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Page 9 1 Budgetary Planning Managerial Accounting Fifth Edition Weygandt Kimmel Kieso Page 9 2 study objectives 1 Indicate the benefits of budgeting 2 State the essentials of effective budgeting 3 Identify the budgets that comprise the master budget 4 Describe the sources for preparing the budgeted income statement 5 Explain the principal sections of a cash budget 6 Indicate the applicability of budgeting in nonmanufacturing companies Page 9 3 preview of chapter 9 Page 9 4 Budgeting Basics Budget Formal written statement of management s plans for a specified future time period expressed in financial terms Primary way to communicate agreed upon objectives to all parts of the company Promotes efficiency Control device important basis for performance evaluation once adopted Page 9 5 Budgeting Basics Budgeting and Accounting Historical accounting data on revenues costs and expenses help in formulating future budgets Accountants normally responsible for presenting management s budgeting goals in financial terms The budget and its administration are however entirely management s responsibility Page 9 6 Budgeting Basics The Benefits of Budgeting Requires all levels of management to plan ahead Provides definite objectives for evaluating performance Creates an early warning system for potential problems Facilitates coordination of activities within the business Page 9 7 SO 1 Indicate the benefits of budgeting Budgeting Basics The Benefits of Budgeting Results in greater management awareness of the entity s overall operations Motivates personnel throughout organization to meet planned objectives A budget is an aid to management not a substitute for management Page 9 8 SO 1 Indicate the benefits of budgeting Budgeting Basics Review Question Which of the following is not a benefit of budgeting a Management can plan ahead b An early warning system is provided for potential problems c It enables disciplinary action to be taken at every level of responsibility d The coordination of activities is facilitated Page 9 9 Solution on notes page SO 1 Indicate the benefits of budgeting Budgeting Basics Essentials of Effective Budgeting Depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined Based on research and analysis with realistic goals Accepted by all levels of management Page 9 10 SO 2 State the essentials of effective budgeting Budgeting Basics Length of the Budget Period May be prepared for any period of time Most common one year Supplement with monthly and quarterly budgets Different budgets may cover different time periods Long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations Short enough for reliable estimates Continuous twelve month budget Page 9 11 SO 2 State the essentials of effective budgeting Budgeting Basics The Budgeting Process Base budget goals on past performance Collect data from organizational units Begin several months before end of current year Develop budget within the framework of a sales forecast Page 9 12 Shows potential industry sales Shows company s expected share SO 2 State the essentials of effective budgeting Budgeting Basics The Budgeting Process Factors considered in Sales Forecasting Page 9 13 General economic conditions Industry trends Market research studies Anticipated advertising and promotion Previous market share Price changes Technological developments SO 2 State the essentials of effective budgeting Page 9 14 Budgeting Basics Budgeting and Human Behavior Participative Budgeting May inspire higher levels of performance or discourage additional effort Depends on how budget developed and administered Invite each level of management to participate This bottom to top approach is called Participative Budgeting Page 9 15 SO 2 State the essentials of effective budgeting Budgeting Basics Participative Budgeting Advantages More accurate budget estimates because lower level managers have more detailed knowledge of their area Tendency to perceive process as fair due to involvement of lower level management Overall goal produce a budget considered fair and achievable by managers while still meeting corporate goals Risk of unreliable budgets greater when they are topdown Page 9 16 SO 2 State the essentials of effective budgeting Budgeting Basics Participative Budgeting Disadvantages Can be time consuming and costly Can foster budgetary gaming through budgetary slack Page 9 17 SO 2 State the essentials of effective budgeting Budgeting Basics Flow of budget data from lower management to top levels Illustration 9 1 Page 9 18 SO 2 State the essentials of effective budgeting Page 9 19 Budgeting Basics Budgeting and Long Range Planning Three basic differences between Budgeting and Long Range Planning 1 Time period involved 2 Emphasis 3 Detail presented Page 9 20 Time period Budgeting is short term usually one year Long range planning at least five years SO 2 State the essentials of effective budgeting Budgeting Basics Review Question The essentials of effective budgeting do not include a Top down budgeting b Management acceptance c Research and analysis d Sound organizational structure Page 9 21 Solution on notes page SO 2 State the essentials of effective budgeting Budgeting Basics The Master Budget A set of interrelated budgets that constitutes a plan of action for a specified time period Contains two classes of budgets Operating budgets Financial budgets Page 9 22 Individual budgets that result in the preparation of the budgeted income statement establish goals for sales and production personnel SO 3 Identify the budgets that comprise the master budget Budgeting Basics The Master Budget A set of interrelated budgets that constitutes a plan of action for a specified time period Contains two classes of budgets Operating budgets Financial budgets Page 9 23 The capital expenditures budget the cash budget and the budgeted balance sheet focus primarily on cash needs to fund operations and capital expenditures SO 3 Identify the budgets that comprise the master budget Budgeting Basics Components of the Master Budget Page 9 24 Illustration 9 2 SO 3 Cost Behavior Analysis Use this list of terms to complete the sentences that follow 1 A sales forecast shows potential sales for the industry and a company s expected share of such sales 2 Operating budgets are used as the basis for the preparation of the budgeted income statement Page 9 25 Solution on notes page SO 3 Identify the


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