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What are budgets?
A plan that uses the company’s resources to get from where it is to where it wants to be
What do budgets use?
A set of assumptions
What do budgets specify?
Goals and how to achieve them for a specific time period
Who uses budgets?
Everyone
What are budgets prepared for?
Different time periods
What are the two main reasons companies prepare budgets?
Planning and Control
What does Planning involve?
Developing goals and preparing various budgets to achieve those goals
What does Control involve?
Gathering feedback to ensure the plan is working, making changes as needed, verifying all parts of the organization are working together toward the goals
What exists inherently between planning and control?
Tension
What is the goal of the Sales Manager?
Keep sales estimates low so can “beat the budget”
What is the goal of the Production Manager?
Show cost estimates high so can “beat the budget”
What must the budget process do for the goals of the Sales Manager and the Production Manager?
Must recognize and manage this behavior
What does the budget process coordinate?
The various business functions (ex: marketing and manufacturing)
What does the budget process require of managers?
To think of relationships among individual operations, departments, and the company as a whole
What is the end result of the budgeting process?
The guide/benchmark for the company
Are budgeting processes the same across firms and industries?
No, there is wide variation
What do many companies begin with in the budgeting process?
Previous budget as a baselines
What does it mean to say the budget process is iterative?
Each step goes through multiple revisions
Examining targets
Challenging assumptions
Examining alternatives & making choices
What is the pyramid of the Budget Approach (from top to bottom)?
Executives
Middle Management
Supervisor
What are the Advantages of the Top-Down approach to budgets?
Time savings
Reduces “super star” syndrome
What are the Disadvantages of the Top-Down approach to budgets?
Overlook opportunities
Underperformance
Morale
What are the Advantages of the Bottom-Up (Participative) approach to budgets?
Ownership
Team
Motivation
Accuracy
What are the Disadvantages of the Bottom-Up (Participative) approach to budgets?
“Super star” syndrome
Where do you start when it comes to budgets?
Start with income statements
Develop interim budgets to create income statement
Begin with revenues
What is the foundational step or cornerstone in every budget?
Budgeting revenue
What does the Revenue Budget require?
Sales and marketing managers to coordinate
What question do we ask when preparing the Revenue Budget?
How much revenue do we expect to generate
How is the question asked when preparing the Revenue Budget answered?
Price (expected selling price per unit)
Quantity (number of units expect to sell)
What is the set up for a Revenue Budget?
Units expect to sell
* Selling price per unit
= Budgeted revenues
What kind of info does the Production Budget combine?
Demand info from the revenue budget and the company’s inventory policy regarding finished goods to determine production levels for the coming year
What does the Production Budget require?
Marketing and Production managers to coordinate
What question do we ask when preparing the Production Budget?
How many units expect to make?
How many units need in Ending Finished Goods Inventory?
How is the question asked when preparing the Production Budget answered?
Budgeted sales in units
Expected beginning Finished Goods in units
Inventory policy assumption
What is the set up for the Production Budget?
Budgeted sales
+ Desired ending finished goods inventory
= Total needed
- Beginning finished goods inventory
= Budgeted production
Once you know the production budget, what other budgets can you determine?
Budgets for materials, labor, and overhead (input resources)
What does the Direct Material, Direct Labor, and Manufacturing Overhead Budget require?
Production, Purchasing, and HR managers to coordinate
What question do we ask when preparing the Direct Material Budget?
How much DM expect to purchase?
How much RM need in RM ending inventory?
How much RM expect to make a unit?
How much expect RM to cost?
How is the question asked when preparing the Direct Material Budget answered?
Budgeted production in units
Budgeted RM per unit
Budgeted cost of RM
Inventory policy assumption
What is the set up for Direct Materials Budget?
Budgeted units (production)
* Materials per unit
= Total materials for production
+ Desired RM ending inventory
= Total needed
- Beginning RM inventory
= Budgeted RM purchases
* Budgeted material price per unit
= Budgeted RM purchases
What question do we ask when preparing the Direct Labor Budget?
How much is the expected DL cost?
How many DL hours expect to make a unit?
How much expect to pay DL per hour?
How is the question asked when preparing the Direct Labor Budget answered?
Budgeted production in units
Budgeted DL hours per unit
Budgeted cost of a DL hour
What is the set up for the Direct Labor budget?
Budgeted units (production)
* Labor hours per unit
= Budgeted direct labor hours
* Budgeted labor cost per hour
= Budgeted direct labor cost
What question do we ask when preparing the Manufacturing Overhead Budget?
How much is the expected MOH cost?
What are the expected variable & fixed components?
What is the expected depreciation?
How is the question asked when preparing the Manufacturing Overhead Budget answered?
Budgeted production in units
Budgeted VMOH cost per unit (allocation base)
Budgeted fixed MOH elements
What is the set up for the Manufacturing Overhead budget?
Units
* Direct Labor Hours
= Budgeted DLH
* VMOH rate per hour
= Budgeted VMOH
+ FMOH
= Budgeted MOH costs
What question do we ask when preparing the Selling & Administrative Budget?
How much is the expected S&A cost?
What are the expected variable and fixed components?
What is the expected depreciation?
How is the question asked when preparing the Selling & Administrative Budget answered?
Budgeted sales in units
Budgeted VS&A cost per unit (allocation base)
Budgeted fixed S&A elements
What is the set up for the Selling & Administrative Expenses budget?
Units (sold)
* VS&A rate
= Budgeted VS&A
+ FS&A
= Budgeted S&A costs
What is the set up for the Budgeted Income Statement?
Revenues
- Variable Costs
= Contribution Margin
- Fixed Costs
= Net Operating Income
What question do we ask when preparing the Cash Budget?
Does the master budget generate enough cash to sustain the projected operations?
How is the question asked when preparing the Cash Budget answered?
Timing of CR and CD
Anticipated min cash balance
Anticipated interest rate
Anticipated borrowings, repayments, and interests
What are cash budgets NOT?
The statement of cash flows
What question do we ask when preparing the Cash Inflows for the Cash Budget?
How much budgeted revenue will be collected in cash in the current period and in the future?
How is the question asked when preparing the Cash Inflows for the Cash Budget answered?
Revenue budget
Collection assumptions: when do we get the cash for a sale
What question do we ask when preparing the Cash Outflows for the Cash Budget?
How much of the budgeted expenditures is expected to be paid in the current period and in the future?
How is the question asked when preparing the Cash Outflows for the Cash Budget answered?
Expense budgets
Capital budgets
Dividend payment (distribution to owner) assumptions
Payment assumptions: when do we pay the cash
Does the income statement include depreciation?
Yes
Does the cash statement include depreciation?
No
What is the set up for the Cash Budget?
Beginning Balance
+ Inflows (collections from revenue)
= Total cash available
- Outflows (DM, DL, MOH, S&A, Equipment)
= Total Disbursements
= Excess (Deficiency)
Note
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