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Budgetary Planning
ASSIGNMENT CLASSIFICATION TABLE
Brief
Exercises
A
Problems
B
Problems
1, 2, 3, 4,
5, 6, 7, 8,
9, 10, 11
1A, 2A, 3A
1B, 2B, 3B
11
1B, 2B, 3B
19, 20
4A, 6A
4B
21, 22
10
3, 15, 16,
17
5A
5B
Study Objectives
Questions
1.
1, 2, 4
2.
3, 5, 6,
7, 8
3.
9, 10, 11,
12, 13, 14,
15, 16
1, 2, 3, 4,
5, 6, 7
4.
17, 18
5.
6.
9-1
Exercises
Description
Difficulty
Level
Time
Allotted (min.)
1A
Simple
3040
2A
Simple
4050
3A
Moderate
3040
4A
Moderate
3040
5A
Simple
3040
6A
Complex
4050
1B
Simple
3040
2B
Simple
4050
3B
Moderate
3040
4B
Moderate
3040
5B
Simple
3040
9-2
9-3
Q9-21
Q9-22
6.
Q9-19
Explain the principal
sections of a cash budget.
5.
3.
2.
Q9-7
Q9-8
E9-1
Q9-4
E9-1
BE9-10
E9-3
E9-15
E9-16
Q9-20
BE9-9
E9-12
Q9-17
BE9-8
E9-11
Q9-12
Q9-13
Q9-14
Q9-15
Q9-16
BE9-2
BE9-3
BE9-4
BE9-5
E9-13
E9-14
E9-15
Analysis
E9-17
P9-5A
P9-5B
E9-16
P9-4A
P9-4B
Manag. Analysis
Communication
Real-World Focus
Exploring the Web
BE9-1
E9-9
E9-10
E9-11
P9-1A
P9-2A
P9-1B
P9-2B
P9-1A P9-1B
P9-2A P9-2B
P9-6A
BE9-6
BE9-7
E9-2
E9-3
E9-4
E9-5
E9-6
E9-7
E9-8
Application
Q9-18
Q9-9
Q9-10
Q9-11
E9-1
Q9-3
Q9-5
Q9-6
Q9-1
Q9-2
Knowledge Comprehension
4.
1.
Study Objective
Decision Making
Across the
Organization
Manag. Analysis
Communication
Synthesis
Ethics Case
Decision Making
Across the
Organization
All About You
P9-3A
P9-3B
P9-3A
P9-3B
Evaluation
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
STUDY OBJECTIVES
1. INDICATE THE BENEFITS OF BUDGETING.
2. STATE THE ESSENTIALS OF EFFECTIVE BUDGETING.
3. IDENTIFY THE BUDGETS THAT COMPRISE THE
MASTER BUDGET.
4. DESCRIBE THE SOURCES FOR PREPARING THE
BUDGETED INCOME STATEMENT.
5. EXPLAIN THE PRINCIPAL SECTIONS OF A CASH
BUDGET.
6. INDICATE THE APPLICABILITY OF BUDGETING IN
NONMANUFACTURING COMPANIES.
9-4
CHAPTER REVIEW
Budgeting Basics
1.
(S.O. 1) A budget is a formal written statement of managements plans for a specified time
period, expressed in financial terms.
2.
The role of accounting during the budgeting process is to (a) provide historical data on revenues,
costs, and expenses, (b) express managements plans in financial terms, and (c) prepare periodic
budget reports.
Benefits of Budgeting
3.
5.
The most common budget period is one year. A continuous twelve-month budget results from
dropping the month just ended and adding a future month. The annual budget is often
supplemented by monthly and quarterly budgets.
6.
The responsibility for coordinating the preparation of the budget is assigned to a budget
committee. The budget committee usually includes the president, treasurer, chief accountant
(controller), and management personnel from each major area of the company.
7.
A budget can have a significant impact on human behavior. A budget may have a strong positive
influence on a manager when
a. Each level of management is invited and encouraged to participate in developing the budget.
b. Criticism of a managers performance is tempered with advice and assistance.
8.
Long-range planning involves the selection of strategies to achieve long-term goals and the
development of policies and plans to implement the strategies. Long-range plans contain considerably
less detail than budgets.
(S.O. 3) The master budget is a set of interrelated budgets that constitutes a plan of action for a
specified time period. It is developed within the framework of a sales forecast which shows
potential sales for the industry and the companys expected share of such sales.
9-5
10.
11.
The sales budget is the first budget prepared. It is derived from the sales forecast, and it
represents managements best estimate of sales revenue for the budget period. It is prepared by
multiplying the expected unit sales volume for each product by its anticipated unit selling price.
12.
