to achieve long-term goals and the
development of policies and plans to implement the strategies. Long-range plans contain considerably
less detail than budgets.
The Master Budget

9.
10.
(L.O. 3) The master budget is a set of interrelated budgets that constitutes a plan of action for a
specified time period. It is developed within the framework of a sales forecast which shows
potential sales for the industry and the companys expected share of such sales.
There are two classes of budgets in the master budget.
a. Operating budgets are the individual budgets that result in the preparation of the budgeted
income statement.
b. Financial budgets focus primarily on the cash resources needed to fund expected
operations and planned capital expenditures.
11.
The sales budget is the first budget prepared. It is derived from the sales forecast, and it
represents managements best estimate of sales revenue for the budget period. It is prepared by
multiplying the expected unit sales volume for each product by its anticipated unit selling price.
12.
The production budget shows the units to produce to meet anticipated sales. It is derived from
the budgeted sales units plus the desired ending finished goods units less the beginning finished
goods units.
13.
The direct materials budget shows both the quantity and cost of direct materials to be
purchased. It is derived from the direct materials units required for production plus the desired
ending direct materials units less the beginning direct materials units.
14.
The direct labor budget shows the quantity (hours) and cost of direct labor necessary to meet
production requirements. The direct labor budget is critical in maintaining a labor force that can
meet expected levels of production.
15.
The manufacturing overhead budget shows the expected manufacturing overhead costs. The
selling and administrative expense budget is a projection of anticipated operating expenses.
Both budgets distinguish between fixed and variable costs.
Budgeted Income Statement

16.
(L.O. 4) The budgeted income statement is the important end-product in preparing operating
budgets. This budget indicates the expected profitability of operations and it provides a basis for
evaluating company performance.
a. The budget is prepared from the budgets described in review points 11-15.
21-3
b.
For example, to find cost of goods sold, it is necessary to determine the total unit cost of a
finished product using the direct materials, direct labor, and manufacturing overhead budgets.
Cash Budget
17.
(L.O. 5) The cash budget shows anticipated cash flows. It contains three sections (cash receipts,
cash disbursements, and financing) and the beginning and ending cash balances. Data for
preparing this budget are obtained from the other budgets.
18.
The budgeted balance sheet is a projection of financial position at the end of the budget period.
It is developed from the budgeted balance sheet for the preceding year and the budgets for the
current year.
Budgeting in Nonmanufacturing Companies

19.
(L.O. 6) The major differences in the master budget of a merchandiser and a manufacturer are
that a merchandiser (a) uses a merchandise purchases budget instead of a production budget
and (b) does not use the manufacturing budgets (direct materials, direct labor, and manufacturing
overhead).
20.
In service enterprises, the critical factor in budgeting is coordinating professional staff needs with
anticipated services. Budget data for service revenue may be obtained from expected output or
expected input.
21.
In the budget process for not-for-profit organizations, the emphasis is on cash flows rather than
on a revenue and expense basis. For governmental units, the budget must be strictly followed and
overspending is often illegal.
21-4
LECTURE OUTLINE
A.
Budgeting Basics.
1. Planning is the process of establishing company-wide objectives.
2. A budget is a formal written statement of managements plans for a
specified future time period, expressed in financial terms.
3. Accounting information makes major contributions to the budgeting
process.
B.
The Benefits of Budgeting.

1. It requires all levels of management to plan ahead and to formalize goals
on a recurring basis.
2. It provides definite objectives for evaluating performance at each level of
responsibility.
3. It creates an early warning system for potential problems so that management can make changes before things get out of hand.
4. It facilitates the coordination of activities within the business by correlating
the goals of each segment with overall company objectives.
5. It results in greater management awareness of the entitys overall operations and the impact on operations of external factors, such as economic
trends.
6. It motivates personnel throughout the organization to meet planned
objectives.
21-5
C.
Essentials of Effective Budgeting.

