TG Management Accounting Chapter 18

TG Management Accounting Chapter 18 - Chapter 18 Budgeting...

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Chapter 18 Budgeting for Planning and Control 18.1 Chapter Objectives The basic objectives of this chapter are to provide an introduction to the nature and terminology of budgets and provide the skills to allow you to prepare and interpret budgets. In this chapter you will learn: 1. Describe the role of budgeting and the structure of the master budget. 2. Prepare an operating budget including the following component budgets: sales, production, direct materials, direct labour, overhead, selling and administrative, ending finished goods, cost of goods sold, and the budgeted profit and loss statement. 3. Prepare the following two components of the financial budget: cash budget and budgeted balance sheet. 4. Identify and discuss the key features that a budgetary system should have to encourage managers to engage in goal-congruent behaviour. 18.2 Description of Budgeting Failure to plan, either formally or informally, can lead to financial disaster. Managers of businesses, whether small or large, must know their resource capabilities and have a plan that details the use of these resources. Careful planning is vital to the health of any organisation. Definition and Role of Budgeting What role does budgeting play in planning and control? Plans identify objectives and the actions needed to achieve them. Budgets are the quantitative expressions of these plans, stated in either physical or financial terms or both. Thus, a budget is a method for translating the goals and strategies of an organisation into operational terms. As a plan of action, budgets can be used to con- trol by comparing actual outcomes as they happen with the planned outcomes. If actual results differ significantly from the plan, actions can be taken to put the plans back on track if necessary. Exhibit 18-1 shows the relationship between planning and control and the role that budgets play in the overall process. Before a budget is prepared, an organisation should develop a strategic plan . The strategic plan identifies strategies for future activities and operations generally involving at least five years. Once an organisation has developed an overall strategy, the next step is to translate this strategy into long-term and short-term objectives. From these objectives, the individual units of a company create short-term plans on which to build the budget. These short-term plans should be compatible 120
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with the overall direction of the firm itself. The management of the company should develop a tight linkage between the budget and the strategic plan. In developing this linkage, however, management should take care that all attention is not focused on the short run. This is important because budgets, as one-period plans, are short run in nature. Strategic Plan Long-Term Objectives Short-Term Objectives Short-Term Plan Budgets Feedback Monitoring of Actual Activity Comparison of Actual with Planned Investigation Corrective Action Planning Control Planning, Control and Budgets EXHIBIT 18-1 121
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To illustrate the process, consider the case of Dr. Jones, a dentist (Refer to Exhibit 18-1 as you
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TG Management Accounting Chapter 18 - Chapter 18 Budgeting...

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