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Chapter 9

ACTG 2020 Chapter 9: ACTG2020FinalReview - Chapter 9

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ACTG 2020
Joelle Pokrajac

York SOS: Students Offering Support Raising Marks, Raising Money, Raising Roofs CHAPTER 9: BUDGETING, PRODUCTION, CASH, AND MASTER BUDGET The Basic Framework of Budgeting Definition of Budgeting · Quantitative plan for the acquisition and use of financial and other resources over specific time period • Budgeting – preparing a budget • Budgetary control – use of budgets to monitor firm’s activities • Master budget – summary of company’s plans that set specific targets for sales, production, distribution, financing Budgets’ Dual Role: Planning and Controlling • Planning – involves developing objectives and preparing various budgets to achieve them • Control – involves steps taken by management to increase likelihood that objectives will be met Advantages of Budgeting · Helps analyze alternatives considered before consuming resources necessary to implementhem • Communicate management’s plan throughout organization – better understanding by employees of goals/objectives · Force managers to think about and plan for future · Provide a means of allocating resources to different parts of organization to maximize effectiveness • Can uncover potential bottlenecks before they occur – identify demands placed on all key activities/processes · Coordinate activities of entire organization by integrating plans of various areas · Define goals and objectives that can serve as benchmarks for evaluating subsequent actual performance Responsibility Accounting · Managers should be held responsible for only those items they have power to influence · Must have someone responsible for each cost · Allows organization to reach quickly and appropriately to deviations from plan Choosing a Budget Period • Operating budgets – one-year period corresponding to fiscal year, divided into quarters then months • Continuous/perpetual budgets – 12-month budget that rolls forward one month as current month is completed • Keeps managers focused at least one year ahead – prevents narrow fixation Participative Budget · Method of preparing budgets in which managers prepare own budget estimates · Ensures cooperation and mutual understanding of budget outlined; advantages: 1. Views and judgements of all individuals at all levels of organization recognized a nd valued bytop management. 2. Front-line managers often have more reliable estimates than top managers with less detailed knowledge. 3. Motivation higher when individuals participate in own go– createcommitment. 4. Prevents excuse that budget is unrealistic (unlike when top management imposes a budget). • Budgetary slack – difference between revenues/expenses manager believes can be achieved and those in the budget · Revenues intentionally underestimated and expenses intentionally overestimated said to conslack • Slack – can result in misallocation of resources, inefficiencies, waste · Budgets must be carefully reviewed by supervisors and top management • Budget committee – group of key management personnel responsible for overall matters relating to budget Behavioural Factor in Budgeting Help us improve by giving us fe edback! 59 York SOS: Students Offering Support Raising Marks, Raising Money, Raising Roofs • Important to note the technical and behavioural aspects of budgeting – top management mustemphasize importance • Purpose – motivate employees to coordinate efforts; emphasis should be placed on value creation, not cost reduction • Stretch budget –highly difficult to attain budget, often requires significant changes to how activities are performed • Should aim for challenging but attainable budgets – harnesses motivation and remains aligned with goals Zero-Based Budgeting · Managers required to justify all budgeted expenditures, not just changes from previous years • Baseline = 0, not last year’s budget • Requires considerable documentation + is more time consuming and costly – but helpful on occasion The Master Budget: An Overview T HE SALES B UDGET • Detailed schedule showing expected sales for budget period – expressed in both dollars and units · All other parts of budget dependent on sales in some way, helps determine productiobudget T HE CASH BUDGET · Detailed plan that shows how cash resour ces will be acquired and used over time period • All operating budgets have impact on cash budget – comes from planned sales and expenditures Sales Forecasting • Sales budget usually based on company’s sales forecast, determined from prior sales, unfilled orde rs,pricing policy, etc. • Utilize statistical tools and analyze data to build models that predict company’s sales in upyearng The Sales Budget • Starting point of master budget – all other factors dependent on sales in some way · Constructed by multiplying budgeted sales in units by selling price · Includes schedule of expected cash collections (sales in prior periods + collections on sales in current periods) The Production Budget • Prepared after sales budget – lists number of units that must be produced during each period to meet expected demand · Determined by: · Production levels i
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