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Financial Management
The Basic Framework of Budgeting
Slide 2
Planning and Control
Planning – Control –
involves developing involves the steps taken by
objectives and management to increase
preparing various the likelihood that the
budgets to achieve objectives set down while
those objectives. planning are attained and
that all parts of the
organization are working
together toward that goal.
Slide 3
Advantages of Budgeting
Define goals
and objectives
Communicate Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
Slide 4
Responsibility Accounting
Slide 5
Choosing the Budget Period
Operating Budget
Slide 6
Self-Imposed Budget
Top Management
Middle Middle
Management Management
Slide 7
Advantages of Self-Imposed Budgets
1. Individuals at all levels of the organization are viewed as
members of the team whose judgments are valued by top
management.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
3. Motivation is generally higher when individuals participate
in setting their own goals than when the goals are
imposed from above.
4. A manager who is not able to meet a budget imposed
from above can claim that it was unrealistic. Self-imposed
budgets eliminate this excuse.
Slide 8
Self-Imposed Budgets
Self-imposed budgets should be reviewed
by higher levels of management to
prevent “budgetary slack.”
Most companies issue broad guidelines in
terms of overall profits or sales. Lower
level managers are directed to prepare
budgets that meet those targets.
Slide 9
Human Factors in Budgeting
The success of a budget program depends on three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based on
meeting budget targets.
Slide 10
The Budget Committee
Slide 11
The Master Budget: An Overview
Sales budget
Selling and
Ending inventory administrative
Production budget
budget budget
Cash Budget
Budgeted
Budgeted
income
balance sheet
statement
Slide 12
PROFIT PLANNING: Step-by-Step Guide
Slide 13
Budgeting Example
Slide 14
The Sales Budget
Slide 15
Expected Cash Collections
Slide 16
Expected Cash Collections
Slide 17
Expected Cash Collections
Slide 18
Expected Cash Collections
Slide 19
Quick Check
Slide 20
Quick Check
Slide 21
Expected Cash Collections
Slide 22
PROFIT PLANNING: Step-by-Step Guide
Production Budget
Slide 23
The Production Budget
Sales Production
Budget Budget
and
Expected
Cash
Collections
Slide 25
The Production Budget
Slide 26
The Production Budget
Slide 28
Quick Check
Slide 29
The Production Budget
Slide 30
The Production Budget
Slide 32
The Direct Materials Budget
Slide 33
The Direct Materials Budget
Slide 34
The Direct Materials Budget
Slide 35
The Direct Materials Budget
March 31 inventory
Slide 37
Quick Check
Slide 38
The Direct Materials Budget
Slide 39
The Direct Materials Budget
Slide 40
Expected Cash Disbursement for Materials
Royal pays $0.40 per pound for its materials.
One-half of a month’s purchases is paid for in the
month of purchase; the other half is paid in the
following month.
The March 31 accounts payable balance is
$12,000.
Slide 41
Expected Cash Disbursement for Materials
Slide 42
Expected Cash Disbursement for Materials
Slide 44
Quick Check
Slide 45
Expected Cash Disbursement for Materials
Slide 46
PROFIT PLANNING: Step-by-Step Guide
Direct Labor
Budget
Slide 47
The Direct Labor Budget
At Royal, each unit of product requires 0.05 hours (3
minutes) of direct labor.
The Company has a “no layoff” policy so all employees
will be paid for 40 hours of work each week.
For purposes of our illustration assume that Royal has a
“no layoff” policy, workers are pay at the rate of $10 per
hour regardless of the hours worked.
For the next three months, the direct labor workforce will
be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.
Slide 48
The Direct Labor Budget
Slide 49
The Direct Labor Budget
Slide 50
The Direct Labor Budget
Slide 52
Quick Check
Slide 53
Quick Check
d. $57,000
Slide 54
PROFIT PLANNING: Step-by-Step Guide
Manufacturing
Overhead Budget
Slide 55
Manufacturing Overhead Budget
Slide 56
Manufacturing Overhead Budget
* rounded
Slide 58
Manufacturing Overhead Budget
Slide 59
Ending Finished Goods Inventory Budget
Direct materials
budget and information.
Slide 60
Ending Finished Goods Inventory Budget
Slide 61
Ending Finished Goods Inventory Budget
Slide 62
Ending Finished Goods Inventory Budget
Production Budget.
Slide 63
PROFIT PLANNING: Step-by-Step Guide
Selling and
Administrative
Expense Budget.
Slide 64
Selling and Administrative Expense Budget
At Royal, the selling and administrative expense budget is
divided into variable and fixed components.
The variable selling and administrative expenses are $0.50
per unit sold.
Fixed selling and administrative expenses are $70,000 per
month.
The fixed selling and administrative expenses include
$10,000 in costs – primarily depreciation – that are not cash
outflows of the current month.
Slide 65
Selling and Administrative Expense Budget
Slide 67
Quick Check
Slide 68
Selling Administrative Expense Budget
Slide 69
PROFIT PLANNING: Step-by-Step Guide
Cash Budget
Slide 70
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the
company will need to borrow money or if it will be able to
repay funds previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.
Slide 71
The Cash Budget
Slide 72
The Cash Budget
Schedule of Expected
Cash Collections.
Slide 73
The Cash Budget
Schedule of Expected
Cash Disbursements.
Direct Labor
Budget.
Manufacturing
Overhead Budget.
Slide 74
The Cash Budget
Slide 75
The Cash Budget
Slide 76
The Cash Budget
Slide 77
Quick Check
Slide 78
Quick Check
Slide 79
The Cash Budget
Slide 80
End of Chapter
Slide 81