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Chapter 7 - Chapter Seven Profit Planning Profit Planning...

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Chapter Seven: Profit Planning Profit Planning – accomplished by preparing a number of budgets which when brought together form an integrated business plan known as the master budget. Master Budget – essential management tool that communicates managements plans throughout the organization, allocates resources, and coordinates activities. The Basic Framework of Budgeting Budget – detailed plan for acquiring and using financial and other resources over a specified time period. It represents a plan for the future expressed in formal quantative terms. The act of preparing a budget is called budgeting. The use of budgets to control an organizations activities is called budgetary control. Master Budget – summary of a company’s plan that sets specific targets for sales, production, and financing activities. It culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. It basically represents a comprehensive expression of managements financial plans for the future. Difference Between Planning and Control Planning – involves developing objectives and preparing various budgets to achieve these objectives. Control – involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal. Advantages of Budgeting 1. Budgets communicate management’s plans throughout the organization. 2. Budgets force managers to think about and plan for the future. 3. Budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. 4. Budgeting process can uncover potential bottlenecks before they occur. 5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. It helps to ensure that everyone in the organization is pulling in the same direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.
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Responsibility Accounting Responsibility Accounting – basic idea is that a manager should be held responsible for only items that the manager can actually control to a significant extent. Choosing a Budget Period Operating budgets usually cover the company’s fiscal year. Many companies divide their budget year into four quarters. o The first quarter is subdivided into months and monthly budgets are developed. o The last three quarters are carried in the budget as quarterly totals only. As the year progresses, the figures for the second quarter are broken down into monthly amounts, then the third quarter…and so on. This approach has the advantage of acquiring periodic review and reappraisal of budget data throughout the year.
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