budgetory control bugetory controls
TRANSCRIPT
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The Budgeting
Process
Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
Chapter 21
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Learning Objective
1. Define budgetingand explain its role
in the management cycle.
2. Identify the elements of a master
budget in different types of
organizations and the guidelines for
preparing budgets.
3. Prepare the operating budgets that
support the financial budgets.
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Learning Objective (contd)
4. Prepare a budgeted income
statement, a cash budget, and a
budgeted balance sheet.
5. Describe managements role in budget
implementation.
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The Budgeting Process
Objective 1
Define budgetingand explain its role in the
management cycle
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Budgeting
is the process of identifying, gathering,
summarizing, and communicating
financial and nonfinancial information
about an organization's future activities
Is essential part of the continuous planning
for an organization in order to accomplishlong-term goals
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The Budgeting Process
Budgets
Plans of action based on forecasted
transactions, activities, and events
Are synonymous with managing an
organization
Essential to accomplishing goals in the
strategic plan
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The Budgeting Process (contd)
Budgets are used to
Communicate information
Coordinate activities and resource usage
Motivate employees
Evaluate performance
Manage and account for cash
Establish minimum levels of cash receipts and
expenditures
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The Budgeting Process (contd)
Many forms of budgets
Examples
Cash budget
Focuses on financial information
Shows, among other things, how cash resources will
be allotted to operating, investing, and financing
activities over a future period
Production budget
Focuses on nonfinancial information Shows planned production in units
Identifies activities needed to meet certain
requirements or standards
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Budgeting and Goals
Strategic planning
Process by which management establishes
an organizations long-term goals
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Long-Term Goals
define the strategic direction an
organization will take over
a five- to ten-year period
Are the basis for
Making annual operating plans
Preparing budgets
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Long-Term Goals (contd)
Should take into consideration
Economic and industry forecasts
Employee-management relations
Structure and role of management Organizational capacity
Any other operational and tactical issues facingthe organization
Expected quality of products or services Growth rates
Desired market share
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Long-Term Goals (contd)
Must set specific targets and timetables
Must assign responsibility for achieving
the goals to specific personnel
A range of long-term goals should be
included in the organization's strategic
plan
Should give direction to efforts to achieve
these goals
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Short-Term Goals
Involve every part of an enterprise
Much more detailed than long-term
goals
To formulate an annual operating plan,
long-term goals must be restated in
terms of what needs to be
accomplished during the next year
Short-term goals are the basis of an
organizations operating budgets for the year
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Short-Term Goals (contd)
Organizations controller takes charge of
coordinating the budget process
Designs a complete set of budget-development
directions Timetable with deadlines
Assigns clearly defined responsibilities for carrying
out each part of the budgets development
To specific individuals or management teams The budget may be reviewed and revised during
the year
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Importance of Participation
The key to a successful budget is
participative budgeting
Process in which personnel at all levels of
an organization actively engage in makingdecisions about the budget
Gives a sense of ownership
Helps ensure that departments will attain targets and
stay within the budget
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Importance of Participation (contd)
Participative budgeting depends on jointdecision making
Controller must be able to communicate
and negotiate effectively with people in alllevels of an organization
Senior managers
Formulate organizational long-and short-term goals
Middle managers Supervisors
Responsible for daily operations
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Importance of Participation (contd)
Authoritative budgeting
Senior executives dictate targets
Do not allow middle managers and supervisors a voice in
setting them
Targets may be unrealistic and impossible to attain
Will undermine motivation of managers and supervisors
Cooperation is essential for successful budget
implementation
Senior executives allow controller to developbudget without consulting other managers
Managers may feel budgeting is not a top priority
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Budgeting
and theManagement
Cycle
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Budgeting and the Management Cycle
Planning
Budgeting
Originates in this stage
Helps managers to
Relate the organizations long-term goals to its short-
term activities
Distribute resources and workloads
Communicate responsibilities
Select performance measures
Set goals for bonuses and rewards
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Budgeting and the Management Cycle
Executing
Budgeting helps managers to
Communicate expectations
Measure performance and motivate employees
Coordinate activities and allot resources
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Budgeting and the Management Cycle
Reporting
Budgeting helps managers to
Communicate budget information
Provide continuous feedback
Support operating decisions
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Budgeting and the Management Cycle
Reviewing
Budgeting helps managers to
Evaluate performance
Determine timeliness
Find variances and create solutions
Compare planned performance with actual
performance
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Discussion
Q. How are short-term goals related to
strategic planning?
