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Chapter 9

ACC 406 Chapter Notes - Chapter 9: Direct Labor Cost, Budget, Earnings Before Interest And Taxes

Course Code
ACC 406
Donna Zathy

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ACC406 - Chapter 9
Budgeting and Planning and Control
oPlanning = Looking ahead to see what actions should be taken to
realize particular goals
oControl = Looking backward, determining what actually happened and
comparing it with the previously planned outcomes
Can be used to adjust the budget, looking forward once more
oBudgets = Financial plans for the future, key component of planning
Identify objectives and the actions needed to achieve them
oStrategic Plan = Identifies strategies for future activities and
operations, generally covering at least 5 years
Needed before a budget is prepared
Organization can translate overall strategy into long and short-
term objectives
These objectives form the basis of the budget
oAdvantages of Budgeting
1) It forces managers to plan
Encourages managers to develop an overall direction for
the organization, foresee problems, and develop future
2) It provides information that can be used to improve decision
3) It provides a standard for performance evaluation
Control is achieved by comparing actual results with
budgeted results on a periodic basis
4) It improves communication and coordination
Budgets formally communicate the plans of the
organization to each employee
Master Budget
ocomprehensive financial plan for the organization as a whole
oTypically for one year, corresponding to the fiscal year of the company
oBroken down into quarterly and monthly budgets
oContinuous Budget = Moving 12-month budget
As a month expires in the budget, an additional month in the
future is added so that the company always has a 12-month
plan on hand
oDirecting and Coordinating
Most organizations prepare the master budget for the coming
year during the last four or five months of the current year
Budget Committee = Reviews the budget, provides policy
guidelines and budgetary goals, resolves differences that arise
as the budget is prepared, approves the final budget, and
monitors the actual performance of the organization
Budget Director = Person responsible for directing and
coordinating the organization's overall budgeting process
oMajor Components of the Master Budget
Can be divided into operating and financial budgets
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Operating Budgets = Income-generating activities of a
firm (e.g., sales, production, and finished goods inventory)
oOutcome of operating budgets is budgeted income
Financial Budgets = Inflows and outflows of cash and the
overall financial position
oOutcome of financial budgets is budgeted balance
Can also include a Capital Budget
Plan for acquiring long-term assets (assets that have a
time horizon that extends beyond the one-year operating
Preparing the Operating Budget
oConsists of a budgeted income statement
Used to prepare an estimate of operating income (Needs
information from all 8 Schedules)
Operating income is not equivalent to the net income of a firm
To get net income, interest expense and taxes much be
subtracted from operating income
oHas the following supporting schedules
1) Sales Budget
Approved by the budget committee
Describes expected sales in units and dollars
Basis for all other operating budgets, and most financial
budgets (must be as accurate as possible)
First step in creating a sales budget is to develop the
sales forecast
oCan use the bottom-up approach (requires
individual salespeople to submit sales predictions)
oAccuracy of sales forecast can be improved by
considering other factors (e.g., general economic
climate, competition, etc.)
2) Production Budget
Tells how many units must be produced to meet sales
needs and to satisfy ending inventory requirements
Units to be Produced = Expected Unit Sales + Units in
Desired Ending Inventory (EI) - Units in Beginning
inventory (BI)
Beginning Inventory for one quarter is ALWAYS equal to
the ending inventory of the previous quarter
3) Direct Materials Purchases Budget
Tells the amount and cost of raw materials to be
purchased in each time period
Company needs to prepare a separate Direct Materials
Purchases Budget for each type of raw material
Purchases = Direct Materials Needed for Production +
Direct Materials in Desired Ending Inventory - Direct
Materials in Beginning Inventory
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