PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 8 Budgetary Planning

8- 3 Role of Budgets in the Planning and Control Cycles Planning Developing objectives for acquisition and use of resources. Control Steps taken by management to ensure that objectives are attained. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization.

8- 4 Planning and Control Cycle

8- 5 Planning Process Tactics Long-term Objectives Short-term Objectives Strategic Plan

8- 6 Benefits of Budgeting

8- 7 Behavioral Effects of Budgets Budget Problems Perceived unfair or unrealistic goals. Poor management- employee communications. Budget Problems Perceived unfair or unrealistic goals. Poor management- employee communications. Solution Reasonable and attainable budgets. Employee participation in budgeting process. Solution Reasonable and attainable budgets. Employee participation in budgeting process.

8- 8 Budget Problems Building budget slack into budgets. A “use-it-or-lose-it” mentality. Budget Problems Building budget slack into budgets. A “use-it-or-lose-it” mentality. Solution Different budgets for planning and for performance evaluation. Continuous, or rolling budgets. Zero-based budgeting. Solution Different budgets for planning and for performance evaluation. Continuous, or rolling budgets. Zero-based budgeting. Behavioral Effects of Budgets

8- 9 Components of the Master Budget

8- 10 Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Sales Budget

8- 11 Production Budget The production budget is directly related to the sales budget and to the quantity of inventory the company wants to have on hand at the beginning and end of each period. The relationship between budgeted production, sales, and inventory is summarized in the following formula:

8- 12 Raw Materials Purchases Budget Next, we must determine what quantity of raw materials to purchase to use for the production budget. Budgeted material purchases will depend on budgeted production needs, as well as on the planned levels for beginning and ending raw materials inventory. The relationship between budgeted raw material purchases, budgeted production, and raw materials inventory is summarized in the following formula:

8- 13 Cash Budget Our focus is on cash flows that arise from operating activities and are directly related to the operating budgets for Cold Stone Creamery. The relationship between budgeted cash collections and budgeted cash payments from operating activities and cash balances is summarized in the following formula:

8- 14 Budgeting in Non-Manufacturing Firms The primary operating budget for a merchandiser is a merchandise purchases budget, which is similar in form to a raw materials purchases budget for a manufacturer. Since a merchandising company does not manufacture, it does not have raw material, direct labor, and manufacturing overhead budgets.

8- 15 End of Chapter 8