Manerial accounting 11e garrison noreen brewer chap009

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11th Edition Chapter McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Profit Planning Chapter Nine McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period The act of preparing a budget is called budgeting The use of budgets to control an organization’s activity is known as budgetary control McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Planning and Control Planning – involves developing objectives and preparing various budgets to achieve these objectives McGraw-Hill/Irwin Control – involves the steps taken by management that attempt to ensure the objectives are attained Copyright © 2006 The McGraw-Hill Companies, Inc Advantages of Budgeting Define goal and objectives Communicate plans Think about and plan for the future Advantages Coordinate activities Means of allocating resources Uncover potential bottlenecks McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Choosing the Budget Period Operating Budget 2003 2004 The annual operating budget may be divided into quarterly or monthly budgets McGraw-Hill/Irwin 2005 2006 A continuous budget is a 12month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed Copyright © 2006 The McGraw-Hill Companies, Inc Self-Imposed Budget Top M anagem ent M id d le M anagem ent S u p e r v is o r S u p e r v is o r M id d le M anagem ent S u p e r v is o r S u p e r v is o r A budget is prepared with the full cooperation and participation of managers at all levels A participative budget is also known as a self-imposed budget McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Advantages of Self-Imposed Budgets 1 Individuals Individuals at at all all levels levels of of the the organization organization are are viewed viewed as as members members of of the the team team whose whose judgments judgments are are valued valued by by top top management management 2 Budget Budget estimates estimates prepared prepared by by front-line front-line managers managers are are often often more more accurate accurate than than estimates estimates prepared prepared by by top top managers managers 3 Motivation Motivation is is generally generally higher higher when when individuals individuals participate participate in in setting setting their their own own goals goals than than when when the the goals goals are are imposed imposed from from above above 4 A A manager manager who who is is not not able able to to meet meet aa budget budget imposed imposed from from above above can can claim claim that that itit was was unrealistic unrealistic SelfSelfimposed imposed budgets budgets eliminate eliminate this this excuse excuse McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Self-Imposed Budgets Most companies not rely exclusively upon self-imposed budget in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Cash Budget Schedule Schedule of of Expected Expected Cash Cash Collections Collections McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Cash Budget Schedule Schedule of of Expected Expected Cash Cash Disbursements Disbursements Direct Labor Budget Manufacturing Overhead Budget Selling and Administrative Expense Budget McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Cash Budget Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on it line-of-credit McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Cash Budget Ending cash balance for April is the beginning May balance McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Cash Budget McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check  What is the excess (deficiency) of cash available over disbursements for June? a $ 85,000 b $(10,000) c $ 75,000 d $ 95,000 McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Quick Check  What is the excess (deficiency) of cash available over disbursements for June? a $ 85,000 b $(10,000) c $ 75,000 d $ 95,000 McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Cash Budget $50,000 × 16% × 3/12 = $2,000 Borrowings on April and repayment on June 30 McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Budgeted Income Statement Cash Budget ed t e pl m o C Budgeted Income Statement After we complete the cash budget, we can prepare the budgeted income statement for Royal McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Budgeted Income Statement Royal Company Budgeted Income Statement For the Three Months Ended June 30 Sales (100,000 units @ $10) Cost of goods sold (100,000 @ $4.99) Gross margin Selling and administrative expenses Operating income Interest expense Net income $ 1,000,000 499,000 501,000 260,000 241,000 2,000 $ 239,000 Sales Sales Budget Budget Ending Ending Finished Finished Goods Goods Inventory Inventory Selling Selling and and Administrative Administrative Expense Expense Budget Budget Cash Cash Budget Budget McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc The Budgeted Balance Sheet Royal Royal reported reported the the following following account account balances balances prior prior to to preparing preparing its its budgeted budgeted financial financial statements: statements:  Land Land $50,000 $50,000  Common Common stock stock $200,000 $200,000  Retained Retained earnings earnings $146,150 $146,150  Equipment Equipment $175,000 $175,000 McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities McGraw-Hill/Irwin $ 43,000 75,000 4,600 24,950 147,550 50,000 367,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550 25% 25% of of June June sales sales of of $300,000 $300,000 11,500 11,500 lbs lbs at at $0.40/lb $0.40/lb 5,000 5,000 units units at at $4.99 $4.99 each each 50% 50% of of June June purchases purchases of of $56,800 $56,800 Copyright © 2006 The McGraw-Hill Companies, Inc Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities McGraw-Hill/Irwin $ 43,000 Beginning balance 75,000 Add: net income 4,600 Deduct: dividends 24,950 Ending balance 147,550 $146,150 239,000 (49,000) $336,150 50,000 367,000 417,000 $ 564,550 $ 28,400 200,000 336,150 $ 564,550 Copyright © 2006 The McGraw-Hill Companies, Inc International Aspects of Budgeting • When a multinational company enters into the budgeting process there are at least three major problems that must be dealt with Fluctuations in foreign currency exchange rates High inflation rates Local economic conditions and governmental policies McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc End of Chapter McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc
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