21-1 Copyright Houghton Mifflin Company. All rights reserved. Chapter 21 The Budgeting Process Belverd E. Needles, Jr. Marian Powers Sherry K. Mills

21-21-11Copyright Houghton Mifflin Company. All rights reserved.

Chapter 21Chapter 21The Budgeting ProcessThe Budgeting Process

Belverd E. Needles, Jr.Belverd E. Needles, Jr.

Marian PowersMarian Powers

Sherry K. MillsSherry K. Mills

Henry R. AndersonHenry R. Anderson- - - - - - - - - - -- - - - - - - - - - -

Multimedia Slides by:Multimedia Slides by:

Dr. Paul J. RobertsonDr. Paul J. RobertsonNew Mexico State UniversityNew Mexico State University

Steve LeaskSteve LeaskNew Mexico State UniversityNew Mexico State University


The Budgeting ProcessThe Budgeting Process

OBJECTIVE 1OBJECTIVE 1

Define Define budgetingbudgeting and explain its and explain its

role in the management cycle.role in the management cycle.


The Budgeting ProcessThe Budgeting Process» Budgeting is the process of:Budgeting is the process of:

IdentifyingIdentifying GatheringGathering SummarizingSummarizing CommunicatingCommunicating

financial and nonfinancial financial and nonfinancial information about an organization’s information about an organization’s future activities.future activities.


The Budgeting ProcessThe Budgeting Process

» The budgeting process provides The budgeting process provides managers with the opportunity to managers with the opportunity to carefully match the goals of the carefully match the goals of the organization with the resources organization with the resources necessary to accomplish those goals.necessary to accomplish those goals.

» Budgets are updated to accommodate Budgets are updated to accommodate management’s needs for management’s needs for performance evaluation in some performance evaluation in some settings such as JIT or TQM settings such as JIT or TQM environments.environments.


The Management CycleThe Management Cycle» Managers use the budgeting process Managers use the budgeting process

throughout the management cycle to throughout the management cycle to help:help: PlanPlan ExecuteExecute ReviewReview ReportReport

the organization’s financing, the organization’s financing, investing, and operating activities.investing, and operating activities.


Budgeting Budgeting and the Management Cycleand the Management Cycle

•Relate the organization’s long-term goals to its short-term activities•Distribute resources and workloads•Communicate responsibilities•Select performance measures•Set goals for bonuses and rewards

• Communicate expectations• Challenge & motivate others• Coordinate activities• Recognize problems

• Communicate budget information• Provide continuous feedback

• Calculate variances• Evaluate performance• Determine timeliness• Create solutions for

continuous improvement


The Planning StageThe Planning Stage» Budgeting pertains especially to the Budgeting pertains especially to the

planning stage.planning stage.

Budgets are tied to long-range and Budgets are tied to long-range and

short-range plans to meet success short-range plans to meet success

factors related to quality, cost, and factors related to quality, cost, and

time.time.


The Planning StageThe Planning Stage Budget information is used to Budget information is used to

communicate responsibilities to communicate responsibilities to

individuals who are accountable for a individuals who are accountable for a

particular segment of the organization.particular segment of the organization.

Performance measures are carefully Performance measures are carefully

selected to motivate individuals or selected to motivate individuals or

teams to achieve targeted goals.teams to achieve targeted goals.


The Executing StageThe Executing Stage

» During the executing stage, During the executing stage, managers use budget information managers use budget information for:for:

Communication.Communication.

Benchmarking.Benchmarking.

Problem recognition.Problem recognition.


The Reviewing StageThe Reviewing Stage» In the reviewing stage, managers:In the reviewing stage, managers:

Calculate variances.Calculate variances.

Evaluate performance.Evaluate performance.

Review timeliness.Review timeliness.

Create solutions for continuous Create solutions for continuous improvement.improvement.


The Reporting StageThe Reporting Stage

» In the reporting stage, budgets In the reporting stage, budgets

serve as a reference point for many serve as a reference point for many

reports, such as performance reports, such as performance

reports that support bonuses and reports that support bonuses and

promotions.promotions.


Basic Principles of Basic Principles of BudgetingBudgeting


Explain the basic principles of Explain the basic principles of

budgeting.budgeting.


