1. Ch 9 Budgeting: Planning for Profits
Every organization has a goal (or set of goals) such as a profitability goal or a set of efficiency goals.
Management develops plans and policies to achieve these goals:
what type of product to produce
what level of price
what level of cost and quality
what degree of advertising
credit and inventory policies

2. Budget
A formal quantitative expression of management's plans
What things are expected to look like for the next twelve months.

3. Difference Between Planning and Control
Planning: Development of objectives and preparation of budgets to achieve them.
Control: Steps to ensure actions consistent with policies.
(e.g.: stay within budget or approve changes)

4. Budget Periods Annual: most common
Perpetual: annual but one month added as one month completed.
Pushes the horizon forward; effective in rapidly changing industries.

5. Types of Budgets Forecast (not a budget)
long term projection of future trends in revenues and expenses
Master Budget
yearly projection
some notion of commitment for management

6. Operating Budget
Sales forecast
Purchasing Budget (retailer)
Purchasing and Production Budget (manufacturer)
Selling and Administrative Cost Budget
Financial Budget
Cash Budget
Pro Forma Income Statement and Balance Sheet

7. Capital Budget
Long range plan for investing in and financing large capital investments
Project Budget
Budget for the life of the project (i.e. building a power dam)
Flexible Budget
A budget for the level of activity actually achieved

8. Responsibility Accounting Managers judged on how well they manage resources under their control.
Assumptions:
Revenues/costs can be identified at the managerial level.
Costs are controllable at the managerial level.

9. Budgeting Example
Royal Company is preparing budgets for the quarter ended June 30. The information below relates to the company's budgets which appear on the following pages.

10. Budgeted sales in units for the next five months are:
Units of product sell for $10 each.
April
May
June
20,000
50,000
30,000
July
August
25,000
15,000

11. See the template in this folder
The company wants the following budgets prepared:
Sales budget
Production budget. (Desired EB = 20% of next month's sales requirements)
EB on 30 March = 4000
c. Material purchases budget (five kgs per unit of $.30 per kg, desired EB = 10% of next month's needs)
See the template in this folder

12. Flexible Budgets The Income Statement
Actual Results (for actual output)
Flexible Budget (for actual output)
Master Budget (planned outcome)
Rev VC CM FC
Income
Purpose is to isolate the causes of differences between the xx's

13. Budget: What if? SP = $40, VC = $24, FC = $700, BQ=100, AQ =90
Actual Results (for actual output)
Flexible Budget (for actual output)
Master Budget (planned outcome)
Units 90
100
Rev
4,050
4,000 VC
2,250
2,400 CM
1,800
1,600 FC
800
700
Inc
1,000
900