ch9notes - Ch. 9 I. Developing a budget is a critical step...

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Ch. 9 I. Developing a budget is a critical step in planning any economic activity II. Purposes of budgeting systems A. A Budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time B. The procedures used to develop a budget constitute a budget system C. Budgets have five primary purposes 1. Planning quantify a plan of action 2. Facilitating communication and coordination a. For any organization to be effective, each manager throughout the organization must be aware of the plans made by other managers b. The budgeting process pulls together the plans of each manager in an organization 3. Allocating resources budgets provide one means of allocating resources among competing uses 4. Controlling profit and operations a. A budget serves as a useful benchmark with which actual results can be compared b. Help managers evaluate the firm’s effectiveness 5. Evaluating performance and providing incentives a. Comparing actual results with budgeted results also helps managers evaluate the performance of individuals, departments, divisions, or entire companies III. Types of budgets A. A master budget , or profit plan , is a comprehensive set of budgets covering all phases of an organization’s operations for a specified period of time B. Budgeted financial statements , often called pro forma financial statements , show how the organization’s financial statements will appear at a specified time if operations proceed according to plan C. A capital budget is a plan for the acquisition of capital assets, such as buildings and equipment D. A financial budget is a plan that shows how the organization will acquire its financial resources
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E. Budgets are developed for specific time periods F. Short range budgets cover a year, a quarter, or a month G. Long range budgets cover periods longer than a year H. Rolling budgets are continually updated by periodically adding a new incremental time period (or called revolving budgets or continuous budgets) IV. The Master budget: a planning tool A. The master budget, the principal output of a budgeting system, is a comprehensive profit plan that ties together all phases of an organization’s operations B. Sales of services or goods 1. The starting point for any master budget is a sales revenue budget based on a sales forecast for services and goods C. Sales forecasting 1. Two things in common when it comes to forecasting sales of services or goods4 2. Sales forecasting is a critical step in the budgeting process, and it is very difficult to do accurately 3. The final forecast usually combines information from many different sources 4. Major factors considered when forecasting sales include the following: a. Past sales levels and trends: for the firm and entire industry b. General economic trends c. Economic trends in the company’s industry d. Other factors expected to affect sales in the industry e. Political and legal events f. The intended pricing policy of the company
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ch9notes - Ch. 9 I. Developing a budget is a critical step...

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