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chapter8 - Management Accounting | 137 Comprehensive...

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Comprehensive Business Budgeting Goals and Objectives Profit planning, commonly called master budgeting or comprehensive business budgeting, is one of the more important techniques or tools in the management accountant’s tool box. Although budgeting is actually an activity performed by management, the management accountant’s assistance is required because the final budget is presented in the form of planned financial statements. The process for budgeting requires from management a set of carefully planned decisions. There are two primary phases in the budgeting process: (1) planning and (2) control. The first phase is the primary subject matter of this chapter. The second phase, control or performance evaluation as it is recognized in accounting, is the primary subject matter of chapter 14 The budgeting process is an all encompassing task that brings in focus all short and long run goals and objectives of the business. The process of preparing a budget compels management to explicitly recognize and assign quantitative values to all marketing, production, and financial decisions. A major reason for preparing a comprehensive budget is to obtain a measure of the impact of interrelated decisions on net income, financial position, and cash flow. However, the benefits of budgeting extend beyond the expression of decisions into numbers. Benefits often cited for budgeting include: 1. Recognition/improvement of organizational structure 2. Increased emphasis on setting of long-term objectives 3. Increased motivation to achieve objectives 4. Explicit recognition of important decision relationships 5. Better coordination of activities by managers 6. Improved profit performance 7. Better performance evaluation
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138 | CHAPTER EIGHT Comprehensive Business Budgeting Board of Directors President Vice-President Production Manager Finishing Dept. Manager Cutting Dept Manager Finishing Dept. Vice-President Finance Vice-President Marketing Accounting Department Income Statement Balance Sheet The end result of the budgeting process is a set of balanced and coordinated decisions quantitatively presented as a set of budgeted financial statements. For a manufacturing business, the final product of budgeting is a: 1 Budgeted balance sheet 2 Budgeted income statement (Including cost of goods manufactured statement) 3 Cash budget 4 Capital expenditures budget The preparation of a complete budget usually involves the preparation of several sets of tentative budgets. The final product is often the result of trial and error procedures. The first completed budget may not reflect the amount of desired profit. Consequently, management in an attempt to budget better performance may change one or more decisions during the budgeting process. The consequence of a single change can easily require computational changes in all budgets and supporting schedules.
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