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BUDGETARYPLANNING
Accounting , Fifth Edition
21
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Preview of Chapter 21
Accounting
Fifth Edition
Kimmel Weygandt Kieso
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BudgetingAn impot!nt "!n!#$m$nt Too%An impot!nt "!n!#$m$nt Too%
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
PerformanceDecisionDecision
MakingMaking
LT = Long Term
ST = Sort Term
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9-(
Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
Planning
Planning -- involves
developing objectives andpreparing various budgets
to achieve these objectives.LT = Long Term
ST = Sort Term
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9-)
Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
Control
Control involves the
steps taken by managementthat attempt to ensure the
objectives are attained.
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Decision
Making
Measure
Performance
Implement
Plans
Initiate LT &
ST Plans
Evaluate
Performance
The Work of Management
B*d#$t+
Initiate LT &
ST Plans
LT = Long Term
ST = Sort Term
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Evaluate
Performance
Decision
Making
Planning
Decision
Making
Evaluate
Performance
Measure
Performance
The Work of Management
Implement
Plans
Implement
Plans
Tho*#h. th$
/*d#$t
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Evaluate
Performance
Decision
Making
Planning
Decision
Making
Evaluate
Performance
Measure
Performance
The Work of Management
Implement
Plans
Measure
Performance
A00odin#.
to th$ B*d#$t
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
LT = Long Term
ST = Sort Term
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A Budget is . . .A Budget is . . .Budget: a formal written statement of management’s plans for
a specified future time period, expressed in financial terms.
Primary method of communicating agreed-upon objectives
throughout the organization.
Promotes efficiency.
Control device - important basis for performance evaluation
once adopted.
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Historical accounting data on revenues, costs, andexpenses help in formulating future budgets.
Accountants normally responsible for presenting
management’s budgeting goals in financial terms.
The budget and its administration are the responsibility
of management.
Budgeting and Accounting
LO 1
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Primary benefits of budgeting
!."e#uires all levels of management to plan ahead.
$.Provides definite objectives for evaluating performance.
%.&reates an early warning system for potential problems.
'.(acilitates coordination of activities within the business.
)."esults in greater management awareness of the entity’s
overall operations.
*.+t motivates personnel throughout organization to meet
planned objectives.
The Benefits of Budgeting
LO 1
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The Benefits ofThe Benefits of Budgeting Budgeting
Ad!nt!#$+
D$fin$ o/$0ti$+
m!n!#$m$nt !!$n$++
oodin!t$
!0tiiti$+
E!%5 !nin# 65+t$m p%!n ! h$!d
moti!t$+ p$+onn$%
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ay be prepared for any period of time.
► ost common - one year.
► upplement with monthly and #uarterly budgets.
► ifferent budgets may cover different time periods.
ong enough to provide an attainable goal and
minimize seasonal or cyclical fluctuations.
!hort enough for reliable estimates.
"#$TH %& TH" B'($"T P")*%(
"ssentials of "ffective Budgeting
LO 1
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NowNow
5 Years5 Years
1 Year1 Year
ost common
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/ase budget goals on past performance
► &ollect data from organizational units.
► /egin several months before end of current year.
evelop budget within the framewor0 of a sales
forecast.
► hows potential industry sales.
► hows company’s expected share.
TH" B'($"T*#$ P)%C"!!
"ssentials of "ffective Budgeting
LO 1
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Impo+$dImpo+$d /*d#$t/*d#$tTop-don. !ppo!0hTop-don. !ppo!0h
P!ti0ip!tP!ti0ip!t
i$ B*d#$ti$ B*d#$t
Bottom to top. !ppo!0hBottom to top. !ppo!0h
Vs.
Budgets . .Budgets . . ..
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Imposed Budgets VersusParticipative Budgets
Impo+$d
B*d#$t+
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In +t!t-*p o#!ni7!tion+In +t!t-*p o#!ni7!tion+In +m!%% /*+in$++$+In +m!%% /*+in$++$+
In tim$+ of $0onomi0 0i+$+In tim$+ of $0onomi0 0i+$+
8h$n op$!tin# m!n!#$+8h$n op$!tin# m!n!#$+
%!0 /*d#$t!5 +i%%+ o%!0 /*d#$t!5 +i%%+ op$+p$0ti$:p$+p$0ti$:
Best Time to Use . . .. .
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R$;*i$+ %$++ tim$:R$;*i$+ %$++ tim$:Uti%i7$ top m!n!#$m$nt
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Disadvantages . . .