The production budget shows the units that must be produced to meet anticipated sales. It is
derived from the budgeted sales units plus the desired ending finished goods units less the
beginning finished goods units.
13.
The direct materials budget shows both the quantity and cost of direct materials to be
purchased. It is derived from the direct materials units required for production plus the desired
ending direct materials units less the beginning direct materials units.
14.
The direct labor budget shows the quantity (hours) and cost of direct labor necessary to meet
production requirements. The direct labor budget is critical in maintaining a labor force that can
meet expected levels of production.
15.
The manufacturing overhead budget shows the expected manufacturing overhead costs. The
selling and administrative expense budget is a projection of anticipated operating expenses.
Both budgets distinguish between fixed and variable costs.
(S.O. 4) The budgeted income statement is the important end-product in preparing operating
budgets. This budget indicates the expected profitability of operations and it provides a basis for
evaluating company performance.
a. The budget is prepared from the budgets described in review points 11-15.
b. For example, to find cost of goods sold, it is necessary to determine the total unit cost of a
finished product using the direct materials, direct labor, and manufacturing overhead
budgets.
Cash Budget
17.
(S.O. 5) The cash budget shows anticipated cash flows. It contains three sections (cash
receipts, cash disbursements, and financing) and the beginning and ending cash balances. Data
for preparing this budget are obtained from the other budgets.
18.
The budgeted balance sheet is a projection of financial position at the end of the budget period.
It is developed from the budgeted balance sheet for the preceding year and the budgets for the
current year.
(S.O. 6) The major differences in the master budget of a merchandiser and a manufacturing
company are that a merchandiser (a) uses a merchandise purchases budget instead of a
production budget and (b) does not use the manufacturing budgets (direct materials, direct labor,
and manufacturing overhead).
9-6
20.
In service enterprises, the critical factor in budgeting is coordinating professional staff needs with
anticipated services. Budget data for service revenue may be obtained from expected output or
expected input.
21.
In the budget process for not-for-profit organizations, the emphasis is on cash flows rather than
on a revenue and expense basis. For governmental units, the budget must be strictly followed and
overspending is often illegal.
9-7
LECTURE OUTLINE
A.
Budgeting Basics.
1. Planning is the process of establishing enterprise-wide objectives.
2. A budget is a formal written statement of managements plans for a
specified future time period, expressed in financial terms.
3. Accounting information makes major contributions to the budgeting
process.
B.
TEACHING TIP
Use ILLUSTRATION 9-1 to discuss the benefits of budgeting. Point out that even
though the budget process is procedural, it has behavioral implications that could
have a positive or negative effect on the accomplishment of company goals.
1. It requires all levels of management to plan ahead and to formalize goals
on a recurring basis.
2. It provides definite objectives for evaluating performance at each level of
responsibility.
3. It creates an early warning system for potential problems so that management can make changes before things get out of hand.
4. It facilitates the coordination of activities within the business by correlating
the goals of each segment with overall company objectives.
9-8
5. It results in greater management awareness of the entitys overall operations and the impact on operations of external factors, such as economic
trends.
6. It motivates personnel throughout the organization to meet planned
objectives.
C.
D.
a.
b.
c.
b.
c.
d.
9-9
TEACHING TIP
b.
Industry trends.
c.
d.
e.
f.
Changes in prices.
g.
Technological developments.
9-10
F.
a.
b.
A budget may discourage additional effort and pull down the morale
of a manager.
c.
b.
c.
9-11
G.
TEACHING TIP
Use ILLUSTRATION 9-3 to describe the components of the master budget. Point
out that the individual budgets making up the master budget are prepared in an
ordered sequence. The information developed in one individual budget serves as
input in preparing other budgets. Budgeting is an interrelated process.
2. Sales Budget: The sales budget is the starting point in preparing the
master budget.
a.
b.
The sales budget is derived from the sales forecast and it represents
managements best estimate of sales revenue for the budget period.
3. Production Budget: The production budget shows the units that must be
produced to meet anticipated sales.
a.
TEACHING TIP
The production budget provides the basis for the budgeted costs for
each manufacturing cost element.
9-12
4. Direct Materials: The direct materials budget shows both the quantity
and cost of direct materials to be purchased.
a.
TEACHING TIP
5. Direct Labor: The direct labor budget contains the quantity (hours) and
cost of direct labor necessary to meet production requirements.
a.
b.
The direct labor budget is also used in preparing the budgeted cost
of goods sold and the cash budget.
9-13
b.
b.
TEACHING TIP
ILLUSTRATION 9-6 provides a format for preparing a cash budget. Point out that a
cash budget is prepared for a period of time, such as a month, a quarter, a year.
c.
Companies obtain data for preparing the cash budget from other
budgets and from information provided by management.
d.
