Information for Planning, Control and Performance 10 Sept

7/31/2019 Information for Planning, Control and Performance 10 Sept

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Information for Planning, Control and

Performance Measurement


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A detailed plan, expressed in quantitative term,

that specifies how an organization will acquire and useresources during a particular period of time.

What is a budget?

What is a budgeting system?

The procedures used to develop a budget

Budgets


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BUDGETS

A Budget is a formal quantitative expressionof plans whether for an individual, business,

or other organization.

Business and other organizations generallyuse budgets to focus on operating or

financial problems early, so that managers

can take steps to avoid or remedy the

problems.

However, a budget is a tool that helps

managers both plan and control operations.


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Benefits of Budgets

Provide an opportunity to

reevaluate existing activities

and evaluate new ones.

Aid managers in communicating

objectives and coordinating actions

across the organization.

Compel

managers

to think

ahead


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BENEFITS OF BUDGETS

1. Formalization of Planning:Budgeting forces managers

to think ahead-to anticipate

and prepare for changing

conditions.

Compel

managers

to think

ahead


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BENEFITS OF BUDGETS

2. Expectation: Framework for Judging Performance

Budgeted goals and performance are generally a

better basis for judging

actual results than is

past performance.

Provide an opportunity to

reevaluate existing activities

and evaluate new ones.


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BENEFITS OF BUDGETS

3. Communication and Coordination:

Another benefit of budgeting is that

personnel are informed of what isexpected of them.

Aid managers in communicating

objectives and coordinating actions

across the organization.


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BENEFITS OF BUDGETS

3. Communication and Coordination:A good budget process communicates both from

the top down and from the bottom up.

Budget also help managers coordinate objectives.For example, a budget forces purchasing

personnel to integrate their plans with production

requirements, while production managers use the

sales budget and deli very schedule to help themanticipate and plan for the employees and

physical facilities they will require.


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Potential Problems in Implementing Budgets


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Every enterprise has a set of goals

ProfitabilityGrowth

PublicService

Strategic Planning

STRATEGIC PLANNINGA plan that sets the overall goals

and objectives ofthe organization.


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The most forward-looking budget is the

strategic plan, which sets the overall

goals and objectives of the organization.

The strategic plan leads to long-range

planning, which producesforecasted financial statements

for five- to ten-year periods.

Strategic Planning


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Some business analysts do not call a strategic planA BUDGET because it covers no specific period

and does not produce forecasted

financial statement.

StrategicPlanning

Express the specific steps required to achieve

the organizations goals.


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Long-range plans

are coordinated with capital budgets,

which detail the planned expenditures

for facilities, equipment, new products,

and other long-term investments.

Master budgets link to both long-range

plans and short-term budgets.


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Discuss the major capital investmentsrequired to:

Maintain

PresentFacilities

IncreaseCapacity

DiversifyProducts orProcesses

Develop

ParticularMarkets

Strategic Long-Range Plans


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Managing Financial &Operating Performance

FacilitatingCommunication

and Coordination

EvaluatingPerformance &

Providing IncentivesPlanning

AllocatingResources

What Are The Key Purposes Of

Budgeting Systems?


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Master Budget

Sales

Production

Distribution

Finance

The master budget

is a detailed and

comprehensive analysis

of the first year of the

long-range plan.

It summarizes the

planned activitiesof all subunits of

an organization.


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Continuous Budget

Rolling budgets...are a common form of

master budgets thatadd a month in the

future as the month

just ended is dropped.


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ROLLING BUDGETContinuous budgets or rolling budgets are a very common form

of

Master budget that add a month in the future as the month justended is dropped.

Continually updated by periodically adding a new incrementaltime period, such as a quarter, and dropping the period just

completed.

Continuous budgets compel managers to think specifically aboutthe forthcoming 12 months and thus stable planning horizon.

Continuous Budget


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Master Budget

Focuses on the Income

Statement and

supporting schedulesor budgeted expenses.

Focuses on the effects

that the operating budget

and other plans will haveon cash balances.


