Chapter%208%20Lecture%20Notes.2012.Students - Acct 2200...

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Acct 2200 Chapter 8 Lecture Notes (2012) Profit Planning Learning Objectives: 1. Understand why organizations budget and the processes they use to create budgets. 2. Prepare a sales budget, including a schedule of expected cash collections. 3. Prepare a production budget. 4. Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials. 5. Prepare a direct labor budget. 6. Prepare a manufacturing overhead budget. 7. Prepare a selling and administrative expense budget. 8. Prepare a cash budget. 9. Prepare a budgeted income statement. 10. Prepare a budgeted Balance Sheet. Part I. The Basic Framework of Budgeting 1. Budget: a quantitative plan for acquiring and using resources over a specified time period. Budgets are used for two distinct purposes: - Planning : involves developing goals and preparing various budgets to achieve those goals. - Control: involves the steps taken by management to increase the likelihood that all parts of the organization are working together to achieve the goals set down at the planning stage. 2. Advantages of budgeting - Budgets communicate management’s plans throughout the organization. - Budgeting force managers to think about and plan for the future. - Budgets provide a means of allocating resources to their most effective uses. - Budgeting uncovers potential bottlenecks . - Budgeting coordinates the activities of the entire organization. - Budgeting provides goals that serve as benchmarks for evaluating subsequent performance. 3. Responsibility accounting - The basic idea underlying responsibility accounting is that a manager should be held responsible for those items of revenues and expenses – and only those items – that the manager can actually control to a significant extent. 1
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4. Choosing the Budget Period Budget periods vary in length. The annual operating budget may be divided into quarterly or monthly budgets. Continuous or perpetual budgets are used by a significant number of organizations. A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. 5. Self-imposed budget or participative budget: a budget that is prepared with the full cooperation and participation of managers at all levels. Advantages of self-imposed budgets: Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management. Budget estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Self-imposed budgets create commitment. A manager who is not able to meet a budget that has been imposed from above can
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Chapter%208%20Lecture%20Notes.2012.Students - Acct 2200...

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