BUDGETING FOR PLANNING AND CONTROL CHAPTER © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER OBJECTIVES Define budgeting, and discuss its role in planning, controlling, and decision making Prepare the operating budget, identify its major components, and explain the interrelationships of the various components Identify the components of the financial budget, and prepare a cash budget © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER OBJECTIVES Define flexible budgeting, and discuss its role in planning, control, and decision making Define activity-based budgeting, and discuss its role in planning, control, and decision making Identify and discuss the key features that a budgetary system should have to encourage managers to engage in goalcongruent behavior © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE ROLE OF BUDGETING IN PLANNING AND CONTROL Budgets •Quantitative plans for the future •Stated in either physical or financial terms or both Control •Process of setting standards, receiving feedback on actual performance, and taking corrective action LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.1—THE MASTER BUDGET AND ITS INTERRELATIONSHIPS LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE ROLE OF BUDGETING IN PLANNING AND CONTROL Purposes of Budgeting •Forces managers to plan •Provides resource information to improve decision making •Aids in the use of resources and employees that can be used for evaluation of performance •Improves communication and coordination LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE ROLE OF BUDGETING IN PLANNING AND CONTROL The Budgeting Process •Directing and Coordinating • Budget director: works under the direction of the budget committee; usually the controller or someone who reports to the controller • Budget committee: responsible for reviewing the budget, providing policy guidelines and budgetary goals, resolving differences, approving the final budget, and monitoring the actual performance LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE ROLE OF BUDGETING IN PLANNING AND CONTROL The Budgeting Process •Types of Budgets • Master budget: financial plan for the year made up of various individual departmental and activity budgets • Operating budgets: concerned with the incomegenerating activities • Financial budgets: concerned with the inflows and outflows of cash and with financial position • Continuous (or rolling) budget: a moving 12month budget LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.2—COMPONENTS OF MASTER BUDGET LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PREPARING THE OPERATING BUDGET • Sales budget: describes expected sales for each product in units and dollars • Production budget: describes how many units must be produced in order to meet sales needs and satisfy ending inventory requirements Units to be produced = Unit sales + Desired units in ending inventory – Units in beginning inventory LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PREPARING THE FINANCIAL BUDGET Shortcomings of the Traditional Master Budget Process 1.Department oriented and does not recognize the interdependencies among departments 2.Static, not dynamic • Static budget: developed for a single level of activity • Incremental approach: current budget based on last year’s amounts as adjusted for inflation • Zero-base budgeting: prior year’s budgeted level is not taken for granted LO-3 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use PREPARING THE FINANCIAL BUDGET Shortcomings of the Traditional Master Budget Process 3.Results, not process, oriented • Managers concentrate on resources and may fail to see the link between resources and output LO-3 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FLEXIBLE BUDGETS FOR PLANNING AND CONTROL Static Budgets versus Flexible Budgets •Static budgets: developed around a single level of activity •Flexible budgets: there are two types • A flexible budget (1) provides expected costs for a variety of activity levels, or (2) provides budgeted costs for the actual level of activity LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FLEXIBLE BUDGETS FOR PLANNING AND CONTROL Flexible Budgets •Total budgeted production costs increase as output increases • Sometimes referred to as a variable budget •Flexible budget variances are generated by comparing budgeted costs for the actual level of activity with actual costs for the same level LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use FLEXIBLE BUDGETS FOR PLANNING AND CONTROL • Budgets can be used to examine the efficiency and effectiveness of a company • Efficiency is achieved when the business process is performed in the best possible way, with little or no waste • Effectiveness means that a manager achieves or exceeds the goals described by the static budget LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.7—ABT PERFORMANCE REPORT FOR QUARTER 1: COMPARISON OF ACTUAL WITH STATIC (MASTER) BUDGET AMOUNTS LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.8—MANAGERIAL PERFORMANCE REPORT: QUARTERLY PRODUCTION (IN THOUSANDS) LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ACTIVITY-BASED BUDGETS • Flexible budgeting allows creation of budgets for varying levels of activity • Begins with output and then determines the resources necessary to create that output • Works backward from activities and their drivers to the underlying costs LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.9—TRADITIONAL BUDGET FOR THE SECURE-CARE DEPARTMENT LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.10—FLEXIBLE BUDGET FOR THE SECURE-CARE DEPARTMENT LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 8.11—ACTIVITY-BASED BUDGET FOR THE SECURE-CARE DEPARTMENT LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ACTIVITY-BASED BUDGETS • Feature costing: assigns costs to activities and products or services based on the product’s or service’s features LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE BEHAVIORAL DIMENSION OF BUDGETING • Budgets are often used to judge the actual performance of managers • The alignment of managerial and organizational goals is often referred to as goal congruence • Dysfunctional behavior involves individual behavior that is in basic conflict with the goals of the organization LO-6 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use THE BEHAVIORAL DIMENSION OF BUDGETING Characteristics of a Good Budgetary System •Frequent Feedback on Performance •Monetary and Nonmonetary Incentives •Participative Budgeting •Realistic Standards •Controllability of Costs •Multiple Measures of Performance LO-6 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use END OF CHAPTER © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ... level of activity •Flexible budgets: there are two types • A flexible budget (1) provides expected costs for a variety of activity levels, or (2) provides budgeted costs for the actual level of. .. the total direct labor hours and direct labor cost needed for the number of units in the production budget • Overhead budget: shows the expected cost of all indirect manufacturing items LO-2 © 2014... budget: supplies information for the balance sheet and serves as an input for the cost of goods sold budget • Cost of goods sold budget: used in preparing the budgeted income statement LO-2 © 2014