Budgeting for
Planning and Control
8
8-1
The Role of Budgeting in
Planning and Control
1
• Budgets
•
Quantitative plans for the future
•
Can be stated in either physical or financial terms or both
•
Control
• The process of setting standards, receiving feedback on
actual performance, and taking corrective action
whenever actual performance deviates significantly from
planned performance
• Budgets can be used to compare actual outcomes with
planned outcomes and they can steer operations back on
course, if necessary
8-2
The Role of Budgeting in
Planning and Control
1
Purposes of Budgeting
•
•
•
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Forces managers to plan.
Provides information to improve decision making.
Aids in setting benchmarks for performance
evaluation.
Improves communication and coordination.
8-3
The Role of Budgeting in
Planning and Control
1
Master Budget
•
A comprehensive financial plan for the year made
up of individual department and activity budgets
•
Operating budgets are concerned with income
generating activities
•
Financial budgets are concerned with inflows
and outflows of cash and with financial position
8-4
The Role of Budgeting in Planning and
1
Control
The data used to create the budget come from many
sources
• The sales forecast is the basis for the sales budget –
which is the basis for all of the other operating
budgets and most of the financial budgets
8-5
Preparing the Operating
Budget
2
The Operating Budget Components
1. Sales budget
2. Production budget
3. Direct materials
purchases budget
4. Direct labor budget
5. Overhead budget
6. Ending finished goods
inventory budget
7. Cost of goods sold
budget
8. Marketing expense
budget
9. Research and
development expense
budget
10. Administrative expense
budget
11. Budgeted Income
Statement
8-6
Preparing the
Operating Budget
2
Understanding Operating Budgets
• Sales Budget: the projection that describes
expected sales for each product in units and
dollars.
• Production Budget: describes the number of units
that must be produced in order to meet sales
needs and satisfy ending inventory requirements
• Basic equation: Units to be produced = Desired
units in ending inventory + unit sales – units in
beginning inventory
8-7
Preparing the
Operating Budget
2
Understanding Operating Budgets
• Direct Materials Purchases Budget: based on
the amount of materials needed for production and
the inventories of direct materials
• Once expected usage is computed, purchases
can be computed by: Purchases = Desired
ending inventory of direct materials + Expected
usage – Beginning inventory of direct materials
• Direct Labor Budget: shows the total direct labor
hours and the total direct labor cost needs for the
number of units to be produced
• The average wage rate should be used in the
direct labor budget.
8-8
Preparing the
Operating Budget
2
Understanding Operating Budgets
• Overhead Budget: shows the expected cost of all
indirect manufacturing items
• Ending Finished Goods Inventory Budget:
supplies information needed for the balance sheet
and also serves as an important input for the
preparation of the cost of goods sold budget
• Cost of Goods Sold Budget: used in preparing
the budgeted income statement
• Marketing Expense Budget: outlines planned
expenditures for selling and distribution activities
8-9
Preparing the
Operating Budget
2
Understanding Operating Budgets
•
•
•
Administrative Expense Budget: consists of estimated
expenditures for the overall organization and operation of the
company
Research and Development Expense Budget: contains
planned expenditures for a separate department devoted to
new product research and development
Budgeted Income Statement: With the completion of the
above budgets, an estimate of operating income can be
completed.
•
Operating income is not equal to net income – to be equal,
interest expense and taxes must be subtracted from operating
income.
8-10
The Role of Today’s Cost and
Management Accountant
The Controller
The Treasurer
•
• Collection of cash
•
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•
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Financial reports
SEC reporting
Tax planning and
reporting
Performance reporting
Internal auditing
Budgeting
Accounting systems and
internal controls
3
• Monitoring of cash
•
•
•
•
payments
Monitors cash availability
Short-term investments
Short and long-term
borrowing
Issuing of capital stock
8-11
The Behavioral Dimension of
Budgeting
Characteristics of a Good Budgetary System
6
• Frequent Feedback on Performance
• Monetary and Nonmonetary Incentives
• Participative Budgeting
• Realistic Standards
• Controllability of Costs
• Multiple Measures of Performance
8-12