Budgetary Control

The Budgeting Process
24-1
Copyright  Houghton Mifflin Company. All rights reserved.
» Budgeting is the process of:
• Identifying
• Gathering
• Summarizing
• Communicating
financial and nonfinancial
information about an organization’s
future activities.
24-2
» Budgets are updated to accommodate
management’s needs for
performance evaluation in some
settings such as JIT or TQM
environments.
» The budgeting process provides
managers with the opportunity to carefully
match the goals of the organization with
the resources necessary to accomplish
those goals.
24-3
Examples of Budgets
State University Knights
Alumni Club
Revenues an Expenditures Budget
Homecoming Activities - 20x1
Budgeted Revenues
Football Concession Sales $32,500
Homecoming Dance Tickets
(1,200 at $20) 24,000
Parking Fees 1,425
Total Budgeted Revenues $57,925
Budgeted Expenditures
Dance Music Group $7,500
Hall Rental 2,000
Refreshments 2,600
Printing Costs 1,450
Concession Purchases 12,200
Clean-up Costs 4,720
Miscellaneous 800
Total Budgeted Expenditures 31,270
Excess of Revenues Over Expenditures $26,655
24-4
The Management Cycle
» Managers use the budgeting process
throughout the management cycle to
help:
• Plan
• Execute
• Review
• Report
the organization’s financing,
investing, and operating activities.
24-5
Budgeting
and the Management Cycle
•Relate the organization’s long-term
goals to its short-term activities
•Distribute resources and workloads
•Communicate responsibilities
•Select performance measures
•Set goals for bonuses and rewards
• Communicate budget information

• Provide continuous feedback
• Calculate variances • Communicate expectations

• Evaluate performance • Challenge & motivate others
• Determine timeliness • Coordinate activities
• Create solutions for • Recognize problems
continuous improvement
24-6
The Planning Stage
» Budgeting pertains especially to the
planning stage.
• Budgets are tied to long-range and

short-range plans to meet success
factors related to quality, cost, and
time.
24-7
The Planning Stage
• Budget information is used to
communicate responsibilities to
individuals who are accountable for a
particular segment of the organization.
• Performance measures are carefully
selected to motivate individuals or
teams to achieve targeted goals.
24-8
The Executing Stage
» During the executing stage,
managers use budget information
for:
• Communication.
• Benchmarking.
• Problem recognition.
24-9
The Reviewing Stage
» In the reviewing stage, managers:
• Calculate variances.
• Evaluate performance.
• Review timeliness.
• Create solutions for continuous
improvement.
24-10
The Reporting Stage
» In the reporting stage, budgets
serve as a reference point for many
reports, such as performance
reports that support bonuses and
promotions.
24-11
Discussion
Q. What are some examples of ways that
budgeting can help managers during
the reviewing stage of the management
cycle?
A. 1. Calculate variances.
2. Evaluate performance.
3. Determine timeliness.
4. Create solutions for continuous
improvement.
24-12
Principles of
Effective Budgeting
» The principles of effective budgeting
can be grouped into five categories.
1. Long-range goals.
2. Short-range goals and strategies.
3. Human responsibilities and interaction.
4. Budget housekeeping.
5. Budget follow-up.
24-13
Discussion
Q. What are the five groups of effective
budgeting principles?
A. 1. Long-range goals.
2. Short-range goals and strategies.
3. Human responsibilities & interaction.
4. Budget housekeeping.
5. Budget follow-up.
24-14
Implementation of Budget
» Two success factors for
implementing a budget are:
• Communications: Communication of
expectations and targets to all key people
in the organization.
• Support: Top management must appear
willing to reward people for meeting the
organization’s goals that are represented
in the budget.
24-15
Discussion
Q. What two factors are needed for
the successful implementation of a
budget?
A. 1. Communication.
2. Support.
24-16
The Quality of Budgets
» To improve the quality of the
budgets, managers need to know:
• Why the budget is being prepared.
• Who will read and use it.
• How the information will be
presented.
• Where the information can be
found.
24-17
The Master Budget
» The master budget is a set
of budgets that consolidate
an organization’s financial
information into budgeted
financial statements for a
future period of time.
24-18
The Master Budget
» A master budget consists of the:
• Detailed operating budgets.
• Cash budget.
• Budgeted income statement.
• Capital expenditures budget.
• Budgeted balance sheet.
24-19
Discussion
Q. What are the four major sections of
the master budget?
A. 1. Detailed operating budgets.
2. Budgeted income statement.
3. Capital expenditures budget.
4. Budgeted balance sheet.
24-20
The Operating Budgets
» Detailed operating budgets include the:
• Sales budget (in units and dollars).
• Production budget (in units).
• Direct materials purchased budget (in units
and dollars).
• Direct labor budget (in hours and dollars).
• Manufacturing overhead budget.
• Cost of goods manufactured.
• Selling and administrative expense budget.
24-21
» Because of the different activities
and information needs of managers
in manufacturing, retail, and service
organizations, the master budget
process in those settings differs in
the preparation of operating
budgets.
24-22
Manufacturing Organizations
» The operating budgets for a
manufacturing organization include
budgets for:
• Sales.
• Production.
• Direct materials purchases.
• Direct labor.
• Manufacturing overhead.
• Cost of goods manufactured.
• Selling and administrative expenses.
24-23
Retail Organizations
» Managers of retail organizations
must know:
• What products to sell.
• Estimated quantities to be sold.
• The selling price for each.
24-24
Retail Organizations
» The operating budgets for retail
organizations include the:
• Sales budget.
• Purchases budget.
• Cost of goods sold budget.
• Selling and administrative budget.
24-25
Preparation of a Master Budget for a
Retail Organization
Sales Budget
Purchases Budget
Operating Selling and
Budgets Cost of Goods Administrative
Sold Budget Expense Budget
Budgeted
Income Statement
Budgeted
Cash Budget
Financial Balance Sheet
Budgets
Capital
Expenditures Budget
24-26
Service Organizations
» Managers of service organizations
must know the types and amounts
of:
• Services to perform.
• Labor hours required.
• Level of expertise of employees.
• Labor rates.
24-27
Service Organizations
» The operating budgets for service
organizations include:
• Service revenue.
• Labor.
• Services overhead.
• Selling and administrative budget.
24-28
Preparation of a Master Budget for a
Service Organization
Service Revenue
Operating Services Selling and

