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Chapter 21
Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
Learning Objective
1. Define budgeting and explain its role in the management cycle. 2. Identify the elements of a master budget in different types of organizations and the guidelines for preparing budgets. 3. Prepare the operating budgets that support the financial budgets.
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Budgeting
is the process of identifying, gathering, summarizing, and communicating financial and nonfinancial information about an organization's future activities
Is essential part of the continuous planning for an organization in order to accomplish long-term goals
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Production budget
Focuses on nonfinancial information Shows planned production in units Identifies activities needed to meet certain requirements or standards
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Long-Term Goals
define the strategic direction an organization will take over a five- to ten-year period
Short-Term Goals
Involve every part of an enterprise Much more detailed than long-term goals To formulate an annual operating plan, long-term goals must be restated in terms of what needs to be accomplished during the next year
Short-term goals are the basis of an organizations operating budgets for the year
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Assigns clearly defined responsibilities for carrying out each part of the budgets development
To specific individuals or management teams
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Importance of Participation
The key to a successful budget is participative budgeting
Process in which personnel at all levels of an organization actively engage in making decisions about the budget
Gives a sense of ownership
Helps ensure that departments will attain targets and stay within the budget
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Senior executives allow controller to develop budget without consulting other managers
Managers may feel budgeting is not a top priority
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GM5
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Slide 18 GM5 Insert updated Exhibit 1, segment information for Goodyear Tire & rubber co., chapter 18, POA, 2005e
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Discussion
Q. How are short-term goals related to strategic planning?
A. Short-term goals define the strategic direction an organization will take over the next year. They are determined to help accomplish the long-term goals that are established during the strategic planning process
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Financial budgets
Projections of financial results for the accounting period Include
Budgeted income statement Capital expenditures budget Cash budget Budgeted balance sheet
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The process differs mainly in the kinds of operating budgets each type of organization prepares
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GM5
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Slide 28 GM5 Insert updated Exhibit 1, segment information for Goodyear Tire & rubber co., chapter 18, POA, 2005e
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GM5
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Slide 29 GM5 Insert updated Exhibit 1, segment information for Goodyear Tire & rubber co., chapter 18, POA, 2005e
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GM6
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Slide 30 GM6 Inset updated figure 4, preparation of a master budget for a service organization, chpater 24, POA, 2005e
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Discussion
Q. Which budget must be prepared first?
A. The sales budget. This budget is used to estimate sales volume and revenues. Once established, the other budgets can be developed
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Operating Budgets
Objective 3
Prepare the operating budgets that support the financial budgets
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Operating Budgets
are a set of budgets that are used in planning the daily operations of an organization
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Operating Budgets
Procedures for preparing operating budgets include
Cost behavior analysis Cost-volume-profit analysis A product costing method
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Sales Budget
is a detailed plan, expressed in both units and dollars, that identifies the product (or service) sales expected in an accounting period
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If the organization has improved the products quality by using more expensive materials or production processes
The estimated selling price may have to be higher than the current price
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GM7
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Slide 44 GM7 Insert exhibit 1, sales budget, chapter 25, POA, 2005e
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Desired level of ending finished goods inventory for each period in the budget year
Often stated as a percentage of the next periods budgeted unit sales
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GM9
Production Budget
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Slide 48 GM9 Insert updated exhibit 2, production budget, chapter 24, POA, 2005e
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Purchasing department
Uses information to plan purchases of direct materials
Accountants
Use information to estimate cash payments to suppliers
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Desired level of direct materials inventory for each period Per unit cost of direct materials Desired level of ending direct materials inventory
Usually stated as a percentage of the next periods production
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GM10
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Slide 53 GM10 Insert updated exhibit 3, direct materials purchases budget, chpater 24, POA, 2005e
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GM11
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Slide 57 GM11 Insert updated exhibit 4, direct labor budget, chapter 24, POA, 2005e
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Two purposes
1. Integrate the overhead cost budgets developed by managers of production and production-related departments 2. Group information for the calculation of manufacturing overhead rates for the forthcoming accounting period
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GM12
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Slide 61 GM12 Insert updated exhibit 5, manufacturing overhead budget, chapter 24, POA, 2005e
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is a detailed plan of operating expenses, other than those related to production, that are needed to support sales and overall operations in an accounting period
Accountants use this budget to estimate cash payments for products or services used in nonproduction-related activities
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GM13
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Slide 63 GM13 Insert exhibit 6, selling and admin. expense budget, chapter 24, POA, 2005e
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is a detailed plan that summarizes the estimated costs of production in an accounting period
Sources of information
Direct materials, direct labor, and manufacturing overhead budgets
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GM14
Note that most companies anticipate some work in process at the beginning or end of a period covered by the budget
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Slide 65 GM14 Insert updated exhibit 7, cost of goods manufactured budget, chapter 24, POA, 2005e. Insert so that exhibit fits between title bar and text box at bottom of page
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Discussion
Q. What are the sources of information for preparing the cost of goods manufactured budget?
A. Direct materials budget Direct labor budget Manufacturing overhead budget
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Financial Budgets
Objective 4
Prepare a budgeted income statement, a cash budget, and a budgeted balance sheet
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Financial Budgets
are projections of financial results for an accounting period Include
Budgeted income statement Capital expenditures budget Cash budget Budgeted balance sheet
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GM16
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Slide 70 GM16 Insert updated exhibit 8, budgeted income statement, chapter 24, POA, 2005e
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Managers rely on information in a capital expenditures budget when making decisions about such matters as
Buying equipment Building a new plant Purchasing and installing a materials handling system Acquiring another business
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Summarizes the cash flow prospects of all transactions considered in the master budget
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G6
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Slide 75 G6 Insert updated Figure 2, Common-size balance sheets presented graphically, chapter 18, POA, 2005e
Gateway_User, 10/31/2003
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GM19
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Slide 81 GM19 Insert updated exhibit 9, schedule of expected cash collected from customers, chapter 24, POA, 2005e
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GM20
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Slide 82 GM20 Insert updated exhibit 10, schedule of expected cash payments for direct materials, chapter 24, POA, 2005e
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GM21
Cash Budget
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Slide 83 GM21 Insert updated exhibit 11, cash budget, chapter 24, POA, 2005e
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Uses all estimated data compiled in the course of preparing a master budget
Is the final step in that process
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GM22
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Slide 86 GM22 Insert updated exhibit 12, budgeted balance sheet, chapter 24, POA, 2005e
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Discussion
Q. How is the ending cash balance estimated?
A. Subtract total estimated cash payments from total estimated cash receipts, then, add the estimated beginning cash balance
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Budget Implementation
Objective 5
Describe managements role in budget implementation
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Budget Implementation
Budget committee
Oversees each stage in the master budget preparation Decides any departmental disputes that might arise in the process Gives final approval to the budget
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Discussion
Q. What two factors are necessary for successful budget implementation?
A. Clear communication and support of top management
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And Finally
4. Prepare a budgeted income statement, a cash budget, and a budgeted balance sheet 5. Describe managements role in budget implementation
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