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Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,11 -,58, 2001,Prentice Hall Business Publishing,Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young,Using Budgets to Achieve Organizational Objectives,Chapter 11,Learning Objective 1,Identify the primary role of budgets and budgeting in organizations.,Capacity-Related and Flexible Resources,What are flexible costs?,They are costs that vary with the activity level in the organization.,What are committed costs?,They are costs that do not change with changes in activity level.,The budgetary process determines the level of most committed costs.,Planning and Control and the Role of Budgets,What is a budget?,It is a quantitative expression of the money inflows and outflows that reveals whether a financial plan will meet organizational objectives.,What is budgeting?,It is the process of preparing budgets.,Planning and Control and the Role of Budgets,Budgets are a central part of the design and operation of management accounting systems.,Budgets also provide a way to communicate the organizations short-term goals to its members.,Budgeting serves to coordinate the organizations activities.,Planning and Control and the Role of Budgets,Budgeting is a tool that forces coordination of the organizations activities and helps identify coordination problems.,Budgets are prepared for specific time periods.,Differences between actual results and the budget plan are called,variances,.,Planning and Control and the Role of Budgets,Identify Organization Objectives and Short-Term Goals,Develop Long-Term Strategy and Short-Term Plans,Develop Master,Budget,Measure and Assess,Performance,Reevaluate Objectives, Goals, Strategy, and Plans,Planning,Control,Planning and Control and the Role of Budgets,Budgeting involves forecasting the demand for three types of resources.,Flexible resources that give rise to variable costs,Intermediate-term capacity resources that give rise to capacity-related costs,Long-term capacity resources that give rise to capacity-related costs,Learning Objective 2,Demonstrate the importance of each element of the budgeting process.,Budgeting,The budgeting process describes the broad activities performed during the budget period.,Planners can select any budget period, but usually choose one year.,Elements of Budgeting,1.,Organization Goals,3.,Capital Spending Plan,2.,Sales Plan,5.,Production Plan,8.,Labor Hiring and Training Plan,10.,Expected Financial Results,4.,Inventory Policy,6.,Productive Capacity,7.,Materials Purchasing Plan,9.,Administrative and Discretionary Spending Plan,11.,Statement of Expected Cash Flows,12.,Projected Financial Statements,Learning Objective 3,Explain the different types of operating budgets and financial budgets and their interrelationships.,Master Budget Outputs,The master budget includes two sets of outputs:,The expected or projected,financial results,The plans or operating budgets,Operating Budgets,Operating budgets typically consist of six operating plans:,The,sales plan,identifies the planned level of sales for each product.,The,capital spending plan,specifies the long-term capital investments.,The,production plan,schedules all required purchasing activities.,Operating Budgets,The,materials purchasing plan,schedules all required purchasing activities.,The,labor hiring and training plan,specifies the number of people the organization must hire or release.,The,administrative and discretionary spending plan,includes administration, staffing, research and development, and advertising.,Financial Budgets,Planners usually present the projected financial results, or financial budgets, in three forms:,A statement of expected,cash flows,The projected (pro forma),balance sheet,The projected (pro forma),income statement,Financial Budgets,Financial analysts use the statement of projected cash flows in two ways:,To plan when excess cash will be generated so that they can undertake short-term investments,To organize how to meet any cash shortages,Learning Objective 4,Describe the way that organizations effectively use and interpret budgets.,The Budgeting Process,What is a,demand forecast,?,It is the estimate of the market demand, or sales potential, for a product given the specific product price.,This forecast drives the budgeting process.,What is the,production plan,?,It identifies the intended production during each sub-period of the annual budget.,The Budgeting Process,How frequent can budget sub-periods be?,daily,weekly,monthly,Planners use the inventory policy along with the sales plan to develop the production plan.,The Budgeting Process,What is,aggregate planning,?,It is an approximated determination of whether the organization has the capacity to undertake a proposed production plan.,What are,spending plans,?,They are tentative resource commitments.,The Budgeting Process,What are examples of,spending plans,?,Materials purchasing,plans,Labor hiring and,training plan,Administrative and,discretionary,spending plan,Capital spending,plan,The Budgeting Process,What resources determine,capacity levels,?,Flexible resources,that the organization can acquire in the short term,Committed resources,that the organization must acquire for the intermediate term,Committed resources,that the organization must acquire for the long term,Capacity Types and Commitment Time,Term,Flexible resources required in short term,(less than several weeks),Type of Capacity Acquired,Provides the ability to use,existing capacity,Examples,Raw materials, supplies,casual labor,Capacity Types and Commitment Time,Term,Committed resources acquired for the,intermediate term (up to six months),Type of Capacity Acquired,General purpose capacity that is,transferable between organizations,Examples,People, general purpose equipment,specialty raw materials,Capacity Types and Commitment Time,Term,Committed resources acquired for the,long-term (more than six months),Type of Capacity Acquired,Special purpose capacity that is customized,for the organizations use,Examples,Buildings,special purpose equipment,Interpreting the Production Plan,Production is the minimum of demand and capacity.,Production =,Minimum (production capacity, total demand),The Financial Plans,Once planners have developed the production, staffing, and capacity plans, they can prepare a financial summary of the tentative operating plans.,What is a line of credit?,It is a short-term financing arrangement, with a pre-specified limit, between an organization and a financial