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Chapter 8 – Budgeting for Planning and Control

Budget – detailed plan for the future in numbers

Purposes of Budgeting
Planning – developing goals and budgets to get there
Control – getting feedback to make sure plan is going well, even if there are
changes

Advantages of Budgeting
- Communicating management’s plans
- Forcing managers to plan for future
- Way to allocate resources effectively
- Uncover bottlenecks before they happen
- Coordinate activities of organization, integrating different departments
- Pulls everyone in the same direction
- Defines goals/benchmarks for evaluation

Responsibility Accounting – the manager is responsible for only the items they can
significantly control
- Personalizes accounting info by holding individuals responsible
- Can respond quickly to deviations, learn from feedback in comparing budget to
results
- Not supposed to penalize managers for not meeting budget

Budget Periods
- Operating Budgets
▪ 1 year (FY of company)
▪ 4 quarters; each quarter divided into months as year progresses
▪ little participation from lower-level managers
- Continuous (Perpetual) Budget – 12 mo. budget, as each month/quarter is
completed, the budget adds one month/quarter to the end of the budget
▪ Keeps managers focused on long-term

Self-imposed (Participative) Budget – prepared with all managers on deck (they


help participate in the process)
- Individuals at all levels are involved
- Higher motivation because of self-imposed goals (creates commitment)
- The front-line managers are best at estimating what they need
- Managers can’t say the budget is unrealistic because they made it themselves
- Limitations
o Lower-level managers may not be thinking in the big picture
o Lower-level managers may create too much slack (they are going to be held
accountable, so might as well make the budget easy to attain)
- Problems with not using self-imposed budgets
o Top managers setting goals too high  motivation suffers
o Too much slack/too little slack  waste

Human Factors in Budgeting


- Budgets unfortunately used to pressure/blame employees; should instead be
used to establish goals and evaluate results
- Some bonuses based on achieving/exceeding budgets
- Highly achievable budgets may build confidence & commitment to budgeting,
less likely to cheat to meet target

Master Budget – separate but interdependent budgets that detail company’s sales,
production , & financial goals

1. Sales budget (expected)


a. Schedule of cash collections
2. Production budget (how much to produce)
a. Would be a merchandise purchases budget instead for a
merchandising company
3. Manufacturing cost budgets
a. DM budget + cash disbursements for material purchases
b. DL budget
c. MOH budget
4. Ending FG Inventory budget
5. SG&A budget
6. Cash budget (how cash resources are acquired and used)
7. Budgeted income statement & balance sheet (estimated net income & ALE)

There’s also a begining balance sheet & budgeting assumptioss Excel sheet,
which is where a lot of numbers are derived from.

Sales budget – includes budgeted unit sales & estimated sale prices. Also includes
expected cash collections; thee’s ofte a beginning A/R amount, which is how much
they were scheduled to receive—this is in the beginning balance sheet. Other
collections are based on estimated percentages of (usually credit) sales for
subsequent months.

Production budget – based on the cost flow below.


- Desired EI can usually be computed; it’s often a percentage of next month’s
sales
- *keep i mind that the amounts listed under Year aren’t just sums; the BI and EI
are the BI for the first quarter/month and the EI for the last quarter/month
- If it was a merchandising company, it would be COGS instead of sales (because
COGS are based on sales); instead of anticipated production , it’s budgeted purc
hases o Schedule of cash disbursements, just like the one that goes in DM o If
it’s a schedule of units,not money , it’s called budgeted unit sales

Cost flow:
Budgeted sales (how much you need)
+ Desired EI
--------------------
Total Needs
— BI
--------------------
Production

Direct materials budget – details raw materials to be purchased


- Calculate how much raw materials you’ll need for production , the calculate
how much you’ll need to buy (use the DM-specific cost flow below). Then,
calculate the cost of the raw materials you need to buy
- Cash disbursements analogous to cash collections
- Last column in DM budget will be the same as the total first-quarter/month
purchases

Cost flow specific to DM:


RM needed for production
+ Desired EI
------------------------------------
Total Needs
— BI
------------------------------------
How much to buy

Direct labor budget – includes required dl hours per unit of production, cost of dl
hours
- Some companies have minimum wage policies—keep this in mind (if there is a
minimumi wage, compare the number of hours worked to hours required)

Manufacturing overhead budget – all costs of production other than DL/DM


- Subtract depreciation to find cash disbursements
- Variable & fixed MOH (fixed costs tend to be the costs of supplying capacity to
make operations happen; can be adjusted during budgeting)
- Includes POHR on schedule below disbursements
Ending FG inventory budget – includes unit product cost and $ value of ending
inventory
-Unit product cost helpful to determine COGS later on

SG&A budget – variable + fixed SG&A expenses


- remember to subtract depreciation from total SG&A expenses to get cash
disbursements for SG&A

Cash budget – four major sections


1. Receipts – all cash inflows (except from financing)
2. Disbursements – all cash outflows (dm/dl/moh payments, equipment
purchases, dividends)
3. Cash excess/deficiency (= receipts – disbursements)
a. If deficiency: must borrow money to meet minimum
requirement for cash on hand
b. If excess: invest the excess funds, or repay principal and
interest
4. Financing – details all borrowings/principal/interest repayments projected to
take place during budget period o Borrowings should = repayments at the
end, if possible
o Assume company will repay loan + interest on last day of final period,
as far as it is able to

Desired ending cash balance + Deficiency of cash available = Minimum required


borrowings
(then adjust for bank stipulations)

Budgeted income statement


- Sales budget  Sales
- Ending FG Inventory  COGS
- SG&A  SG&A expenses
- Cash budget  operating income