A. Short-term goals define the strategic
direction an organization will take overthe next year. They are determined to
help accomplish the long-term goals that
are established during the strategic
planning process
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The Master Budget
Objective 2
Identify the elements of a master budget in
different types of organizations and the
guidelines for preparing budgets
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The Master Budget
consists of a set of operating budgets
and a set of financial budgets
that detail an
organizations financial plansfor a specific accounting period,
generally a year
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The Master Budget (contd)
Operating budgets Plans used in daily operations
Basis for financial budgets
Financial budgets Projections of financial results for the accounting
period
Include
Budgeted income statement Capital expenditures budget
Cash budget
Budgeted balance sheet
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The Master Budget (contd)
Process of preparing a master budget is
similar in all three types of organizations
Manufacturing
Retail
Service
The process differs mainly in the kinds
of operating budgets each type of
organization prepares
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Preparation of
a Master
Budget for aManufacturing
Organization
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Preparation
of a Master
Budget for aRetail
Organization
P ti f M t B d t f S i
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Preparation of a Master Budget for a Service
Organization
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The Master Budget (contd)
Sales budget
Is prepared first
Used to estimate sales volume and revenues
Once developed, other budgets can be
developed
These other budgets will help manage the
organization's resources so that profits can be
generated on sales
In a service organization, the sales budget
is called the service revenue budget
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The Master Budget (contd)
No standard format for budget
preparation
Procedures vary from organization to
organization
Only universal requirement is that budgets
communicate the appropriate information
to the reader in a clear and understandablemanner
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The Master Budget (contd)
Managers can improve the quality of budgetsby using the following guidelines
1. Know the purpose of the budget
2. Identify the user group and its information needs
3. Identify sources of accurate, meaningful budget
information
4. Establish a clear format for the budget
5. Use appropriate formulas and calculations toderive quantitative information
6. Revise the budget until it includes all planning
decisions
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Discussion
Q. Which budget must be prepared first?
A. The sales budget. This budget is used to
estimate sales volume and revenues.
Once established, the other budgets canbe developed
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Operating Budgets
Objective 3
Prepare the operating budgets that support
the financial budgets
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Operating Budgets
are a set of budgets that are used in
planning the daily operations of an
organization
Are part of the master budget
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Operating Budgets
Procedures for preparing operating budgetsinclude
Cost behavior analysis
Cost-volume-profit analysis
A product costing method
Organizations that manufacture a variety ofproducts or services may prepare
Separate operating budgets, or One comprehensive budget for each product or
service
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Sales Budget
is a detailed plan,expressed in both units and value,
that identifies the product (or service)
sales expected in an accounting period
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Sales Budget (contd)
Sales mangers use the information to Plan sales- and marketing-related activities
Determine human, physical, and technicalresource needs
Accountants use the information to Determine estimated cash receipts for the cash
budget
To determine the total budgeted sales
Total
BudgetedSales
=Estimated
Selling Priceper Unit
x
Estimated
Sales inUnits
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Sales Budget (contd)
Selecting the best estimates for selling priceper unit and the sales demand in units can be
difficult
If the organization wants to increase its share inthe market
An estimated selling price below the current selling price
may be needed
If the organization has improved the products
quality by using more expensive materials or
production processes
The estimated selling price may have to be higher than
the current price
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Sales Budget (contd)
Estimated sales volume is veryimportant
Will affect the level of operating activities
and amount of resources needed foroperations
Managers may use a sales forecast
A projection of sales demand based on ananalysis of internal and external factors
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Sales Budget (contd)
External factors taken into considerationin a sales forecast include
1. The state of the local and national
economies
2. The state of the industrys economy
3. The nature of the competition and its
sales volume and selling price
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Sales Budget (contd)
Internal factors include
1. The number of units sold in prior periods
2. The organizations credit policies
3. The organizations collection policies
4. The organizations pricing policies
5. Any new products the organization plans
to introduce to the market
6. The capacity of the organizations
manufacturing facilities
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Sales Budget (contd)
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The Production Budget
is a detailed planshowing the number of units
a company must produce
to meet budgeted salesand inventory levels
