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Chapter 9

Chapter 9 - ACTG 2020.docx

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York University
ACTG 2020
Sylvia Hsingwen Hsu

Chapter 9 – Budgeting - A budget is a quantitative plan for the acquisition and use of financial and other resources over a specified future time period - Using budget to control activities – budgetary control - Master budget is a summary of a company's plans that sets specific targets for sales, production, distribution, and financing activities Budgets’ Dual Role: Planning and Control - Serve as planning and control tool in orgs - Planning involves developing objectives and preparing various budgets to achieve these objectives. - Control involves the steps taken by management to achieve objectives developed at the planning stage are attained and to ensure that all parts of the organization function properly - Good planning without effective control is wasted and unless plans are laid down in advanced, no objectives toward which control can be directed Advantages of Budgeting - Good for complex and uncertain situations - Important to analyze alternatives being considered before consuming resources to implement them - Multiple benefits from the budgeting process: o Communicate plan throughout the ogs (so everyone has solid understanding of goals/obj) o Force managers to think about AND plan for the future o Allows for allocation of resources to parts of orgs where they can be used most effectively and in greatest need o Uncover bottlenecks before they occur by ID demands that will be placed on key activities and processes; if required, changes can be made to any activity or process that doesn’t currently have capability/capacity to meet the budgeted levels o Budgets coordinate activities of entire orgs by integrating plans of various areas; help ensure that everyone in orgs is pulling in same direction o Define goals and objectives that can serve as benchmarks for evaluating subsequent actual performance Responsibility Accounting - Basic idea behind responsibility accounting is that managers should be held responsible for those items—and only those items—that they can actually influence - Each item in the budget is made responsibility of a mger and that mger held responsible for subsequent deviations b/w budgeted goals and actual results o KEY, b/c otherwise, cost will inevitably grow out of control - Doesn’t mean mger will be penalized; instead: manager should take the initiative to correct any unfavourable discrepancies, understand the source of significant favourable or unfavourable discrepancies, and should be prepared to explain the reasons for discrepancies to top management Choosing budget Pd - Typically cover one year; divided into 4 Q - The 1st Q then divided into months and 2-4 Q as quarterly totals - As the year progresses, the figures for the second quarter are broken down into monthly amounts, then the third-quarter figures are broken down, and so forth. o This approach has the advantage of requiring periodic review and reappraisal of budget data throughout the year. - Continuous/perpetual budget: 12 month budget that rolls forward one month (or quarter) as the current month or quarter is completed - *One month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close o Keeps managers focused at least one year ahead** NOT overly focused on ST results Participative Budget - Most successful budget programs involve managers with cost control responsibilities in preparing their own budget estimates—rather than having a budget imposed from above*** - Participative budget approach^^ - If a budget is imposed top-down, then it may generate resentment rather than cooperation and increased productivity - - Advantages to this system: o Everyone is recognized as having an equal opinion and say that is valued by the top management o Estimates made by front-line mgers are more accurate and reliable than estimates made by top mgers w/ less detail and knowledge of day-to-day ops o Motivation higher when people make their own goals and elicit greater commitment towards achieving that goal o Can’t make up excuses for not meeting the budget (i.e. if it comes from the top it can be ―impossible to meet‖) - Budget estimates made by lower-level mgmt must be checked for budgetary slack – difference between the rev and expenses a mger really believes can b achieved and the amts included in the budget * - Managers may attempt to create slack to get more rewards thar are contingent on meeting or beating the budget - Slack can result in the misallocation of resources, inefficiencies, waste, and less effort by managers. o Therefore, before budgets are accepted, they must be carefully reviewed by immediate superiors. - All levels of the organization should work together to make budget o Top-mgmt and lower mgmt should contribute in a cooperative effort to develop an integrated and realistic budget - In an effort to ensure an effective budgeting process, many companies use a budget committee o Responsible for overall policy matters related