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CHAPTER 7 Profit Planning 1. DESCRIPTION OF BUDGETING A. Budgeting and Planning and Control A budget is a plan of action expressed in financial terms. Budgeting is a planning and control tool used by managers. Identify objectives. Compare actual results with budgeted (planned) amounts. Identify actions needed to achieve objectives. Corrective action can be taken, if needed. The steps involved in the planning and control process are as follows: Develop a strategic plan. A strategic plan identifies strategies for future activities and operations, generally covering at least five years. Translate the strategic plan into long-term and short-term objectives. From the objectives, develop short-term plans. Develop budgets based upon the short-term plans. Compare actual results with planned (budgeted) amounts. Take corrective action, if necessary. B. Advantages of Budgeting Advantages of budgeting include the following: Budgets force managers to plan. Budgets provide information that can be used to improve decision making. Budgets provide standards used for performance evaluation and control. Control involves comparing actual results with budgeted amounts and taking corrective action whenever actual performance deviates significantly from planned performance. Budgets improve communication and coordination. 2. THE MASTER BUDGET Most budgets are for a one-year period, further broken down into quarterly and/or monthly budgets. A continuous budget is a moving twelve-month budget. As a month expires in the budget, an additional month is added so that the company always has a twelve-month plan on hand. The master budget is a comprehensive financial plan consisting of various individual budgets. Control Tool Planning Tool
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Definition: budgets concerned with income-generating activities budgets concerned with cash flows and financial position at end of period Examples: sales budget production budget direct materials purchases budget direct labor budget overhead budget selling and administrative expenses budget ending finished goods inventory budget cost of goods sold budget cash budget budgeted balance sheet budget for capital expenditures A. Preparing The Operating Budget
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This note was uploaded on 02/28/2012 for the course ACCT 2361 taught by Professor Severance during the Spring '08 term at Texas State.

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