Presentation by Chapter.ppt

BUDGETING BASICS AND

BEYOND

(4

th

Edition)

CHAPTER 1



_{A budget is defned as the formal}

expression of plans, goals, and

objectives of management that

covers all aspects of operations

for a designated time period

 _{A budget is a fnancial plan to control}

future operations and results

Efective budgeting requires the existence of the following:

 _{Predictive ability}

 _{Clear channels of communication,}

authority, and responsibility

 _{Accounting-generated accurate, reliable,}

and timely information

 _{Compatibility and understandability of}

information

 _{Support at all levels of the organization}

from upper, middle, and lower

Types of Budgets

 _{Master Budget}

 _{Static (Fixed)}

Budget

 _{Flexible (Expense)}

Budget

 _{Operating and}

Financial Budgets

 _{Cash Budget}

 _{Capital Expenditure}

Budget

 _{Program Budget}

 _{Incremental Budget}

 _{Rolling Budget}

 _{Add-On Budget}

 _{Supplemental Budget}  _{Bracket Budget}

 _{Stretch Budget}  _{Strategic Budget}  _{Activity-Based}

Budget (ABB)

 _{Target Budget}



_{Setting objectives.}



_{Analyzing available resources.}



_{Negotiating to estimate budget}

components.



_{Coordinating and reviewing}

components.



_{Obtaining fnal approval.}



_{Distributing the approved budget.}

 _{At the beginning of the period, the}

budget is a plan. At the end of the period, the budget is a control

instrument to assist management in measuring its performance against plan so as to improve future

performance. Budgeted revenue and costs are compared to actual revenue and costs to determine variances

 _{Bottom-up (Participative) versus}

Top-down

 _{Advantages and Disadvantages of}

Budgets

 _{Budgetary Slack: Padding the Budget}

CHAPTER 2

 _{Planning should link short-term,}

intermediate-term, and long-term goals. The objective is to make the best use of the companies’ available resources over the long term. Budgeting is simply one portion of the plan.

 _{The plan is the set of details}

implementing the strategy. The plan of ex ecution is typically explained in

sequential steps including costs and

timing for each step. Deadlines are set.



_{Strategic plans are long-term, broad}

plans ranging from 2 to 30 years,

with 5 to 10 years being most typical



_{The strategic plan is the mission of}

the company and looks to existing

and prospective products and

markets. Strategic plans are

designed to direct the company’s

activities, priorities, and goals.

 _{Short-range plans are typically for one year}

(although some plans are for two years). The plans examine expected earnings, cash fow, and capital expenditures

 _{Long-term planning is usually of a broad,}

strategic (tactical) nature to accomplish

objectives. A long-term plan is typically 5-10 years (or more) and looks at the future

direction of the company. It also considers economic, po litical, and industry conditions

The accuracy of budget preparation may be determined by comparing actual numbers to budget numbers in terms of dollars and units. Budget accuracy is higher when the two

fgures are closer to each other. Ratios showing budget accuracy include:

 _{Sales Accuracy = Actual Sales/Budgeted Sales}  _{Cost Accuracy = Actual Cost/Budgeted Cost}  _{Proft Accuracy = Actual Proft/Budgeted}

Proft

CHAPTER 3

 _{Planning reports may be short term,}

looking at the company as a whole, each division, each department, and each

responsibility center within the department

 _{Control reports concentrate on}

performance efectiveness and areas needing improvement.

 _{Information reports assist in planning}

and policy formulation. The re ports show areas of growth or contraction

Budget reports should contain the

following data:



_{Trends over the years}



_{Comparison to industry norms}



_{Comparison of actual to budget}

with explanation and responsible

party for variances. Follow-up

procedures are needed for control.



_{Periodic Reports.}

_{These are reports}

prepared at regular intervals



_{Advance Reports.}

_{Important partial}

information may be reported before

all information is available for a

periodic report



_{Special Studies.}

_{Special reports are}

issued for a specifc, nonroutine

purpose



_{A budget manual describes how a}

budget is to be prepared.

The manual includes:

 _{Standardized forms, lists, and reports}

 _Instructions

 _{Format and coverage of performance}

reports

 _{Administrative details}

 _{Follow-up procedures}

A budget sheet should be designed to record the information used by the op erating manager and budget preparer. The budgeting sheet should include

the following information:

 _{Historical cost records used}  _{Cost formulas}

 _{Changes in operating conditions}  _{Foreseeable conditions}

 _{A standing budget committee is usually}

responsible for overall policy relating to the budget program and for

coordinating the preparation of the budget itself. This committee may consist of the president; vice

presidents in charge of various

functions such as sales, production, purchasing, CFO, and the controller.

 _{The budget planning calendar is the}

schedule of activities for the

development and adoption of the

budget. It should include a list of dates indicating when specifc information is to be provided by each information

source to others.

CHAPTER 4

BREAK-EVEN AND CONTRIBUTION

 _{What sales volume is required to break even?}  _{What sales volume is necessary to earn a}

desired proft?

 _{What proft can be expected on a given sales}

volume?

