Kế toán tài chính 2 - Chapter 24: The budgeting process

The Budgeting ProcessMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 24Learning ObjectiveDefine budgeting and explain its role in the management cycle.Identify the elements of a master budget in different types of organizations and the guidelines for preparing budgets.Prepare the operating budgets that support the financial budgets.Copyright © Houghton Mifflin Company. All rights reserved.Learning Objective (cont’d)Prepare a budgeted income statement, a cash budget, and a budgeted balance sheet.Describe management’s role in budget implementation.Copyright © Houghton Mifflin Company. All rights reserved.The Budgeting ProcessObjective 1Define budgeting and explain its role in the management cycleCopyright © Houghton Mifflin Company. All rights reserved.Budgeting is the process of identifying, gathering, summarizing, and communicating financial and nonfinancial information about an organization's future activitiesIs essential part of the continuous planning for an organization in order to accomplish long-term goalsCopyright © Houghton Mifflin Company. All rights reserved.The Budgeting ProcessBudgetsPlans of action based on forecasted transactions, activities, and eventsAre synonymous with managing an organizationEssential to accomplishing goals in the strategic planCopyright © Houghton Mifflin Company. All rights reserved.The Budgeting Process (cont’d)Budgets are used toCommunicate informationCoordinate activities and resource usageMotivate employeesEvaluate performanceManage and account for cashEstablish minimum levels of cash receipts and expendituresCopyright © Houghton Mifflin Company. All rights reserved.The Budgeting Process (cont’d)Many forms of budgets ExamplesCash budgetFocuses on financial informationShows, among other things, how cash resources will be allotted to operating, investing, and financing activities over a future periodProduction budgetFocuses on nonfinancial informationShows planned production in unitsIdentifies activities needed to meet certain requirements or standardsCopyright © Houghton Mifflin Company. All rights reserved.Budgeting and GoalsStrategic planningProcess by which management establishes an organization’s long-term goalsCopyright © Houghton Mifflin Company. All rights reserved.Long-Term Goals define the strategic direction an organization will take over a five- to ten-year periodAre the basis for Making annual operating plansPreparing budgetsCopyright © Houghton Mifflin Company. All rights reserved.Long-Term Goals (cont’d)Should take into considerationEconomic and industry forecastsEmployee-management relationsStructure and role of managementValue chain considerationsOrganizational capacityAny other operational and tactical issues facing the organizationExpected quality of products or servicesGrowth ratesDesired market shareCopyright © Houghton Mifflin Company. All rights reserved.Long-Term Goals (cont’d)Must set specific targets and timetablesMust assign responsibility for achieving the goals to specific personnelA range of long-term goals should be included in the organization's strategic planShould give direction to efforts to achieve these goalsCopyright © Houghton Mifflin Company. All rights reserved.Short-Term GoalsInvolve every part of an enterpriseMuch more detailed than long-term goalsTo formulate an annual operating plan, long-term goals must be restated in terms of what needs to be accomplished during the next yearShort-term goals are the basis of an organization’s operating budgets for the yearCopyright © Houghton Mifflin Company. All rights reserved.Short-Term Goals (cont’d)Organization’s controller takes charge of coordinating the budget processDesigns a complete set of budget-development directionsTimetable with deadlinesAssigns clearly defined responsibilities for carrying out each part of the budget’s developmentTo specific individuals or management teamsThe budget may be reviewed and revised during the yearCopyright © Houghton Mifflin Company. All rights reserved.Importance of ParticipationThe key to a successful budget is participative budgetingProcess in which personnel at all levels of an organization actively engage in making decisions about the budgetGives a sense of ownershipHelps ensure that departments will attain targets and stay within the budgetCopyright © Houghton Mifflin Company. All rights reserved.Importance of Participation (cont’d)Participative budgeting depends on joint decision makingController must be able to communicate and negotiate effectively with people in all levels of an organizationSenior managersFormulate organizational long-and short-term goalsMiddle managersSupervisorsResponsible for daily operationsCopyright © Houghton Mifflin Company. All rights reserved.Importance of Participation (cont’d)Authoritative budgetingSenior executives dictate targetsDo not allow middle managers and supervisors a voice in setting themTargets may be unrealistic and impossible to attainWill undermine motivation of managers and supervisorsCooperation is essential for successful budget implementationSenior executives allow controller to develop budget without consulting other managersManagers may feel budgeting is not a top priorityCopyright © Houghton Mifflin Company. All rights reserved.Budgeting and the Management CycleBudgeting and the Management CyclePlanningBudgetingOriginates in this stageHelps managers toRelate the organization’s long-term goals to its short-term activitiesDistribute resources and workloadsCommunicate responsibilitiesSelect performance measuresSet goals for bonuses and rewardsCopyright © Houghton Mifflin Company. All rights reserved.Budgeting and the Management CycleExecutingBudgeting helps managers toCommunicate expectationsMeasure performance and motivate employeesCoordinate activities and allot resourcesCopyright © Houghton Mifflin