H.
Merchandisers.
b.
Service enterprises.
c.
Not-for-profit organizations.
b.
b.
9-15
b.
9-16
20 MINUTE QUIZ
Circle the correct answer.
True/False
1.
Budgeting is the process of establishing enterprise-wide objectives that serve as a deterrent to waste and inefficiency.
True
2.
The effectiveness of the budget program is directly related to its acceptance by all levels
of management.
True
3.
False
The budgeted income statement indicates the expected profitability of operations for the
next year and provides the basis for evaluating company performance.
True
9.
False
The manufacturing overhead budget shows only the expected indirect labor costs for
the year.
True
8.
False
The quantities of direct materials in the direct materials budget are derived from the
formula: Desired Ending Direct Materials Units + Direct Materials Units Required for
Production Beginning Direct Materials Units = Required Direct Materials Units to be
Purchased.
True
7.
False
The sales budget is the first budget prepared and each of the other budgets depends on it.
True
6.
False
One disadvantage of budgeting is that it does not facilitate the coordination of activities
within a business.
True
5.
False
Budgeting always has the effect on human behavior of inspiring managers to higher
levels of performance.
True
4.
False
False
Long-range planning differs from budgeting in the time period involved, emphasis, and
the amount of detail presented.
True
False
9-17
10.
Budgeting is not used in not-for-profit organizations because it is not necessary for these
organizations to engage in profit planning.
True
False
Multiple Choice
1.
A formal written statement of managements plans for a specified future time period,
expressed in financial terms is a(n)
a. accounting plan.
b. budget.
c. research analysis.
d. sales budget.
2.
3.
4.
5.
If required production units are 75,000, budgeted sales units are 65,000, required direct
materials purchases units are 3,000, and beginning finished goods units are 5,000, then
desired ending finished goods units would be
a.
2,000.
b.
5,000.
c. 12,000.
d. 15,000.
9-18
ANSWERS TO QUIZ
True/ False
1.
2.
3.
4.
5.
False
True
False
False
True
6.
7.
8.
9.
10.
True
False
True
True
False
Multiple Choice
1.
2.
3.
4.
5.
b.
a.
b.
d.
d.
9-19
ILLUSTRATION 9-1
BENEFITS OF BUDGETING
1. It requires all levels of management to plan ahead and to formalize
goals on a recurring basis.
2. It provides definite objectives for evaluating performance at each
level of responsibility.
3. It creates an early warning system for potential problems so that
management can make changes before things get out of hand.
4. It facilitates the coordination of activities within the business by
correlating the goals of each segment with overall company objectives.
5. It results in greater management awareness of the entity's
overall operations and the impact on operations of external factors.
6. It motivates personnel throughout the organization to meet
planned objectives.
9-20
ILLUSTRATION 9-2
BUDGETING PROCESS
BUDGET COMMITTEE
MASTER BUDGET
OPERATING BUDGETS
FINANCIAL BUDGETS
9-21
ILLUSTRATION 9-3
COMPONENTS OF THE MASTER BUDGET
Sales
Budget
Production
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Operating Budgets
Budgeted
Balance
Sheet
Financial Budgets
Selling and
Administrative
Expense Budget
Budgeted
Income
Statement
Capital
Expenditure
Budget
Cash
Budget
9-22
ILLUSTRATION 9-4
PRODUCTION BUDGET
Budgeted
Sales
Units
Desired
Ending
Finished
Goods Units
Beginning
Finished
Goods
Units
Required
Production
Units
EXAMPLE COMPANY
Production Budget
For the Quarter Ended March 31, 2008
Expected unit sales
Add: Desired ending finished goods units
Total units required
Less: Beginning finished goods units
Required production units
9-23
75,000
5,000
80,000
8,000
72,000
ILLUSTRATION 9-5
DIRECT MATERIALS BUDGET
Direct
Materials
Units
Required for
Production
Desired
Ending
Direct
Materials
Units
Beginning
Direct
Materials
Units
Required
Direct
Materials
Units to be
Purchased
EXAMPLE COMPANY
Direct Materials Budget
For the Quarter Ended March 31, 2008
Units to be produced
Direct materials per unit
Total materials needed for production
Add: Desired ending direct materials
Total materials required
Less: Beginning direct materials
Direct materials units to be purchased
Cost per unit
Total cost of direct materials purchased
9-24
72,000
3
216,000
20,000
236,000
18,000
218,000
$5
$1,090,000
ILLUSTRATION 9-6
CASH BUDGET
EXAMPLE COMPANY
Cash Budget
For the Quarter Ended March 31, 2008
Beginning cash balance
$100,000
250,000
350,000
310,000
40,000
Financing
60,000
$100,000
9-25