Budgeting

What is a budget?

A budget is an organization’s operation plan for a specified period; it identifies the resources and commitments required to fulfill the organization’s commitments required to fulfill the organization’s goals.

The budget is...

a plan of operations; a basis for allocating resources; a communication and authorization device; a device for motivating and guiding implementation; a guideline for operations and gauge for controlling operations; a basis for performance evaluation

What is a master budget?

A master budget is an organization’s operating and financing plans for a specified period

What features has a successful budget?

the acceptance and support of the budget by all managers and employees; employees perceive budget as a planning and coordinating tool to help them to do their jobs coordinating tool to help them to do their jobs; a motivating device; has technically correct and reasonably accurate numbers

WHat is the budget processing?

The budget committee; The budget period; A continuous (rolling) budget; The budget guidelines

External factors to consider

Changes in the labor market, raw material prices; Availability of raw materials or components and their prices; Industry’s outlook for the near term; Competitors’ actions

Sales forecasting

Current sales levels and sales trends of the past few years; General economic and industry conditions; Competitors’ actions and operating plans; Pricing policies; Credit policies; Advertising and promotional activities; Unfilled back-orders

What is sales budget?

sales budget shows expected sales in units at their expected selling prices; A firm prepares the sales budget for a period based on the forecasted sales level, production capacity for the budget period, and long term capacity for the budget period, and long-term plan and short-term goal of the firm

What is production budget?

A firm prepares a production budget after determining the number of units that it expects to sell; A production budget is a plan for acquiring the resources needed to carry out the manufacturing operations to satisfy the expected sales and maintain the desired ending inventory

What is direct material budget?

The information in the production budget becomes the basis for preparing several manufacturing-related budgets; A direct materials usage budget shows the direct materials required for production and their budgeted cost

What is direct labor budget?

To prepare the direct labor budget, a company would use its production budget; The direct labor budget enables the personnel department to plan for hiring and repositioning of department to plan for hiring and repositioning of employees; A good labor budget helps the firm to avoid emergency hiring, prevent labor shortages, and reduce or eliminate the need to lay off workers

What is factory overhead budget?

A factory overhead budget often includes all production costs other than direct materials and direct labor; Unlike direct materials and direct labor, manufacturing overhead costs include costs that vary in direct proportion with the units manufactured as well as costs that vary with either the kind of facilities the firm has or the way in which the firm carries out it operations

What is cost of goods manufactured used for?

The income statement budget uses the cost of goods sold to determine the gross margin of the period, and the balance sheets includes the finished goods ending inventory it total assets

What is total budget cost?

The cost of goods manufactured production cost and the cost of goods sold budget reports the total budgeted cost of units sold for a period

A selling and general administrative expense budget

Delineates plans for all non- manufacturing expenses; This budget serves as a guideline for selling and administrative activities during the budget period

What is a cash budget?

A cash budget depicts effects of all budgeted activities on cash

By preparing a cash budget, management can:

1. take steps to ensure having sufficient cash on hand to carry out the planned activities hand to carry out the planned activities; allow sufficient time to arrange for additional financing that may be needed during the budget period (and thus avoid high costs of emergency borrowing); plan for investments of excess cash on hand to earn the highest possible return

A cash budget generally includes three major sections:

Cash available, Cash disbursements, Financing

Budget income statement

The budgeted income statement estimates the expected operating income from the budgeted operations; A budgeted income statement allows management a glimpse of the likely operating result upon completion of the budgeted operation

Budgeting in Not-for-Profit Organizations

The master budget of a not-for-profit organization often becomes an authorization document for allowable expenditures and activities; In effect, the budget for a not-for-profit organization often becomes the source of both the power and limitations of the budgeted unit

What is zero-based budgeting?

A zero-base budgeting process allows no activities or functions to be included in the activities or functions to be included in the budget unless managers can justify their need

What is activity based budgeting?

It starts with the budgeted output and segregates costs required for the budgeted segregates costs required for the budgeted output into homogeneous activity cost pools

What is Keizen budgeting?

Kaizen budgeting is a budgeting approach that explicitly demands continuous improvement and incorporates the expected improvements in the budget; A firm using kaizen budgeting prepares budgets based on the desired future operating processes for the budget period

The advantages of using a highly achievable budget target

Increasing managers’ commitment to achieving the budget target 2. Maintaining managers’ confidence in the budget 2. Maintaining managers’ confidence in the budget 3. Decreasing organizational control cost 4. Reducing the risk that managers will engage in harmful earnings management practices or violate corporate ethical standards 5. Allowing effective and efficient managers greater operating flexibility

top-down budget

In a top-down budgeting process, management prepares budgets for the entire organization (including those for lower-level operations) – this process is often referred to as authoritative budgeting

bottom-up budget

In a bottom-up budgeting process, the people affected by the budget, including lower-level employees, are involved in the budget preparation process – this process is often referred to as participative budgeting