C1109s - ACCT2200 ProfitPlanning(Budgeting) (Chapter9) 1

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1 ACCT 2200 Profit Planning (Budgeting)  (Chapter 9)
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2 Chapter 9: Profit Planning (Budgeting) Objectives: I. Purposes and Overview of Budgeting. II. Building a Master Budget. 1. Sales budget 2. Production budget 3. Direct materials budget 4. Direct labor budget 5. Manufacturing overhead budget 6. Ending finished goods inventory budget 7. Selling and administrative expenses budget 8. Cash budget 9. Budgeted income statement 10. Budgeted balance sheet
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3 I. Purposes and Overview of Budgeting  A budget is a detailed plan for acquiring and using financial and other resources over a specified period. Budgeting involves two stages: Planning : developing objectives and preparing various detailed budgets to achieve those objec-tives. Control : the steps taken by management to attain the objectives set down at the planning stage.
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4 I. Purposes and Overview of Budgeting Purposes of budgeting Budgets communicate management’s plans throughout the organization. Budgets provide a means of allocating resources to their most effective uses. Budgeting uncovers potential bottlenecks and coordinates the activities of the entire organization. Budgeting provides goals that serve as benchmarks for evaluating subsequent performance.
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5 I. Budgets Are Bad for Business (?) They control the wrong things and miss the right ones. They erect walls. They assume everything is translatable to dollars but, “just because a budget was not overspent doesn’t mean it was well spent.” They create distorted behavior… “managers do incredibly stupid things to make budget.” They don’t measure value creation. The average budget: contains some 230 line items eats up an average of 4.5 months of company time Two-thirds of CFOs surveyed believe their planning process is influenced more by politics than by strategy. Source: “Why Budgets Are Bad for Business,”  Fortune , June 4, 1990.
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6 1. Top management should be enthusiastic and committed to the budget process. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. 3. Achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets. Human Factors in Budgeting Responsibility accounting : 1. Managers should be held responsible for the things that they control 2. In general, they should not be held responsible for the things that they don’t control
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II. Building a Master Budget  The master budget is a formal summary of the company’s plans. It sets specific targets for sales, production, material purchases and financing activities.
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This note was uploaded on 01/10/2012 for the course ACCT 220 taught by Professor Kirillnovoselov during the Fall '08 term at HKUST.

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C1109s - ACCT2200 ProfitPlanning(Budgeting) (Chapter9) 1

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