Prepared by Debby Bloom-Hill CMA, CFM. Slide 10-2 CHAPTER 10 Budgetary Planning and Control.
-
Upload
edgar-moody -
Category
Documents
-
view
216 -
download
0
Transcript of Prepared by Debby Bloom-Hill CMA, CFM. Slide 10-2 CHAPTER 10 Budgetary Planning and Control.
Prepared by Debby Bloom-Hill CMA, CFM
Slide 10-2
CHAPTER 10CHAPTER 10
Budgetary Planning and ControlBudgetary Planning and Control
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-3
Budgetary Planning and Control
Budgetary Planning and Control
Budgets are the formal documents that quantify a company’s plans for achieving its goals
For many companies, the entire planning and control process is built around budgets.
Slide 10-4
Use of Budgets in Planning and Control
Use of Budgets in Planning and Control
Planning Budgets enhance communication
and coordination The process of developing a formal
plan forces managers to consider their goals and objectives and to specify means of achieving them
Budgets become the vehicle for communicating information about where the company is heading
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-5
Use of Budgets in Planning and Control
Use of Budgets in Planning and Control
Control Budgets provide a basis for
evaluating performance Control makes sure the company is
heading in the proper direction and operating efficiently To control a company, it is essential to
assess the performance of managers and their operations for which they are responsible
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-6
Use of Budgets in ControlUse of Budgets in Control
Often performance evaluation is carried out by comparing actual with planned or budgeted performance Significant deviations from planned
performance associated with three potential causes:
1. The budget was poorly conceived2. Conditions have changed3. Managers have done a particularly good
or poor job managing operationsLearning objective 1: Discuss the use of budgets in planning and control
Slide 10-7
Which of the following statements regarding budgets is false?
a. They are formal documents that quantify a company’s plans.
b. They enhance communication and coordination.
c. They are useful in planning but not in control.
d. They provide a basis for evaluating performance.
Answer: c They are useful in planning AND in control
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-8
Developing the BudgetDeveloping the Budget
Budgets are prepared for: Departments Divisions of a company For the entire company
Often the group within a company that is responsible for approval of the various budgets is the budget committee
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-9
Developing the BudgetDeveloping the Budget
The budget committee consists of senior managers The budget committee works with
departments to develop realistic plans that are consistent with overall company goals In some cases the budget committee
may impose a budget without soliciting input from department managers
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-10
Developing the BudgetDeveloping the Budget
In a top-down approach budgets are developed at higher operational levels without substantial input from lower level managers
In a bottom-up approach, lower level managers are the primary source of information used in setting the budget
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-11
Budget Time PeriodBudget Time Period
Managers must decide on an appropriate budget period Depending on needs, budgets can
be prepared for a variety of time periods Long run budgets are prepared for a
three or even a five year period Short run budgets may cover a month,
a quarter, or a year Generally, the longer the time
period, the less detailed the budget Learning objective 1: Discuss the use of
budgets in planning and control
Slide 10-12
Five-Year BudgetsFive-Year Budgets
Learning objective 1: Discuss the use of budgets in planning and control
Slide 10-13
Zero Base BudgetingZero Base Budgeting
A common starting point in budgeting is previous period revenues and costs
Zero base requires budgeted amounts to be justified by each department at the start of each period This results in a fresh consideration
for the validity of budgeted amounts It is a time consuming and expensive
process Not widely used by business enterprises
Learning objective 1: Discuss the use of budgets in planning and control
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-14
The Master BudgetThe Master Budget
The master budget is a comprehensive planning document that incorporates a number of individual budgets Typically, it includes budgets for sales,
production, direct materials, direct labor, manufacturing overhead, selling and administrative expense, capital acquisitions, and cash receipts and disbursements
Also includes budgeted income statement and balance sheet
Slide 10-15
Master BudgetMaster Budget
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-16
Sales BudgetSales Budget
The first step involved preparation of sales forecasts and a sales budget Prepared first because an estimate
of sales is needed for other budgets Companies use numerous methods
to estimate sales, including Economic models Sales trends Trade journals, among others