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The sales level of theprior year

StartingPoint

Sales Forecasting


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Sales Forecasting

A sales forecast is a prediction of sales

under a given set of conditions.

Sales forecasts are usually prepared under

the direction of the top sales executive.

The sales budget is the result of decisions to create

Conditions that will generate a desired level of sales.


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Factors to Consider When Forecasting Sales


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Steps in Preparing the Master Budget

1. Basic data

2. Operating budget

3. Financial budget


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1. Basic dataa. Sales budget

b. Cash collections from customers

c. Purchases and cost-of-goods sold budget

d. Cash disbursements for purchases

e. Operating expense budget

f. Cash disbursements for operating expenses

The principal steps in preparing

the master budget:


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Financial Budget

3. Prepare forecasted financial statements:

b. Capital budgetc. Cash budget

d. Budgeted Balance sheet

Operating Budget

2. Prepare budgeted income statement using basic data in step 1.


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Operating Budget

Sales

budget

Cash collections

from customers

Disbursements

for purchases

Disbursements for

operating expenses

Purchases

budget

Operating expenses

budget


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Cash Collections

It is easiest to prepare budgeted

cash collections at the same

time as the sales budget.

Cash collections include the current

months cash sales plus the

previous months credit sales.


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Purchases Budget and Cash Disbursements

Budgeted purchases

= Desired ending inventory

+ Cost of goods sold

Beginning inventory

Disbursements could include 50% of the current months

purchases and 50% of the Previous months purchases.


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Operating Expense Budget

The budgeting of operating expenses depends on several factors.

Month-to-month changes in sales volume and other cost-driveractivities directly influence many operating expenses.

Expenses driven bysales volume include

sales commissions and

many delivery expenses.


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Other expenses are not influenced by sales

or other cost-driver activity and are regarded

as fixed, within appropriate relevant ranges.

Rent

Insurance

Depreciation

Salaries

Operating Expense Budget


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Operating Expense Disbursements

Disbursements for operating expenses are

based on the operating expense budget.

Disbursements may include 50% of last months and this months

wages and commissions plus miscellaneous and rent expenses.

The total of these disbursements is then

used in preparing the cash budget.


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Budgeted Income Statement

The income statement will be complete

after addition of the interest expense,

which is computed after the cash

budget has been prepared.

Budgeted income from operations

is often a benchmark for judging

management performance.


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Financial Budget


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Cash Budget

Available cash balance

= Beginning cash balance

Minimum cash balance desired.

Cash receipts depend on collections from

customers accounts receivable, cash sales,

and on other operating income sources.


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Cash Budget

Cash disbursements for purchases depend

on the credit terms extended by suppliers

and the bill-paying habits of the buyer.

Payroll depends on wage, salary, and

commission terms and on payroll dates.


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Cash Budget

Other disbursements include outlays forfixed assets, long-term investments,

dividends, and the like.

Disbursements for some costs and expenses

depend on contractual terms for installment

payments, mortgage payments, rents,leases, and miscellaneous items.


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Cash Budget

Management determines the minimum

cash balance desired depending

on the nature of the business

and credit arrangements.


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Cash Budget

Financing requirements depend on how

the total cash available compares

with the total cash needed.

Needs include the disbursements plus

the desired ending cash balance.


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Cash Budget

Ending cash balance

= Beginning cash balance

+ Receipts Disbursements

+ Cash from financing

The cash from financing can beeither positive (borrowing)

or negative (repayment).


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Budgeted Balance Sheet

The final step in preparing the master budget

is to construct the budgeted balance sheet

that projects each balance sheet item in

accordance with the business plan.

Management then considers all the major

financial statements as a basis for changing

the course of events.


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Activity-Based Master Budgets

An activity-based budgetary system

emphasizes the planning and controlpurpose of cost management.

Functional budgeting focuses on

preparing budgets for various

functions such as production,

selling, and administrative support.


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End of Chapter

The End

Documents

Information for Planning, Control and Performance 10 Sept