Understand why organizations budget and the processes they use to create budgets.
Prepare a sales budget, including a schedule of expected cash collections.
Prepare a production budget.
Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.
Prepare a direct labor budget.
Prepare a manufacturing overhead budget.
Prepare a selling and administrative expense budget.
Prepare a cash budget.
Prepare a budgeted income statement.
Prepare a budgeted balance sheet.
Budgeting Basics
Definition of Budget: A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.
Budgeting: The act of preparing a budget.
Budgetary Control: Using budgets to control an organization’s activity and ensure objectives are met.
Planning and Control:
Planning involves setting objectives and preparing various budgets.
Control ensures that objectives are attained through management actions.
Advantages of Budgeting
Define and communicate organizational goals and objectives.
Identify potential bottlenecks and resource allocation issues.
Coordinate activities across various departments.
Facilitate future planning and decision-making.
Provide a basis for performance evaluation.
Responsibility Accounting
Managers are responsible for items they can control.
Helps to personalize accountability and ensure costs do not run out of control.
Discrepancies between budgeted and actual results should prompt initiatives for correction, not penalization.
Choosing the Budget Period
Annual budgets are common and can be broken down into quarterly or monthly budgets.
Continuous budgets roll forward, maintaining a 12-month outlook.
Types of Budgets
Self-Imposed Budgets: Prepared with input from managers at all levels for increased accuracy and motivation.
Participative Budgeting: Engages employees in the budgeting process.
Human Factors in Budgeting
Success depends on enthusiasm and commitment from top management.
Budgets should be used to promote cooperation, not as pressure tools.
Budget targets should strike a balance between realism and challenge to motivate performance.
The Master Budget Overview
Consists of several interdependent budgets, culminating in:
Cash Budget
Budgeted Income Statement
Budgeted Balance Sheet
Sales Budget: Key to the entire budgeting process, directly influencing production and financial forecasts.
Key Components of Budget Preparation
Sales Budget: Estimated sales volume multiplied by selling price.
Cash collections based on credit sales patterns.
Production Budget: Calculated from the sales budget, accounting for desired ending inventory.
Direct Materials Budget: Details material purchases necessary for production, including desired ending inventory of raw materials.
Direct Labor Budget: Estimates labor hours needed based on production requirements.
Manufacturing Overhead Budget: Includes variable and fixed manufacturing costs.
Selling and Administrative Expense Budget: Forecasts expenses outside of manufacturing.
Cash Budget
Divided into sections: Cash receipts, cash disbursements, cash excess/deficiency, financing.
Important for managing liquidity and planning for potential borrowing needs.
Budgeted Income Statement
Reflects planned profitability based on sales projections, costs, and expenses.
Budgeted Balance Sheet
Utilizes data from the budgeted income statement and various operational budgets to project the company's financial position at the period's end.