Chapter 8 Profit Planning

(Budgeting)
I need a better budget. The more I save, the less I seem to have.

Clicker Question 1

Planning Control
to control

Purposes of Budgeting

to anticipate problems and responses to maximize opportunities

various parts of the organization to control the performance of individuals to ensure managements objectives are followed

Evaluation
to provide a basis of evaluation of individuals and

of the entity

parts

Communication
discloses the organizations

priorities

Who Needs To Budget

All entities
service to manufacturing commercial, not-for-profit, and governmental

Budgets of governmental entities are legal documents

exceeding the budget for a governmental entity

may be a violation of the law

Budgeting and uncertainty

the greater the uncertainty the greater the need for

planning, but the harder it is to forecast the future

Strategic plan

Types of Planning/Budgeting

this should come first, even before the business

begins operations should be reexamined as conditions change

Capital budgets
relate to planned expenditures affecting multiple

accounting periods obviously, should not contradict the strategic plan

Operating budget
detailed plan for the coming year also called the master budget

Who Prepares the Budget

Not the accountants
accountants provide data and technical assistance;

budgets belong to management

Preparation of budgets should be a participatory process

otherwise failure to meet the budget will be blamed

on those that prepared it

Obvious potential for conflict of interest

with no oversight, budgets will be too soft

support them and are tempted to cheat Clicker Question 2

if unrealistic budgets are imposed, people will not

Preparing the Operating Budget

Forecast sales
expected sales drives everything else in the

operational budget

Prepare the Production budget

depends on expected sales and the companys

inventory policy

Prepare the Materials, Labor, and Overhead budgets

depend on the planned production overhead may depend on a secondary factor(s)

such as DL (what drives overhead?)

Preparing the Operating Budget

Prepare the Selling and administrative budget
this

is also related to planned sales mostly independent of the production budgets

Prepare the Cash budget

basically a forecasted statement of cash flows, it must be prepared for short time periods
cash

but

must be available to pay bills throughout the year, not just at year-end

preparation may show the need for borrowings

or periods with excess cash that should be invested a line of credit can reduce some of these problems, but they must be obtained in advance

Preparing the Operating Budget

Prepare the budgeted Income statement
based on results of the previously prepared budgets cash budget may affect the budgeted income statement

because of borrowings and/or investment of excess cash budgeted income statement needed to know cash payments for taxes on the cash budget

Prepare the budgeted Balance sheet

the final

step in the budget process because it depends on ALL of the previous budgets another example of the articulation of the financial statements

Flow of the Budgeting Process

Sales
Sell. & Admin Production D. M. D. L.
(ex.)

O.H.

Stat. of Cash Balance Sheet

Income Stat.

Static vs. Flexible Budgets

A static budget is prepared for the circumstances management thinks is most likely to occur A flexible budget shows what the budget would be at varying levels of sales (Discussed further in chapter 11.) Key difference between budgets for different levels of sales are
amount of revenue effects on fixed vs. variable costs

Other Budgeting Issues

Continuous budgets
used when multi-period budgets are prepared

Zero-based budgeting
primarily used in governments in theory, all expenditures must be justified each

year; i.e., the budget starts with a zero base

Standard costing systems

covered in the chapters 10 and 11 a type of budget for the cost of producing a single

unit of goods

Clicker Question 3