After studying Chapter 7, you should be able to: Understand why organizations budget and the processes they use to create budgets; prepare a sales budget, including a schedule of expected cash receipts; prepare a production budget; prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials;. | Profit Planning Chapter7 Planning and Control Planning -- involves developing objectives and preparing various budgets to achieve these objectives. Control -- involves the steps taken by management that attempt to ensure the objectives are attained. Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinate activities Communicating plans Think about and plan for the future Means of allocating resources Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent. Choosing the Budget Period Operating Budget 1999 2000 2001 2002 The annual operating budget may be divided into quarterly or monthly budgets. Participative Budget System Flow of Budget Data The Budget Committee A standing committee responsible for overall policy matters relating to the budget coordinating the preparation of the budget The Master Budget Production Budget Selling and Administrative Budget Direct Materials Budget Manufacturing Overhead Budget Direct Labor Budget Cash Budget Sales Budget Budgeted Financial Statements The Sales Budget Detailed schedule showing expected sales for the coming periods expressed in units and dollars. Budgeting Example Royal Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units. The selling price is $10 per unit. The Sales Budget The Sales Budget The Production Budget Sales Budget Production Budget Completed Production must be adequate to meet budgeted sales and provide for sufficient ending inventory. The Production Budget Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4,000 units were on hand. Let’s prepare the production budget. The Production Budget Budgeted sales 50,000 Desired percent 20% Desired . | Profit Planning Chapter7 Planning and Control Planning -- involves developing objectives and preparing various budgets to achieve these objectives. Control -- involves the steps taken by management that attempt to ensure the objectives are attained. Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinate activities Communicating plans Think about and plan for the future Means of allocating resources Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent. Choosing the Budget Period Operating Budget 1999 2000 2001 2002 The annual operating budget may be divided into quarterly or monthly budgets. Participative Budget System Flow of Budget Data The Budget Committee A standing committee responsible for overall policy matters relating to the budget coordinating the preparation of the budget The Master Budget Production Budget Selling .
