Chapter 21 The Budgeting Process

Chapter 21The Budgeting Process Belverd E. Needles, Jr. Marian Powers Sherry K. Mills Henry R. Anderson - - - - - - - - - - - Multimedia Slides by: Dr. Paul J. Robertson New Mexico State University Steve Leask New Mexico State University

The Budgeting Process OBJECTIVE 1 Define budgeting and explain its role in the management cycle.

The Budgeting Process • Budgeting is the process of: • Identifying • Gathering • Summarizing • Communicating financial and nonfinancial information about an organization’s future activities.

The Budgeting Process • Budgets are updated to accommodate management’s needs for performance evaluation in some settings such as JIT or TQM environments. • The budgeting process provides managers with the opportunity to carefully match the goals of the organization with the resources necessary to accomplish those goals.

The Management Cycle • Managers use the budgeting process throughout the management cycle to help: • Plan • Execute • Review • Report the organization’s financing, investing, and operating activities.

Budgeting and 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 budget information • Provide continuous feedback • Calculate variances • Evaluate performance • Determine timeliness • Create solutions for continuous improvement • Communicate expectations • Challenge & motivate others • Coordinate activities • Recognize problems

The Planning Stage • Budgeting pertains especially to the planning stage. • Budgets are tied to long-range and short-range plans to meet success factors related to quality, cost, and time.

The Planning Stage • Budget information is used to communicate responsibilities to individuals who are accountable for a particular segment of the organization. • Performance measures are carefully selected to motivate individuals or teams to achieve targeted goals.

The Executing Stage • During the executing stage, managers use budget information for: • Communication. • Benchmarking. • Problem recognition.

The Reviewing Stage • In the reviewing stage, managers: • Calculate variances. • Evaluate performance. • Review timeliness. • Create solutions for continuous improvement.

The Reporting Stage • In the reporting stage, budgets serve as a reference point for many reports, such as performance reports that support bonuses and promotions.

Basic Principles of Budgeting OBJECTIVE 2 Explain the basic principles of budgeting.

Discussion A. 1. Long-range goals. 2. Short-range goals and strategies. 3. Human responsibilities & interaction. 4. Budget housekeeping. 5. Budget follow-up. Q. What are the five groups of effective budgeting principles?

The Master Budget OBJECTIVE 3 Describe the master budget process for different types of organizations, and list the guidelines for preparing budgets.

The Master Budget • The master budget is a set of budgets that consolidate an organization’s financial information into budgeted financial statements for a future period of time. They include a: • Budgeted income statement. • Budgeted balance sheet. • Cash budget. • Capital expenditure budget.

Manufacturing Organizations • The operating budgets for a manufacturing organization include budgets for: • Sales. • Production. • Direct materials purchases. • Direct labor. • Manufacturing overhead. • Cost of goods manufactured. • Selling and administrative expenses.

Retail Organizations • The operating budgets for retail organizations include the: • Sales budget. • Purchases budget. • Cost of goods sold budget. • Selling and administrative budget.

Preparation of a Master Budget for a Retail Organization Sales Budget Purchases Budget Operating Budgets Selling and Administrative Expense Budget Cost of Goods Sold Budget Budgeted Income Statement Cash Budget Budgeted Balance Sheet Financial Budgets Capital Expenditures Budget

Service Organizations • The operating budgets for service organizations include: • Service revenue. • Labor. • Services overhead. • Selling and administrative budget.

Preparation of a Master Budget for a Service Organization Service Revenue Labor Budget Services Overhead Budget Selling and Administrative Expense Budget Operating Budgets Budgeted Income Statement Budgeted Balance Sheet Cash Budget Financial Budgets Capital Expenditures Budget

The Operating Budgets OBJECTIVE 4 Prepare a budgeted income statement and supporting operating budgets.

The Master Budget • A master budget consists of the: • Detailed operating budgets. • Budgeted income statement. • Capital expenditures budget. • Budgeted balance sheet.

The Operating Budgets • Detailed operating budgets include the: • Sales budget (in units and dollars). • Production budget (in units). • Direct materials purchased budget (in units and dollars). • Direct labor budget (in hours and dollars). • Manufacturing overhead budget. • Selling and administrative expense budget.

Hi-Flyer Company Sales 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 Price per Unit $ 5 $ 5 $ 5 $ 5 $ 5 Total Sales $ 50,000 $150,000 $ 50,000 $200,000 $450,000 Sales Budget

Hi-Flyer Company Production 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 Ending Finished 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 of Beginning Finished Goods Inventory 1,000 3,000 1,000 4,000 1,000 Total Production Units 12,000 28,000 13,000 37,500 90,500 Production Budget

Hi-Flyer Company Direct Labor Budget For 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 Direct Labor Budget

Cash Budgeting OBJECTIVE 5 Prepare a cash budget.

The Cash Budget • A cash budget is a projection over a period of time of: • Beginning cash. • Cash receipts. • Cash payments. • Ending cash.

Activities Cash Receipts From Cash Payments For Operating Cash sales Purchases of direct materials Cash collections on credit cards Purchases of operating supplies Direct labor Manufacturing overhead expenses Selling expenses Administrative expenses Sale of investments Purchase of investments Investing Sale of long-term assets Purchase of long-term assets Interest income from investments Cash dividends from investments Loan proceeds Loan repayment Financing Proceeds from sale of stock Interest expense Proceeds from sale of bonds Cash dividends to stockholders Elements of a Cash Budget

Discussion A. 1. Communication. 2. Support. Q. What two factors are needed for the successful implementation of a budget?

Responsibility Accounting OBJECTIVE 7 Define responsibility accounting and discuss its relation to responsibility centers.

Responsibility Accounting • Responsibility accounting is an information system that does the following: • 1. Classifies financial data according to areas of responsibility. • 2. Reports only controllable cost and revenue information for managers.

Responsibility Centers • Responsibility centers include: • Cost centers. • Profit centers. • Investment centers. • Responsibility accounting focuses on the reporting, not on the recording, of information.

Responsibility Centers • A profit center is a responsibility center whose manager is responsible for both revenues and costs, and for the resulting profits. • An investment center is a responsibility center whose manager is responsible for profit generation and makes significant decisions about the assets that the center uses.

The Organizational Chart • The corporate organization chart determines the flow of reports.

Chapter 21 The Budgeting Process