Budgeting Processes and Creating Budgets in Organizations, Study notes of Management Accounting

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Profit Planning

Chapter 9

Learning Objective 1

Understand why Understand why organizations budget and organizations budget and the processes they use to the processes they use to create budgets. create budgets.

Planning and Control

Planning Planning – – involves developing involves developing objectives and objectives and preparing various preparing various budgets to achieve budgets to achieve those objectives. those objectives. Planning Planning – – involves developing involves developing objectives and objectives and preparing various preparing various budgets to achieve budgets to achieve those objectives. those objectives. Control Control – – involves the steps taken by involves the steps taken by management to increase management to increase the likelihood that the the likelihood that the objectives set down while objectives set down while planning are attained and planning are attained and that all parts of the that all parts of the organization are working organization are working together toward that goal. together toward that goal. Control Control – – involves the steps taken by involves the steps taken by management to increase management to increase the likelihood that the the likelihood that the objectives set down while objectives set down while planning are attained and planning are attained and that all parts of the that all parts of the organization are working organization are working together toward that goal. together toward that goal.

Advantages of Budgeting

Advantages Define goals Define goals and objectives and objectives Uncover potential Uncover potential bottlenecks bottlenecks Coordinate Coordinate activities activities Communicate Communicate plans plans Means of allocating Means of allocating resources resources

Choosing the Budget Period

Operating Budget Operating Budget 2008 2009 2010 2011 Operating budgets ordinarilyOperating budgets ordinarily cover a one-year period cover a one-year period corresponding to a company’s corresponding to a company’s fiscal year. Many companies fiscal year. Many companies divide their annual budget divide their annual budget into four quarters. into four quarters. Operating budgets ordinarily Operating budgets ordinarily cover a one-year period cover a one-year period corresponding to a company’s corresponding to a company’s fiscal year. Many companies fiscal year. Many companies divide their annual budget divide their annual budget into four quarters. into four quarters. A continuous budget is aA continuous budget is a 12-month budget that rolls 12-month budget that rolls forward one month (or quarter) forward one month (or quarter) as the current month (or quarter) as the current month (or quarter) is completed. is completed. A continuous budget is a A continuous budget is a 12-month budget that rolls 12-month budget that rolls forward one month (or quarter) forward one month (or quarter) as the current month (or quarter) as the current month (or quarter) is completed. is completed.

Self-Imposed Budget

A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels. S u p e r v i s o r S u p e r v i s o r M i d d l e M a n a g e m e n t S u p e r v i s o r S u p e r v i s o r M i d d l e M a n a g e m e n t T o p M a n a g e m e n t

Human Factors in Budgeting

The success of a budget program depends on three

important factors:

1.Top management must be enthusiastic and

committed to the budget process.

2.Top management must not use the budget to

pressure employees or blame them when

something goes wrong.

3.Highly achievable budget targets are usually

preferred when managers are rewarded based on

meeting budget targets.

The Budget Committee

A standing committee responsible for A standing committee responsible for  overall policy matters relating to the budgetoverall policy matters relating to the budget  (^) coordinating the preparation of the budgetcoordinating the preparation of the budget  (^) resolving disputes related to the budgetresolving disputes related to the budget  approving the final budgetapproving the final budget A standing committee responsible for A standing committee responsible for  overall policy matters relating to the budgetoverall policy matters relating to the budget  coordinating the preparation of the budgetcoordinating the preparation of the budget  (^) resolving disputes related to the budgetresolving disputes related to the budget  approving the final budgetapproving the final budget

Learning Objective 2

Prepare a sales budget, Prepare a sales budget, including a schedule of including a schedule of expected cash collections. expected cash collections.

Budgeting Example

 Royal Company is preparing budgets for the

quarter ending June 30.

 Budgeted sales for the next five months are:

 (^) April 20,000 units  (^) May 50,000 units  (^) June 30,000 units  (^) July 25,000 units  (^) August 15,000 units.

 The selling price is $10 per unit.

Expected Cash Collections

All sales are on account.

Royal’s collection pattern is:

 70% collected in the month of sale,

 25% collected in the month following sale,

 5% uncollectible.

The March 31 accounts receivable

balance of $30,000 will be collected in full.

Expected Cash Collections

Expected Cash Collections

From the Sales Budget for May. From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.

Expected Cash Collections