Master Budgets and Performance Planning

ACCT 102 Lecture Notes, Chapter 20: Master Budgets and Performance Planning A budget is a formal statement of a company’s plans, expressed quantitatively. The following describes basic budgeting concepts. Long Term Strategic Plans: Usually span 5 – 10 years, and set the long term direction of the company. Shorter Term Plans: These usually cover the next fiscal year. They are more specific. All managers should be involved in the budgeting process. Benchmarking Budgets: Benchmarking is an evaluation process that compares results against some norm. The norm may include past performance and/or expected future performance. Human Considerations: Budgets set performance expectations. A budget that requires performance above usually attainable results can demotivate employees, rather than motivate them, as expectations are not achievable. If performance goals set forth in the budget are easily attainable, employees will not be motivated to work to their potential as the goals are easily achieved. Goals should be clearly stated, measurable, and attainable with some effort. Committees, Reporting, and Timing: Read about this section in your book. Some companies use continuous budgets, rolling budgets, some companies spend months preparing budgets, and for some it’s a year-round process. Comparing Actual Results to the Budget: The budget is a useful planning tool only if actual results are compared to budgeted amounts, with changes to the budget or in operations made in a timely fashion. 1 The Master Budget Model The following lists the order in which budgets should be prepared, with a brief description of each budget its title. Sales Budget The sales budget forecasts unit sales by product, with anticipated sales in dollars. Manufacturing Budgets Production Budget This budget forecasts how many units of product should be produced. The formula is: Units for ending inventory + units for budgeted sales – units in beginning inventory. Direct Materials Budget The direct materials budget forecasts materials requirements and their costs. Direct Labor Budget This budget shows labor hours required to produce the units needed, along with their costs. Factory Overhead Budget The factory overhead budget shows variable factory overhead costs expected to be incurred, based on expected production, as well as fixed factory overhead costs. Selling Expense Budget This includes variable selling expenses, such as commissions, and fixed components such as management salaries. General and Administrative Expense Budget The “G&A” budget shows costs such as administrative salaries, depreciation, and interest. Capital Expenditures Budget This budget forecasts purchases of fixed assets. Cash Budget The cash budget includes expected cash receipts from customers, cash payments for materials purchases, selling and G&A expenses, interest payments, dividend payments, and other equipment purchases. This budget will forecast borrowing requirements, as well. Budgeted Financial Statements The final outcome of the budgeting process is to forecast an income statement and a balance sheet. 2