1. The essentials of effective budgeting are (a) sound organizational
structure, (b) research and analysis, and (c) acceptance by all levels of
management.
D.
a.
Effective budgeting depends on a sound organizational structure.

In such a structure, authority and responsibility for all phases of
operations are clearly defined.
b.
Budgets based on research and analysis should result in realistic

goals that will contribute to the growth and profitability of a company.
c.
The effectiveness of a budget program is directly related to its

acceptance by all levels of management.
Length of the Budget Period.

1. A budget may be prepared for any period of time. Various factors influence
the length of the budget period.
a.
The type of budget.
b.
The nature of the organization.
c.
The need for periodic appraisal.
d.
Prevailing business conditions.
2. The budget period should be long enough to provide an attainable goal

under normal business conditions and should minimize the impact of
seasonal or cyclical fluctuations.
3. The most common budget period is one year.
21-6
MANAGEMENT INSIGHT
A recent study found that fewer than 14% of businesses with fewer than 500
employees do an annual budget or have a written business plan. For many small
businesses the basic assumption is that, As long as I sell as much as I can, and
keep my employees paid, Im doing OK.
Describe a situation in which a business sells as much as it can but cannot
keep its employees paid.
Answer: If sales are made to customers on credit and collection is slow, the
company may find that it does not have enough cash to pay employees
or suppliers. Without these resources the company will fail to survive.
E.
The Budgeting Process/Budgeting and Human Behavior.

1. The budget is developed within the framework of a sales forecast that
shows potential sales for the industry and the companys expected share
of such sales. Sales forecasting involves a consideration of various factors:
a.
General economic conditions.
b.
Industry trends.
c.
Market research studies.
d.
Anticipated advertising and promotion.
e.
Previous market share.
f.
Changes in prices.
g.
Technological developments.
2. The input of sales personnel and top management is essential to the

sales forecast.
3. In larger companies, a budget committee has responsibility for coordinating the preparation of the budget.
21-7
4. A budget can have a significant impact on human behavior.
F.
a.
A budget may inspire a manager to higher levels of performance.
b.
A budget may discourage additional effort and pull down the morale
of a manager.
c.
In developing the budget, each level of management should be

invited to participate. The overall goal is to reach agreement on a
budget that the managers consider fair and achievable, but which
also meets the corporate goals set by top management.
Budgeting and Long-Range Planning.

1. Budgeting and long-range planning are not the same.
a.
One important difference is the time period involved; long-range

planning usually encompasses a period of at least five years.
b.
A second significant difference is in emphasis; long-range planning

identifies long-term goals, selects strategies to achieve those goals,
and develops policies and plans to implement the strategies. Management also considers anticipated trends in the economic and political
environment and how the company should cope with them.
c.
The final difference pertains to the amount of detail presented.

Long-range plans contain considerably less detail than budgets
because the data in long-range plans are intended more for a review
of progress toward long-term goals than as a basis of control for
achieving specific results.
2. The primary objective of long-range planning is to develop the best

strategy to maximize the companys performance over an extended
future period.
21-8
G.
The Master Budget.

1. The master budget is a set of interrelated budgets that constitutes a plan
of action for a specified time period.
2. Sales Budget: The sales budget is the starting point in preparing the
master budget.
a.
Each of the other budgets depends on the sales budget.
b.
The sales budget is derived from the sales forecast and it represents
managements best estimate of sales revenue for the budget period.
SERVICE COMPANY INSIGHT

Governments at all levels must submit budgets; most are required to submit
balanced budgets where revenues cover anticipated expenses. But, estimating
government revenues can be as difficult or even more difficult than estimating
company revenue.
Why is it important that government budgets accurately estimate future
revenues during economic downturns?
Answer:
Accuracy of government revenue estimates is especially

important during economic downturns because most
governments must balance their budgets. If anticipated
revenues in one period do not match expectations, then the
shortfall must be made up in the next period. This can result in
much steeper, more disruptive cuts than might have been
necessary had the government anticipated the revenue decline
more accurately and consequently started cutting expenditures
sooner.it use to prepare the new budget?
3. Production Budget: The production budget shows the units to produce to

meet anticipated sales.
21-9
a.
Production requirements are determined from the following formula:

Budgeted Sales Units + Desired Ending Finished Goods Units
Beginning Finished Goods Units = Required Production Units.
b.
The production budget provides the basis for the budgeted costs for
each manufacturing cost element.
4. Direct Materials: The direct materials budget shows both the quantity
and cost of direct materials to be purchased.
a.
The quantities of direct materials are derived from the following

formula: Direct Materials Units Required for Production + Desired
Ending Direct Materials Units Beginning Direct Materials Units =
Required Direct Materials Units to be Purchased.
b.
The desired ending inventory is a key component in the budgeting

process; inadequate inventories could result in temporary shutdowns
of production.
MANAGEMENT INSIGHT
Some businesses faced a predicament recently due to the skyrocketing cost of
raw materials. Some managers decided to stockpile much larger quantities of
raw materials to avoid paying even higher prices in the future.
What are the potential downsides of stockpiling a huge amount of raw materials?
Answer:
21-10
If prices continue to go up, these managers will avoid paying higher

prices until their inventory runs out. However, it is a risky strategy.
First of all, prices fluctuate. If a price goes up by 90% in a year, it can
also go down by 90%. If this happens, the managers will be stuck
with overpriced raw materials. Second, if the economy slows down, it
might take a lot longer to sell their inventory than they had planned.
There are many costs associated with holding large quantities of
inventory. The additional storage, insurance, and handling costs can
be very expensive, and obsolescence can occur.
5. Direct Labor: The direct labor budget contains the quantity (hours) and
cost of direct labor necessary to meet production requirements.
a.
The direct labor budget is critical in maintaining a labor force that

can meet the expected levels of production.
b.
The direct labor budget is also used in preparing the budgeted cost
of goods sold and the cash budget.
6. Manufacturing Overhead: The manufacturing overhead budget shows

the expected variable and fixed manufacturing overhead costs for the
budget period.
7. Selling and Administrative Expense: The selling and administrative expense
budget projects anticipated selling and administrative expenses for the
budget period. This budget classifies expenses as either variable or fixed.
This budget is also used in preparing the budgeted income statement
and the cash budget.
8. Budgeted Income Statement: The budgeted income statement is the
important end-product of the operating budgets.
a.
This budget indicates the expected profitability of operations for the

budget period.
b.
The budgeted income statement provides the basis for evaluating

company performance.
9. Cash Budget: The cash budget shows anticipated cash flows.

a.
Because cash is so vital, this budget is often considered to be the

most important financial budget.
b.
The cash budget contains three sections:

(1) Cash receipts.
(2) Cash disbursements.
(3) Financing.
21-11
c.
Companies obtain data for preparing the cash budget from other
budgets and from information provided by management.
d.
A cash budget contributes to more effective cash management. It

shows managers when additional financing is necessary well before
the actual need arises and it indicates when excess cash is available
for investments or other purposes.
MANAGEMENT INSIGHT
Behind the grandeur of the Olympic Games lies a huge financial challengehow
to keep budgeted costs in line with revenues. The 2006 Winter Olympics in Italy
narrowly avoided going into bankruptcy before the Games even started;
organizers shifted promotional responsibilities to an Italian state-run agency.
Why does it matter whether the Olympic Games exceed their budget?
Answer: If the Olympic Games exceed their budget, taxpayers of the sponsoring
community and country will end up footing the bill. Depending on the
size of the losses, and the resources of the community, this could
produce a substantial burden. As a result, other communities might be
reluctant to host the Olympics in the future.
10. Budgeted Balance Sheet: The budgeted balance sheet is developed
from the budgeted balance sheet for the preceding year and the budgets
for the current year.
H.
Budgeting in Nonmanufacturing Companies.

