Lecture Accounting principles (8th edition) – Chapter 23: Budgetary planning

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In this chapter, the learning objectives are: Indicate the benefits of budgeting, state the essentials of effective budgeting, identify the budgets that comprise the master budget, describe the sources for preparing the budgeted income statement. Chapter 23-1 CHAPTER  23 BUDGETARY PLANNING Accounting Principles,  Eighth Edition Chapter 23-2 Study Objectives Study Objectives Indicate the benefits of budgeting State the essentials of effective budgeting Identify the budgets that comprise the master budget Describe the sources for preparing the budgeted income  statement Explain the principal sections of a cash budget Indicate the applicability of budgeting in nonmanufacturing  companies Chapter 23-3 Preview of Chapter Preview of Chapter Budgeting is critical to financial well­being  Use budgets in planning and controlling operations Specific focus is on how budgeting is used as a planning tool  by  management Chapter 23-4 Budgetary Planning Budgetary Planning Budgeting Budgeting Basics Basics Preparing Preparingthe the Operating Operating Budgets Budgets Budgeting & accounting Benefits Sales Production Essentials of effective budgeting Length of budget period Direct materials Direct labor Budgeting process Budgeting and human behavior Budgeting and longrange planning The master budget Chapter 23-5 Manufacturing overhead Selling and administrative expense Budgeted income statement Preparing Preparingthe the Financial Financial Budgets Budgets Cash Budgeted balance sheet Budgeting Budgetingin in NonNonmanufacturing manufacturing Companies Companies Merchandisers Service Not-for-profit Budgeting Basics Budgeting Basics Budget A formal written statement of management’s plans for a specified  future time period, expressed in financial terms Primary way to communicate agreed­upon objectives to all parts of  the company Promotes efficiency Control device  evaluation  Control device ­ important basis for performance  once adopted Chapter 23-6 Budgeting Basics – Role of Accounting Budgeting Basics – Role of Accounting Historical accounting data on revenues, costs, and expenses help in  formulating future budgets Accountants normally responsible for presenting management’s  management’s budgeting goals in financial terms The budget and its administration are, however, entirely  management’s responsibility Chapter 23-7 Budgeting Basics ­ Benefits Budgeting Basics ­ Benefits Requires all levels of management to plan ahead  and formalize  goals on a recurring basis Provides definite objectives  for evaluating performance at each  level of responsibility Creates an early warning system  for potential problems Chapter 23-8 LO 1:  Indicate the benefits of budgeting Budgeting Basics ­ Benefits Budgeting Basics ­ Benefits Facilitates coordination of activities  within the business Results in greater management awareness  of the entity’s overall  operations and the impact of external factors  Motivates personnel  throughout organization to meet planned  objectives Chapter 23-9 LO 1:  Indicate the benefits of budgeting Budgeting Basics ­ Benefits Budgeting Basics ­ Benefits A budget is  an  aid  to management not a substitute  for management Chapter 23-10 LO 1:  Indicate the benefits of budgeting Financial Budgets: Cash Budget Financial Budgets: Cash Budget Example – Hayes Company Usually prepare schedule of collections from customers Chapter 23-47 LO 5:  Explain the principal sections of a cash budget Financial Budgets: Cash Budget Financial Budgets: Cash Budget Example – Hayes Company Prepare schedule of cash payments for direct materials Now prepare the Cash Budget based on the assumptions and preceding  schedules Chapter 23-48 LO 5:  Explain the principal sections of a cash budget Financial Budgets: Cash Budget Financial Budgets: Cash Budget Chapter 23-49 LO 5:  Explain the principal sections of a cash budget Financial Budgets: Cash Budget Financial Budgets: Cash Budget Contributes to more effective cash management Shows managers the need for additional financing before actual  need arises Indicates when excess cash will be available Chapter 23-50 LO 5:  Explain the principal sections of a cash budget Financial Budgets:  Budgeted Balance Sheet Financial Budgets:  Budgeted Balance Sheet A projection of financial position  at the end of the budgeted  period Developed from the budgeted  balance sheet for the preceding  year and the budgets for the  current year Chapter 23-51 LO 5:  Explain the principal sections of a cash budget Financial Budgets:  Budgeted Balance Sheet Financial Budgets:  Budgeted Balance Sheet Example – Hayes Company Additional data: Chapter 23-52 LO 5:  Explain the principal sections of a cash budget Let’s Review Let’s Review Expected direct materials purchases in Read Company are $70,000 in  the first quarter and $90,000 in the second quarter.  