6a: Describe how budgets are used for planning and controlling operations.
Most companies and organizations assign a budget committee to spearhead the budgeting process to help their leaders make informed decisions for their company and present accurate reports about the financial well-being of their organization.
- Name two additional reasons managers prepare a budget.
- Why is it important to review a budget that includes actual results?
Review the role of budgets in planning and controlling operations in Planning and Controlling Operations from Managerial Accounting.
6b: Explain the process of establishing budgets.
Managers prepare different types of budget reports to help them plan for, keep track of, and present the financial success or failure of individual projects and their overall company.
- Describe the top-down approach for budget preparation.
- Describe the bottom-up approach for budget preparation.
Review The Budgeting Process from Managerial Accounting.
Review the following ten examples of different types of budget reports, which you should also review to prepare for Learning Outcome 6c.
Figure 9.3 Sales Budget for Jerry’s Ice Cream:
Figure 9.8 Selling and Administrative Budget for Jerry’s Ice Cream:
Figure 9.4 Production Budget for Jerry’s Ice Cream
Figure 9.5 Direct Materials Purchases Budget for Jerry’s Ice Cream
Figure 9.6 Direct Labor Budget for Jerry’s Ice Cream
Figure 9.7 Manufacturing Overhead Budget for Jerry’s Ice Cream
Figure 9.10 Capital Expenditures Budget for Jerry’s Ice Cream
Figure 9.9 Budgeted Income Statement for Jerry’s Ice Cream
Figure 9.11 Cash Budget for Jerry’s Ice Cream
Figure 9.12 Budgeted Balance Sheet for Jerry’s Ice Cream
6c: Develop the components of a master budget, including multiple schedules.
The master budget for a manufacturing company is complex. Managers begin the process by calculating the sales budget and its accompanying schedules.
1. The first step for preparing a master budget is to create a sales budget.
- Define sales budget.
- Name some different methods companies use to estimate future sales.
2. The master budget should also include a production budget.
- Define production budget.
- Calculate the production budget by adding desired finished inventory to the projected sales budget and subtracting beginning finished inventory.
3. The direct materials budget is based on the production budget and calculated in the same way.
- Define direct materials budget.
- Calculate the direct materials budget by adding desired raw materials ending inventory to the raw materials needed for the production budget, and subtracting the balance in beginning raw materials inventory.
4. The direct labor budget is also based on the production budget and estimates the cost of labor to achieve the desired production levels.
- Define direct labor budget.
- Calculate the direct labor budget by estimating the number of hours needed for production and multiplying it by the hourly rate.
5. The manufacturing overhead budget is the last budget that is also based on the production budget. It calculates all other production costs besides direct materials and direct labor.
- Define manufacturing overhead budget.
- Calculate a manufacturing overhead budget that considers fixed and variable costs.
Managers prepare and include the following additional budgets in the master budget. The selling and administrative budget accounts for all other costs that are not related to production.
- Define selling and administrative budget.
- Why do managers report depreciation at the end of the selling and administrative budget?
The budgeted income statement estimates profits based on the sales and expenses included in the other budgets. A budgeted income statement includes sales, cost of goods sold, selling expenses, and administrative expenses.
- Define budgeted income statement.
The cash expenditures budget predicts the necessity and related costs of purchasing fixed assets for the next five to ten years.
- Define capital expenditures budget.
Managers prepare a cash budget to predict cash inflows and cash outflows.
- Define cash budget.
- List the three sections of a cash budget.
Finally, managers prepare a budgeted balance sheet.
- Define a budgeted balance sheet.
- Explain the information a budgeted balance sheet includes.
Review The Master Budget from Managerial Accounting.
Review the examples of different types of budget reports in Learning Outcome 6b.
6d: Describe operating budgets for merchandising, service, and not-for-profit organizations.
Managers from all types of organizations use operating budgets. The operating budget for a merchandising company does not include production budgets.
- Define merchandising company, service organization, and not-for-profit organization.
- What information is included in an operating budget for a merchandising company?
- What information is included in an operating budget for a service organization?
- What information is included in an operating budget for a not-for-profit organization?
- Describe any legal consequences that pertain to the operating budget of a not-for-profit organization.
Review operating budgets for merchandising, service, and not-for-profit organizations in Budgeting in Non-manufacturing Organizations from Managerial Accounting.
6e: Analyze ethical issues in creating operating budgets.
- What types of ethical issues can arise when preparing operating budgets, particularly when compensation or other awards are based on budget results?
Review operating budgets for merchandising, service, and not-for-profit organizations in Ethical Issues in Creating Operating Budgets from Managerial Accounting.
Unit 6 Vocabulary
- Budget committee
- Budgeted balance sheet
- Budgeted income statement
- Capital expenditures budget
- Cash budget
- Direct labor budget
- Direct materials purchases budget
- Full-absorption costing
- Gross margin
- Manufacturing overhead budget
- Master budget
- Merchandise purchases budget
- Merchandising organization
- Not-for-profit organization
- Operating budget
- Production budget
- Sales budget
- Selling and administrative budget
- Service organization