Budgeting Plan for a period of time Helps management determine how to use resources Used to estimate future cots Develop Strategy Plane Act Control On going process Long term goals 5 10 years in future Setting key strategies for goals Putting into action Analyzing Rolling Budget Continuous budget is updated so that the next 12 months is always budgeted Participative Budget Involves all levels of management Benefits Lower level managers are closer to the action and should have a more detailed knowledge for creating realistic budgets Managers are more likely to accept and be motivated by budgets they helped to create Cons Process is more complex and time consuming and more people Managers may slack on the budget in their area of operations by over budgeting expenses and under budgeting revenue Developing the budget Prior year s budget or actual results Zero based budgeting All managers begun with a budget of zero and must justify every dollar they put in the budget Approach is time consuming Companies may use it to keep their expenses in check Benefits of budgeting Forces managers to plan Promotes coordination and communication Provides a benchmark Master Budget Comprehensive planning document for entire organization Supporting all budgets Operating Budget Sales Production Direct materials direct labor MOH Operating expense Budgeted income statement Capital Expenditures and Financial Budgets Balance Sheet Budgeted income statement Financial Capital expenditures cash budgeted balance sheet Sales Budget Plan for sales revenues in future periods Number of total units to be sold sales prices per unit total sales revenue Needed Units in BI Or last month s Desired EI Units to produce Note Start with number of product Only add across for Unit Sales Year Total need 4th quarter EI Year Unit Sales and Year BI is 1st quarter BI Direct Materials Budgeted Desired DM EI Most likely used to find Q of next month and BI of previous month TQ of DM needed DM BI Quantity of DM to purchase Cash Budget Cash Receipts Cash Disbursements Cash Available Desired Beg Balance Borrow Direct Labor Budget Cost per DLH Total DLC Financial Budget Components Capital expenditures Budget Cash Collections Budget Cash Payments Budget Combined Cash Budget Budgeted Balance Sheet Quantity of DM needed for production or units to produce quantity of DM needed per unit Note for budgets create 1st 2nd 3rd quarter tables and year Production Budget Units to be Produced x DLH per unit total DLH needed x Units need for sales Desired EI Total Units Beg Cash Cash Sales Collection on Credit 85 of credit sales last month 14 of credit sales 2 months ago Total CC Jan 120 000 425 000 67 200 612 200 Feb 80 000 408 000 70 000 558 000 March 100 000 272 000 67 200 439 200 1st Quarter 300 000 1 105 000 204 400 1 609 400 Month 37 500 43 500 36 000 33 800 36 900 7 800 195 500 8 300 548 430 556 730 575 160 18 430 7 300 25 730 A what if what a result amount is not underlying Sustainability for in company s judging purchases Sensitivity Analysis technique that asks will be if a predicted achieved or id an assumption changes and budgeting Goals sustainability reflected Cash Payments for direct materials Last month s Purchases Cash Payments for direct materials purchases Next month s Cash payments for direct labor Cash payments for manufacturing overhead Cash payments for operating expenses Cash payments for income taxes Total payments Beginning Cash Balance Cash Collection from customers Cash available before financing Total cash payments Ending cash balance financing Minimum cash balance desired Cash deficiency budgets Long term sustainability goals affect shorter term budgets Benchmark for performance Merchandising Companies Sales Budget COGS inventory and budget Operating expense budget Budgeted income statement The financial budgets are the same COGS inventory and Purchases Budget COGS desired EI Total inventory needed BI Purchases of Inventory Service companies No merchandise inventory and purchase budget Operating Budget Sales budget Operating expense budget Budgeted income statement Financial Budgets are the same Decentralize Splitting operations into different segments Advantages Free top management time Uses experts knowledge Improves customer relations Provides training to move to top managers Improves motivation and retention Disadvantages Duplication of costs Potential problems achieving goal congruence Performance Evaluation System Provides management with feedback Must be Clearly communicate Provide bench marks Motivates segment managers Responsibility Accounting Resp Center Part of an organization whose manager is accountable for planning and controlling activities Cost Cost only Production line at Dell Revenue Revenues could be responsible for costs of their own sales operation Call centers selling time shares Profit Both revenues and costs Apple bees individual store Investment Investments revenues and costs Treated almost as if they were stand alone companies Company divisions like Walt Disney World Resorts Resp Accounting system for evaluating performance of each responsibility center and its manager Responsibility Center Performance Report Performance Report Compares actual revenue vs budgeted Variance difference between actual and budgeted Favorable income higher than budgeted Unfavorable lower than budgeted Management by exception Segment Margin Operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the center Organization Wide Performance Reports Performance reports for each level of management flow up Controllable vs uncontrollable variance Hazelton Sports Subunit X Variance Variance 1 140 U 980 F 4 300 U 1 110 U 0 630 F 4 940 U Based on data presented what type of responsibility is subunit Cost Which items should be investigated Management only investigates variances exceeding 10 5 or 2 800 management would investigate IDL Repairs and maintenance costs Management by expectation Should unfavorable only be looked at No you could be short cutting Calculate ROI Sales Margin Capital Turnover Evaluation of Investment Centers Duties of investment center manager similar to CEO To assess performance ROI Operating income Total assets Measures the 7 60 U Direct Materials 4 9 F DL 17 2 U IDL 9 25 U Utilities 0 Depreciation 15 75 F Repair and Maint 5 20 U Total amount of income an investment center earns relative to the size of the assets ROI Sales Margin