Principles of Managerial Accounting Chapter 9

Budgeting A good budgeting system must provide for both planning and control. Planning involves developing objectives and preparing budgets to achieve those objectives. Control involves the steps taken by management to ensure that the objectives set down at the planning stage are attained and that all parts of the organization work together towards those objectives.

Advantages of budgeting: Provides managers with a vehicle for communicating their plans in an orderly way throughout the entire organization. Requires managers to give planning top priority. Provides a means of allocating resources to those parts of the organization where they can be most effectively used. Uncovers potential bottlenecks before they occur. Coordinates the activities of the entire organization by integrating the plan and objectives of the various parts.

Self-imposed participative budget The most successful budget programs involve lower-level managers in preparing their own budgets. Two reasons: They are more familiar with the details of their own operations than top managers. Managers tend to be more committed to budgets that they have been able to influence. Budgets should not be used as a “club” in pointing blame.

Preparing the Master Budget Sales budget – a detailed schedule showing the expected sales for the coming period. Expressed in dollars and units. Generally accompanied by a schedule of expected cash receipts. Production Budget – Expected Sales in units + desired ending inventory – beginning inventory = required production.

Master budget (cont) Direct Materials Budget Materials needed for production + desired ending inventory – Beginning Inventory Usually accompanied by a schedule of expected cash disbursements for raw materials

Master budget (cont) Direct Labor budget – Typically expressed in direct labor hours and in dollars. Manufacturing overhead budget – All production costs other than direct materials and direct labor.

Master Budget (cont) Ending Finished Goods Inventory Budget – data for the computations are found in the direct materials, direct labor, and manufacturing overhead budget.

Master Budget (Cont) Selling & Administrative Expense Budget – One of the most difficult for management to determine. Numbers are generally based on several smaller individual budgets.

Master Budget (cont) Cash Budget – consists of four sections The receipts section The disbursements section If deficiency exists – must arrange for additional funds. If excess exists – previous borrowings must be paid or short- term investments made. Financing section – details of borrowings and interest cost

Master Budget (cont) Budgeted Financial Statements Income Statement Balance Sheet (Statement of Financial Position)

Zero-based budgeting Managers start at zero budget levels every year and justify all costs as if all programs were being proposed for the first time. The benefits of an annual in-depth budgeting review must be weighted against the time and effort required for such a review.