Manerial accounting 11e garrison noreen brewer chap009

11th Edition
Chapter 9

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Profit Planning

Chapter Nine

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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.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activity is known as
budgetary control.

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Planning and Control
Planning –
involves developing
objectives and
preparing various
budgets to achieve
these objectives.

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Control –
involves the steps
taken by
management that
attempt to ensure
the objectives are
attained.

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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

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Responsibility Accounting
Managers should be held responsible for those
items — and only those items — that
the manager can actually control
to a significant extent.

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Choosing the Budget Period

Operating Budget

2003

2004

The annual operating budget
may be divided into quarterly
or monthly budgets.

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2005

2006

A continuous budget is a 12month budget that rolls forward
one month (or quarter) as the
current month (or quarter) is
completed.
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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.
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Advantages of Self-Imposed Budgets
1.
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.
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.
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.
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.
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Self-Imposed Budgets
Most companies do 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.

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Human Factors in Budgeting
The success of budgeting depends upon 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.
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Zero Based Budgeting
A zero-based budget requires managers to
justify all budgeted expenditures, not just
changes in the budget from the prior year.
Most
Most managers

managers argue
argue that
that
zero-based
zero-based budgeting
budgeting is
is too
too
time
time consuming
consuming and
and costly
costly to
to
justify
justify on
on an
an annual
annual basis.
basis.

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The Budget Committee
A standing committee responsible for
 overall policy matters relating to the
budget

 coordinating the preparation of the
budget

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The Master Budget: An Overview

Ending
Finis he d Go o ds
Budg e t

Dire c t
Mate rials
Budg e t

S ale s
Budg e t

Pro duc tio n
Budg e t

S e lling and
Adminis trative
Budg e t

Dire c t
Labo r

Budg e t

Manufac turing
Ove rhe ad
Budg e t

Cas h
Budg e t

Budgeted Financial Statements
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Budgeting Example
 Royal Company is preparing budgets for the
quarter ending June 30.
 Budgeted sales for the next five months are:
April
May
June
July
August

20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.

 The selling price is $10 per unit.
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The Sales Budget
The individual months of April, May, and June are
summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th

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Expected Cash Collections
••
••

All
All sales
sales are
are on
on account.
account.
Royal’s
Royal’s collection
collection pattern

pattern is:
is:
70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
5%
5% uncollectible.
uncollectible.

•• The
The March
March 31
31 accounts
accounts receivable
receivable balance
balance of
of

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

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Expected Cash Collections

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Expected Cash Collections

From the Sales Budget for April.

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Expected Cash Collections

From the Sales Budget for May.

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Quick Check 
What will be the total cash collections for the
quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000

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Quick Check 
What will be the total cash collections for the
quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000

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Expected Cash Collections

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The Production Budget

Sales
Budget
d
e
and
et
l
p
Expected
m
o
C
Cash
Collections

Production
Budget

Production must be adequate to meet budgeted
sales and provide for sufficient ending inventory.
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The Production Budget
• The management at Royal Company wants
ending inventory to be equal to 20% of the
following month’s budgeted sales in units.

• On March 31, 4,000 units were on hand.

Let’s prepare the production budget.

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