The Use of Budgets in Planning and Decision Making Chapter 9 The Use of Budgets in Planning and Decision Making

Introduction Budgets are plans dealing with the acquisition and use of resources over a specified time period.

Introduction Budgets can be in terms of: Monetary or financial Time Acquisition and use of thousands of materials Manufacturing of hundreds of products Attendance at a baseball game

The Budget Development Process Zero-Based Budgets require managers to build budgets from the ground up each year rather than just add a percentage increase to last year’s numbers. Why shouldn’t I just use 10% more than last year for everything?

The Budget Development Process Budgeting is an integral part of the planning, operating, and control activities of managers. Planning: Developing objectives and goals Operating: Day-to-day management decisions BUDGETING Control: Insuring that objectives and goals are met, comparing actual to budget

The Budget Development Process The operating cycle focuses on cash; thus, budgeting for cash needs is crucial. Disbursement of cash for manufacturing costs or purchases of inventory Cash on hand Sale of Product Collection of cash from customers

Advantages of Budgeting The budgeting process forces communication throughout the organization. 2. The budgeting process forces management to focus on the future and not be distracted by daily crises in the organization.

Advantages of Budgeting 3. The budgeting process can help management identify and deal with potential bottlenecks or constraints before they become major problems. 4. The budgeting process can increase the coordination of organizational activities and help facilitate goal congruence. 5. The budgeting process can define specific goals and objectives that can become benchmarks, or standards of performance for evaluating future performance.

The master budget consists of an interrelated set of budgets prepared by a business.

Budgeting for Sales: Some Ways to Forecast Sales Anticipated marketing or advertising plans The impact of new products or changes in product mix on the entire product line Other factors, such as political and legal events and weather changes.

Basic Production Budget Operating Budgets Basic Production Budget Sales forecast (in units) + Projected ending inventory = Projected production needs - Projected beginning inventory = Projected production volume

Cash Budgets Many managers consider managing cash flow to be the single most important consideration in running a successful business.

Cash Budgets Cash Disbursements Budget- Operating Activities Cash disbursements include: Material Purchases for Concentrate Material Purchases for Bottles Direct Labor Manufacturing Overhead Selling and Administrative Costs

Cash Budgets Summary Cash Budget Beginning cash balance Cash flows from operating activities Cash receipts Cash disbursements Cash flows from investing activities Equipment purchases Cash flows from financing activities Payment of dividends Interest on long-term debt Borrowing from line of credit Repayments of line of credit Final cash balance

What do I do with all of these budgets? More Budget Topics Using the budgets, management prepares pro forma (budgeted) financial statements. They are used for internal planning purposes and to provide information to external users, such as a bank, when requesting a loan. What do I do with all of these budgets?

Budgeted Financial Statements Pro forma statements include: Cost of Goods Manufactured Income Statement Balance Sheet

Nonfinancial Budgets Time Budgets: to plan the number of hours expected to be incurred in each engagement (CPA firm and law offices) Customer Satisfaction Measures: includes the number of returned or defective items, the number of customer complaints, time waiting to be served

Static vs. Flexible Budgets Static budgets are set at the beginning of the period and remain constant throughout the budget period. Flexible budgets take differences in cost and revenue due to volume differences out of the analysis by budgeting for labor (and other costs) based on the actual number of units produced. What if my sales are not what I projected? I know. I’ll use flexible budgets.

The budgeting process is worth the effort. End of Chapter 9 The budgeting process is worth the effort.