Learning objective 2: Prepare the budget schedules that make up the master budget
Sales BudgetSales Budget
Budgeted sales revenue:Budgeted sales (units) x budgeted sales price
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-17
Production BudgetProduction Budget
The production budget can be developed once the sales budget has been prepared In deciding how much to produce,
managers must take into account how much they expect to sell, how much is in beginning inventory, and how much they want in ending inventory
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-18
Production BudgetProduction Budget
The quantity that must be produced is calculated using the following formula
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-19
Finished units to
be produced
=Expected sales in units
+
Desired ending
inventory of finished
goods
-
Beginning
inventory of
finished units
Slide 10-20
Production BudgetProduction Budget Preston Joystick budget plan, Quarter 1
Ending inventory of finished goods = 10% of next quarter’s sales (25,000 X 10% = 2,500)
Budgeted unit sales,Q1 = 21,000 units Budgeted unit sales, Q2 = 25,000 units Beginning inventory Q1 = 2,100 units
Budget finished units to be producedExpected sales in units 21,000 Add: Desired ending inventory of finished goods 2,500 Subtract: Beginning inventory of finished units (2,100) Finished units to be produced 21,400
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-21
Mason Manufacturing expects to sell 10,000 units in the first quarter and 14,000 in the second quarter. The company desires beginning inventory equal to 20% of sales for the coming quarter. Finished goods on hand at the start of the first quarter equals 2,000 units. How many units should be produced in the first quarter?
a. 14,000 unitsb. 16,000 unitsc. 10,800 unitsd. 12,000 units
Answer: c10,800 units = 10,000 + 2,800 – 2,000
Learning objective 2: Prepare the budget schedules that make up the master budget
Direct Material Purchases Budget
Direct Material Purchases Budget
The amount of direct materials that must be purchased depends on The amount needed for production,
and The amount needed for ending
inventory The amount that must be purchased
can be calculated from the following formula
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-22
Required purchases of direct materials
=
Amount required
for productio
n
+
Desired ending
inventory of direct materials
-
Beginning inventory of direct materials
Slide 10-23
Budgeted production: Q1= 50,000; Q2= 60,000Parts per unit= 3 , cost per part= $5 Ending inventory = 20% of next month’s production
Number of parts required for Q1 production is:a. 50,000b. 150,000c. 60,000d. 180,000
Answer: bQ1 production 50,000 x 3 parts per unit = 150,000
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-24
Budgeted production: Q1= 50,000; Q2= 60,000Parts/unit= 3, cost/part= $5 Ending inventory = 20% of next month’s required
partsDesired ending inventory of parts for Q1 in units is:
a. 10,000b. 12,000c. 30,000d. 36,000
Answer: dQ2 parts = 60,000 x 3 = 180,000 x 20% = 36,000
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-25
Budgeted production: Q1= 50,000; Q2= 60,000Parts/unit= 3, cost/per part= $5Ending inventory = 20% of next month’s required
partBeginning parts inventory, Q1= 30,000 unitsBudgeted cost of purchases for Q1 is:
a. $750,000b. $900,000c. $780,000d. $1,650,000
Answer: c156,000 parts to purchase = 150,000 + 36,000 –
30,000156,000 parts to purchase x $5 cost = $780,000
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-26
Direct Labor BudgetDirect Labor Budget
The direct labor budget presents the direct labor cost by quarter Direct labor cost is calculated by
multiplying the number of units produced each quarter by the labor hours per unit and the rate per hour
The direct labor budget can be used to budget the number of employees needed
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-27
Direct Labor BudgetDirect Labor Budget
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-28
Manufacturing Overhead Budget
Manufacturing Overhead Budget
The manufacturing overhead budget separates variable and fixed costs The cost per unit of production of each
variable cost item is multiplied by the quantity produced each quarter
The fixed costs are identical each quarter except for the amount of depreciation
Budget information is also needed for selling and administrative expenses
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-29
Manufacturing Overhead Budget
Manufacturing Overhead Budget
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-30
Selling and Administrative Expense Budget
Selling and Administrative Expense Budget
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-31
Budgeted Income Statement
Budgeted Income Statement
Much of the information contained in the budgets already described is utilized in the preparation of a budgeted income statement The sales figures come directly from
the sales budget Cost of goods sold requires a
calculation of the unit cost of production
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-32
Budgeted Income Statement
Budgeted Income Statement
Calculation of the unit cost of production The direct materials budget
