Chapter 20 Class Notes

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Louisiana State University
ACCT 2000

Accounting 2000Chapter 20 NotesWhat is a BudgetA formal writtenmanagements plans for a specified future time periodstatement of expressed in financial termsPromotes efficiency and is a primary way to communicate agreedupon objectives to all parts of the companyControl Deviceimportant basis for performance evaluation once adopted How is it put together Historical accounting data on revenues costs and expenses help in formulating future budgetsCompany accountants are normally responsible for presenting managements budgeting goals in financial termsThe budget and its administration are however entirely managements responsibilityBenefits of BudgetingRequires all levels of management to plan ahead and formalize goals on a recurring basisProvides definite objectives for evaluating performance at each level of responsibilityCreates an early warning system for potential problems Facilitates coordination of activity within the businessResults in greater management awareness of the entitys overall operations and the impact of external factorsMotivates personnel throughout organization to meet planned objectivesbut there are NO guaranteesPrinciples of Effective BudgetingDepends on a sound organizational structure with authority and responsibility for all phases of operations clearly definedBased on research and analysis with realistic goalsShould be accepted by ALL levels of managementMay inspire higher levels of performance or discourage additional effort Invite each level of management to participate The bottomtotop approach is called Participative BudgetingRisk of unreliable budgets greater when they are topdown 1Accounting 2000Chapter 20 NotesBudgetary Slack refers to managers using the budget to foster gaming by intentionally underestimating budgeted revenues or overestimating budgeted expenses so that budget goals are easier to meet The Budget PeriodMay be prepared for any period of timeoMost commonone yearoSupplement with monthly and quarterly budgetsoDifferent budgets may cover different time periodsLong enough to provide an attainable goal and minimize seasonal or cyclical fluctuationsShort enough for reliable estimatesOne option of a budget period is a continuous twelvemonth budget oDrop the month just ended and add a future monthoKeeps management planning a full year ahead Budgeting versus Long Range PlanningThree basic differences between Budgeting and Long Range Planning1Time period involved2Emphasis3Detail presentedBudgeting is shorttermusually one yearLong range planningat least 5 yearsThe Budgeting ProcessBase budget goals on past performanceoCollect data from organizational unitsoBegin several months before end of current yearDevelop budget within the framework of a sales forecastThe Master BudgetA set of interrelated budgets that constitutes a plan of action for a specified time periodContains two classes of budgets Operating and FinancialOperating budgets2
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