ACCT 2020 1st Edition Lecture 15 Outline of Last Lecture I Preparing a Master Budget Outline of Current Lecture I Budgeting II Cash Budgeting Current Lecture I Budgeting A budget is a detailed quantitative plan for acquiring and using financial other resources over a specified forthcoming time period o Act of preparing a budget is called budget o The use of budget to control an organization activities is called budgetary control Planning and control o Planning involves developing objectives and preparing various budgets to achieve the objectives o Control involves steps taken by management to increase the likelihood that the objectives set down while planning is attained Are we effectively managing our costs Are we on Track What do we need to change with our operations to achieve our goals Advantages of budgeting o The act of budgeting forces us to think about the future and develop a plan to achieve our goals for the future We can establish goals and objectives to be well 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 defined Budgeting forces us to define our goals and a budget is really good way of sharing these goals with the company If everyone is aware of the plan we are able to reach the goal All of the activities can be coordinated if we have done a master budget It also helps us uncover potential bottlenecks and means of allocating resources Instead of spending and possibly running out of cash we can see how much cash we will have at the beginning of the year and how we will use it throughtout the year We can see what our resources are and allocate them without running into problems Responsibility Accounting o Managers should be held responsible for budgets but only for those that he has control over What time period for budgeting o Continuous budget is 12 month budget that rolls forward one month as one is completed If a company does a calendar year budget than in October we could only see 2 months of what the company expects AND the goals will only go forward two months A continuous budget lets you ALWAYS have 12 months prepared which allows us to see a longer horizon for company personal goals Managers should be paid on their ability to meet budgets so this allows managers to meet personal and thus company goals How should we prepare these budgets o Essentially we should get input from the departments that are part of the budget So we should get information from lower level supervisors within department and get influence Participative and self imposed budget o Advantages Individuals at all levels are viewed as members of a team who s judgments are valued by top management which makes them more willing to engage in behaviors that help the organization The budgets are more accurate due to asking those who do the work telling you how much it costs to do the work Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed form above For example if you set your own goal to run a marathon I would be more willing to achieve this than if somebody gave me this goal A manager who is not able to meet a budget imposed from above can claim that it is unrealistic self imposed budgets eliminate this excuse o One Main Disadvantage Budgetary slack for example a sales department For every unit you sell above and beyond the budgeted sales you get 10 for each additional unit If the sales manager is telling the manager the figure than he might give a low estimate to sell more units than budget to achieve bonus level The difference between what management reports they can achieve and what they can actually achieve is budgetary slack Top management needs to review these estimates for reasonableness Most companies five their departments some raw guidelines Human Factors o The success of the budget depends on three factors Top management must be enthusiastic about the budget and committed to its process must be used to Must not use the budget to pressure employees or blame them when something goes wrong If budget used as punishment then it will be seen as slight Highly achievable budget targets are usually preferred when managers are rewarded or it will bring resentment Budgetary Committee o A standing committee is responsible for the budget for overall matters relating to the budget coordinating the preparation of the budget resolving disputes related to the budget and approving the final budget o Sales Budget Ending Inventory Production Budget Direct Materials Direct Labor Manufacturing Overhead Cash Budget Budgeted income statement II Budgeted Balance Sheet Cash Budgeting Make sure to subtract non cash items such as depreciation from the budgets One of the main goals of a master budget is to get a cash budget What would go into a cash budget Total expected cash receipts and disbursements o Sales budget expected cash receipts production budget for cash needed direct materials direct labor overhead and selling and administrative budget Exercise 7 Total cash receipts 340 000 670 000 410000 470000 Total cash Disbursements 530 000 450 000 430 000 480 000 o How much financing needed in 1st quarter HINT interest charged for two quarts in Q2 Q1 Q2 Q3 Beginning Cash Bal 50 000 30 000 69 800 49 800 50 000 Total Cash Receipts 340 000 670 000 410 000 430 000 1 890 000 Less Total Disburs 530 000 450 000 430 000 480 000 1 890 000 Excess defic of cash 140 000 250 000 49 800 39 800 50 000 Borrowings 0 0 0 170 000 170 000 Q4 Total Repayments 0 170 000 0 0 170 000 Interest 0 10 200 0 0 10 200 Ending Cash 30 000 69 800 49 800 39 800 39 800