indicates the materials cost per unit The direct labor budget indicates
the labor cost per unit The manufacturing overhead budget
indicates the overhead cost per unit
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-33
Capital Acquisitions BudgetCapital Acquisitions Budget
For decisions with respect to long-lived assets such as plant and equipment Incremental cash flows along with
net present value and internal rate of return are used for evaluation
The final list of approved projects is documented in the capital acquisitions budget
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-34
Cash Receipts and Disbursements Budget
Cash Receipts and Disbursements Budget
Managers must plan for the amount and timing of cash flows
Careful planning of receipts and disbursements is necessary to: Anticipate cash shortages and
arrange to borrow funds Anticipate cash surpluses and seek
productive uses
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-35
Which of the following items does not require a cash outflow?
a. Salariesb. Purchase of raw materialsc. Advertisingd. Depreciation
Answer: dDepreciation
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-36
Estimate Cash CollectionsEstimate Cash Collections
To prepare an estimate of cash collections, management must determine the percent of credit sales revenue that is collected in the period of sale and the percent collected in the subsequent period The percentage can be estimated
based on past collection experience
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-37
Estimate Cash DisbursementsEstimate Cash Disbursements
To prepare an estimate of cash disbursements, management must determine the percent of material purchases that is paid in the period of purchase and the percent that is paid in the subsequent period The timing of all other cash
disbursements must also be considered
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-38
Estimate Cash DisbursementsEstimate Cash Disbursements
In preparing a cash budget, it is important to remember that some expenses do not require cash outlays For example, depreciation is a part
of manufacturing overhead but does not require a current outlay of cash
Another example of a noncash expense is the amortization of prepaid insurance
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-39
Mason Manufacturing expects sales of $100,000 in the first quarter and $140,000in the second quarter. The company collects 70% of sales in the quarter sold and 30% in the subsequent quarter. What are expected cash collections in the second quarter?
a. $128,000b. $30,000c. $98,000d. $142,000
Answer: a$128,000 = (.3 * $100,000) + (.7 * $140,000)
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-40
Budgeted Balance SheetBudgeted Balance Sheet
The last component of the master budget is the budgeted balance sheet This is simply a planned balance
sheet Sometimes called a pro forma balance
sheet Managers can use this budget to
assess the effect of their planned decisions on the future financial position of the firm
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-41
Use of Computers in the Budget Planning ProcessUse of Computers in the Budget Planning Process
Budget committee may review a budget and decide it is inconsistent with company goals This conclusion may lead managers
to explore a variety of actions that affect future costs and revenues If managers decide to make changes,
they must also revise the budget
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-42
Use of Computers in the Budget Planning ProcessUse of Computers in the Budget Planning Process
Computers are very useful in this situation Most companies define the budget
relationships in a computer model With computerized budget
information, an item can be changed and the computer can recalculate that budget and any other budget affected by the change
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-43
Budgetary ControlBudgetary Control
Budgets facilitate control by providing a standard for evaluation The standard is the budgeted
amount, against which actual results are compared
Differences between budgeted and actual amounts are referred to as budget variances
Learning objective 2: Prepare the budget schedules that make up the master budget
Slide 10-44
Static and Flexible BudgetsStatic and Flexible Budgets
In evaluating performance, care must be taken to make sure that the level of activity used in the budget is equal to the actual level of activity A static budget is not adjusted for
the actual level of production A more appropriate analysis would
make use of a flexible budget
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Slide 10-45
Flexible BudgetsFlexible Budgets
A flexible budget is a set of budget relationships that can be adjusted to various activity levels Thus, flexible budgets take into
account the fact that when production increases or decreases, variable costs can change
Fixed costs, however, stay the same
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Slide 10-46
Flexible BudgetFlexible Budget
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Slide 10-47
A ____ budget is not adjusted for the actual level of production.
