Reasons for Budgeting

Reasons for Budgeting

• Planning is a key reason for budgeting
• Budgeting helps in coordinating activities
• Communication is facilitated through budgeting
• Budgeting provides a benchmark for performance evaluation

Budgeting and Strategic Planning

• The budgeting process begins with strategic planning
• Strategic planning involves setting long-term goals
• Budgets help achieve those strategic goals by providing a roadmap

Top-Down Budgeting

• Top management sets the budget
• It takes less time to prepare
• May be unrealistic due to lack of knowledge from lower levels
• Management is likely to resist, or consider it unrealistic

Participative Budgeting

• Many levels of management are involved in the budget process
• Utilizing people more involved helps improves knowledge
• There is a higher acceptance of the budget
• There is a higher risk of budgetary slack

Types of Budgets

• A comprehensive budget includes all budgets combined.
• Operating budgets include sales, production, product cost, operating expenses, and the income statement
• Financial budgets include capital expenditures, cash, and the balance sheet

Sales Budget

• The sales budget is prepared first
• Number of Unit Sales multiplied by Sales Price per Unit equals Total Revenue

Production Budget

• Calculation involves Units Needed for Sales plus Desired Ending Finished Goods Inventory, minus Units in Beginning Finished Goods Inventory to get Units to Produce

Direct Materials Budget

• Calculation includes Units to produce multiplied by DM per unit to get the Quantity of DM Needed for Production
• Plus Desired DM Ending Inventory equals Total Quantity of DM Needed
• DM Beginning Inventory equals Quantity of DM to Purchase
• The next step is to multiply by Cost per unit of DM to calculate Total Cost of DM Purchases

Direct Labor Budget

• Calculation includes Units to be Produced multiplied by DL Hours per Unit, equaling Total DL Hours Required
• Multiply by DL Cost per Hour = Total Direct Labor Cost

Manufacturing Overhead Budget

• Variable manufacturing overhead is added to fixed manufacturing overhead

Operating Expenses Budget

• Variable operating expense is added to fixed operating expense

Budgeted Income Statement

• Calculated as Sales Revenue less Cost of Goods Sold equals Gross Profit
• Gross Profit less Operating Expenses equals Operating Income
• The next steps are to subtract Interest Expense and Income Tax Expense to reach Net Income

Capital Expenditures Budget

• Details planned investments in long-term assets

Cash Collections Budget

• Projects the timing and amount of cash inflows

Cash Payments Budget

• Includes projections of cash outflows
• Noncash expenses like depreciation and bad debt expense should be excluded

Combined Cash Budget

• Beginning Cash Balance plus Cash Collections equals Total Cash Available
• Total Cash Available less Cash Payments equals Ending Cash Balance Before Financing
• The next steps are financing to account for New Borrowings, Debt Repayments, and Interest Payments and reach Ending Cash Balance

Budgeted Balance Sheet

• Estimates assets, liabilities, and equity at the end of the budget period

Budgets for a Merchandiser

• A service company has no inventory
• Merchandising company purchases finished goods they are going to sell based on; Budget sales + COGS equaling Desired ending inventory = Total inventory requirements -BI = Inventory to purchase

Debit and Credit Card Sales

• Credit card companies charge a fee, so cash received is lower
• The fee is considered an operating expense

Big Data (Six V’s)

• Volume is the amount of data
• Velocity is the speed at which data is collected
• Variety is the different types of data collected from different sources
• Veracity is the quality of raw data
• Value is the usefulness of data to those with access
• Vulnerability includes risks related to privacy and bias issues

Qualitative Forecasting Models

• Use human judgment and knowledge to develop the forecast
• The Delphi method is forecasting based on opinions collected by interviewing experts individually
• The Panel consensus method is a forecast based on agreed upon consensus of a panel of experts
• The Market research method is based on research conducted from focus groups, customer surveys, etc.

Quantitative Forecasting Models

• Mathematical models are based on numerical data
• Time series forecasts are based on historical time-ordered data
• Causal models are based on regression and econometric models by determining cause and effect relationships between sales and other variables