Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 9 Profit Planning and Budgeting Maher, Stickney and Weil

Learning Objectives (Slide 1 of 2) Explain the use of a budget as a tool for planning and performance evaluation. Explain how a budget can affect employee motivation. Compare the four types of responsibility centers. Describe the master budget.

Learning Objectives (Slide 2 of 2) Explain the difference between a flexible budget and master budget. Describe ethical dilemmas in budgeting. List the components of a comprehensive master budget. (Appendix 10.1) Describe an incentive model for accurate reporting. (Appendix 10.2)

Organizational Plan Define its three parts

Describe the Master Budget

Interaction in Developing the Master Budget Organizational Individual Organizational Goals Long-Range Strategic Plan Individual Goals & Values Anticipated Conditions for Budget Period Individ. Beliefs & Expectations Master Budget Strategic Evaluation Actual Period Reported Results Periodic Performance Evaluation

Employee Participation in Developing Budgets Define Participative budgeting –

Performance Evaluation Budgets provide estimates of expected performance Comparing budgeted with actual results provides a basis for evaluating performance Budgets must be prepared for individual responsibility centers in order to use them to evaluate performance

Responsibility Centers (Slide 1 of 2) Define A responsibility center

Responsibility Centers (Slide 2 of 2) Responsibility centers can be classified as follows (continued): Profit centers - mgmt is responsible for both revenues and costs Investment centers - mgmt is responsible for revenues, costs, and assets

Discuss Flexible Budgets Shows the expected relation between costs and volumes Has two components, what are they?

Explain Cost Hierarchies

Forecasting Sales Developing the master budget starts with forecasting sales Various methods and sources used to obtain sales forecasts include: Sales staff Market research Delphi technique Trend analysis Econometric Models

Production Budget (Slide 1 of 3) The production budget is based on the sales budget and estimates of beginning and desired ending inventories Production is calculated as follows: Number of Units to Be Sold +Units in Ending Inventory -Units in Beginning Inventory Units to Be Produced

Production Budget (Slide 2 of 3) After determining the number of units to be produced, we can budget for the following: Direct materials - traceable to units produced and almost always a variable cost Direct labor - traceable to units produced; usually a variable cost but could be a fixed cost

Production Budget (Slide 3 of 3) We assume direct labor is a variable cost in this chapter Manufacturing overhead - typically has both variable and fixed components; variable overhead varies with units produced, fixed overhead gives a firm production capacity

Describe the Marketing and Administrative Budgets

Discretionary Fixed Costs Many “fixed” costs are really discretionary costs They are budgeted as fixed costs but if, for example, the economic conditions look bad, these costs can be reduced Examples: maintenance, advertising Discretionary fixed costs should be distinguished from committed fixed costs, like rent on a factory building, which are required to run the firm

Comment on the Budgeted Income Statement

Discuss the Need for Accurate Forecasts

Using the Master Budget What does the master budget include?

Compare Flexible and Master Budgets

Budgeting in Nonprofit organizations The master budget is important in nonprofit organizations Used as a basis for authorizing the expenditure of funds In governmental units, the budget is a legal authorization for expenditure Penalties for exceeding authorized expenditures can be severe

Review Ethical Issues in Budgeting

Review Ethical Issues in Budgeting

Dr. Michael Blue, CFE, CPA, CMA blue@bloomu.edu If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: Dr. Michael Blue, CFE, CPA, CMA blue@bloomu.edu Bloomsburg University of Pennsylvania