1. Planning and Budgeting
Chapter 12

2. Learning Objectives
Understand the role of budgets in overall organization plans.
Understand the importance of people in the budgeting process.
Estimate sales.
Develop production and cost budgets.
Estimate cash flows.
Develop budgeted financial statements.
Explain budgeting in service, retail, and wholesale organizations.
Explain why ethical issues arise in budgeting.
Explain how to use sensitivity analysis to budget under uncertainty.

3. Critical Success Factors
Budgets
L.O. 1 Understand the role of budgets in overall organization plans.
Budget
Financial plan of the resources needed to carry out activities and meet financial goals
Ties together:
Goals
Plans
Decision making
Performance evaluations
Critical Success Factors
Strengths of a company that enable it to outperform competitors

4. Strategic Long-Range Plan
Organizational Plan
Master Budget
Financial plan of an organization for the coming year or other planning period
Organization Goals
Company’s broad objectives established by management that employees work to achieve
Strategic Long-Range Plan
Statement detailing steps to take to achieve a company’s organization goals

5. Organization and Individual Interaction
Organization goals
Long-range strategic plans
Individual goals and values
Anticipated conditions for the budget period
Individual beliefs and expectations
Master budget
Periodic performance evaluation
Strategic evaluation
Actual reported results for period

6. Master Budget
Tactical short range plan that ties the strategic plan to operating plan
Static Budget
Budget Plan
Planning Budget
Profit Plan
Income statement portion of the master budget

7. Human Element in Budgeting
L.O. 2 Understand the importance of people in the budgeting process.
Organization goals
Goal congruence
Individual goals
Participative Budgeting
Use of input from lower- and middle-management employees; also called grass roots budgeting

8. How do we forecast sales?
Sales Budget
L.O. 3 Estimate sales.
Sales is the most difficult aspect of budgeting.
How do we forecast sales?
Staff
Delphi Technique
Trend analysis
Econometric models

9. Forecast by Staff Sales budget consists of: Who knows how many units
Number of units x
Sales price of a unit
Who knows how many units
will sell and at what price?
Sales personnel have knowledge about customers.
Market researchers have knowledge about the market.

10. Reduces bias of individual forecasts
Delphi Technique
Forecasting method in which individual forecasts of group members are submitted anonymously and evaluated by the group as a whole.
Reduces bias of individual forecasts

11. Forecast method based on past data
Trend Analysis
Forecast method based on past data
Ranges from:
Simple visual extrapolation of points on a graph
Highly sophisticated computerized time series analysis. to

12. Econometric Models The best method?
Statistical methods of forecasting economic data using regression models
The best method?
Cost versus benefit

13. Sales Budget: An Illustration
Estimated sales =
Number of units x
Price per unit
$7,200,000 =
160,000 x
$45

14. Production Budget Remember the cost flow model?
L.O. 4 Develop production and cost budgets.
Production plan of resources needed to meet current sales demand and ensure that inventory levels are sufficient for future sales
Remember the cost flow model? BB TI TO EB
Inventories
Units in beginning inventory
Required production (units)
Budgeted sales (units)
Units in ending inventory = + -

15. Production Budget ContinuedBB TI TO EB BB TI TO EB
Units in beginning inventory
Required production (units)
Budgeted sales (units)
Units in ending inventory - = +
5,000 units (beginning Inventory)
Required production (units)
160,000 units (sales)
15,000 units (ending inventory) - = +
Required production (units) =
170,000 units

16. Production Budget Santiago Pants Production Budget (in units)
For the Budget Year Ended December 31

17. Production Costs
Direct Materials
Labor
Overhead
santiago

18. Direct Materials: An Example
Santiago Pants
Estimated Production
Material Data

19. Direct Materials: An Example Continued
Santiago Pants
Estimated Production
Material Data
Yards needed =
515,000 yards
Cotton
170,000 x 3.0 +
15,000 -
10,000
Fine cotton =
170,000 x 0.2 +
1,000 -
34,000 yards

20. Direct Material Continued
Santiago Pants
Direct Materials Budget
For the Budget Year Ended December 31

21. Direct Labor Santiago Pants Direct Labor Budget
For the Budget Year Ended December 31

22. Overhead Santiago Pants Overhead Budget
For the Budget Year Ended December 31

23. Cost of Goods Sold Santiago Pants
Budgeted Statement of Cost of Goods Sold
For the Budget Year Ended December 31

24. Marketing and Administrative Budget
Santiago Pants
Schedule of Budgeted Marketing and Administrative Costs
For the Budget Year Ended December 31

25. Income Statement Santiago Pants Budgeted Income Statement
For the Budget Year Ended December 31

26. Cash Budget Cash receipts
L.O. 5 Estimate cash flows.
Statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period.
Cash receipts
Collections of accounts receivable
Cash sales
Sales of assets
Borrowing
Issuing stock
Other

27. Cash Budget Continued Cash disbursements Materials purchases
Manufacturing costs
Operating activities
Debt repayment
Acquire new assets
Income taxes
Dividends
Other

28. For the Budget Year Ended December 31
Cash Budget Continued
Santiago Pants
Cash Budget
For the Budget Year Ended December 31

29. Cash Collections From Credit Sales
Santiago Pants
Collection of Credit Sales
Expected Sales for:

30. Cash Collections Continued
Santiago Pants
Schedule of Cash Collections
For the Quarter Ended March 31

31. Expected Purchases for:
Cash Disbursements
Santiago Pants
Cash Disbursements for Purchases
Expected Purchases for:

32. Cash Disbursements Continued
Santiago Pants
Schedule of Cash Disbursements
For the Quarter Ended March 31

33. Budgeted Balance Sheet ($000)
Budget Balance Sheet
L.O. 6 Develop budgeted financial statements.
Santiago Pants
Budgeted Balance Sheet ($000)
Year Ended December 31

34. Budget Balance Sheet Continued

35. Master Budget for a Manufacturing Firm
Sales Forecast
Marketing and administrative cost budget
Production budget
Required direct material, direct labor, and manufacturing overhead budgets
Budgeted income statement
Budgeted cost of goods sold
Cash budget
Budgeted balance sheet

36. Budgeting in Service Organizations
L.O. 7 Explain budgeting in service, retail, and wholesale organizations.
Sales Forecast
Marketing and administrative cost budget
Labor budget
Budgeted cost of services
Budgeted income statement
Cash budget
Budgeted balance sheet

37. Budgeting Retail and Wholesale Organizations
Sales Forecast
Marketing and administrative cost budget
Purchases
Budgeted income statement
Cash budget
Budgeted balance sheet

38. Ethical Issues in Budgeting
L.O. 8 Explains why ethical issues arise in budgeting.
Budgets can create serious ethical issues for many people. The company must recognize the trade-off between encouraging unbiased reporting by managers and the use of budget information in performance evaluation and rewards.

39. Alternative Budgeting Scenarios
Budgeting Under Uncertainty
L.O. 9 Explain how to use sensitivity analysis to budget under uncertainty.
Santiago Pants
Alternative Budgeting Scenarios

40. Chapter 12
The End