Forty percent of  the purchases are paid in cash as incurred, and the balance is paid in the  following quarter.  The budgeted cash payments for purchases in the  second quarter are: a $96,000 b.  $90,000  c.  $78,000 d.  $72,000  Chapter 23-53 LO 5: Explain the principal sections of a cash budget Budgeting:  Merchandisers Budgeting:  Merchandisers Sales Budget:  starting point and key factor in developing the  Sales Budget master budget Use a purchases budget instead of a production budget purchases budget Does  not   use the manufacturing budgets (direct materials, direct  use the manufacturing budgets labor, manufacturing overhead) To determine budgeted merchandise purchases: Chapter 23-54 LO 6:  Indicate the applicability of budgeting in non­ manufacturing companies Budgeting:  Merchandisers Budgeting:  Merchandisers Example – Lima Company Budgeted sales for July $300,000 and for August $320,000 Cost of Goods Sold:  70% of sales Desired ending inventory:  30% of next month’s Cost of  Chapter 23-55 Goods Sold LO 6:  Indicate the appliability of budgeting in nonmanufacturing  companies Budgeting:  Service Companies Budgeting:  Service Companies Critical factor in budgeting is coordinating professional staff needs  with anticipated services Problems if overstaffed: overstaffed Disproportionately high labor costs Lower profits due to additional salaries Increased staff turnover due to lack of challenging work Problems if understaffed: understaffed Lost revenues because existing and future client needs for services  cannot be met Loss of professional staff due to excessive work loads Chapter 23-56 LO 6:  Indicate the applicability of budgeting in non­ manufacturing companies Budgeting:  Not­for­Profit Companies Budgeting:  Not­for­Profit Companies Just as important as for profit­oriented company However, budget process differs significantly from that of a profit­ oriented company Budget on the basis of cash flows (expenditures and receipts), not on a  revenue and expense basis The starting point is usually  expenditures, not receipts Management’s task is to find  receipts needed to support planned expenditures Budget must be strictly followed, overspending often illegal Chapter 23-57 LO 6:  Indicate the applicability of budgeting in non­ manufacturing companies Let’s Review Let’s Review The budget for a merchandiser differs from a budget for a manufacturer  because: a A merchandise purchases budget replaces the production  budget b.  The manufacturing budgets are not applicable.  c.  None of the above d.  Both (a) and (b) above Chapter 23-58 LO 6: Indicate the applicability of budgeting in non­ manufacturing companies Chapter Review ­ Brief Exercise 23­8  Chapter Review ­ Brief Exercise 23­8  Perine Company has completed all of its operating budgets.  The sales  budget for the year shows 50,000 units and total sales of $2,000,000.   The total unit cost of making one unit of sales is $22.  Selling and  administrative expenses are expected to be $300,000.  Income taxes are  estimated to be $150,000 Prepare a budgeted income statement for the year ending  December 31, 2008 Chapter 23-59 Chapter Review ­ Brief Exercise 23­8  Chapter Review ­ Brief Exercise 23­8  Perine Company Budgeted Income Statement For Year Ending December 31, 2008 Sales Cost of Goods Sold (50,000 units @ $22) Gross Profit Selling & Administrative Expenses Income from Operations Income Tax Expense Net Income Chapter 23-60 $2,000,000    1,100,000      900,000      300,000      600,000      150,000   $450,000 Copyright Copyright Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or  translation of this work beyond that permitted in Section 117 of the 1976 United  States Copyright Act without the express written permission of the copyright owner  is unlawful. Request for further information should be addressed to the Permissions  Department, John Wiley & Sons, Inc. The purchaser may make back­up copies for  his/her own use only and not for distribution or resale. The Publisher assumes no  responsibility for errors, omissions, or damages, caused by the use of these programs  or from the use of the information contained herein Chapter 23-61 ... Specific focus is on how budgeting is used as a? ?planning? ?tool  by  management Chapter 23-4 Budgetary? ?Planning Budgetary? ?Planning Budgeting Budgeting Basics Basics Preparing Preparingthe the Operating Operating Budgets Budgets Budgeting & accounting. . .CHAPTER? ? 23 BUDGETARY PLANNING Accounting? ?Principles,   Eighth Edition Chapter 23-2 Study Objectives Study Objectives Indicate the benefits of budgeting... ­ important basis for performance  once adopted Chapter 23-6 Budgeting Basics? ?–? ?Role of? ?Accounting Budgeting Basics? ?–? ?Role of? ?Accounting Historical? ?accounting? ?data on revenues, costs, and expenses help in 
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