Managerial accounting 6e jams jambalvo chapter 10

CHAPTER 10
Budgetary Planning and
Control

Slide 10-2


Budgetary Planning and Control
 Budgets are the formal documents that
quantify a company’s plans for achieving
its goals
 For many companies, the entire planning
and control process is built around
budgets.

Slide 10-3

Learning objective 1: Discuss the use of
budgets in planning and control.


Use of Budgets in Planning and
Control
 Planning
 Budgets enhance communication and
coordination
 The process of developing a formal plan
forces managers to consider their goals
and objectives and to specify means of
achieving them

 Budgets become the vehicle for
communicating information about where
the company is heading
Slide 10-4

Learning objective 1: Discuss the use of
budgets in planning and control.


Use of Budgets in Planning and
Control
 Control
 Budgets provide a basis for evaluating
performance
 Control makes sure the company is heading
in the proper direction and operating
efficiently
 To control a company, it is essential to
assess the performance of managers and
their operations for which they are
responsible
Slide 10-5

Learning objective 1: Discuss the use of
budgets in planning and control.


Use of Budgets in Control
 Often performance evaluation is carried out
by comparing actual with planned or

budgeted performance
 Significant deviations from planned
performance associated with three potential
causes:

1.

The budget was poorly conceived

2.

Conditions have changed

3.

Slide 10-6

Managers have done a particularly good or
poor job managing operations
Learning objective 1: Discuss the use of
budgets in planning and control.


Test Your Knowledge 1
Which of the following statements regarding
budgets is false?
a. They are formal documents that quantify a
company’s plans.
b. They enhance communication and coordination.
c. They are useful in planning but not in control.

d. They provide a basis for evaluating
performance.
Answer: c
They are useful in planning AND in control

Slide 10-7

Learning objective 1: Discuss the use of
budgets in planning and control.


Developing the Budget
 Budgets are prepared for:
 Departments
 Divisions of a company
 For the entire company

 Often the group within a company that is
responsible for approval of the various
budgets is the budget committee

Slide 10-8

Learning objective 1: Discuss the use of
budgets in planning and control.


Developing the Budget
 The budget committee consists of senior
managers

 The budget committee works with
departments to develop realistic plans that
are consistent with overall company goals
 In some cases the budget committee may
impose a budget without soliciting input
from department managers

Slide 10-9

Learning objective 1: Discuss the use of
budgets in planning and control.


Developing the Budget
 In a top-down approach budgets are
developed at higher operational levels
without substantial input from lower level
managers
 In a bottom-up approach, lower level
managers are the primary source of
information used in setting the budget

Slide 10-10

Learning objective 1: Discuss the use of
budgets in planning and control.


Budget Time Period
 Managers must decide on an appropriate

budget period
 Depending on needs, budgets can be
prepared for a variety of time periods
 Long run budgets are prepared for a three
or even a five year period
 Short run budgets may cover a month, a
quarter, or a year

 Generally, the longer the time period, the
less detailed the budget
Slide 10-11

Learning objective 1: Discuss the use of
budgets in planning and control.


Five-Year Budgets

Slide 10-12

Learning objective 1: Discuss the use of
budgets in planning and control.


Zero Base Budgeting
 A common starting point in budgeting is
previous period revenues and costs
 Zero base requires budgeted amounts to be
justified by each department at the start of
each period

 This results in a fresh consideration for
the validity of budgeted amounts
 It is a time consuming and expensive
process
 Not widely used by business enterprises
Slide 10-13

Learning objective 1: Discuss the use of
budgets in planning and control.


The Master Budget
 The master budget is a comprehensive
planning document that incorporates a
number of individual budgets
 Typically, it includes budgets for sales,
production, direct materials, direct labor,
manufacturing overhead, selling and
administrative expense, capital acquisitions,
and cash receipts and disbursements
 Also includes budgeted income statement and
balance sheet

Slide 10-14

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Master Budget

Slide 10-15

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Sales Budget
 The first step involved preparation of
sales forecasts and a sales budget
 Prepared first because an estimate of
sales is needed for other budgets

 Companies use numerous methods to
estimate sales, including
 Economic models
 Sales trends
 Trade journals, among others
Slide 10-16

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Sales Budget
Budgeted sales revenue:
Budgeted sales (units) x budgeted sales price

Slide 10-17

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Production Budget
 The production budget can be developed
once the sales budget has been prepared
 In deciding how much to produce,
managers must take into account how
much they expect to sell, how much is in
beginning inventory, and how much they
want in ending inventory

Slide 10-18

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Production Budget
 The quantity that must be produced is
calculated using the following formula
Finished
Expected
units to be = sales in
produced
units

Slide 10-19

Desired
ending
+ inventory of
finished
goods

Beginning
inventory
of finished
units

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Production Budget
 Preston Joystick budget plan, Quarter 1
 Ending inventory of finished goods = 10% of next
quarter’s sales (25,000 X 10% = 2,500)
 Budgeted unit sales,Q1 = 21,000 units
 Budgeted unit sales, Q2 = 25,000 units
 Beginning inventory Q1 = 2,100 units
 Budget finished units to be produced

Slide 10-20

Learning objective 2: Prepare the budget schedules
that make up a master budget.

Production Budget

Slide 10-21

Learning objective 2: Prepare the budget
schedules that make up a master budget.


Test Your Knowledge 2
Mason Manufacturing expects to sell 10,000 units in the first
quarter and 14,000 in the second quarter. The company
desires beginning inventory equal to 20% of sales for the
coming quarter. Finished goods on hand at the start of the
first quarter equals 2,000 units. How many units should be
produced in the first quarter?
a. 14,000 units
b. 16,000 units
c. 10,800 units
d. 12,000 units
Answer: c
10,800 units = 10,000 + 2,800 – 2,000
Slide 10-22

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Direct Material Purchases Budget
 The amount of direct materials that must be
purchased depends on

 The amount needed for production, and
 The amount needed for ending inventory

 The amount that must be purchased can be
calculated from the following formula
Required
Amount
purchases of
= required for
direct
production
materials

Slide 10-23

+

Desired
ending
inventory
of direct
materials

-

Beginning
inventory of
direct
materials

Learning objective 2: Prepare the budget schedules
that make up a master budget.


Direct Material Purchases Budget

Slide 10-24

Learning objective 2: Prepare the budget
schedules that make up a master budget.


Test Your Knowledge 3
Budgeted production: Q1= 50,000; Q2= 60,000
Parts per unit= 3 , cost per part= $5
Ending inventory = 20% of next month’s production
Number of parts required for Q1 production is:
a. 50,000
b. 150,000
c. 60,000
d. 180,000
Answer: b
Q1 production 50,000 x 3 parts per unit = 150,000

Slide 10-25

Learning objective 2: Prepare the budget schedules
that make up a master budget.