1 profit planning and budgeting chapter 9 © 2012 cengage learning. all rights reserved. may not be...
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1
Profit Planning and Budgeting
CHAPTER 9
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
PowerPointPowerPoint Presentation by Presentation by
LuAnn BeanLuAnn BeanProfessor of AccountingProfessor of AccountingFlorida Institute of TechnologyFlorida Institute of Technology
Managerial Accounting 11E
Maher/Stickney/Weil
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CHAPTER GOAL
This chapter shows how a short-term operating budget is established and how it fits into the overall plan for achieving organization goals. You will also learn how ethical issues affect the budgeting and performance evaluation process.
☼ ☼
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BUDGET: DefinitionBUDGET: Definition
Is a plan of the resources needed to carry out tasks and
meet financial goals.
LO 1
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STRATEGIC PLANNING
Companies start the strategic planning process by stating their critical success factors, that is the most important things the company must do for success. Companies build on critical success factors to expand operations.
Companies start the strategic planning process by stating their critical success factors, that is the most important things the company must do for success. Companies build on critical success factors to expand operations.
LO 1
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MASTER BUDGET
A master budget is part of the overall organization plan for the next year and includes:Organizational goalsStrategic long-range profit planMaster budget (a tactical short-range profit plan)
LO 1
6
ORGANIZATIONAL GOALS: Definition
ORGANIZATIONAL GOALS: Definition
Are broad objectives management establishes and employees work to achieve.
LO 1
7
STRATEGIC LONG-RANGE PROFIT PLAN
Any plan that focuses on the intermediate or distant future is stated in broad termsCost control
Optimize contribution from existing product lines by holding product cost increases to less than the general rate of inflation
Market shareMaintain market share by providing a level of service
and quality comparable to top competitors
LO 1
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LO 1
Budgeting is an
information gathering
process where information comes from both internal and external
sources.
Budgeting is an
information gathering
process where information comes from both internal and external
sources.
EXHIBITEXHIBIT 9.19.1
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PARTICIPATIVE BUDGETING: Definition
PARTICIPATIVE BUDGETING: Definition
Is a process of gathering information from lower- and
middle-management employees.
LO 2
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RESPONSIBILITY CENTER: Definition
RESPONSIBILITY CENTER: Definition
Is a division, department responsible for managing a
particular group of activities in the organization.
LO 3
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RESPONSIBILITY CENTERS: Four Types
Cost centersExample: Manufacturing departmentsManagers responsible for managing costs
Engineered cost centers: well-established input/output relationsProduction departments
Discretionary cost centers: input/output relations not well specifiedResearch departments
Revenue centersExample: Marketing departmentsManagers responsible for revenues
LO 3
Continued
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RESPONSIBILITY CENTERS: Four Types
Profit centersManagers responsible for managing costs and
revenues
Investment centersExample: Corporate divisionsManagers responsible for costs, revenues, and
assets
LO 3
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Activity Category
Example
Unit Converts resources into products Direct labor
Batch Batch of same setup, personnel Machine setups
Product Support a particular product line Design work
Customer Meet customer needs Customer service
Facility Support entire organization Human resources
ESTABLISHING BUDGETS: Using Cost Hierarchies
LO 3
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SALES BUDGET
PRODUCTION BUDGET
MARKETING BUDGET
ADMINISTRATIVE BUDGETS
PROFIT PLANNING BUDGET
LO 4BUDGET
PROCESS
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DEVELOPING SALES BUDGET
Forecasting Sales is the heart of the budgeting process and perhaps the most difficult. Information is sought from many sources.
LO 4
Sales staff
Market researchers
Delphi technique
Trend analysis
Econometric models
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EXAMPLE: Victoria’s Gourmet Coffee
Victoria’s Gourmet Coffee is preparing its budget for the year.
LO 4
Continued
VGC
Five departments are involved in budgeting
process.
Five departments are involved in budgeting
process.
EX
HIB
ITE
XH
IBIT
9.29.2
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VICTORIA’S SALES BUDGETVictoria’s Gourmet Coffee forecasts three levels of
sales for budgeting purposes.
LO 4VGC
Ultimately, Victoria’s chose the
expected level of sales,
70,000 units @ $6 each, for
their budgeting process.
Ultimately, Victoria’s chose the
expected level of sales,
70,000 units @ $6 each, for
their budgeting process.
EXHIBITEXHIBIT 9.39.3
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DEVELOPING PRODUCTION BUDGET
Production budgets begin with Beginning Inventory (BI). They combine this with estimate of units to be sold and desired Ending Inventory (EI) to estimate production.
Units Produced =
Units to be sold + Desired EI – Units BI
LO 4
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LO 4VGC
EX
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XH
IBIT
9.49.4
Production budgets include direct materials, direct labor, and
variable and fixed overhead.
Production budgets include direct materials, direct labor, and
variable and fixed overhead.
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LO 4
Continued
VGC
EX
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ITE
XH
IBIT
9.59.5
Marketing budgets are comprised of
variable (unit) and fixed
(customer and facility) costs.
Marketing budgets are comprised of
variable (unit) and fixed
(customer and facility) costs.
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LO 4
Continued
VGC
EX
HIB
ITE
XH
IBIT
9.69.6
Administrative budgets are comprised of fixed costs,
some of which are
discretionary.
Administrative budgets are comprised of fixed costs,
some of which are
discretionary.
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LO 4VGC
EX
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XH
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9.79.7
Budget Profit plans combine
information from all prior
budgets to project an estimate of
profit.
Budget Profit plans combine
information from all prior
budgets to project an estimate of
profit.
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What happens if projected profit is
not the desired profit?
When projected profit does not meet the desired level, managers will seek ways to improve profits.
LO 4MANAGERS WANT TO KNOW!
What happens if actual sales and
production differ from projected levels?
Managers can develop a flexible budget to
compare actual with projected levels.
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LO 5VGC
EX
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XH
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9.79.7
Flexible budget based on actual sales volume show higher
profit.
Flexible budget based on actual sales volume show higher
profit.
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What do the terms “favorable” and “unfavorable”
variance mean?
Favorable means the variance will increase profits; unfavorable
means the variance will decrease profits.
LO 5
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IMPORTANCE OF BUDGETS
LO 6
Budgets affect both organizational and individual performance. If sales forecasts are too high, excess inventory arises. Forecasts too low lead to lost sales. Individuals are rewarded when performance measures are met.
Budgets affect both organizational and individual performance. If sales forecasts are too high, excess inventory arises. Forecasts too low lead to lost sales. Individuals are rewarded when performance measures are met.
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SUMMARY OF THE MASTER BUDGET The master budget summarizes management’s plans for the period
covered. Preparing the master budget requires the participation of all managerial groups, from local plant and sales managers to the top executives of the firm and the board of directors.
Once management adopts the budget, it becomes the major planning and control instrument. Master budgets are almost always static budgets; that is, they consider the likely results of the operations at the one level of operations specified in the budget.
Computerizing the process makes it less costly to develop multiple master budgets that take into account various uncertainties facing the firm, such as market conditions, material prices, labor difficulties, and government regulations.
LO 7
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IMPLICATIONS FOR INCENTIVE PLANS
Typical implications for developing good incentive plans include:
developing incentive methods that provide rewards for both accurate forecasts and good performance.
rewards that are positively related to forecasted sales to give incentives to forecast high rather than low.
additional rewards for employees who beat the forecast and penalties for results worse than forecast.
LO 8
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End of CHAPTER 9