Company. All rights reserved.Budgeting and the Management CycleReportingBudgeting helps managers toCommunicate budget informationProvide continuous feedbackSupport operating decisionsCopyright © Houghton Mifflin Company. All rights reserved.Budgeting and the Management CycleReviewingBudgeting helps managers toEvaluate performanceDetermine timelinessFind variances and create solutionsCompare planned performance with actual performanceCopyright © Houghton Mifflin Company. All rights reserved.DiscussionHow are short-term goals related to strategic planning?Short-term goals define the strategic direction an organization will take over the next year. They are determined to help accomplish the long-term goals that are established during the strategic planning processCopyright © Houghton Mifflin Company. All rights reserved.The Master BudgetObjective 2Identify the elements of a master budget in different types of organizations and the guidelines for preparing budgetsCopyright © Houghton Mifflin Company. All rights reserved.The Master Budget consists of a set of operating budgets and a set of financial budgets that detail an organization’s financial plans for a specific accounting period, generally a yearCopyright © Houghton Mifflin Company. All rights reserved.The Master Budget (cont’d)Operating budgetsPlans used in daily operationsBasis for financial budgetsFinancial budgetsProjections of financial results for the accounting periodIncludeBudgeted income statementCapital expenditures budgetCash budgetBudgeted balance sheetCopyright © Houghton Mifflin Company. All rights reserved.The Master Budget (cont’d)Process of preparing a master budget is similar in all three types of organizationsManufacturing RetailServiceThe process differs mainly in the kinds of operating budgets each type of organization preparesCopyright © Houghton Mifflin Company. All rights reserved.Preparation of a Master Budget for a Manufacturing OrganizationPreparation of a Master Budget for a Retail OrganizationPreparation of a Master Budget for a Service OrganizationCopyright © Houghton Mifflin Company. All rights reserved.The Master Budget (cont’d)Sales budgetIs prepared firstUsed to estimate sales volume and revenuesOnce developed, other budgets can be developedThese other budgets will help manage the organization's resources so that profits can be generated on salesIn a service organization, the sales budget is called the service revenue budget Copyright © Houghton Mifflin Company. All rights reserved.The Master Budget (cont’d)No standard format for budget preparationProcedures vary from organization to organizationOnly universal requirement is that budgets communicate the appropriate information to the reader in a clear and understandable mannerCopyright © Houghton Mifflin Company. All rights reserved.The Master Budget (cont’d)Managers can improve the quality of budgets by using the following guidelinesKnow the purpose of the budgetIdentify the user group and its information needsIdentify sources of accurate, meaningful budget informationEstablish a clear format for the budgetUse appropriate formulas and calculations to derive quantitative informationRevise the budget until it includes all planning decisionsCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhich budget must be prepared first?The sales budget. This budget is used to estimate sales volume and revenues. Once established, the other budgets can be developedCopyright © Houghton Mifflin Company. All rights reserved.Operating BudgetsObjective 3Prepare the operating budgets that support the financial budgetsCopyright © Houghton Mifflin Company. All rights reserved.Operating Budgets are a set of budgets that are used in planning the daily operations of an organizationAre part of the master budgetCopyright © Houghton Mifflin Company. All rights reserved.Operating BudgetsProcedures for preparing operating budgets includeCost behavior analysisCost-volume-profit analysisA product costing methodOrganizations that manufacture a variety of products or services may prepareSeparate operating budgets, orOne comprehensive budget for each product or serviceCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget is a detailed plan, expressed in both units and dollars, that identifies the product (or service) sales expected in an accounting periodCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget (cont’d)Sales mangers use the information toPlan sales- and marketing-related activitiesDetermine human, physical, and technical resource needsAccountants use the information toDetermine estimated cash receipts for the cash budgetTo determine the total budgeted salesCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget (cont’d)Selecting the best estimates for selling price per unit and the sales demand in units can be difficultIf the organization wants to increase its share in the marketAn estimated selling price below the current selling price may be neededIf the organization has improved the product’s quality by using more expensive materials or production processesThe estimated selling price may have to be higher than the current priceCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget (cont’d)Estimated sales volume is very importantWill affect the level of operating activities and amount of resources needed for operationsManagers may use a sales forecastA projection of sales demand based on an analysis of internal and external factorsCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget (cont’d)External factors taken into consideration in a sales forecast includeThe state of the local and national economiesThe state of the industry’s economyThe nature of the competition and its sales volume and selling priceCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget (cont’d)Internal factors includeThe number of units sold in prior periodsThe