In this chapter, the learning objectives are: Indicate the benefits of budgeting, state the essentials of effective budgeting, identify the budgets that comprise the master budget, describe the sources for preparing the budgeted income statement.
Chapter 23-1 CHAPTER 23 BUDGETARY PLANNING Accounting Principles, Eighth Edition Chapter 23-2 Study Objectives Study Objectives Indicate the benefits of budgeting State the essentials of effective budgeting Identify the budgets that comprise the master budget Describe the sources for preparing the budgeted income statement Explain the principal sections of a cash budget Indicate the applicability of budgeting in nonmanufacturing companies Chapter 23-3 Preview of Chapter Preview of Chapter Budgeting is critical to financial wellbeing Use budgets in planning and controlling operations Specific focus is on how budgeting is used as a planning tool by management Chapter 23-4 Budgetary Planning Budgetary Planning Budgeting Budgeting Basics Basics Preparing Preparingthe the Operating Operating Budgets Budgets Budgeting & accounting Benefits Sales Production Essentials of effective budgeting Length of budget period Direct materials Direct labor Budgeting process Budgeting and human behavior Budgeting and longrange planning The master budget Chapter 23-5 Manufacturing overhead Selling and administrative expense Budgeted income statement Preparing Preparingthe the Financial Financial Budgets Budgets Cash Budgeted balance sheet Budgeting Budgetingin in NonNonmanufacturing manufacturing Companies Companies Merchandisers Service Not-for-profit Budgeting Basics Budgeting Basics Budget A formal written statement of management’s plans for a specified future time period, expressed in financial terms Primary way to communicate agreedupon objectives to all parts of the company Promotes efficiency Control device evaluation Control device important basis for performance once adopted Chapter 23-6 Budgeting Basics – Role of Accounting Budgeting Basics – Role of Accounting Historical accounting data on revenues, costs, and expenses help in formulating future budgets Accountants normally responsible for presenting management’s management’s budgeting goals in financial terms The budget and its administration are, however, entirely management’s responsibility Chapter 23-7 Budgeting Basics Benefits Budgeting Basics Benefits Requires all levels of management to plan ahead and formalize goals on a recurring basis Provides definite objectives for evaluating performance at each level of responsibility Creates an early warning system for potential problems Chapter 23-8 LO 1: Indicate the benefits of budgeting Budgeting Basics Benefits Budgeting Basics Benefits Facilitates coordination of activities within the business Results in greater management awareness of the entity’s overall operations and the impact of external factors Motivates personnel throughout organization to meet planned objectives Chapter 23-9 LO 1: Indicate the benefits of budgeting Budgeting Basics Benefits Budgeting Basics Benefits A budget is an aid to management not a substitute for management Chapter 23-10 LO 1: Indicate the benefits of budgeting Financial Budgets: Cash Budget Financial Budgets: Cash Budget Example – Hayes Company Usually prepare schedule of collections from customers Chapter 23-47 LO 5: Explain the principal sections of a cash budget Financial Budgets: Cash Budget Financial Budgets: Cash Budget Example – Hayes Company Prepare schedule of cash payments for direct materials Now prepare the Cash Budget based on the assumptions and preceding schedules Chapter 23-48 LO 5: Explain the principal sections of a cash budget Financial Budgets: Cash Budget Financial Budgets: Cash Budget Chapter 23-49 LO 5: Explain the principal sections of a cash budget Financial Budgets: Cash Budget Financial Budgets: Cash Budget Contributes to more effective cash management Shows managers the need for additional financing before actual need arises Indicates when excess cash will be available Chapter 23-50 LO 5: Explain the principal sections of a cash budget Financial Budgets: Budgeted Balance Sheet Financial Budgets: Budgeted Balance Sheet A projection of financial position at the end of the budgeted period Developed from the budgeted balance sheet for the preceding year and the budgets for the current year Chapter 23-51 LO 5: Explain the principal sections of a cash budget