University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

99

Pages:

22
Author:

Ruby Bates

Chapter 9: Profit Planning Part 3 3 Cash Budget: Cash Disbursements ► The cash disbursements section lists all planned cash outlays for the period. ► All expenses that do not require a cash outlay are excluded from the list (e.g., depreciation is never included in the disbursements section). ► Just as sources of cash may require a schedule of cash collections on accounts receivable to calculate cash expected from credit sales, the disbursements section may require care in handling payments on account. 3 Cornerstone 9-11 Determining Cash Payments on Accounts Payable 3 Cornerstone 9-11 Determining Cash Payments on Accounts Payable (continued) 3 Cash Budget: Cash Excess or Deficiency ► Some companies expand the basic cash budget format by adding lines to show any borrowing or repayment necessary to achieve a minimum desired cash amount. ► When this is done, the preliminary ending cash balance is called cash excess or deficiency. ► The cash excess or deficiency line is compared to the minimum cash balance (or lowest amount of cash acceptable as noted by company policy). ► If a cash deficiency exists with less cash on hand than is needed, the company usually obtains a short-term loan. ► A cash excess is usually used to repay loans or used to make temporary investments. 3 Cash Budget: Borrowings and Repayments, Ending Cash Balance ► Borrowings and Repayments: If a company converts its preliminary cash balance line to a cash excess (deficiency) line, it may be borrowing or repaying money. If there is a deficiency, this section shows the necessary amount to be borrowed. When excess cash is available, this section shows planned repayments, including interest expense. ► Ending Cash Balance: The last line of the cash budget is the ending cash balance. This is the planned amount of cash to be on hand at the end of the period after all receipts and disbursements, as well as borrowings and repayments, are considered. 3 Cornerstone 9-12 Preparing a Cash Budget 3 Cornerstone 9-12 Preparing a Cash Budget (continued) 3 You Decide Cash Budgeting for a Small Painting Company You are the accountant for a number of small businesses in your town, one of which is Ramon’s Paint and Plaster. Ramon has been through a tough year as construction in the town has been down. However, new home construction is picking up and Ramon has been asked to bid on twice as many jobs in the past month as he was last year at this time. Ramon needs to know what his cash flow will be for the coming year. You are starting to amass information to help you forecast monthly cash inflows and outflows for the next six months. What information do you need to forecast cash inflows and outflows for the paint and plaster business for the next six months? 3 You Decide Cash Budgeting for a Small Painting Company (continued) This is a two part problem. The first question, what inflows of cash are expected, depends on the number and size of the jobs Ramon can successfully bid on. Ramon’s business has been primarily residential, so you’ll need to know the number of housing starts (or the number of building permits applied for) and the number of remodeling jobs expected. You will also need to consider the price Ramon charges as well as the probability of prompt payment. Some builders have a good reputation for paying promptly in the first ten days of the month following work by Ramon’s crew. Others lag behind. While you can encourage Ramon to work primarily with the better builders, he may be forced to accept some jobs with contractors who frequently pay later. The second question requires a forecast of the potential cash outflows. Ramon has a crew of six workers and the hourly rate is known. He also can figure out the cost of the paint and plaster materials fairly accurately, once the size of the job is known. It will be difficult to forecast the cash inflows and outflows too far in advance. As a result, you will probably want to set up the cash budget for one to three months in advance and then update the forecasted numbers as the year progresses. Forecasts of cash inflows and outflows depend on the economic conditions, the reputation of the payment patterns of the customers, and the prices charged both for the jobs obtained as well as for the supplies used. Information from the past year can be used as a baseline, however, changing economic conditions will affect future amounts. 3 Budgeted Balance Sheet ►The budgeted balance sheet depends on information contained in the current balance sheet and in the other budgets in the master budget. ►Explanations for the budgeted figures are typically provided in the footnotes. 4 Using Budgets for Performance Evaluation ► Budgets are often used to judge the performance of managers. ► Bonuses, salary increases, and promotions are all affected by a manager’s ability to achieve or beat budgeted goals. ► Positive behavior occurs when the goals of each manager are aligned with the goals of the organization and each manager has the drive to achieve them. ► The alignment of managerial and organizational goals is often referred to as goal congruence. ► If the budget is improperly administered, subordinate managers may subvert the organization’s goals. ► Dysfunctional behavior is individual behavior that is in basic conflict with the goals of the organization. 