VIDEO LECTURE NOTES—
BUDGETING CONCEPTS
Section Breakdown
1.
Why budgets are crucial to an organization’s success
2.
Measuring performance against established goals
3.
Characteristics of a successful budget
4.
Developing standard costs for direct labor and material
5.
Budgetary slack
Why Budgets Are Crucial to an Organization’s Success
1.
Quantitative planning
2.
Vertical and horizontal communication
3.
Monitor plan vs. actual performance
4.
Performance evaluation
Who Should Participate in the Budgeting Process?
1.
Board of Directors
2.
Top Management
3.
Budget Committee
4.
Middle and Lower Management
The Budget Cycle
1.
Master Budget
2.
Buy‐In
3.
Performance Evaluation
4.
Variance Analysis
5.
Corrective Action
6.
If Necessary, Revisions
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Budgeting Concepts
Economic and Industry Considerations
Economic
Industry
 Changes in economic and
business cycles
 Forthcoming recession
 State of the global economy
 Monetary and fiscal policies
 Interest rates, exchange rates
 Unemployment levels
 Competitive conditions and
profitability
Measuring Performance Against Established Goals
BUDGETS
Actual Results
Planned Results
[/] Variance analysis
[/] Compared with competitor’s performance
[/] Industry standards
[/] Prior year’s results
Characteristics of a Successful Budget
1.
The budget must be linked with the company’s strategy.
2.
The budget must be supported by all levels of the management.
3.
There must be a sense of ownership of the budget.
4.
The budget must foster motivation among employees rather than serve as a limitation.
5.
The budget must represent an unbiased estimate of what is expected to happen in the
future.
6.
The budget must be flexible to adapt to changing environments.
7.
The budget must be properly communicated and coordinated to concerned departments or
individuals.
Developing Standard Costs and Budgets
1.
Standard costs are predetermined costs.
2.
Estimates of direct labor, direct material, and overhead costs
3.
Result of activity analysis, historical data, and benchmarking
4.
Standard costs vs. budgeted costs
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Budgeting Concepts
5.
6.
7.
8.
9.
Ideal (theoretical) standards
a.
Maximum efficiency
b.
Tight standards
c.
No allowances
Currently attainable (practical) standards
a.
Challenging but attainable
b.
Integrated with a company’s cost system
c.
Allowances permitted
d.
Discourages continued improvement
Authoritative standards
a.
Top‐down approach
b.
Reduces time required to create a budget
c.
Buy‐in may be difficult.
Participative standards
a.
Motivating to management
b.
Higher accuracy
c.
Downside: budgetary slack
Direct material costs
a.
Quality
b.
Quantity
c.
Price
10. Direct labor costs
a.
Skills, manufacturing process, operating conditions
b.
Quantity standard determined by labor hours
c.
Fixed by personnel department
Budgetary Slack
1.
Underestimating budgeted revenues, and/or
2.
Overestimating budgeted costs
3.
Resource allocation inefficiencies
4.
Buffer against unpredictable economic changes
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