Profit Planning

Chapter 9

McGrawHill/Irwin

Copyright2010byTheMcGrawHillCompanies,Inc.Allrightsreserved.

Learning Objective 1

Understand why
organizations budget and
the processes they use to
create budgets.

9-2

The Basic Framework of Budgeting

A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organizations activities is known
as budgetary control.

9-3

Planning and Control

Planning
Planning

involves
involves developing
developing
objectives
objectives and
and
preparing
preparing various
various
budgets
budgets to
to achieve
achieve
those
those objectives.
objectives.

Control
Control

involves
involves the
the steps
steps taken
taken by
by
management
management to
to increase
increase
the
the likelihood
likelihood that
that the
the
objectives
objectives set
set down
down while
while
planning
planning are
are attained
attained and
and
that
that all
all parts
parts of
of the
the
organization
organization are
are working
working
together
together toward
toward that
that goal.
goal.

9-4

Advantages of Budgeting
Define goals
and objectives
Communicate
plans

Advantages
Coordinate
activities

Means of allocating
resources
Uncover potential
bottlenecks

9-5

Responsibility Accounting

Managers should be
held responsible for
those items - and only
those items - that they
can actually control
to a significant extent.

9-6

Choosing the Budget Period

Operating Budget

2008

2009

2010

2011

Operating
Operating budgets
budgets ordinarily
ordinarily
A
continuous
budget
is
aa
A
continuous
budget
is
cover
cover aa one-year
one-year period
period
12-month
budget
that
rolls
12-month
budget
that
rolls
corresponding
to
a
companys
corresponding to a companys forward one month (or quarter)
forward one month (or quarter)
fiscal
year.
Many
companies
fiscal year. Many companies as the current month (or quarter)
as the current month (or quarter)
divide
their
annual
budget
divide their annual budget
is
is completed.
completed.
into
four
quarters.
into four quarters.
9-7

Self-Imposed Budget
Top M anagem ent

M id d le
M anagem ent

S u p e r v is o r

S u p e r v is o r

M id d le
M anagem ent

S u p e r v is o r

S u p e r v is o r

A self-imposed budget or participative budget is a budget that is

prepared with the full cooperation and participation of managers
at all levels.
9-8

Advantages of Self-Imposed Budgets

1.
1. Individuals
Individuals at
at all
all levels
levels of
of the
the organization
organization are
are viewed
viewed
as
as members
members of
of the
the team
team whose
whose judgments
judgments are
are valued
valued
by
by top
top management.
management.
2.
2. Budget
Budget estimates
estimates prepared
prepared by
by front-line
front-line managers
managers are
are
often
often more
more accurate
accurate than
than estimates
estimates prepared
prepared by
by top
top
managers.
managers.
3.
3. Motivation
Motivation is
is generally
generally higher
higher when
when individuals
individuals
participate
participate in
in setting
setting their
their own
own goals
goals than
than when
when the
the
goals
goals are
are imposed
imposed from
from above.
above.
4.
4. A
A manager
manager who
who is
is not
not able
able to
to meet
meet aa budget
budget imposed
imposed
from
from above
above can
can claim
claim that
that itit was
was unrealistic.
unrealistic. SelfSelfimposed
imposed budgets
budgets eliminate
eliminate this
this excuse.
excuse.
9-9

Self-Imposed Budgets
Self-imposed budgets should be reviewed
by higher levels of management to
prevent budgetary slack.
Most companies issue broad guidelines in
terms of overall profits or sales. Lower
level managers are directed to prepare
budgets that meet those targets.

9-10

Human Factors in Budgeting

The success of a budget program depends on three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based on
meeting budget targets.

9-11

The Budget Committee

A
A standing
standing committee
committee responsible
responsible for
for
overall
overall policy
policy matters
matters relating
relating to
to the
the budget
budget
coordinating
coordinating the
the preparation
preparation of
of the
the budget
budget
resolving
resolving disputes
disputes related
related to
to the
the budget
budget
approving
approving the
the final
final budget
budget

9-12

The Master Budget: An Overview

Sales
Sales budget
budget
Ending
Ending inventory
inventory
budget
budget

Direct
Direct materials
materials
budget
budget

Production
Production budget
budget

Direct
Direct labor
labor
budget
budget

Selling
Selling and
and
administrative
administrative
budget
budget
Manufacturing
Manufacturing
overhead
overhead budget
budget

Cash
Cash Budget
Budget
Budgeted
Budgeted
income
income
statement
statement

Budgeted
Budgeted
balance
balance sheet
sheet

9-13

Format of the Cash Budget

The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the
company will need to borrow money or if it will be able to
repay funds previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.
9-14

End of Chapter 9

9-15