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
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The Budgeting Process
OBJECTIVE 1
Define budgeting and explain its
role in the management cycle.
21-2
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The Budgeting Process
» Budgeting is the process of:
 Identifying
 Gathering
 Summarizing
 Communicating
financial and nonfinancial
information about an organization’s
future activities.
21-3
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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
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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
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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
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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
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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
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The Executing Stage
» During the executing stage,
managers use budget information
for:
 Communication.
 Benchmarking.
 Problem recognition.
21-9
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The Reviewing Stage
» In the reviewing stage, managers:
 Calculate variances.
 Evaluate performance.
 Review timeliness.
 Create solutions for continuous
improvement.
21-10
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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
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Basic Principles of
Budgeting
OBJECTIVE 2
Explain the basic principles of
budgeting.
21-12
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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
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The Master Budget
OBJECTIVE 3
Describe the master budget
process for different types of
organizations, and list the
guidelines for preparing budgets.
21-14
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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
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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
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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
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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
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Service Organizations
» The operating budgets for service
organizations include:
 Service revenue.
 Labor.
 Services overhead.
 Selling and administrative budget.
21-19
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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
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The Operating Budgets
OBJECTIVE 4
Prepare a budgeted income
statement and supporting
operating budgets.
21-21
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The Master Budget
» A master budget consists of the:
 Detailed operating budgets.
 Budgeted income statement.
 Capital expenditures budget.
 Budgeted balance sheet.
21-22
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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
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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
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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
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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
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Cash Budgeting
OBJECTIVE 5
Prepare a cash
budget.
21-27
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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
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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
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Discussion
Q. What two factors are needed for
the successful implementation of a
budget?
A. 1. Communication.
2. Support.
21-30
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Responsibility Accounting
OBJECTIVE 7
Define responsibility accounting
and discuss its relation to
responsibility centers.
21-31
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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
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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
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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
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The Organizational Chart
» The corporate
organization chart
determines the flow
of reports.
21-35
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