Chapter 9

Process of establishing enterprise-wide objectives.

Formal written statement of management's plans for a specified future time period, expressed in financial terms.

• 1. Plan ahead.
• 2. Definite objectives.
• 3. Early warning system.
• 4. Coordination of activities.
• 5. Management awareness.
• 6. Motivates personnel.

• 1. Sound organizational structure.
• 2. Research and analysis.
• 3. Acceptency by all levels of management.

• 1. A budget may be prepared for any period of time.
• 2. The most common budget period is one year.
• 3. Many companies use continuous 12-month budgets.

Potential sales for the industry and the company's expected share of such sales.

• (1) general economic conditions.
• (2) industry trends.
• (3) market research studies.
• (4) anticipated advertising and promotion.
• (5) previous market share.
• (6) changes in prices.
• (7) technological developments.

A group responsible for coordinating the preparation of the budget.

The advantages of participative budgeting are, first, that lower-level managers have more detailed knowledge of their specific area and thus should be able to provide more accurate budgetary estimates.

Managers intentionally underestimate budgeted revenues or overestimate budgeted expenses in order to make it easier to achieve budgetary goals.

Relates to how the budget is used by top management.

• 1. Difference is the time period involved.
• 2. Difference is in emphasis.
• 3. Difference is pertains to the amount of detail presented.

Identifies long-term goals, selects strategies to achieve those goals, and develops policies and plans to implement the strategies.

A set of interrelated budgets that constitutes a plan of action for a specified time period.

Individual budgets that result in the preparation of the budgeted income statement.

Are the capital expenditure budget, the cash budget, and the budgeted balance sheet. These budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.

• Derived from sales forecast.
• The sales budget is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price.
• 

• The units that must be produced to meet anticipated sales.
• Production requirements are determined from the following formula:
• Budgetted sales units + desired ending finished goods inventory - beginning finished goods inventory = required production units.
• A realistic estimate of ending inventory is essential in scheduling production requirements.

• The quantity and cost of direct materials to be purchased.
• The quantities of direct materials are derived from the following formula:
• Direct material units required for production + desired ending direct material units - beginning direct material units = required direct material units to be purchased.
• The desired ending inventory is again a key component in the budgeting process.

• Contains the quantity (hours) and cost of direct labor necessary to meet production requirements.
• The total direct labor cost is derived from the following formula:
• Units to be produced * direct labor time per unit * direct labor cost per unit = total direct labor cost.

• The expected manufacturing over-head costs for the budget period.
• This budget distinguishes between variable and fixed overhead costs.

This budget projects anticipated selling and administrative expenses for the budget period.

This budget indicates the expected profitability of operations for the budget period.

• Anticipated cash flows.
• The cash budget contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances.

Expected receipts from the company's principal source(s) of revenue.

Expected cash payments.

Expected borrowings and the repayment of the borrowed funds plus interest.

• A projection of financial position at the end of the budget period.
• This budget is developed from the budgeted balance sheet for the preceding year and the budgets for the current year.

The estimated cost of goods to be purchased to meet expected sales.

• (1) A merchandiser uses a merchandise purchases budget instead of a production budget.
• (2) A merchandiser does not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead).

Budgetted cost of goods sold + desired merchandize inventory - beginning merchandize inventory = required merchandize purchases.

• Coordinating professional staff needs with anticipated services.
• Budget data for service revenue may be obtained from expected output or expected input.

• In most cases not-for-profit entities budget on the basis of cash flows (expenditures and receipts), rather than on a revenue and expense basis.
• Further, the starting point in the process is usually expenditures, not receipts.