Production managers use this information toplan for the materials and human resources
that production activities will require
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The Production Budget (contd)
To prepare a production budget,managers must know
Budgeted number of sales units
From the sales budget
Desired level of ending finished goods
inventory for each period in the budget
year Often stated as a percentage of the next
periods budgeted unit sales
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The Production Budget (contd)
To determine the production needs foran accounting period
Total
ProductionUnits
=
Budgeted
Sales inUnits
+
Desired Units of
Ending FinishedGoods Inventory
Desired Units of
Beginning FinishedGoods Inventory
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Production Budget
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The Direct Materials Purchases Budget
is a detailed plan that identifiesthe quantity of purchases required
to meet budgeted production
and inventory needs and the costsassociated with those purchases
The Direct Materials Purchases Budget
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The Direct Materials Purchases Budget
(contd)
Purchasing department
Uses information to plan purchases of
direct materials
Accountants
Use information to estimate cash payments
to suppliers
The Direct Materials Purchases Budget
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The Direct Materials Purchases Budget
(contd)
To prepare a direct materials purchasesbudget managers must know
What production needs will be in the nextaccounting period
Provided in the production budget
Desired level of direct materials inventory for eachperiod
Per unit cost of direct materials
Desired level of ending direct materials inventory Usually stated as a percentage of the next periods
production
The Direct Materials Purchases Budget
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The Direct Materials Purchases Budget
(contd)
Steps to prepare a direct materialspurchasing budget
1. Calculate each periods total production needs in
units of direct materials
2. Determine the total number of units of directmaterials to be purchased during each
accounting period in the budget
3. Calculate the cost of the direct materials
purchases
Total Unitsof Direct
Materials toBe Purchased
=
Total Production
Needs in Units ofDirect Materials
+
Desired Unitsof Ending
Direct MaterialsInventory
Desired Unitsof Beginning
Direct MaterialsInventory
Di t M t i l P h B d t
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Direct Materials Purchases Budget
Th Di t L b B d t
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The Direct Labor Budget
is a detailed plan that estimatesthe direct labor hours needed
in an accounting period
and the associated costs
Th Di t L b B d t ( td)
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The Direct Labor Budget (contd)
Production managers use estimated direct laborhours to plan
How many employees will be required during the period
The hours each employee will work
Accountants use estimated direct labor costs to plan For cash payments to workers
Human resource managers use information on thedirect labor budget to
Decide whether to hire new employees
Reduce the existing work force
Train employees
Prepare schedules of employee fringe benefits
Th Di t L b B d t ( td)
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The Direct Labor Budget (contd)
Steps in preparing a direct labor budget
1. Estimate the total direct labor hours
Multiply estimated direct labor hours per
unit by the anticipated units of production
2. Calculate the total budgeted direct labor
cost
Total BudgetedDirect Labor Cost
= Estimated TotalDirect Labor Hours
xEstimated Direct
Labor Cost per Hour
Di t L b B d t
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Direct Labor Budget
Th M f t i O h d B d t
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The Manufacturing Overhead Budget
is a detailed planof anticipated manufacturing costs,
other than direct materials
and direct labor costs,that must be incurred to
meet budgeted production needs
Th M f t i O h d B d t ( td)
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The Manufacturing Overhead Budget (contd)
Two purposes
1. Integrate the overhead cost budgets
developed by managers of production
and production-related departments2. Group information for the calculation of
manufacturing overhead rates for the
forthcoming accounting period
Th M f t i O h d B d t ( td)
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The Manufacturing Overhead Budget (contd)
Presentation of information is flexible
Grouping by activities is useful for
organizations using activity-based
costing
Man fact ring O erhead B dget
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Manufacturing Overhead Budget
The Selling and Administrative Expense
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g p
Budget
is a detailed planof operating expenses,
other than those related to production,that are needed to support sales
and overall operationsin an accounting period
Accountants use this budget to estimate cashpayments for products or services used innonproduction-related activities
Selling and Administrative Expense Budget
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Selling and Administrative Expense Budget
The Cost of Goods Manufactured Budget
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The Cost of Goods Manufactured Budget
is a detailed plan that summarizes theestimated costs of production in an
accounting period
Sources of information Direct materials, direct labor, and manufacturing
overhead budgets
Cost of Goods Manufactured Budget
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Cost of Goods Manufactured Budget
Note that most companies anticipate some work in processat the beginning or end of a period covered by the budget
Discussion
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Discussion
Q. What are the sources of informationfor preparing the cost of goods
manufactured budget?
