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Chapter 9

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ACC 406
Donna Zathy

ACC406 - Chapter 9 • Budgeting and Planning and Control o Planning = Looking ahead to see what actions should be taken to realize particular goals o Control = 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 o Budgets = Financial plans for the future, key component of planning  Identify objectives and the actions needed to achieve them o Strategic 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 o Advantages of Budgeting  1) It forces managers to plan • Encourages managers to develop an overall direction for the organization, foresee problems, and develop future policies  2) It provides information that can be used to improve decision making  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 o comprehensive financial plan for the organization as a whole o Typically for one year, corresponding to the fiscal year of the company o Broken down into quarterly and monthly budgets o Continuous 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 o Directing 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 o Major Components of the Master Budget  Can be divided into operating and financial budgets • Operating Budgets = Income-generating activities of a firm (e.g., sales, production, and finished goods inventory) o Outcome of operating budgets is budgeted income statement • Financial Budgets = Inflows and outflows of cash and the overall financial position o Outcome of financial budgets is budgeted balance sheet  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 period) • Preparing the Operating Budget o Consists 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 o Has 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 o Can use the bottom-up approach (requires individual salespeople to submit sales predictions) o Accuracy 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 • Quantity of direct materials in inventory is determined by the firm's inventory policy  4) Direct Labor Budget • Shows the total direct labor hours and the direct labor cost needed for the number of units in the production budget • Budgeted hours of direct labor are determined by the relationship between labor and output  5) Overhead Budget • Shows the expected cost of all production costs other than direct materials and direct labor • Companies use direct labor hours as the driver for overhead  6) Selling and Administrative Expenses Budget •
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