Chapter 9-1 CHAPTER Budgetary Planning Managerial Accounting, Fifth Edition Chapter 9-2 Study Study Objectives Objectives Chapter 9-3 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 Preview Preview of of Chapter Chapter Budgeting is critical to financial well-being Use budgets in planning and controlling operations Specific focus is on how budgeting is used as a planning tool by management Chapter 9-4 Budgetary Budgetary Planning 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 9-5 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 Budgeting Basics Basics Budget A formal written statement of management’s plans for a specified future time period, expressed in financial terms Primary way to communicate agreed-upon objectives to all parts of the company Promotes efficiency Control device - important basis for performance evaluation once adopted Chapter 9-6 Budgeting Budgeting Basics Basics –– Role Role of of Accounting Accounting Historical accounting data on revenues, costs, and expenses help in formulating future budgets Accountants normally responsible for presenting management’s budgeting goals in financial terms The budget and its administration are, however, entirely management’s responsibility Chapter 9-7 Budgeting Budgeting Basics Basics Benefits 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 9-8 LO 1: Indicate the benefits of budgeting Budgeting Budgeting Basics Basics Benefits 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 9-9 LO 1: Indicate the benefits of budgeting Budgeting Budgeting Basics Basics Benefits Benefits A budget is an aid to management not a substitute for management Chapter 9-10 LO 1: Indicate the benefits of budgeting Financial Financial Budgets: Budgets: Cash Cash Budget Budget Example – Hayes Company Prepare schedule of cash payments for direct materials Illustration 9-16 Now prepare the Cash Budget based on the assumptions and preceding schedules Chapter 9-48 LO 5: Explain the principal sections of a cash budget Financial Financial Budgets: Budgets: Cash Cash Budget Budget Illustration 9-17 Chapter 9-49 LO 5: Explain the principal sections of a cash budget Financial Financial Budgets: Budgets: Cash Cash Budget 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 9-50 LO 5: Explain the principal sections of a cash budget Financial Financial Budgets: Budgets: Budgeted Budgeted Balance Balance Sheet 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 9-51 LO 5: Explain the principal sections of a cash budget Financial Financial Budgets: Budgets: Budgeted Budgeted Balance Balance Sheet Sheet Additional data: Chapter 9-52 Illustration 9-18 LO 5: Explain the principal sections of a cash budget Review Review Question Question 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 b Chapter 9-53 c $96,00 $90,00 1st Quarter 28,000 60% 2nd Quarter 42,000 = 36,000 = 40% LO 5: Explain the principal sections 78,000of a cash budget Budgeting: Budgeting: Merchandisers Merchandisers Sales Budget: Starting point and key factor in developing the master budget Use a purchases budget instead of a production budget Does not use the manufacturing budgets (direct materials, direct labor, manufacturing overhead) To determine budgeted merchandise purchases: Chapter 9-54 LO 6: Indicate the applicability of budgeting in nonmanufacturing companies Budgeting: Budgeting: Merchandisers 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 Goods Sold Illustration 9-20 Chapter 9-55 LO 6: Indicate the applicability of budgeting in nonmanufacturing companies Budgeting: Budgeting: Service Service Companies Companies Critical factor in budgeting is coordinating professional staff needs with anticipated services Problems if overstaffed: Disproportionately high labor costs, Lower profits due to additional salaries, and / or Increased staff turnover due to lack of challenging work Problems if understaffed: Lost revenues because existing and future client needs for services cannot be met, and / or Loss of professional staff due to excessive work loads Chapter 9-56 LO 6: Indicate the applicability of budgeting in manufacturing companies Budgeting: Budgeting: Not-for-Profit Not-for-Profit Companies Companies Just as important as for profit-oriented 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 9-57 LO 6: Indicate the applicability of budgeting in nonmanufacturing companies Review Review Question Question 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 9-58 LO 6: Indicate the applicability of budgeting in nonmanufacturing companies Chapter Chapter Review Review 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, 2011 Chapter 9-59 Chapter Chapter Review Review Solution Solution Perine Company Budgeted Income Statement For Year Ending December 31, 2011 Sales $2,000,000 Cost of Goods Sold (50,000 units @ $22) 1,100,000 Gross Profit 900,000 Selling & Administrative Expenses 300,000 Income from Operations 600,000 Income Tax Expense 150,000 Net Income $450,000 Chapter 9-60 All About YOU: Avoiding Personal Financial Disaster The average U.S household income is $49,430, before taxes The average family spends $5,375 on food, $13,283 on housing, and $7,759 on transportation annually Chapter 9-61 Copyright Copyright Copyright © 2011 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 back-up 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 9-62 ... Control device - important basis for performance evaluation once adopted Chapter 9-6 Budgeting Budgeting Basics Basics –– Role Role of of Accounting Accounting Historical accounting data on revenues,.. .CHAPTER Budgetary Planning Managerial Accounting, Fifth Edition Chapter 9-2 Study Study Objectives Objectives Chapter 9-3 Indicate the benefits of budgeting... Companies Companies Merchandisers Service Not -for- profit Budgeting Budgeting Basics Basics Budget A formal written statement of management’s plans for a specified future time period, expressed