PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 8

Budgetary Planning

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Role of Budgets in the Planning and Control Cycles

Planning Developing objectives for

acquisitionand use of resources.

Control Steps taken by

management to ensure that

objectives are attained.

A budget is a comprehensive financialplan for achieving the financial and

operational goals of an organization.

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Planning and Control Cycle

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Planning Process

Tactics

Long-termObjectives

Short-termObjectives

StrategicPlan

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Benefits of Budgeting

Thinking Ahead Communication Motivation

Forcing managers to Communicating Providing motivation forlook ahead and state management's employees to work

their goals for the future expectations toward organizational and priorities objectives

Providing lead time to Promoting cooperation Providing a benchmarksolve potential problems and coordination for evaluating

between functional performanceareas of the organization

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Behavioral Effects of Budgets

Budget Problems• Perceived unfair or

unrealistic goals.• Poor management-

employee communications.

Solution• Reasonable and

attainable budgets.• Employee participation in

budgeting process.

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Budget Problems• Building budget slack

into budgets.• A “use-it-or-lose-it”

mentality.

Solution• Different budgets for

planning and for performance evaluation.

• Continuous, or rolling budgets.

• Zero-based budgeting.

Behavioral Effects of Budgets

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Components of the Master Budget

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SalesBudge

tEstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions+

Forecasts of customer needs from marketing personnel

Sales Budget

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Production Budget

The production budget is directly related to the sales budget and to the quantity of inventory the company wants to have on

hand at the beginning and end of each period. The relationship between budgeted production, sales, and

inventory is summarized in the following formula:

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Raw Materials Purchases Budget

Next, we must determine what quantity of raw materials to purchase to use for the production budget. Budgeted material purchases will depend on budgeted production needs, as well

as on the planned levels for beginning and ending raw materials inventory. The relationship between budgeted raw material purchases, budgeted production, and raw materials

inventory is summarized in the following formula:

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Cash Budget

Our focus is on cash flows that arise from operating activities and are directly related to the operating budgets

for Cold Stone Creamery. The relationship between budgeted cash collections and budgeted cash payments

from operating activities and cash balances is summarized in the following formula:

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Budgeting in Non-Manufacturing Firms

The primary operating budget for a merchandiser is amerchandise purchases budget, which is similar in formto a raw materials purchases budget for a manufacturer.

Since a merchandising company does not manufacture, it does not have raw material, direct labor, and manufacturing overhead budgets.

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End of Chapter 8