1. 1 BUDGETING Accounting Principles II Fall, 1999

2. 2 BUDGETS A plan expressed in numbers Financial plans for the future

3. 3 PURPOSES OF BUDGETS Forces managers to plan & look at the future Provides resource information that can be used to improve decision making Provides a standard for performance evaluation Improves communication & coordination

4. 4 TWO DIMENSIONS OF BUDGETING How the budget is prepared How the budget is used to implement the organization’s plans and to control operations

5. 5 Elements Of The Operating Budget Sales Budget Production Budget Direct Material Budget Direct Labor Budget Overhead Budget Selling & Administrative Expense Budget Ending Finished Goods Inventory Budget Cost of Goods Sold Budget

6. 6 Using Budgets For Performance Evaluation Budgets are useful control measures Two major considerations must consider when using for performance evaluation: (1) How budgeted amounts should be compared with actual results (2) How budgets and their use will effect human behavior

7. 7 Two Basic Types of Budgets Static Budgets Flexible Budgets

8. 8 The Behavioral Dimension of Budgeting Budgets often used to judge the actual performance of managers Bonuses, salary increases, and promotions are all affected by a manager’s ability to achieve or beat budgeted goals Budgets can therefore have a significant behavioral effect This effect can be positive or negative

9. 9 Positive Behavioral Effects Occurs when –the goals of individual managers are aligned with the goals of the organization and –the manager has the drive to achieve these goals Goal Congruence –When the goals of the organization and the goals of the manager are aligned

10. 10 Negative Behavioral Effects When a manager or a subordinate subverts the organization’s goals Dysfunctional Behavior –When individual behavior is in basic conflict with the goals of the organization

11. 11 Characteristics of a Good Budgeting System One that promotes positive behavior Key Features: –Frequent feedback on performance –monetary and nonmonetary incentives –participatory budgeting –realistic standards –controllability of costs –multiple measures of performance

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