ACCT 2102 1st Edition Lecture 26 Outline of Last Lecture I Problem 1 II Problem 2 III Problem 3 IV Problem 4 Outline of Current Lecture V Budgets VI Types of Budgets a Operating b Financial c Manufacturing d Merchandising VII Operating Expenses Budget Current Lecture The Master Budget Part I Chapter 9 V Budgets are quantitative plans used by managers to plan for resource requirements and to control operations What are the Benefits of Budgeting Budgeting forces management to plan for the future rather than just focusing on daily operations In addition budgets are tools used by management to communicate the company s goals and provide a means of coordinating activities and efforts throughout the company Used properly budgets help to align the goals of management with the goals of the company this is known as goal congruence At the end of the period budgets are used as a control tool to evaluate performance The difference between the budgeted figure and the actual result is called a variance How are Budgets Developed The majority of businesses now use a participative approach to budgeting This approach relies on the knowledge of multiple levels of management within the company Participative budgeting is beneficial for companies because the information gathered is more accurate and the involvement These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute of multiple levels of management results in increased motivation On the down side participative budgeting increases the complexity of the budgeting process and the likelihood of budgetary slack Budgetary slack is the intentional overbudgeting of expenses or underbudgeting of revenue Slack is built into budgets to overcome inevitable budget cuts to account for uncertainty in the market and to improve the appearance of operational results If slack causes a budget to be loo loose employee motivation will suffer because the goals will be easy to achieve Budgetary slack can be minimized by implementing a formal budget review process and by offering incentives to management for meeting challenging yet achievable goals Upper management should be careful during the formal budget review process to not make the budget too tight If a budget is too tight employee motivation will suffer because the goals will be unattainable Additionally management should consider more than just monetary incentives for meeting goals set during the budgeting process Such things as recognition and additional vacation time also motivate employees to achieve their goals Companies often begin the annual budgeting process by reviewing the results of their prior operating period and making the necessary adjustments to achieve future goals The problem with this approach is that it can often lead to annual budget increases that are not necessary To eliminate this problem some companies will periodically begin the annual budgeting process with a clean slate This approach is known as zero based budgeting The advantage of zero based budgeting is that it forces management to consider every dollar that is included in the budget Some companies also use a rolling budget approach Instead of budgeting for 12 months at a time the company is in perpetual budgeting mode At all times the company has 12 months worth of budgets available The advantage to this approach is that it keeps management focused on their operational and strategic goals VI Types of Budgets a Operating Budgets Sales Budget FOR MERCHANDISING COMPANIES Inventory Purchases and Cost of Goods Sold budget FOR MANUFACTURING COMPANIES Production DM DL MOH Operating Expenses budget Budgeted Income Statement b Financial Budgets Capital Expenditure budget Cash Budgets collections payments and combined Budgeted Balance Sheet c Manufacturing Budgets I II III Sales budget expected unit and dollar sales Production budget expected number of units to produce DM DL MOH budgets expected resources needed to meet production d Merchandising Budgets VII Sales Budget expected unit and dollar sales Cost of Goods Sold Inventory and Purchases Budget expected cost of inventory purchases Operating Expenses Budget University Apparel is a wholesaler who sells college sweatshirts to university bookstores August sales totaled 250 000 while September sales totaled 200 000 In October sales are expected to increase 8 above their September level November s sales should be 10 above the October level December sales are expected to be 250 000 Prices are set to achieve a 40 gross profit Like most companies University Apparel maintains some safety stock The company wants to maintain an ending inventory equal to 40 000 plus 10 of the next month s cost of goods sold Prepare all merchandising budgets for October and November 1 Sales Budget Sales Revenue August September October November December 2 Purchases Budget 250 000 200 000 216 000 237 600 250 000 Aug Sept Oct Nov Dec Sales Revenue 250 000 200 000 216 000 237 600 250 000 Cost of Sales 150 000 120 000 129 600 142 560 150 000 Cost of EI 52 000 52 960 54 256 55 000 Cost of BI 55 000 52 000 52 960 54 256 55 000 Cost of Purchases 147 000 120 960 130 896 143 304 95 000 Cost of Sales 60 x Sales Revenue Cost of EI 40 000 10 x next month s Cost of Sales Cost of BI 40 000 10 x current month s Cost of Sales