Budgets Labor Budget Overhead Administrative
Budget Expense Budget
Budgeted
Income Statement
Budgeted
Cash Budget Balance
Financial Sheet
Budgets
Capital
Expenditures Budget
24-29
Discussion
Q. What three financial statements
are included in the preparation of a
master budget?
A. 1. Budgeted income statement.
2. Budgeted balance sheet.
3. Cash budget.
24-30
Sales Budget
Hi-Flyer Company
Sales Budget
For the Year Ended December 31, 20x1
Quarter
1 2 3 4 Year
Sales in Units 10,000 30,000 10,000 40,000 90,000

x Selling Price
per Unit $ 5 $ 5 $ 5 $ 5 $ 5
Total Sales $ 50,000 $150,000 $ 50,000 $200,000 $450,000
24-31
Production Budget
Hi-Flyer Company
Production Budget
Quarter
1 2 3 4 Year
Sales in Units 10,000 30,000 10,000 40,000 90,000

Add Desired Units of Ending
Finished Goods Inventory 3,000 1,000 4,000 1,500 1,500
Desired Total Units 13,000 31,000 14,000 41,500 91,500
Less Desired Units of
Beginning Finished Goods
Inventory 1,000 3,000 1,000 4,000 1,000
Total Production Units 12,000 28,000 13,000 37,500 90,500
24-32
Direct Labor Budget
Hi-Flyer Company
Direct Labor Budget
Quarter
1 2 3 4 Year
Total Production Units 12,000 28,000 13,000 37,500 90,500

x Direct Labor Hours
per Unit .1 .1 .1 .1 .1
Total Direct Labor Hours 1,200 2,800 1,300 3,750 9,050
x Direct Labor Cost
per Hour $ 6 $ 6 $ 6 $ 6 $ 6
Total Production Units $ 7,200 $16,800 $ 7,800 $22,500 $54,300
24-33
The Cash Budget
» A cash budget is a projection over
a period of time of:
• Beginning cash.
• Cash receipts.
• Cash payments.
• Ending cash.
24-34
Elements of a Cash Budget
Activities Cash Receipts From Cash Payments For
Operating Cash sales Purchases of direct materials

Cash collections on Purchases of operating supplies
credit cards Direct labor
Manufacturing overhead
expenses
Selling expenses
Administrative expenses
Investing Sale of investments Purchase of investments

Sale of long-term assets Purchase of long-term assets
Interest income from investments
Cash dividends from investments
Financing Loan proceeds Loan repayment

Proceeds from sale of stock Interest expense
Proceeds from sale of bonds Cash dividends to stockholders
24-35
Discussion
Q. What are the three major activity
classifications of a cash budget?
A. 1. Operating activities.
2. Investing activities.
3. Financing activities.
24-36
Budgeted Balance Sheet
» Information from all other elements
of a master budget is used to
prepare a budgeted balance sheet.
» A budgeted balance sheet projects
the financial position of an
organization.
24-37
OK, LET’S REVIEW . . .
1.Define budgeting and explain

its role in the management
cycle.
2.Explain the basic principles of
budgeting.
3.Describe the master budget
process for different types of
organizations, and list the
guidelines for preparing 24-38
budgets.
AND ALSO . . .
5. Prepare a cash budget.

6. Prepare a budgeted
balance sheet.
24-39

Budgetary Control

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Budgetary Control

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The Budgeting Process

• Communicate budget information

• Calculate variances • Communicate expectations

• Budgets are tied to long-range and

Operating Services Selling and

Sales in Units 10,000 30,000 10,000 40,000 90,000

Sales in Units 10,000 30,000 10,000 40,000 90,000

Total Production Units 12,000 28,000 13,000 37,500 90,500

Operating Cash sales Purchases of direct materials

Investing Sale of investments Purchase of investments

Financing Loan proceeds Loan repayment

1.Define budgeting and explain

5. Prepare a cash budget.

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