A. Direct materials budget
Direct labor budget
Manufacturing overhead budget
Financial Budgets
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Financial Budgets
Objective 4
Prepare a budgeted income statement, a
cash budget, and a budgeted balance
sheet
Financial Budgets
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Financial Budgets
are projections of financial resultsfor an accounting period
Include
Budgeted income statement
Capital expenditures budget
Cash budget
Budgeted balance sheet
The Budgeted Income Statement
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The Budgeted Income Statement
projects an organizations net incomein an accounting period
based on revenues and expenses
estimated for that period
Budgeted Income Statement
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Budgeted Income Statement
The Capital Expenditures Budget
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The Capital Expenditures Budget
. is a detailed plan outlining theanticipated amount and timing of
capital outlays for long-term assets
in an accounting period
The Capital Expenditures Budget (contd)
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The Capital Expenditures Budget (cont d)
Managers rely on information in acapital expenditures budget when
making decisions about such matters as
Buying equipment
Building a new plant
Purchasing and installing a materials
handling systemAcquiring another business
The Cash Budget
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The Cash Budget
is a projection of the cashan organization will receive
and the cash it will pay out
in an accounting period
Summarizes the cash flow prospects of all
transactions considered in the master budget
The Cash Budget (contd)
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The Cash Budget (cont d)
Information it provides enablesmanagers to plan for
Short-term loans when the cash balance is
low Short-term investments when the cash
balance is high
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The Cash Budget (contd)
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The Cash Budget (cont d)
Excludes some planned noncashtransactions
Depreciation expense
Issuance and receipt of stock dividends Uncollectible accounts expense
Gains and losses on sales of assets
May also exclude
Deferred taxes
Accrued interest
The Cash Budget (contd)
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The Cash Budget (cont d)
To calculate the estimated ending cashbalance
Estimated
EndingCash Balance
=
Total
EstimatedCash Receipts
Total
EstimatedCash Payments
+
Estimated
BeginningCash Balance
The Cash Budget (contd)
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The Cash Budget (cont d)
Sources for estimating cash receipts Sales budget
Budgeted income statement
Cash budgets from previous periods
Cash collection records and analyses of
collection trends
Records pertaining to notes, stocks, andbonds
The Cash Budget (contd)
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The Cash Budget (cont d)
Sources for estimating cash payments Operating budgets
Budgeted income statement
Capital expenditures budget
Previous years financial statements
Loan records
The Cash Budget (contd)
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The Cash Budget (cont d)
Supporting schedules Schedule of expected cash collections
from customers
Schedule of expected cash payments fordirect materials
Cash budget
Schedule of Expected Cash Collections from
C t
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Customers
Schedule of Expected Cash Payments for
Di t M t i l
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Direct Materials
Cash Budget
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Cash Budget
The Cash Budget (contd)
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The Cash Budget (cont d)
Organizations may maintain a minimum cashbalance
To cover unusual expenditures
If the ending cash balance on the cash
budget Falls below the minimum level required
Short-term borrowing may be necessary
Is significantly larger than the minimum levelrequired
May invest excess in short-term securities to generateadditional income
The Budgeted Balance Sheet
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The Budgeted Balance Sheet
projects an organizationsfinancial position
at the end of an accounting period
Uses all estimated data compiled in the
course of preparing a master budget
Is the final step in that process
Budgeted Balance Sheet
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Budgeted Balance Sheet
Discussion
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Discussion
Q. How is the ending cash balanceestimated?
A. Subtract total estimated cash payments
from total estimated cash receipts, then,add the estimated beginning cash
balance
Budget Implementation
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g p
Objective 5 Describe managements role in budget
implementation
Budget Implementation
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Budget committee Oversees each stage in the master budget
preparation
Decides any departmental disputes thatmight arise in the process
Gives final approval to the budget
Budget Implementation (contd)
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g p ( )
Budget committee members Controller
Has overall responsibility for budget
implementation President
Vice presidents
The make-up of the committee ensures that the
budgeting process has a companywide perspective
Budget Implementation (contd)
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g p ( )
A master budget may go through manyrevisions after approval
Budget committee monitors the progress
the company is making in attaining budgettargets
Using periodic reports from department
managers
Budget Implementation (contd)
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g p ( )
Successful budget implementationdepends on two factors
1. Clear communication
2. Support of top management Middle- and lower-level managers must see
that top management supports the budget
and encourages its implementation
Discussion
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Q. What two factors are necessary forsuccessful budget implementation?
A. Clear communication and support of top
management
Time for Review
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1. Define budgetingand explain its rolein the management cycle
2. Identify the elements of a master
budget in different types oforganizations and the guidelines for
preparing budgets
3. Prepare the operating budgets thatsupport the financial budgets
And Finally
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4. Prepare a budgeted incomestatement, a cash budget, and a
budgeted balance sheet
5. Describe managements role in budgetimplementation