Chapter 21 The 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 21-1 Copyright Houghton Mifflin Company. All rights reserved. The Budgeting Process OBJECTIVE 1 Define budgeting and explain its role in the management cycle. 21-2 Copyright Houghton Mifflin Company. All rights reserved. The Budgeting Process » Budgeting is the process of: Identifying Gathering Summarizing Communicating financial and nonfinancial information about an organization’s future activities. 21-3 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-4 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-5 Copyright Houghton Mifflin Company. All rights reserved. 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 • • • • • Communicate expectations • Challenge & motivate others • Coordinate activities • Recognize problems Calculate variances Evaluate performance Determine timeliness Create solutions for continuous improvement 21-6 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-7 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-8 Copyright Houghton Mifflin Company. All rights reserved. The Executing Stage » During the executing stage, managers use budget information for: Communication. Benchmarking. Problem recognition. 21-9 Copyright Houghton Mifflin Company. All rights reserved. The Reviewing Stage » In the reviewing stage, managers: Calculate variances. Evaluate performance. Review timeliness. Create solutions for continuous improvement. 21-10 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-11 Copyright Houghton Mifflin Company. All rights reserved. Basic Principles of Budgeting OBJECTIVE 2 Explain the basic principles of budgeting. 21-12 Copyright Houghton Mifflin Company. All rights reserved. Discussion Q. What are the five groups of effective budgeting principles? A. 1. 2. 3. 4. 5. Long-range goals. Short-range goals and strategies. Human responsibilities & interaction. Budget housekeeping. Budget follow-up. 21-13 Copyright Houghton Mifflin Company. All rights reserved. The Master Budget OBJECTIVE 3 Describe the master budget process for different types of organizations, and list the guidelines for preparing budgets. 21-14 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-15 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-16 Copyright Houghton Mifflin Company. All rights reserved. Retail Organizations » The operating budgets for retail organizations include the: Sales budget. Purchases budget. Cost of goods sold budget. Selling and administrative budget. 21-17 Copyright Houghton Mifflin Company. All rights reserved. Preparation of a Master Budget for a Retail Organization Sales Budget Purchases Budget Operating Budgets Cost of Goods Sold Budget Selling and Administrative Expense Budget Budgeted Income Statement Cash Budget Financial Budgets Budgeted Balance Sheet Capital Expenditures Budget 21-18 Copyright Houghton Mifflin Company. All rights reserved. Service Organizations » The operating budgets for service organizations include: Service revenue. Labor. Services overhead. Selling and administrative budget. 21-19 Copyright Houghton Mifflin Company. All rights reserved. Preparation of a Master Budget for a Service Organization Service Revenue Operating Budgets Labor Budget Services Overhead Budget Selling and Administrative Expense Budget Budgeted Income Statement Financial Budgets Cash Budget Budgeted Balance Sheet Capital Expenditures Budget 21-20 Copyright Houghton Mifflin Company. All rights reserved. The Operating Budgets OBJECTIVE 4 Prepare a budgeted income statement and supporting operating budgets. 21-21 Copyright Houghton Mifflin Company. All rights reserved. The Master Budget » A master budget consists of the: Detailed operating budgets. Budgeted income statement. Capital expenditures budget. Budgeted balance sheet. 21-22 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-23 Copyright Houghton Mifflin Company. All rights reserved. Sales Budget Hi-Flyer Company Sales Budget For the Year Ended December 31, 20x1 Quarter Sales in Units 1 2 3 4 Year 10,000 30,000 10,000 40,000 90,000 x Selling Price per Unit $ Total Sales $ 50,000 $150,000 5 $ 5 $ 5 $ 5 $ 5 $ 50,000 $200,000 $450,000 21-24 Copyright Houghton Mifflin Company. All rights reserved. Production Budget Hi-Flyer Company Production Budget For the Year Ended December 31, 20x1 Quarter 1 Sales in Units 2 3 4 Year 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 Total Production Units 1,000 3,000 1,000 4,000 1,000 12,000 28,000 13,000 37,500 90,500 21-25 Copyright Houghton Mifflin Company. All rights reserved. Direct Labor 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 1,200 2,800 1,300 3,750 9,050 $ $ $ $ $ Total Direct Labor Hours x Direct Labor Cost per Hour Total Production Units 6 6 6 6 6 $ 7,200 $16,800 $ 7,800 $22,500 $54,300 21-26 Copyright Houghton Mifflin Company. All rights reserved. Cash Budgeting OBJECTIVE 5 Prepare a cash budget. 21-27 Copyright Houghton Mifflin Company. All rights reserved. The Cash Budget » A cash budget is a projection over a period of time of: Beginning cash. Cash receipts. Cash payments. Ending cash. 21-28 Copyright Houghton Mifflin Company. All rights reserved. Elements of a Cash Budget Activities Cash Receipts From Operating Cash sales Cash Payments For Purchases of direct materials Cash collections on credit cards Purchases of operating supplies Direct labor Manufacturing overhead expenses Selling expenses Administrative expenses Investing Sale of investments Sale of long-term assets Interest income from investments Cash dividends from investments Financing Loan proceeds Proceeds from sale of stock Proceeds from sale of bonds Purchase of investments Purchase of long-term assets Loan repayment Interest expense Cash dividends to stockholders 21-29 Copyright Houghton Mifflin Company. All rights reserved. Discussion Q. What two factors are needed for the successful implementation of a budget? A. 1. Communication. 2. Support. 21-30 Copyright Houghton Mifflin Company. All rights reserved. Responsibility Accounting OBJECTIVE 7 Define responsibility accounting and discuss its relation to responsibility centers. 21-31 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-32 Copyright Houghton Mifflin Company. All rights reserved. Responsibility Centers » Responsibility centers include: Cost centers. Profit centers. Investment centers. » Responsibility accounting focuses on the reporting, not on the recording, of information. 21-33 Copyright Houghton Mifflin Company. All rights reserved. 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. 21-34 Copyright Houghton Mifflin Company. All rights reserved. The Organizational Chart » The corporate organization chart determines the flow of reports. 21-35 Copyright Houghton Mifflin Company. All rights reserved.