to the budget program and for coordinating the preparation of the budget itself o Consists of CEO, functional heads (sales, pdn, etc), and controller o Handles problems b/w top mgmt and lower-mgmt o **Approves final budget and receives reports regarding co’s success in meeting its targets - Still, some co’s assign budgets to their employees; assigning is more efficient b/c it doesn’t involve negotiating b/w mgers and subordinates (can take considerable amt of time and effort) - Mgmt may also assign tough budgets to workers in belief that attaining budgets is necessary for co’s survival o Imposing budgets may be necessary to ensure LT viability b/c workers may not set high challenging goals for themselves Behavioural Factors in Budgeting - Whether or not budget is accepted by lower mgmt personnel is reflective of 1) degree to which top mgmt accepts the budget program as a vital part of the co’s activities - 2) way in which top mgmt uses its budgeted data; if budget program is to be successful, it must have complete acceptance and support of persons in key mgmt positions - The behavioural connotations of budgeting are vital - Overemphasis on cost reduction rather than value creation can lead to budget games by which managers skillfully time revenues, expenditures, and investments in the short term, sometimes to the detriment of long-term performance o Important obj is that the budget be designed as a positive aid in achieving individual and co goals** - Important issue of developing budget is difficulty of targets; if targets are too difficult, workers will quickly recognize that they are unattainable and motivation will suffer - If too easy, inefficiencies or less effort will result - Stretch budget: highly difficult to attain and doing so requires significant changes to the way the related task activities are performed –impossible to achieve - Most co’s set at challenging but attainable level - Managers who work under such a bonus plan, or whose performance is evaluated based on meeting budget targets, usually prefer to have challenging but attainable budgets rather than stretch budgets Zero-Based Budgeting - Used for NPO or gov’t industry - Mgers required to justify all budgeted expenditures not just changes from ladt year o Baseline is 0 instead of last yr’s budget - Requires considerable documentation; mger must make ―decision packages‖ where all activities of deptmt are ranked according to their relative importance and cost of each activity is ID - Too time-consuming and costly to justify on annual basis; annual reviews can become mechanical as well - - limits benefits of 0-based budgeting Mastery Budget Sales Budget - Shows the expected sales for the budget period; typically, it is expressed in both dollars and units of product - Key to the entire budgeting process* - so if its fucked up, then so are other budgets depending on it - Helps determine how many units need to be produced, so then the production budget is made after the sales budget; the pdn budget tells us mfting costs (DM, DL, and MOH budget) - DM, DL, MOH + Sales and Admin exp budget used to make cash bdugt Cash Budget - Once operating budgets made, cash and other financial budgets can be made - Is detailed plan showing how resources will be acquired and used over time - All ops budgets have impact on the cash budgets; from the sales budget, the impact comes from planned cash receipts to be received from sales and for other budgets, the impact comes from planned cash expenditures within the budgets themselves Sales Forecasting – Critical Step - Sales budget based on sales forecast - Look at previous years sales, trends, polic, marketing plans, economic conditions, etc - Some Co’s use complex statistical tools to analyze data and build models that predict co’s sales in the coming year Making Master Budget Sales Budget - The sales budget is constructed by multiplying the budgeted sales in units by the selling price - A schedule of expected cash collections prepared after sales budget o Needed to make cash budget later on!! - Cash collections consist of collections on sales made to customers in prior periods plus collections on sales made in the current budget period - - ***The 90k is Cash collections from last year's fourth-quarter sales and Uncollected fourth-quarter sales appear as accounts receivable on the company's end-of-year balance sheet*** PDN budget - Need desired level of ending inventory to make - - - B.S (UNITS) + DESIRED EI = TOTAL NEEDS – BI = REQUIRED PDN Inventory Purchases - Merchandising firm - A firm would make a pdn budget only if it’s a MANUFACTURING FIRM if MERCHANDISING FIRM, then make a MERCHANDISE PURCHASES BUDGET o Showing the amount of goods to be purchased from its suppliers during the period o  Done for each item carried in inventory; can be in units or purchase cost of units Direct Materials Purchases Budget - Made after pdn requirements have been computed - DMPB details raw mtls that must be purchased to meet pdn budget and provide for adequate inventories -
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