Financial Budgets: Budgeted Balance Sheet Financial Budgets: Budgeted Balance Sheet Example – Hayes Company Additional data: Chapter 23-52 LO 5: Explain the principal sections of a cash budget Let’s Review Let’s Review Expected direct materials purchases in Read Company are $70,000 in the first quarter and $90,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are: a $96,000 b. $90,000 c. $78,000 d. $72,000 Chapter 23-53 LO 5: Explain the principal sections of a cash budget Budgeting: Merchandisers Budgeting: Merchandisers Sales Budget: starting point and key factor in developing the Sales Budget master budget Use a purchases budget instead of a production budget purchases budget Does not use the manufacturing budgets (direct materials, direct use the manufacturing budgets labor, manufacturing overhead) To determine budgeted merchandise purchases: Chapter 23-54 LO 6: Indicate the applicability of budgeting in non manufacturing companies Budgeting: Merchandisers Budgeting: Merchandisers Example – Lima Company Budgeted sales for July $300,000 and for August $320,000 Cost of Goods Sold: 70% of sales Desired ending inventory: 30% of next month’s Cost of Chapter 23-55 Goods Sold LO 6: Indicate the appliability of budgeting in nonmanufacturing companies Budgeting: Service Companies Budgeting: Service Companies Critical factor in budgeting is coordinating professional staff needs with anticipated services Problems if overstaffed: overstaffed Disproportionately high labor costs Lower profits due to additional salaries Increased staff turnover due to lack of challenging work Problems if understaffed: understaffed Lost revenues because existing and future client needs for services cannot be met Loss of professional staff due to excessive work loads Chapter 23-56 LO 6: Indicate the applicability of budgeting in non manufacturing companies Budgeting: NotforProfit Companies Budgeting: NotforProfit Companies Just as important as for profitoriented company However, budget process differs significantly from that of a profit oriented company Budget on the basis of cash flows (expenditures and receipts), not on a revenue and expense basis The starting point is usually expenditures, not receipts Management’s task is to find receipts needed to support planned expenditures Budget must be strictly followed, overspending often illegal Chapter 23-57 LO 6: Indicate the applicability of budgeting in non manufacturing companies Let’s Review Let’s Review The budget for a merchandiser differs from a budget for a manufacturer because: a A merchandise purchases budget replaces the production budget b. The manufacturing budgets are not applicable. c. None of the above d. Both (a) and (b) above Chapter 23-58 LO 6: Indicate the applicability of budgeting in non manufacturing companies Chapter Review Brief Exercise 238 Chapter Review Brief Exercise 238 Perine Company has completed all of its operating budgets. The sales budget for the year shows 50,000 units and total sales of $2,000,000. The total unit cost of making one unit of sales is $22. Selling and administrative expenses are expected to be $300,000. Income taxes are estimated to be $150,000 Prepare a budgeted income statement for the year ending December 31, 2008 Chapter 23-59 Chapter Review Brief Exercise 238 Chapter Review Brief Exercise 238 Perine Company Budgeted Income Statement For Year Ending December 31, 2008 Sales Cost of Goods Sold (50,000 units @ $22) Gross Profit Selling & Administrative Expenses Income from Operations Income Tax Expense Net Income Chapter 23-60 $2,000,000 1,100,000 900,000 300,000 600,000 150,000 $450,000 Copyright Copyright Copyright © 2008 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 backup 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 Chapter 23-61 ... Specific focus is on how budgeting is used as a? ?planning? ?tool by management Chapter 23-4 Budgetary? ?Planning Budgetary? ?Planning Budgeting Budgeting Basics Basics Preparing Preparingthe the Operating Operating Budgets Budgets Budgeting & accounting. . .CHAPTER? ? 23 BUDGETARY PLANNING Accounting? ?Principles, Eighth Edition Chapter 23-2 Study Objectives Study Objectives Indicate the benefits of budgeting... important basis for performance once adopted Chapter 23-6 Budgeting Basics? ?–? ?Role of? ?Accounting Budgeting Basics? ?–? ?Role of? ?Accounting Historical? ?accounting? ?data on revenues, costs, and expenses help in