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chapter08 - CHAPTER 8 Budgeting for Planning and Control...

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CHAPTER 8 Budgeting for Planning and Control LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Define budgeting and discuss its role in planning, controlling, and decision making. 2. Prepare the operating budget, identify its major components, and explain the interrelation- ships of the various components. 3. Identify the components of the financial budget, and prepare a cash budget. 4. Describe budgets for merchandising and service firms. CHAPTER SUMMARY This chapter explains how budgeting plays a key role in planning, controlling, and decision mak- ing, as well as improving communication and coordination. The chapter focuses on the master budget and identifies its major components. The process of preparing a set of operating and fin- ancial budgets for the budget period is described with the emphasis on the interrelationships of the various budgets. The chapter concludes by describing budgets for merchandising and service firms. CHAPTER REVIEW I. The Role of Budgeting in Planning and Control Budgeting plays a crucial role in planning and control. Budgets are the quantitative expressions of plans that identify an organization’s object- ives and the actions needed to achieve them. They form the basis for operations. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action. Budgets can be used to compare actual outcomes with planned outcomes. Review textbook Exhibit 8-1, which illustrates the relationship of budgets to planning, operating, and control. A. Purposes of Budgeting The system of budgets serves as the comprehensive financial plan for the organization as a whole. Advantages of budgeting include: 169 Learning Objective #1
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170 Chapter 8 1. Budgeting forces management to plan for the future—to develop an overall direc- tion for the organization, foresee problems, and develop future policies. 2. Budgeting helps convey significant information about the resource capabilities of an organization, making better decisions possible. Example: A cash budget points out potential shortfalls. 3. Budgeting helps set standards that can control the use of a company’s resources and control and motivate employees. 4. Budgeting improves the communication of the plans of the organization to each employee. Budgets also encourage coordination because the various areas and activities of the organization must all work together to achieve the stated object- ives. B. The Budgeting Process The budgeting process can range from fairly informal to elaborately detailed. 1. Directing and Coordinating a. The budget director , usually the controller or someone who reports to the con- troller, is responsible for coordinating and directing the overall budgeting pro- cess.
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