Chapter 10 Budgetary Planning and Control

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Chapter 10Budgetary Planning and Control
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Presentation Outline

1. An Overview of Budgeting
2. The Master Budget and Selected Budget Formats

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I. An Overview of Budgeting

1. The Stages of Budgeting
2. Developing the Budget

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A. The Stages of Budgeting

1. Planning
2. Control

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1. Planning

• The budget process forces managers to consider
  carefully their goals and objectives and to
  specify means of achieving them.

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2. Control

• Budgets provide a means of evaluating
  performance. Potential causes of significant
  deviations from budgets include
• Budget was poorly conceived.
• Conditions have changed since the budget was
  prepared.
• Managers have done a particularly good or poor
  job.

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B. Developing the Budget

1. The Budget Committee
2. The Budget Time Period
3. Zero Base Budgeting

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1. The Budget Committee

• Various budgets are approved by a budget
  committee that is composed of senior managers
  such as the president, CFO, VP of operations, and
  the controller. Budgets may be developed with
  either a top-down or bottom-up approach.

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2. The Budget Time Period

• Budgets may cover a variety of time periods
  including a month, quarter, year, or even longer.
  Generally, longer budget periods provide less
  detail.

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3. Zero Base Budgeting

• Budgets are often adjusted up or down on the
  basis of a previous period adjusted for current
  conditions. Zero base budgeting requires that
  all budget amounts be currently justified even if
  they were supported in prior budgets. Due to the
  cost of the process, this zero base budgeting is
  often not used in business.

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II. The Master Budget and Budget Formats

1. A Formal Summary of Company Plans
2. Selected Budget Formats

The master budget coordinates the organizations
activities.
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A. A Formal Summary of Company Plans

• It sets specific targets for sales, production,
  selling and admin., and capital acquisitions.
• It culminates a budgeted income statement,
  balance sheet, and cash receipt and disbursement
  summary.

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III. Selected Budget Formats

1. Sales Budget
2. Production Budget
3. Direct Materials Budget
4. Direct Labor Budget
5. Overhead Budget
6. Cash Receipts and Disbursements Budget

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A. Sales Budget
Projected sales
x Selling price per unit
Budgeted sales revenue
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B. Production Budget
Budgeted sales in units
Desired ending inventory of finished goods
Total needs
- Beginning inventory of finished goods
Units to be produced
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C. Direct Materials Budget
Units to be produced
x Cost of parts per unit
Cost of parts needed for production
Desired ending inventory of parts
Total needed
- Beginning inventory of parts
Cost of purchases
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D. Direct Labor Budget
Direct labor hours per unit
x Labor rate per hour
Direct labor cost per unit
x Units to be produced
Total direct labor cost
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E. Overhead Budget
Units to be produced
x Variable costs per unit
Total variable overhead
Budgeted fixed overhead
Total budgeted overhead
- Noncash expenses
Cash disbursements for overhead
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F. Cash Receipts and Disbursements Budget
Cash receipts
- Cash disbursements
Excess (deficiency) of cash
available over disbursements
Beginning cash balance
Ending cash balance
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IV. Static v. Flexible Budget

1. Static Budget
2. Static Budget Illustration
3. Flexible Budget
4. Flexible Budget Illustration

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A. Static Budget
Why are we so off from budget?

• A budget designed for only one level of activity.
  Differences from the budget can be misleading
  when an organization actually operates at a
  different level of activity.

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B. Static Budget Illustration
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C. Flexible Budget

• A budget designed to cover a range of activity.
  Can be used to compare actual costs incurred to
  budgeted costs around that level of activity.

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D. Flexible Budget Illustration
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Summary

• Planning and control stages of budget
• Budget committees, time periods, zero based
  budgeting
• Formal plan culminating in projected financial
  statements
• Budget formats
• Static and flexible budgets