The Budgeting Process Managerial Accounting Prepared by Diane Tanner University of North Florida...
-
Upload
hillary-wiggins -
Category
Documents
-
view
221 -
download
0
Transcript of The Budgeting Process Managerial Accounting Prepared by Diane Tanner University of North Florida...
Copyright ©2015. University of North Florida. All rights reserved.
The Budgeting Process
Managerial Accounting
Prepared by Diane TannerUniversity of North Florida
Chapter 37
2 Budgets • What is a budget?
– A projection of future operations (costs, revenues, and cash) and the resulting financial position of a company
• Three basic types– Capital budgets
• Proposed expenditures for long-term capital expenditures
– Operating budgets• Costs, revenues, and cash flows relating to
operations– Financial budgets
• Proforma financial statements
2
3 Budget Characteristics
• Are prepared in advance and pertain to future periods
• Are derived from a company’s long-term strategy • Quantified in physical or monetary units• Serve as a benchmark of expected performance• Must be realistic• Should be flexible• Should be evaluated regularly • Must be clearly communicated
3
Budgeting helps managers Communicate plans to other levels of
management and employees Quantify targets Determine directions in order to
allocate resources Promote forward thinking Turn strategic objectives into reality Specify a means of achieving goals
Planning Aspects of Budgeting4
Controlling Aspects of Budgeting
Budgeting helps managers…. Aid in measuring performance Provide direction and co-ordination Assign responsibilities Motivate managers to achieve goals Improve efficiency Establish targets and standards
5
6 What Can We Budget?
• Monetary and nonmonetary amounts can be budgeted
• Budgets can be in terms of:– Financial amounts– Time– Acquisition and use of materials– Manufacturing of products– Attendance at a football game– Number of points earned for class
participation
6
Budget Committee
Responsible for approval of the various budgets Includes the senior managers, president,
CFO, various vice-presidents and controller
7
Budget committees do not prepare the
budgets.
Budget Approaches
Top-down Approach
Goals are pushed down from top management
Bottom-up approach
Lower-level managers are the primary source of
information used in setting the budget
8
Budget Time Periods
Range from months to several years Inverse relationship between the length
of the budget period and the detail contained within the budget
ShortBudget Period
LongBudget Period
MuchDetail
LessSpecific
9
Specialized Budgeting Zero-based budgeting
A method of budget preparation which starts from zero each budget period
Managers must justify budgets every period Used primarily in government
Kaizen budgeting A Japanese model of budgeting Incorporates continuous improvement into each
subsequent budget period Assumes costs can be reduced somewhat as
time goes by because the company becomes more efficient
10
11 Are Budgets Successful?
Depends on1. Degree of support that top management
gives the budget 2. How top management uses budget
information3. Timeliness of budget follow up
11
12
Problems as a Result of Budgeting
Goal incongruence Occurs when upper-level management and lower-
level managers focus on different goals Arises from
Managers’ desires to make their annual performance evaluations look good and
Upper-level management wanting to maximum profits or ROI
13
Problems as a Result of Budgeting
Budget slack Also known as padding the budget Only occurs when bottom-up budgeting is employed
Bottom-up budgeting allows lower-level managers to provide input into budgeted amounts
To avoid the possibility of not meeting the budget target, managers tend to Overstate budget expenses Understate revenue
14
Problems as a Result of Budgeting
Income shifting Occurs when a manager’s bonus is tied to
meeting or beating budget targets Causes managers to shift income between
periods to increase their performance evaluations
Budget Variances
Managers may have done a ‘very good’ or ‘very bad’ job
Business or economic conditions may have changed
Weak development of budget
15
• Exist when actual results differ from budgeted amounts
• Causes of variances