A.A. 1.1. Long-range goals.Long-range goals.

2.2. Short-range goals and strategies.Short-range goals and strategies.

3.3. Human responsibilities & interaction.Human responsibilities & interaction.

4.4. Budget housekeeping.Budget housekeeping.

5.5. Budget follow-up.Budget follow-up.

Discussion Discussion

Q.Q. What are the five groups of effective What are the five groups of effective

budgeting principles?budgeting principles?


The Master BudgetThe Master Budget


Describe the master budget Describe the master budget process for different types of process for different types of organizations, and list the organizations, and list the guidelines for preparing budgets.guidelines for preparing budgets.


The Master BudgetThe Master Budget» The master budget is a set of budgets The master budget is a set of budgets

that consolidate an organization’s that consolidate an organization’s financial information into budgeted financial information into budgeted financial statements for a future financial statements for a future period of time. They include a:period of time. They include a: Budgeted income statement.Budgeted income statement. Budgeted balance sheet.Budgeted balance sheet. Cash budget.Cash budget. Capital expenditure budget.Capital expenditure budget.


Manufacturing OrganizationsManufacturing Organizations

Sales.Sales. Production.Production. Direct materials purchases.Direct materials purchases. Direct labor.Direct labor. Manufacturing overhead.Manufacturing overhead. Cost of goods manufactured.Cost of goods manufactured. Selling and administrative expenses.Selling and administrative expenses.

» The operating budgets for a The operating budgets for a manufacturing organization include manufacturing organization include budgets for:budgets for:


Retail OrganizationsRetail Organizations

Sales budget.Sales budget. Purchases budget.Purchases budget. Cost of goods sold budget.Cost of goods sold budget. Selling and administrative budget.Selling and administrative budget.

» The operating budgets for retail The operating budgets for retail

organizations include the:organizations include the:


Preparation of a Master Budget for a Preparation of a Master Budget for a Retail OrganizationRetail Organization

Capital Expenditures Budget

Purchases Budget

Sales Budget

Cash Budget

Budgeted Income Statement

Cost of GoodsSold Budget

OperatingBudgets

FinancialBudgets

Selling andAdministrative

Expense Budget

BudgetedBalance Sheet


Service OrganizationsService Organizations

Service revenue.Service revenue. Labor.Labor. Services overhead.Services overhead. Selling and administrative budget.Selling and administrative budget.

» The operating budgets for service The operating budgets for service

organizations include:organizations include:


Preparation of a Master Budget for a Preparation of a Master Budget for a Service OrganizationService Organization

Service Revenue

OperatingBudgets

FinancialBudgets

Selling andAdministrative

Expense Budget

BudgetedBalanceSheet

Labor BudgetServicesOverhead

Budget

BudgetedIncome Statement

Cash Budget

Capital Expenditures Budget


The Operating BudgetsThe Operating Budgets


Prepare a budgeted income Prepare a budgeted income

statement and supporting statement and supporting

operating budgets.operating budgets.


The Master BudgetThe Master Budget

Detailed operating budgets.Detailed operating budgets.

Budgeted income statement.Budgeted income statement.

Capital expenditures budget.Capital expenditures budget.

Budgeted balance sheet.Budgeted balance sheet.

» A master budget consists of the:A master budget consists of the:


The Operating BudgetsThe Operating Budgets

Sales budget Sales budget (in units and dollars).(in units and dollars).

Production budget Production budget (in units).(in units).

Direct materials purchased budget Direct materials purchased budget (in units (in units

and dollars).and dollars).

Direct labor budget Direct labor budget (in hours and dollars).(in hours and dollars).

Manufacturing overhead budget.Manufacturing overhead budget.

Selling and administrative expense Selling and administrative expense

budget.budget.

