Page 9-1Page 9-2Budgetary PlanningManagerial AccountingFifth EditionWeygandt Kimmel KiesoPage 9-3study objectives1. 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 non-manufacturing companies.Page 9-4preview of chapter 9Page 9-5Budgeting BasicsFormal written statement of management’s plansfor 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.BudgetPage 9-6Budgeting BasicsHistorical 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.Budgeting and AccountingPage 9-7Budgeting BasicsRequires 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.The Benefits of BudgetingSO 1 Indicate the benefits of budgeting.Page 9-8Budgeting BasicsResults in greater management awareness of the entity’s overall operations.Motivates personnel throughout organization to meet planned objectives.The Benefits of BudgetingSO 1 Indicate the benefits of budgeting.A budget is an aid to management; not a substitute for management.Page 9-9Which 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. Review QuestionBudgeting BasicsSO 1 Indicate the benefits of budgeting.Solution on notes pagea. 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 9-10Budgeting BasicsDepends 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.Essentials of Effective BudgetingSO 2 State the essentials of effective budgeting.Page 9-11Budgeting BasicsMay 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. Length of the Budget PeriodSO 2 State the essentials of effective budgeting.Page 9-12Budgeting BasicsBase 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. Shows potential industry sales. Shows company’s expected share.The Budgeting ProcessSO 2 State the essentials of effective budgeting.Page 9-13Budgeting BasicsFactors considered in Sales Forecasting: General economic conditions  Industry trends Market research studies Anticipated advertising and promotion Previous market share  Price changes  Technological developmentsThe Budgeting ProcessSO 2 State the essentials of effective budgeting.Page 9-14Page 9-15Budgeting BasicsParticipative BudgetingMay inspire higher levels of performance or discourage additional effort.Depends on how budget developed and administered.Invite each level of management to participate.Budgeting and Human BehaviorSO 2 State the essentials of effective budgeting.This “bottom-to-top” approach is called Participative Budgeting.Page 9-16Budgeting BasicsAdvantages: 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 “top-down.”Participative BudgetingSO 2 State the essentials of effective budgeting.Page 9-17Budgeting BasicsDisadvantages: Can be time consuming and costly. Can foster budgetary “gaming” through budgetary slack.Participative BudgetingSO 2 State the essentials of effective budgeting.Page 9-18Flow of budget data from lower management to top levelsIllustration 9-1Budgeting BasicsSO 2 State the essentials of effective budgeting.Page 9-19Page 9-20Three basic differences between Budgeting and Long Range Planning:1. Time period involved.2. Emphasis3. Detail presentedTime period:Budgeting is short-term –usually one year.Long range planning - at least five years.Budgeting BasicsBudgeting and Long-Range PlanningSO 2 State the essentials of effective budgeting.Page 9-21The essentials of effective budgeting do notinclude:a. Top-down budgeting.b. Management acceptance. c. Research and analysis.d. Sound organizational structure. Review QuestionBudgeting BasicsSO 2 State the essentials of effective budgeting.Solution on notes pagea. Top-down budgeting.b. Management acceptance. c. Research and analysis.d. Sound organizational structure.Page 9-22A set of interrelated budgets that constitutes a plan of action for a specified time period.Contains two classes of budgets: Operating budgets. Financial budgets.SO 3 Identify the budgets that comprise the master budget.Budgeting BasicsThe Master BudgetIndividual budgets that result in the preparation of the budgeted income statement – establish goals for sales and production personnel.Page 9-23A set of interrelated budgets that constitutes a plan of action for a specified time period.Contains two classes of budgets: Operating budgets. Financial budgets.SO 3 Identify the budgets that comprise the master budget.Budgeting BasicsThe Master BudgetThe capital expenditures budget,