Lecture 9 - Budgeting

Lecture 9- - Lecture 9 Lecture Budgeting Chapter 10 Budgeting Budgeting Budget is Managements formal quantification of the operations of an

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Lecture 9 Lecture 9 Budgeting– Chapter 10
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Budgeting Budgeting Budget is … Management’s formal quantification of the operations of an organization for a future time period An aggregate forecast of all transactions expected to occur Developed using key planning assumptions: Product prices, unit sales, external prices of key inputs The budget communicates these planning assumptions to members of the organization
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Budgeting for planning Budgeting for planning Bottom up flow of information transfers specific information to the top of the hierarchy Top managers use this information to make long term decisions Top-down flow of information allows managers to transfer information about the organization and its environment to lower-level managers for decentralized decisions
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Budgeting for Control Budgeting for Control Budgets are often used to assign decision rights by allocating resources to managers Budget numbers are also used as goals to motivate managers Budget becomes the target by which performance is evaluated and rewarded Comparison of actual to budgets: variance analysis Variance can be favorable (F) or unfavorable (U)
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Bottom-Up vs. Top-Down Budgeting Bottom-Up vs. Top-Down Budgeting Bottom-up budgets are those submitted by lower levels of the organization to higher levels and usually imply greater decision management Also called participative budget Enhances the motivation of the lower-level participants by getting them to accept the targets Top-down: budget is prepared at the executive level and then parceled down to operating managers, provides greater decision control
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Bottom-Up vs. Top-Down Bottom-Up vs. Top-Down Budgeting Budgeting The extent to which a budget is bottom-up or top-down ultimately depends in where the specialized knowledge is located Most budgets are set in a negotiation process involving lower and higher level managers Incentive of lower level managers is to set the target low to guarantee the budget will be met and favorably rewarded Incentive of higher level managers is to set the target high to motivate lower-level managers to exert additional efforts
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The Master Budget The Master Budget Starting point: the sales forecast Cash collections schedule: collections of credit sales based on historical cash collection patterns Inventory purchases schedule: monthly requirements = Sales ( Cost of Goods Sold) Add ending inventory requirements Less opening inventory Cash disbursements schedule – payments to suppliers based on historical cash payments patterns
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Sales Budget Sales Budget Factors considered when forecasting sales Past sales and events (firm and industry) General economic trends (interest rate, inflation) http://www.bankofcanada.ca/en/press/2006/pr06-11.htm Economic trends in the company’s industry (mergers, decrease demand etc) Political and legal events Pricing policy of the company Competitor’s action New products to launch Market research studies
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This note was uploaded on 12/15/2010 for the course ACCT 1005 taught by Professor Mr during the Spring '10 term at Carleton CA.

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Lecture 9- - Lecture 9 Lecture Budgeting Chapter 10 Budgeting Budgeting Budget is Managements formal quantification of the operations of an

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