One of management"s major responsibilities is planning.Planning: the process of establishing company-wide objectives. A successful organization makes both long-term and short-term plans. These plans establish the objectives of the company and the proposed way of accomplishing them.Budget is a formal written statement of management"s plans for a specified future time period, expressed in financial terms. It represents the primary method of communicating agreed-upon objectives throughout the organization. A budget becomes an important basis for evaluating performance. It promotes efficiency and serves as a deterrent to waste and inefficiency. We consider the role of budgeting as a control deviceAccounting information makes major contributions to the budgeting process. From the accounting records, companies can obtain historical data on revenues, costs, and expenses. These data are helpful in formulating future budget goals.Accountants translate management"s plans and communicate the budget to employees throughout the company. They prepare periodic budget reports that provide the basis for measuring performance and comparing actual results with planned objectives. The budget itself and the administration of the budget, however, are entirely management responsibilities.

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The primary benefits of budgeting are as follows.-It requires all levels of management to plan ahead and to formalize goals on a recurring basis.-It provides definite objectives for evaluating performance at each level of responsibility.-It creates an early warning system for potential problems so that management can make changes before things get out of hand.-It facilitates the coordination of activities within the business. It does this by correlating the goals of each segment with overall company objectives. Thus, the company can integrate production and sales promotion with expected sales.-It results in greater management awareness of the entity"s overall operations and the impact on operations of external factors, such as economic trends.-It motivates personnel throughout the organization to meet planned objectives.A budget is an aid to management; it is not a substitute for management. A budget cannot operate or enforce itself. Companies can realize the benefits of budgeting only when managers carefully administer budgets.One benefit of participative budgeting is that lower-level managers have more detailed knowledge of their specific area and thus are able to provide more accurate budgetary estimates. Also, when lower-level managers participate in the budgeting process, they are more likely to perceive the resulting budget as fair
Budgets based on research and analysis are more likely to result in realistic goals that will contribute to the growth and profitability of a company. And, the effectiveness of a budget program is directly related to its acceptance by all levels of management.Managers should systematically and periodically review variations between actual and expected results to determine their cause(s). However, individuals should not be held responsible for variations that are beyond their control. For the budget to be effective, top management must completely support the budget.
The development of the budget for the coming year generally starts several months before the end of the current year. The budgeting process usually begins with the collection of data from each organizational unit of the company. Past performance is often the starting point from which future budget goals are formulated.The budget is developed within the framework of a sales forecast. This forecast shows potential sales for the industry and the company"s expected share of such sales. Sales forecasting involves a consideration of various factors: (1) general economic conditions, (2) industry trends, (3) market research studies, (4) anticipated advertising and promotion, (5) previous market share, (6) changes in prices, and (7) technological developments. The input of sales personnel and top management is essential to the sales forecast.The desired ending inventory is again a key component in the budgeting process.
Variations from budgets & Consequences
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Budget period
The budget period is not necessarily one year in length. A budget may be prepared for any period of time. Various factors influence the length of the budget period.These factors include the type of budget, the nature of the organization, the need for periodic appraisal, and prevailing business conditions.The budget period should be long enough to provide an attainable goal under normal business conditions. Ideally, the time period should minimize the impact of seasonal or cyclical fluctuations. On the other hand, the budget period should not be so long that reliable estimates are impossible.The most common budget period is one year. The annual budget, in turn, is often supplemented by monthly and quarterly budgets. Many companies use continuous 12-month budgets. These budgets drop the month just ended and add a future month. One benefit of continuous budgeting is that it keeps management planning a full year ahead.
A budget committee has responsibility for coordinating the preparation of the budget. The committee ordinarily includes the president, treasurer, chief accountant (controller), and management personnel from each of the major areas of the company, such as sales, production, and research.The budget committee serves as a review board where managers can defend their budget goals and requests. Differences are reviewed, modified if necessary, and reconciled. The budget is then put in its final form by the budget committee, approved, and distributed.A budget can have a significant impact on human behavior. If done well, it can inspire managers to higher levels of performance. However, if done poorly, budgets can discourage additional effort and pull down the morale of managers.