4 Positive Behavior ►Key features that promote a reasonable degree of positive behavior include: ►frequent feedback on performance ►monetary and nonmonetary incentives ►participative budgeting ►realistic standards ►controllability of costs ►multiple measures of performance 4 Frequent Feedback on Performance ►Managers need to know how they are doing as the year progresses. ►Frequent, timely performance reports allow managers to know how successful their efforts have been, to take corrective actions, and to change plans as necessary. 4 Monetary and Nonmonetary Incentives ► Incentives are the means an organization uses to influence a manager to exert effort to achieve an organization’ s goal. ► Traditional organizational theory assumes that employees are primarily motivated by monetary rewards, they resist work, and they are inefficient and wasteful. ► Thus, monetary incentives are used to control a manager’s tendency to shirk and waste resources by relating budgetary performance to salary increases, bonuses, and promotions. ► Nonmonetary incentives, including job enrichment, increased responsibility and autonomy, and recognition programs can be used to enhance a budgetary control system. 4 Participative Budgeting ► Rather than imposing budgets on subordinate managers, participative budgeting allows subordinate managers considerable say in how the budgets are established. ► The increased responsibility and challenge inherent in the process provide nonmonetary incentives that lead to a higher level of performance. ► However, participative budgeting has three potential problems: ► setting standards that are either too high or too low ► building slack into the budget (often referred to as padding the budget) ► pseudoparticipation 4 Standard Setting ► Some managers may tend to set the budget either too loose or too tight. ► Since budgeted goals tend to become the manager’s goals when participation is allowed, making this mistake in setting the budget can result in decreased performance levels. ► The trick is to get managers in a participative setting to set high but achievable goals. 4 Budgetary Slack ► The second problem with participative budgeting is the opportunity for managers to build slack into the budget. ► Budgetary slack (or padding the budget) exists when a manager deliberately underestimates revenues or overestimates costs in an effort to make the future period appear less attractive in the budget than they think it will be in reality. ► Either approach increases the likelihood that the manager will achieve the budget and consequently reduces the risk that the manager faces. ► The act of padding the budget is questionable when considering what is viewed as ethical professional practice. It is certainly not communicating information fairly and objectively and constitutes a violation of the credibility standard. 4 Pseudoparticipation ►The third problem with participation occurs when top management assumes total control of the budgeting process, seeking only superficial participation from lower-level managers. ►This practice is termed pseudoparticipation. ►Top management is simply obtaining formal acceptance of the budget from subordinate managers, not seeking real input. 4 Realistic Standards ► Budgets should reflect operating realities, including the following: ► Actual Levels of Activity: Flexible budgets are used to ensure that budgeted costs can be realistically compared with costs for actual levels of activity. ► Seasonal Variations: Interim budgets should reflect seasonal effects. Toys ‘‘R’’ Us, for example, would expect much higher sales in the quarter that includes Christmas than in other quarters. ► Efficiencies: Budgetary cuts should be based on planned increases in efficiency and not simply arbitrary across-the-board reductions. Across-the-board cuts without any formal evaluation may impair the ability of some units to carry out their missions. ► General Economic Trends: General economic conditions also need to be considered. Budgeting for a significant increase in sales when a recession is projected is not only foolish but also potentially dangerous. 4 Controllability of Costs ►Ideally, managers are held accountable only for costs that they can control. ►Controllable costs are costs whose level a manager can influence. ►If noncontrollable costs are put in the budgets of subordinate managers to help them understand that these costs also need to be covered, then they should be separated from controllable costs and labeled as noncontrollable. 4 Multiple Measures of Performance ►Often, organizations make the mistake of using budgets as their only measure of managerial performance. ►While financial measures of performance are important, overemphasis can lead to a form of dysfunctional behavior called milking the firm or myopia. ►Myopic behavior occurs when a manager takes actions that improve budgetary performance in the short run but bring long-run harm to the firm. ►Budgetary measures alone cannot prevent myopic behavior.