a. Staticb. Flexiblec. Pro formad. None of the above
Answer: aStatic
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Slide 10-48
SpreadsheetsSpreadsheets
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Slide 10-49
Investigating Budget Variances
Investigating Budget Variances
Significant deviations from the budget, called budget variances, may have three causes1. The budget may not have been well
conceived2. Conditions may have changed3. Managers may have performed
their jobs particularly well or poorly
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Slide 10-50
Investigating Budget Variances
Investigating Budget Variances
Using a management by exception approach, only exceptional variances are investigated Generally, variances that are large
in absolute dollars or relative to budgeted amounts are considered exceptional It is important to point out that both
exceptional “unfavorable” and exceptional “favorable” variances should be investigated Learning objective 3: Explain why flexible budgets are
needed for performance evaluation
Slide 10-51
“Unfavorable” Budget Variance“Unfavorable” Budget Variance
Learning objective 3: Explain why flexible budgets are needed for performance evaluation
Learning objective 4: Discuss the conflict between the planning and control uses of budgets
Slide 10-52
Conflict in Planning and Control Uses of BudgetsConflict in Planning and Control Uses of Budgets
Budgets are used for both planning and control With respect to planning, they
communicate company goals and help coordinate various activities
With respect to control, they focus the attention of managers on meeting or beating budget targets There are inherent conflicts when
budgets are used for both planning and control
Slide 10-53
Issues With Budget-Based Compensation
Issues With Budget-Based Compensation
The following slide helps understanding of the two related problems The illustration shows a common
budget based compensation scheme in which a manager receives a “hurdle” bonus once a target is hit Performance better than 80% of
budgeted profit results in additional “variable” bonus
Learning objective 4: Discuss the conflict between the planning and control uses of budgets
Slide 10-54
Common Budget-based Compensation SchemeCommon Budget-based Compensation Scheme
Learning objective 4: Discuss the conflict between the planning and control uses of budgets
Slide 10-55
Issues With Budget-Based Compensation
Issues With Budget-Based Compensation
The first problem is that managers have incentive to pad a budget and create budget slack Budget slack is a budget with
targets that are easy to achieve The lower the budget target, the
more likely it is that managers will receive the hurdle and variable bonus Managers can create slack by lowering
sales and increasing cost forecastsLearning objective 4: Discuss the conflict between the planning and control uses of budgets
Slide 10-56
Issues With Budget-Based Compensation
Issues With Budget-Based Compensation
The second problem relates to the fact that managers who are evaluated may have an incentive to shift income from one period to another Consider a manager who estimates
that it is unlikely that the target will be met
The manager has an incentive to shift income from a future period to the current period Learning objective 4: Discuss the conflict between the planning
and control uses of budgets
Slide 10-57
Issues With Budget-Based Compensation
Issues With Budget-Based Compensation
The best that can be done to mitigate the conflict between the planning and control uses of budgets is to assure managers that their performance in comparison to the budget will be fairly evaluated and compensated Managers should be confident that
they will be allowed to comment on the real causes of budget variances and tell their side of the storyLearning objective 4: Discuss the conflict between the planning
and control uses of budgets
Slide 10-58
Budget PaddingBudget Padding
Learning objective 4: Discuss the conflict between the planning and control uses of budgets
Slide 10-59
CopyrightCopyright© 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.