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Managerial Accounting Chapter Nine Notes

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ACCT 2230
Elliot Currie

Chapter Nine Budgeting y The Basic Framework of Budgeting o A budget is a detailed plan for the acquisition and use of financial and other resources over a specified time period It represents a plan for the future expressed in formal quantitative termso The master budget is a summary of a companys plans that set specific targets for sales production distribution and financing activities It generally culminates in a cash budget a budgeted income statement and a budgeted balance sheet It represents a comprehensive financial expression of managements plans for the future and how these plans are to be accomplishedo It is widely accepted that budgets serve as both a planning and control tool in organizations Planning is developing objectives and preparing budgets to achieve these objectives Control is the steps taken by management that attempt to increase the likelihood that the objectives developed at the planning stage are attained and to ensure that all parts of the organization function in a manner consistent with organizational policies To e completely effective a good budgeting system must provide for both planning and controlo Managers usually will have informal plans even before they become involved in developing their budgets The budget process provides a mechanism for quantifying the financial consequences of these plans Companies realize many benefits from a budgeting program includingBudgets provide a means of communicating managements plans throughout the organizationBudgets force managers to think about and plan for the future In the absence of the necessity to prepare a budget many managers might spend considerable time dealing with daily emergencies The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively The budgeting process can uncover potential bottlenecks a machine activity or process that limits total output because it is operating at capacity before they occur Budgets coordinate the activities of the entire organization by integrating the plans of the various parts Budgeting helps to ensure that everyone in the organization is pulling in the same directionBudgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance o Responsibility AccountingResponsibility accounting is a system of accountability in which managers are held responsible for those items of revenue and cost and only those items over which the manager can exert significant influence The managers are held responsible for differences between budgeted and actual results The concept is central to any effective profit planning and control system Someone must be hold responsible for each cost or else no one will be responsible and the cost will inevitably grow out of controlo Choosing a Budget Period
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