Budgeting A plan for a specific period of time Assists in planning acting controlling and developing strategy Is an ongoing process creating long term goals setting key strategies for attaining goals putting plans into action Analyzing results to take necessary corrective action Benefits of budgeting budgeting forces mangers to plan promotes coordination and communication and provides a benchmark for motivating employees and evaluating performance Rolling budget a budget that is continuously updated so that the next 12 months of operations are always budgeted Participative budget Involves many 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 Disadvantages Process can become much more complex and time consuming as more people participate in the process Managers may intentionally build budgetary slack into the budget for their area of operation by overbudgeting expenses or underbudgeting revenue Budget committee Companies often use this to review the submitted budgets remove unwarranted slack and revise and approve the final budget Often includes upper management such as the CEO and CFO as well as mangers from every area of the value chain Starting points for developing the budgets Either 1 or 2 1 Prior years budgeted figures or actual results 2 Zero based budgeting 1 New products customers or geographical areas Changes in the marketplace caused by competitors Changes in labor contracts raw material and fuel costs Inflation New strategies However this approach to budgeting may cause year after year increases that after time grow out of control 2 All managers must begin with a budget of zero and must justify every dollar they put into the budget Approach is very time consuming and labor intensive Companies may use it from time to time to keep their expenses in check Master Budget The comprehensive planning document for the entire organization It consists of all of the supporting budgets needed to create the companies budgeted financial statements Operating budgets the budgets needed to run the daily operations of the company Culminate in a budgeted income statement The starting point of operating budgets is the sales budget because it affects most other components of a master budget After estimating sales manufacturers prepare the production budget which determines how many units need to be produced Once production volume is established managers prepare the individual budgets determining the amounts of dm dl and moh that will be needed to meet production Next managers prepare the operating expenses budget After all these budgets are prepared management will be able to prepare th budgeted income statement Financial Budgets project the collection and payment of cash as well as forecast the companies budgeted balance sheet Capital Expenditures Budget Shows the companies plan for purchasing property plant and equipment Cash Budget projects the cash that will be available to run the companies operations and determines whether the company will have the extra funds to invest or need borrow cash Budgeted Balance Sheet forecasts the companies position at the end of the budget Sales Budget Number of Unit Sales X Sales Price Per Unit Total Sales Revenue Plan for sales revenue in future periods If sales are not projected as accurately as possible all others will be off target Sales budget is prepared taking into considerations past trends and current economic factors market demand The rest of operating budgets depend on the sales budget Production Budget Once managers have estimated how many units they expect to sell they can figure out how many units they need to produce If you know how much to produce you can then determine the materials labor and machine hours needed to meet production Most managers maintain some ending finished goods inventory or Saftey Stock inventory kept on hand in case demand is higher than predicted or problems in the factory slow preduction Direct Materials Budget First the company figures out the quantity of direct materials DM needed for production Next the company adds in the desired ending inventory of direct materials Some amount of direct materials safety stock is usually needed in case suppliers do not deliver all of the direct materials needed on time Next managers determine the direct material inventory they expect to have on hand at the beginning of the month Finally by subtracting what the company already has in stock at the beginning of the month from the total quantity needed the company is able to calculate the quantity of direct materials they need to purchase beginning inventory of any month is equal to the ending inventory of the previous month Direct Labor Budget Start a direct labor budget by multiplying the number of units to be produced as calculated in the production budget by the direct labors hours needed per unit to find total direct labor hours needed for the month Multiply the total direct labor hours needed for the month by the costs per hour to find the total direct labor costs needed to meet production Financial Budget Components Capital expenditure budget cash collections budget cash payments budget combined cash budget budgeted balance sheet Managers typically prepare a capital expendatures budget as well as three separate cash budgets Cash collections or receipts budget Cash payments or disbursements budget and Combined cash budget Capital expenditure Budget shows company s intentions to invest in new property plant or equipment capital investments budget specifies the time frame for making those investments Cash collections budget all about timing When does a company expect to receive cash from its sales Of course it will receive cash immediately on its cash COD sales But what about sales on account When will these be collected Cash Payments budget also about timing When will a company pay for its DM purchases DL costs MOH costs operating expenses capital expenditures and income taxes Combined Cash Payments budget merges the budgeted cash collections and cash payments to project the company s ending cash position It shows the following Budgeted cash collections for the month are added to the beginning cash balance to determine the total cash available Budgeted cash payments are then subtracted to determine the ending cash balance before financing