organization’s credit policiesThe organization’s collection policiesThe organization’s pricing policiesAny new products the organization plans to introduce to the marketThe capacity of the organization’s manufacturing facilitiesCopyright © Houghton Mifflin Company. All rights reserved.Sales Budget (cont’d)Copyright © Houghton Mifflin Company. All rights reserved.The Production Budget is a detailed plan showing the number of units a company must produce to meet budgeted sales and inventory levelsProduction managers use this information to plan for the materials and human resources that production activities will requireCopyright © Houghton Mifflin Company. All rights reserved.The Production Budget (cont’d)To prepare a production budget, managers must knowBudgeted number of sales unitsFrom the sales budgetDesired level of ending finished goods inventory for each period in the budget yearOften stated as a percentage of the next period’s budgeted unit salesCopyright © Houghton Mifflin Company. All rights reserved.The Production Budget (cont’d)To determine the production needs for an accounting periodCopyright © Houghton Mifflin Company. All rights reserved.Production BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Direct Materials Purchases Budget is a detailed plan that identifies the quantity of purchases required to meet budgeted production and inventory needs and the costs associated with those purchasesCopyright © Houghton Mifflin Company. All rights reserved.The Direct Materials Purchases Budget (cont’d)Purchasing departmentUses information to plan purchases of direct materialsAccountants Use information to estimate cash payments to suppliersCopyright © Houghton Mifflin Company. All rights reserved.The Direct Materials Purchases Budget (cont’d)To prepare a direct materials purchases budget managers must know What production needs will be in the next accounting periodProvided in the production budgetDesired level of direct materials inventory for each periodPer unit cost of direct materialsDesired level of ending direct materials inventoryUsually stated as a percentage of the next period’s productionCopyright © Houghton Mifflin Company. All rights reserved.The Direct Materials Purchases Budget (cont’d)Steps to prepare a direct materials purchasing budgetCalculate each period’s total production needs in units of direct materialsDetermine the total number of units of direct materials to be purchased during each accounting period in the budgetCalculate the cost of the direct materials purchasesCopyright © Houghton Mifflin Company. All rights reserved.Direct Materials Purchases BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Direct Labor Budget is a detailed plan that estimates the direct labor hours needed in an accounting period and the associated costsCopyright © Houghton Mifflin Company. All rights reserved.The Direct Labor Budget (cont’d)Production managers use estimated direct labor hours to plan How many employees will be required during the periodThe hours each employee will workAccountants use estimated direct labor costs to plan For cash payments to workersHuman resource managers use information on the direct labor budget toDecide whether to hire new employeesReduce the existing work forceTrain employeesPrepare schedules of employee fringe benefitsCopyright © Houghton Mifflin Company. All rights reserved.The Direct Labor Budget (cont’d)Steps in preparing a direct labor budgetEstimate the total direct labor hoursMultiply estimated direct labor hours per unit by the anticipated units of productionCalculate the total budgeted direct labor costCopyright © Houghton Mifflin Company. All rights reserved.Direct Labor BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Manufacturing Overhead Budget is a detailed plan of anticipated manufacturing costs, other than direct materials and direct labor costs, that must be incurred to meet budgeted production needsCopyright © Houghton Mifflin Company. All rights reserved.The Manufacturing Overhead Budget (cont’d)Two purposesIntegrate the overhead cost budgets developed by managers of production and production-related departmentsGroup information for the calculation of manufacturing overhead rates for the forthcoming accounting periodCopyright © Houghton Mifflin Company. All rights reserved.The Manufacturing Overhead Budget (cont’d)Presentation of information is flexibleGrouping by activities is useful for organizations using activity-based costingCopyright © Houghton Mifflin Company. All rights reserved.Manufacturing Overhead BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Selling and Administrative Expense Budget is a detailed plan of operating expenses, other than those related to production, that are needed to support sales and overall operations in an accounting periodAccountants use this budget to estimate cash payments for products or services used in nonproduction-related activitiesCopyright © Houghton Mifflin Company. All rights reserved.Selling and Administrative Expense BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Cost of Goods Manufactured Budget is a detailed plan that summarizes the estimated costs of production in an accounting periodSources of informationDirect materials, direct labor, and manufacturing overhead budgetsCopyright © Houghton Mifflin Company. All rights reserved.Cost of Goods Manufactured BudgetNote that most companies anticipate some work in process at the beginning or end of a period covered by the budgetCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat are the sources of information for preparing the cost of goods manufactured budget?Direct materials budget Direct labor budget Manufacturing overhead budgetCopyright © Houghton Mifflin Company. All rights reserved.Financial BudgetsObjective 4Prepare a budgeted income statement, a cash budget, and a budgeted balance sheetCopyright © Houghton Mifflin Company. All rights reserved.Financial Budgets are projections of financial results for an accounting periodIncludeBudgeted income statementCapital expenditures budgetCash budgetBudgeted balance sheetCopyright © Houghton Mifflin Company. All rights reserved.The Budgeted Income Statement projects an organization’s net income in an accounting period based on revenues and expenses estimated for that periodCopyright © Houghton Mifflin Company. All rights reserved.Budgeted Income StatementCopyright © Houghton Mifflin Company. All rights reserved.The Capital Expenditures Budget. is a detailed plan outlining the anticipated amount and timing of capital outlays for long-term assets in an accounting periodCopyright © Houghton Mifflin Company. All rights reserved.The Capital Expenditures Budget (cont’d)Managers rely on information in a capital expenditures budget when making decisions about such matters asBuying equipmentBuilding a new plantPurchasing and installing a materials handling systemAcquiring another businessCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget is a projection of the cash an organization will receive and the cash it will pay out in an accounting periodSummarizes the cash flow prospects of all transactions considered in the master budgetCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)Information it provides enables managers to plan forShort-term loans when the cash balance is low Short-term investments when the cash balance is highCopyright © Houghton Mifflin Company. All rights reserved.Copyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)Excludes some planned noncash transactionsDepreciation expenseIssuance and receipt of stock dividendsUncollectible accounts expenseGains and losses on sales of assetsMay also excludeDeferred taxesAccrued interestCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)To calculate the estimated ending cash balanceCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)Sources for estimating cash receiptsSales budgetBudgeted income statementCash budgets from previous periodsCash collection records and analyses of collection trendsRecords pertaining to notes, stocks, and bondsCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)Sources for estimating cash paymentsOperating budgetsBudgeted income statementCapital expenditures budgetPrevious year’s financial statementsLoan recordsCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)Supporting schedulesSchedule of expected cash collections from customersSchedule of expected cash payments for direct materialsCash budgetCopyright © Houghton Mifflin Company. All rights reserved.Schedule of Expected Cash Collections from CustomersCopyright © Houghton Mifflin Company. All rights reserved.Schedule of Expected Cash Payments for Direct MaterialsCopyright © Houghton Mifflin Company. All rights reserved.Cash BudgetCopyright © Houghton Mifflin Company. All rights reserved.The Cash Budget (cont’d)Organizations may maintain a minimum cash balance To cover unusual expendituresIf the ending cash balance on the cash budgetFalls below the minimum level requiredShort-term borrowing may be necessaryIs significantly larger than the minimum level requiredMay invest excess in short-term securities to generate additional incomeCopyright © Houghton Mifflin Company. All rights reserved.The Budgeted Balance Sheet projects an organization’s financial position at the end of an accounting periodUses all estimated data compiled in the course of preparing a master budgetIs the final step in that processCopyright © Houghton Mifflin Company. All rights reserved.Budgeted Balance SheetCopyright © Houghton Mifflin Company. All rights reserved.DiscussionHow is the ending cash balance estimated?Subtract total estimated cash payments from total estimated cash receipts, then, add the estimated beginning cash balanceCopyright © Houghton Mifflin Company. All rights reserved.Budget ImplementationObjective 5Describe management’s role in budget implementationCopyright © Houghton Mifflin Company. All rights reserved.Budget ImplementationBudget committeeOversees each stage in the master budget preparationDecides any departmental disputes that might arise in the processGives final approval to the budgetCopyright © Houghton Mifflin Company. All rights reserved.Budget Implementation (cont’d)Budget committee membersControllerHas overall responsibility for budget implementationPresidentVice presidentsThe make-up of the committee ensures that the budgeting process has a companywide perspectiveCopyright © Houghton Mifflin Company. All rights reserved.Budget Implementation (cont’d)A master budget may go through many revisions after approvalBudget committee monitors the progress the company is making in attaining budget targetsUsing periodic reports from department managersCopyright © Houghton Mifflin Company. All rights reserved.Budget Implementation (cont’d)Successful budget implementation depends on two factorsClear communicationSupport of top managementMiddle- and lower-level managers must see that top management supports the budget and encourages its implementationCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat two factors are necessary for successful budget implementation?Clear communication and support of top managementCopyright © Houghton Mifflin Company. All rights reserved.Time for ReviewDefine budgeting and explain its role in the management cycleIdentify the elements of a master budget in different types of organizations and the guidelines for preparing budgetsPrepare the operating budgets that support the financial budgetsCopyright © Houghton Mifflin Company. All rights reserved.And FinallyPrepare a budgeted income statement, a cash budget, and a budgeted balance sheetDescribe management’s role in budget implementationCopyright © Houghton Mifflin Company. All rights reserved.