institution.,The Cash Flow Statement,Projected Cash Flow Statement,Cash inflows from sales and collections,of receivables,Cash outflows for:, Short-term flexible resources, Intermediate-term committed,resources, Long-term committed resources,Results of financing operations,The Cash Flow Statement,Format of Cash Flow Statement,Cash inflows Cash outflows,= Net cash flow,The Cash Flow Statement,Format of Financing Section of,Cash Flow Statement,Net cash flow from operations,+ Opening cash, Cash invested or withdrawn, Cash provided or used in,issuing or retiring stock or debt,=,Cash available before short-tem financing, Cash used or provided by short-term financing,= Ending cash,Using the Projected Results,Planners use budget information to.,identify broad resources requirements.,identify potential problems.,compare projected operating and financial results.,Cost-Volume-Profit Analysis,Conventional cost-volume-profit analysis rests on several assumptions.,What are some of these assumptions?,All of an organizations costs are either flexible or capacity related.,Units made equals units sold.,Revenue per unit does not change as volume changes.,Cost-Volume-Profit Analysis,What is the contribution margin?,It is the selling price less all flexible costs.,What is the break-even point in units?,Capacity-Related Costs,Contribution Margin Per Unit,Cost-Volume-Profit Analysis,Assume Princeton Company manufactures three products: Plastic valves, metal valves, and specialty valves.,Capacity related costs are $20,400,000.,Plastic,Metal,Specialty,Unit Sales 500,000425,000 400,000,Contribution Margin $14 $15 $13,Cost-Volume-Profit Analysis,What is the weighted average contribution margin?,Plastic valves: $14,500,000 1,325,000,Metal valves: $15,425,000 1,325,00,Specialty valves: $13,400,000 1,325,00,$14.0189,Cost-Volume-Profit Analysis,What is the breakeven in units?,$20,400,000 $14.0189 = 1,455,178,How many plastic valves?,1,455,178,500,000 1,325,000 = 549,124,How many metal valves?,1,455,178,425,000 1,325,000 = 466,755,Learning Objective 5,Undertake what-if and sensitivity analysis two important budgeting tools used by budget planners.,What-If Analysis,What is “what-if” analysis?,It is a strategy that uses a model to predict the results of varying key parameters or estimates.,Sensitivity Analysis,What is sensitivity analysis?,It is the process of selectively varying a plans or a budgets key estimates.,If small changes in parameters produce large changes in decisions or results, the plan is said to be sensitive to the estimates.,Learning Objective 6,Identify the role of budgets in service and not-for-profit organizations.,The Role of Budgeting in Service and Not-For-Profit Organizations,The role for budgeting in planning and control is as important in not-for-profit and government organizations as it is in profit seeking organizations.,The Role of Budgeting in Service and Not-For-Profit Organizations,Organization Focus of Budgeting Type Process,Manufacturing Sales and manufacturing,activities,Natural resources Sales, resource,availability, and acquisition,Service Sales activities, and,staffing requirements,Nonprofit Raising revenues and,controlling expenditures,The Role of Budgeting in Service and Not-For-Profit Organizations,What is an appropriation?,It is an authorized spending limit in a governmental department.,What is a periodic budget?,It is a budget prepared for a specified period of time.,usually one year,The Role of Budgeting in Service and Not-For-Profit Organizations,What is continuous budgeting?,It is the process that organizes the budget into subintervals.,As each budget subinterval ends, the organization drops the completed subinterval from the budget and adds the next budget subinterval,.,Controlling Discretionary Expenditures,Organizations use three general approaches to budget discretionary expenditures.,Incremental Budgeting,Zero-Based Budgeting,Project Funding,Controlling Discretionary Expenditures,What is incremental budgeting?,It is an approach to developing appropriations for discretionary expenditures that assumes that the starting point for each discretionary expenditure item is the amount spent on it in the previous budget.,Controlling Discretionary Expenditures,What is zero-based budgeting?,It is an approach to developing appropriations for discretionary expenditures that assumes that the starting point for each discretionary expenditure item is zero.,Controlling Discretionary Expenditures,What is project funding?,It is an approach to developing appropriations for discretionary expenditures that organizes appropriations into a package that focuses on achieving some defined output.,Controlling Discretionary Expenditures,A recent phenomenon has been the rise of,activity based budgeting,.,Activity based budgeting uses knowledge about the relationship between production units and the activities required to produce those units to develop detailed estimates of activity requirements.,Learning Objective 7,Recognize the behavioral effects of budgeting on an organizations employees.,Managing the Budget Process,Who should manage and oversee the budgeting process?,Many organizations use a budget team.,The budget team usually reports to a budget committee which generally includes the chief executive officer.,Behavioral Aspects of Budgeting,There are two interrelated behavioral issues in budgeting:,Designing the budget process,Influencing the budget process,Designing the Budget Process,What is authoritative budgeting?,It is a budget in which superiors tell subordinates what their budget will be.,What are stretch targets?,They are targets that exceed previous targets by a significant amount and usually require an enormous increase in a goal over the next budgeting period.,Designing the Budget Process,What is participative budgeting?,It is a method of budget setting that involves a joint decision making process in which all parties agree about setting the budget targets.,Designing the Budget Process,What is consultative budgeting?,It is a budgeting method whereby managers ask subordinates to discuss their ideas about the budget, but no joint decision making occurs.,Influencing the Budget Process,What is influencing the budget process?,It is when people try to influence or manipulate the budget to their own ends.,Managers have been known to play,budgeting games,in which they attempt to manipulate information and targets to achieve as high a bonus as possible.,End of Chapter 11,
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