Budgeting and long-range planning are not the same. One important difference is the time period involved. The maximum length of a budget is usually one year, and budgets are often prepared for shorter periods of time, such as a month or a quarter. In contrast, long-range planning usually encompasses a period of at least five years.A second significant difference is in emphasis. Budgeting focuses on achieving specific short-term goals, such as meeting annual profit objectives. Long-range planning, on the other hand, identifies long-term goals, selects strategies to achieve those goals, and develops policies and plans to implement the strategies. In long-range planning, management also considers anticipated trends in the economic and political environment and how the company should cope with them.The final difference between budgeting and long-range planning relates to the amount of detail presented. Budgets, as you will see in this chapter, can be very detailed. Long-range plans contain considerably less detail. The data in long-range plans are intended more for a review of progress toward long-term goals than as a basis of control for achieving specific results. The primary objective of long-range planning is to develop the best strategy to maximize the company"s performance over an extended future period.Helpful HintIn comparing a budget with a long-range plan, a budget has more detail and is more concerned with short-term goals, while a long-range plan is done for a longer period of time.
The term "budget" is actually a shorthand term to describe a variety of budget documents. All of these documents are combined into a master budget. The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.The master budget contains two classes of budgets. Operating budgets are the individual budgets that result in the preparation of the budgeted income statement. These budgets establish goals for the company"s sales and production personnel. In contrast, financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures. Financial budgets include the capital expenditure budget, the cash budget, and the budgeted balance sheet.the sales budget is prepared first. Each of the other budgets depends on the sales budget. The sales budget is derived from the sales forecast. It represents management"s best estimate of sales revenue for the budget period.
Which of the following is not a benefit of budgeting?(a)Management can plan ahead.(b)An early warning system is provided for potential problems.(c)It enables disciplinary action to be taken at every level of responsibility.(d)The coordination of activities is facilitated.
(c)It enables disciplinary action to be taken at every level of responsibility.Budgeting does not necessarily enable disciplinary action to be taken at every level of responsibility. The other choices are all benefits of budgeting.
A budget:(a)is the responsibility of management accountants.(b)is the primary method of communicating agreed-upon objectives throughout an organization.(c)ignores past performance because it represents management"s plans for a future time period.(d)may promote efficiency but has no role in evaluating performance.
(b)is the primary method of communicating agreed-upon objectives throughout an organization.A budget is the primary method of communicating agreed-upon objectives throughout an organization. The other choices are incorrect because (a) a budget is the responsibility of all levels of management, not management accountants; (c) past performance is not ignored in the budgeting process but instead is the starting point from which future budget goals are formulated; and (d) the budget not only may promote efficiency but is an important tool for evaluating performance.
The essentials of effective budgeting do not include:(a)top-down budgeting.(b)management acceptance.(c)research and analysis.(d)sound organizational structure.
(a)top-down budgeting.Top-down budgeting is not one of the essentials of effective budgeting. The other choices are true statements.
Compared to budgeting, long-range planning generally has the:(a)same amount of detail.(b)longer time period.(c)same emphasis.(d)same time period.
(b)longer time period.Long-range planning generally encompasses a period of at least 5 years whereas budgeting usually covers a period of 1 year. The other choices are incorrect because budgeting and long-range planning (a) do not have the same amount of detail, (c) do not have the same emphasis, and (d) do not cover the same time period.
Direct materials inventories are kept in pounds in Byrd Company, and the total pounds of direct materials needed for production is 9,500. If the beginning inventory is 1,000 pounds and the desired ending inventory is 2,200 pounds, the total pounds to be purchased is:(a)9,400.(b)9,500.(c)9,700.(d)10,700.
(d)10,700.Pounds to be purchased=amount needed for production (9500) + Desired ending inventory (2200) - Beginning inventory (1000) = 107000
The formula for computing the direct labor budget is to multiply the direct labor cost per hour by the:(a)total required direct labor hours.(b)physical units to be produced.(c)equivalent units to be produced.(d)No correct answer is given.
Each of the following budgets is used in preparing the budgeted income statement except the:(a)sales budget.(b)selling and administrative expense budget.(c)capital expenditure budget.(d)direct labor budget.
(c)capital expenditure budget.The capital expenditure budget is not used in preparing the budgeted income statement. The other choices are true statements.
The budgeted income statement is:(a)the end-product of the operating budgets.(b)the end-product of the financial budgets.(c)the starting point of the master budget.(d)dependent on cash receipts and cash disbursements.
(a)the end-product of the operating budgets.The budgeted income statement is the end-product of the operating budgets, not (b) the financial budgets, (c) the starting point of the master budget, or (d) dependent on cash receipts and cash disbursements.
The budgeted balance sheet is:(a)developed from the budgeted balance sheet for the preceding year and the budgets for the current year.(b)the last operating budget prepared.(c)used to prepare the cash budget.(d)All of the above.

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(a)developed from the budgeted balance sheet for the preceding year and the budgets for the current year.The budgeted balance sheet is developed from the budgeted balance sheet for the preceding year and the budgets for the current year. The other choices are therefore incorrect.
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