R$d*0$ f$$%in# of t$!mo:R$d*0$ f$$%in# of t$!mo:Di++!ti+f!0tion !nd %o mo!%$:Di++!ti+f!0tion !nd %o mo!%$:
Limit$d !00$pt!n0$ of +t!t$d #o!%+Limit$d !00$pt!n0$ of +t!t$d #o!%+!nd o/$0ti$+:!nd o/$0ti$+:
"!5 +t"!5 +topop initi!ti$ of %o$ %$$%initi!ti$ of %o$ %$$%m!n!#$+:m!n!#$+:
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Imposed Budgets VersusParticipative Budgets
P!ti0ip!ti$
B*d#$t+
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Best Time to UseBest Time to Use . . .. . .
In $%%-$+t!/%i+h$d o#!ni7!tion+:In $%%-$+t!/%i+h$d o#!ni7!tion+:In %!#$ /*+in$++$+:In %!#$ /*+in$++$+:
In tim$+ of $0onomi0In tim$+ of $0onomi0 i+ #oin#i+ #oin#::
8h$n op$!tin# m!n!#$+ h!$8h$n op$!tin# m!n!#$+ h!$
+ton# /*d#$t!5 +i%%++ton# /*d#$t!5 +i%%+
!nd p$+p$0ti$+:!nd p$+p$0ti$+:
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Advantages . . .Advantages . . .
=/t!in infom!tion fom tho+$=/t!in infom!tion fom tho+$p$+on+ mo+t f!mi%i! ith th$p$+on+ mo+t f!mi%i! ith th$
n$$d+ !nd 0on+t!int+ of th$n$$d+ !nd 0on+t!int+ of th$
o#!ni7!tion!% *nit+:o#!ni7!tion!% *nit+:L$!d+ to /$tt$ mo!%$ !nd hi#h$L$!d+ to /$tt$ mo!%$ !nd hi#h$
moti!tion:moti!tion:
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Advantages . . .Advantages . . .
D$$%op ! hi#h d$#$$ ofD$$%op ! hi#h d$#$$ of!00$pt!n0$ of !nd 0ommitm$nt to!00$pt!n0$ of !nd 0ommitm$nt to
o#!ni7!tion!% #o!%+ !nd o/$0ti$+o#!ni7!tion!% #o!%+ !nd o/$0ti$+
/5 op$!tin# m!n!#$m$nt:/5 op$!tin# m!n!#$m$nt:A$ #$n$!%%5 mo$ $!%i+ti0:A$ #$n$!%%5 mo$ $!%i+ti0:
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Disadvantages . . .Disadvantages . . .
R$;*i$ +i#nifi0!nt%5 mo$ tim$:R$;*i$ +i#nifi0!nt%5 mo$ tim$:"!5 moti!t$ m!n!#$+ to"!5 moti!t$ m!n!#$+ to
intod*0$ +%!0. into th$ /*d#$t:intod*0$ +%!0. into th$ /*d#$t:B*d#$t!5 +%!0B*d#$t!5 +%!0 o00*+ h$n m!n!#$+ int$ntion!%%5o00*+ h$n m!n!#$+ int$ntion!%%5 *nd$$+tim!t$ /*d*nd$$+tim!t$ /*d##$t$d $$n*$+$t$d $$n*$+
o o$$+tim!t$ /*d#$t$d $>p$n+$+o o$$+tim!t$ /*d#$t$d $>p$n+$+
in od$ to m!$ it $!+i$ to !0hi$$ /*d#$t!5 #o!%+:in od$ to m!$ it $!+i$ to !0hi$$ /*d#$t!5 #o!%+:
To minimi7$ /*d#$t!5 +%!0, hi#h$-%$$% m!n!#$+ m*+tTo minimi7$ /*d#$t!5 +%!0, hi#h$-%$$% m!n!#$+ m*+t0!$f*%%5 $i$ !nd thoo*#h%5 ;*$+tion th$ /*d#$t0!$f*%%5 $i$ !nd thoo*#h%5 ;*$+tion th$ /*d#$t
po$0tion+ poid$d to th$m /5 $mp%o5$$+ hom th$5po$0tion+ poid$d to th$m /5 $mp%o5$$+ hom th$5
+*p$i+$:+*p$i+$:
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et of interrelated budgets that constitutes a plan ofaction for a specified time period.
&ontains two classes of budgets
► %perating budgets.
► &inancial budgets.
+ndividual budgets that resultin the preparation of the
budgeted income statement
1 establish goals for sales
and production personnel.
The +aster Budget
LO 1
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et of interrelated budgets that constitutes a plan ofaction for a specified time period.
&ontains two classes of budgets
► %perating budgets.
► &inancial budgets.
The +aster Budget
The capital expendituresbudget, the cash budget,
and the budgeted balance
sheet 1 focus primarily on
cash needs to fund
operations and capital
expenditures.
LO 1
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Te Master !u"get
Sales !u"get
Pro"uction
!u"get
DL !u"get
S E$p !u"get
Cas !u"get
DM !u"get
Capital
E$pen"iture
! " t
M% Overea"
!u"get
!u"gete"
!alance Seet
!u"gete" Income Statement