» Detailed operating budgets include the:Detailed operating budgets include the:


Sales BudgetSales Budget

Hi-Flyer CompanySales Budget

For the Year Ended December 31, 20x1

Quarter

1 2 3 4 Year

Sales in Units 10,000 30,000 10,000 40,000 90,000

x Selling Priceper Unit $ 5 $ 5 $ 5 $ 5 $ 5

Total Sales $ 50,000 $150,000 $ 50,000 $200,000 $450,000


Production BudgetProduction BudgetHi-Flyer CompanyProduction Budget

For the Year Ended December 31, 20x1

Quarter

1 2 3 4 Year

Sales in Units 10,000 30,000 10,000 40,000 90,000

Add Desired Units of EndingFinished Goods Inventory 3,000 1,000 4,000 1,500 1,500

Desired Total Units 13,000 31,000 14,000 41,500 91,500

Less Desired Units ofBeginning Finished GoodsInventory 1,000 3,000 1,000 4,000 1,000Total Production Units 12,000 28,000 13,000 37,500 90,500


Direct Labor BudgetDirect Labor BudgetHi-Flyer Company

Direct Labor BudgetFor the Year Ended December 31, 20x1

Quarter

1 2 3 4 Year

Total Production Units 12,000 28,000 13,000 37,500 90,500

x Direct Labor Hours per Unit .1 .1 .1 .1 .1

Total Direct Labor Hours 1,200 2,800 1,300 3,750 9,050

x Direct Labor Cost per Hour $ 6 $ 6 $ 6 $ 6 $ 6

Total Production Units $ 7,200 $16,800 $ 7,800 $22,500 $54,300


Cash BudgetingCash Budgeting

OBJECTIVE 5 OBJECTIVE 5

Prepare a cash budget.Prepare a cash budget.


The Cash BudgetThe Cash Budget

Beginning cash.Beginning cash.

Cash receipts.Cash receipts.

Cash payments.Cash payments.

Ending cash.Ending cash.

» A cash budget is a projection over A cash budget is a projection over

a period of time of:a period of time of:


Elements of a Cash BudgetElements of a Cash Budget

Activities Cash Receipts From Cash Payments For

Operating Cash sales

Cash collections on credit cards

Purchases of direct materials

Purchases of operating supplies

Direct laborManufacturing overhead expensesSelling expenses

Administrative expenses

Investing Sale of investmentsSale of long-term assetsInterest income from investmentsCash dividends from investments

Purchase of investmentsPurchase of long-term assets

Financing Loan proceedsProceeds from sale of stockProceeds from sale of bonds

Loan repaymentInterest expenseCash dividends to stockholders


A.A. 1. Communication.1. Communication.

2. Support.2. Support.

Discussion Discussion

Q.Q. What two factors are needed for What two factors are needed for

the successful implementation of a the successful implementation of a

budget?budget?


Responsibility AccountingResponsibility Accounting


Define Define responsibility accounting responsibility accounting

and discuss its relation to and discuss its relation to

responsibility centers.responsibility centers.


Responsibility AccountingResponsibility Accounting

1.1. Classifies financial data according to Classifies financial data according to

areas of responsibility.areas of responsibility.

2.2. Reports only controllable cost and Reports only controllable cost and

revenue information for managers.revenue information for managers.

» Responsibility accounting is an Responsibility accounting is an

information system that does the information system that does the

following:following:


» Responsibility centers include:Responsibility centers include:

Cost centers.Cost centers.

Profit centers.Profit centers.

Investment centers.Investment centers.

Responsibility CentersResponsibility Centers

» Responsibility accounting focuses Responsibility accounting focuses

on the reporting, not on the on the reporting, not on the

recording, of information.recording, of information.


Responsibility CentersResponsibility Centers» A profit center is a responsibility A profit center is a responsibility

center whose manager is responsible center whose manager is responsible for both revenues and costs, and for for both revenues and costs, and for the resulting profits.the resulting profits.

» An investment center is a An investment center is a responsibility center whose manager responsibility center whose manager is responsible for profit generation is responsible for profit generation and makes significant decisions and makes significant decisions about the assets that the center uses.about the assets that the center uses.


The Organizational ChartThe Organizational Chart

» The corporate The corporate

organization chart organization chart

determines the flow determines the flow

of reports.of reports.

Documents

21-1 Copyright Houghton Mifflin Company. All rights reserved. Chapter 21 The Budgeting Process Belverd E. Needles, Jr. Marian Powers Sherry K. Mills