Notes_Chapter_09 - CHAPTER 9: PROFIT PLANNING I. Budgeting...

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CHAPTER 9: PROFIT PLANNING I. Budgeting Basics A. Definitions A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified time period. The budget is developed within the framework of a sales forecast that shows potential sales for the industry and the company’s expected share of such sales. Requires consideration of various factors. Budgets are used for BOTH Planning and Control. B.Benefits of Budgeting. 1. Communication of corporate goals 2. Forces managers to plan for the future 3. Provides a means for allocating resources 4. Before-the-fact control : It creates an early warning system of potential problems so that management can make changes before things get out of hand (i.e., identify potential bottlenecks) 5. After-the-fact control —the budget provides definite objectives for evaluating performance at each level of responsibility. 6. Coordination of segments : correlates each segment’s goals with corporate objectives. 7. Motivation tool for managers. 1
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C.Other Budgeting Terms/Concepts 1. Responsibility Accounting : a system of accountability in which managers are held responsible for revenue and cost items over which they can exert significant control 2.Length of the Budget Period: A budget may be prepared for any period of time. The most common budget period is one year, which is then broken down into quarters and/or months Continuous Budgeting: 3. Self-imposed budgets: each level of management is invited to participate in developing the budget ( participative budgeting ). Participative budgeting has potential advantages and disadvantages: 2
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Behavioral Considerations in Budgeting A budget may inspire a manager to higher levels of performance but…A budget may discourage additional effort and pull down the morale of a manager. The effectiveness of a budget program is directly related to its acceptance by all levels of management. 5. Budget Committee : Usually responsible for overall budget policies, coordinating and approving the budget and resolving disputes. II. The Master Budget The master budget is a set of interdependent budgets (See Exhibit 9-2 in text) Results in a budgeted income statement and budgeted balance sheet A. Sales Budget : Each of the other budgets depends on the sales budget. Include schedule of expected cash
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 230 taught by Professor Allen during the Spring '11 term at Texas A&M.

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Notes_Chapter_09 - CHAPTER 9: PROFIT PLANNING I. Budgeting...

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