chapter 8
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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
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