1. Budgets are also used by:
a.
Merchandisers.
b.
Service enterprises.
c.
Not-for-profit organizations.
2. The major differences between the master budgets of a merchandiser

and a manufacturer are that a merchandiser:
21-12
a.
Uses a merchandise purchases budget instead of a production

budget.
b.
Does not use the manufacturing budgets (direct materials, direct

labor, and manufacturing overhead).
3. In service enterprises, such as a public accounting firm, a law office, or a

medical practice, the critical factor in budgeting is coordinating professional staff needs with anticipated services.
a.
If a firm is overstaffed, several problems may result:

(1) Labor costs are disproportionately high.
(2) Profits are lower because of the additional salaries.
(3) Staff turnover may increase because of lack of challenging
work.
b.
If a service enterprise is understaffed, it may lose revenue because

existing and prospective client needs for service cannot be met.
Also, professional staff may seek other jobs because of excessive
work loads.
4. Budgeting is just as important for not-for-profit organizations as for profitoriented enterprises.

a.
In most cases, not-for-profit entities budget on the basis of cash

flows (expenditures and receipts), rather than on a revenue and
expense basis.
b.
The starting point in budgeting is usually expenditures, not receipts.
SERVICE COMPANY INSIGHT
21-13
All organizations need to stick to budgets. The most recent recession has created
budgeting challenges for nearly all governmental agencies. Even Princeton
University experienced a 25% drop in the value of its endowment when the
financial markets plunged. When the endowment fell the university had to make
cuts because the endowment supports 45% of the universitys budget.
Why would a universitys budgeted scholarships probably fall when the stock
market suffers a serious drop?
Answer: Scholarships typically cannot be paid out of the principal portion
of donations made to scholarship endowment funds. Instead, scholarships are usually funded through earnings generated by endowment
investments. Any excess earnings above current year scholarship
needs can be used for scholarships in subsequent years. But a serious
drop in the value of endowment investments can wipe out previous
earnings, in some cases completely eliminating funds available for
scholarships.
21-14
20 MINUTE QUIZ
Circle the correct answer.
True/False
1.
Budgeting is the process of establishing company-wide objectives that serve as a deterrent to waste and inefficiency.
True
2.
The effectiveness of the budget program is directly related to its acceptance by all levels
of management.
True
3.
False
Long-range planning differs from budgeting in the time period involved, emphasis, and
the amount of detail presented.
True
10.
False
The budgeted income statement indicates the expected profitability of operations for the
next year and provides the basis for evaluating company performance.
True
9.
False
The manufacturing overhead budget shows only the expected indirect labor costs for
the year.
True
8.
False
The quantities of direct materials in the direct materials budget are derived from the
formula: Desired Ending Direct Materials Units + Direct Materials Units Required for
Production Beginning Direct Materials Units = Required Direct Materials Units to be
Purchased.
True
7.
False
The sales budget is the first budget prepared and each of the other budgets depends on it.
True
6.
False
One disadvantage of budgeting is that it does not facilitate the coordination of activities
within a business.
True
5.
False
Budgeting always has the effect on human behavior of inspiring managers to higher
levels of performance.
True
4.
False
False
Budgeting is not used in not-for-profit organizations because it is not necessary for

these organizations to engage in profit planning.
True
False
21-15
Multiple Choice
1.
A formal written statement of managements plans for a specified future time period,
expressed in financial terms is a(n)
a. accounting plan.
b. budget.
c. research analysis.
d. sales budget.
2.
Which of the following is not a benefit of budgeting?

a. It reveals the prevailing business conditions.
b. It results in greater management awareness of the entitys overall operations.
c. It creates an early warning system of potential problems.
d. It provides definite objectives for evaluating performance at each level of responsibility.
3.
All of the following are financial budgets except the

a. budgeted balance sheet.
b. budgeted income statement.
c. capital expenditure budget.
d. cash budget.
4.
The master budget includes all of the following except

a. Budgeted Income Statement.
b. Capital Expenditure Budget.
c. Cash Budget.
d. Indirect Labor Budget.
5.
If required production units are 75,000, budgeted sales units are 65,000, required direct
materials purchases units are 3,000, and beginning finished goods units are 5,000, then
desired ending finished goods units would be
a.
2,000.
b.
5,000.
c. 12,000.
d. 15,000.
21-16
ANSWERS TO QUIZ
True/ False
1.
2.
3.
4.
5.
False
True
False
False
True
6.
7.
8.
9.
10.
True
False
True
True
False
Multiple Choice
1.
2.
3.
4.
5.
b.
a.
b.
d.
d.
21-17

Class Notes CH21

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Class Notes CH21

Загружено:

Авторское право:

Доступные форматы

CHAPTER 21

INDICATE THE BENEFITS OF BUDGETING.

STATE THE ESSENTIALS OF EFFECTIVE BUDGETING.

IDENTIFY THE BUDGETS THAT COMPRISE THE

DESCRIBE THE SOURCES FOR PREPARING THE BUDGETED

EXPLAIN THE PRINCIPAL SECTIONS OF A CASH BUDGET.

INDICATE THE APPLICABILITY OF BUDGETING IN

The primary benefits of budgeting are as follows:

Essentials of Effective Budgeting

(L.O. 2) In order to be effective management tools, budgets must be based upon

The Master Budget

Budgeted Income Statement

Budgeting in Nonmanufacturing Companies

The Benefits of Budgeting.

Essentials of Effective Budgeting.

Effective budgeting depends on a sound organizational structure.

Budgets based on research and analysis should result in realistic

The effectiveness of a budget program is directly related to its

Length of the Budget Period.

The type of budget.

The nature of the organization.

The need for periodic appraisal.

Prevailing business conditions.

2. The budget period should be long enough to provide an attainable goal

The Budgeting Process/Budgeting and Human Behavior.

General economic conditions.

Market research studies.

Anticipated advertising and promotion.

Previous market share.

2. The input of sales personnel and top management is essential to the

4. A budget can have a significant impact on human behavior.

A budget may inspire a manager to higher levels of performance.

In developing the budget, each level of management should be

Budgeting and Long-Range Planning.

One important difference is the time period involved; long-range

A second significant difference is in emphasis; long-range planning

The final difference pertains to the amount of detail presented.

2. The primary objective of long-range planning is to develop the best

The Master Budget.

Each of the other budgets depends on the sales budget.

SERVICE COMPANY INSIGHT

Accuracy of government revenue estimates is especially

3. Production Budget: The production budget shows the units to produce to

Production requirements are determined from the following formula:

The quantities of direct materials are derived from the following

The desired ending inventory is a key component in the budgeting

If prices continue to go up, these managers will avoid paying higher

The direct labor budget is critical in maintaining a labor force that

6. Manufacturing Overhead: The manufacturing overhead budget shows

This budget indicates the expected profitability of operations for the

The budgeted income statement provides the basis for evaluating

9. Cash Budget: The cash budget shows anticipated cash flows.

Because cash is so vital, this budget is often considered to be the

The cash budget contains three sections:

A cash budget contributes to more effective cash management. It

Budgeting in Nonmanufacturing Companies.

2. The major differences between the master budgets of a merchandiser

Uses a merchandise purchases budget instead of a production

Does not use the manufacturing budgets (direct materials, direct

3. In service enterprises, such as a public accounting firm, a law office, or a

If a firm is overstaffed, several problems may result:

If a service enterprise is understaffed, it may lose revenue because

4. Budgeting is just as important for not-for-profit organizations as for profitoriented enterprises.

In most cases, not-for-profit entities budget on the basis of cash