 _{How would changes in selling price, variable}

costs, fxed costs, and output afect profts?

 _{How would a change in the mix of products sold}

afect the break-even and target income volume and proft potential?

Questions Answered by

Break-even and Contribution Margin



_{Economic analysis of new product.}



_{Labor contract negotiations.}



_{Choice of production process.}



_{Pricing policy.}



_{Location selection.}



_{Financing decisions.}



_{Make or buy decision}



_{Capital budgeting analysis.}



_{Sales Mix Analysis}



_{Contribution Margin Analysis and}

Nonproft Organizations



_{CVP Analysis with Step-function}

Costs



_{CVP-based Strategies}



_{CVP Analysis under Uncertainty}

Some Applications of

 _{The selling price per unit is constant throughout}

the entire relevant range of activity.

 _{All costs are classifed as fxed or variable.}  _{The variable cost per unit is constant.}

 _{There is only one product or a constant sales}

mix.

 _{Inventories do not change signifcantly from}

period to period.

 _{Volume is the only factor afecting variable}

costs.

Assumptions Underlying

CHAPTER 5



_{Profts are planned, they just do}

not happen. Proft planning

involves setting realistic and

attainable proft objectives and

targets, and then accomplishing

them

 _{The objective must be defnite and}

specifc

 _{An objective states what is going to be}

done. The objective must be clear, quantifable, compatible, practical, strong, realistic, and attainable (not too easy or too difcult). A general and vague objective is of little value. The objective should be in writing

CHAPTER 6

MASTER BUDGET: GENESIS OF

 _{Obviously these budgets cannot be}

prepared independently. Production is scheduled to meet the sales demand. Materials, labor, and factory overhead

costs are related to production. Selling and administrative ex penses are based on

sales. Cash receipts and disbursements can be esti mated only after sales revenue and costs are known. It is obvious that all of these separate budgets must be closely coordinated.

 _{Sales planning and forecasting often are confused.}

Although related, they have distinctly diferent purposes.

 _{A forecast is not a plan; rather it is a statement and/or}

a quantifed assessment of future conditions about a particular subject (e.g., sales revenue) based on one or more explicit assumptions.

 _{A sales plan incorporates management decisions that}

are based on the forecast, other inputs, and

management judgments about such related items as sales volume, prices, sales efects, production, and fnancing.

Types of Budgets

 _{Sales budget}

 _{Production budget}  _Materials

requirement budget

 _{Materials purchases}

budget

 _{Direct labor budget}  _{Factory overhead}

costs budget

 _{Selling and}

administrative expenses budget

 _{Cash budget}

 _{Budgeted income}

statement

 _{Budgeted balance}

        Expected   Desired  

Producti

on = sales Planned + Ending — Beginning inventory

Volume   Inventory  

       

CHAPTER 7

COST BEHAVIOR:

An understanding of cost -behavior is helpful to managers for four reasons:

_{Flexible budgeting}

_{Break-even and contribution margin}

analysis

_{Appraisal of divisional performance} _{Short-term choice decisions}

An understanding of cost

-behavior is helpful to

 _{VARIABLE COSTS. Variable costs, also}

known as engineered costs, vary in total with changes in volume or level of activity

 _{FIXED COSTS. Fixed costs do not change}

in total regardless of the volume or level of activity

 _{MIXED (SEMI-VARIABLE) COSTS. As}

previously discussed, mixed costs contain both a fxed element and a variable one.

Since the mixed costs contain both fxed and variable elements, the analysis takes the

following mathematical form, which is called a

fexible budget formula: Y = a + bX

where Y = the mixed cost to be broken up (dependent variable).

X = any given measure of activity (cost driver) such as direct labor hours, machine hours, or production volume (independent variable).

a = the fxed cost component (constant). b = the variable rate per unit of X (slope).

Analysis of Mixed

 An alternative format of income

statement, known as the contribution income statement, organizes the

costs by behavior rather than by

function. It shows the relationship of variable costs and fxed costs a given cost item is associated with,

regardless of the functions.

 _{Contribution margin is available to}

cover fxed costs.

 _{The statement highlights the concept}

of contribution margin, which is the diference between sales and variable costs. The traditional format, on the other hand, emphasizes the concept of gross margin, which is the

diference between sales and cost of goods sold.

CHAPTER 8



_{Variance analysis compares}

standard to actual costs or

performances



_{There are two types of variances:}

material and immaterial

 _{Standard cost, which is the}

predetermined cost of manufacturing, servicing, or marketing an item during a given future period. It is based on current and projected conditions. This norm is also dependent upon quantita tive and qualitative measurements

(e.g., working conditions).

There are four types of standards

 _{Basic. These are not changed from period}

to period

 _{Maximum efciency. These are perfect}

standards, which assume ideal, optimal conditions

 _{Currently attainable. These are based on}

efcient activity

 _{Expected. These are expected fgures, which}

should come very close to actual fgures

Three cost measures:

 _{Quantity per unit of work times actual}

units of work produced

 _{Standard cost equals standard price}

times standard quantity, where

standard quantity equals standard

quantity per unit of work times actual units of work produced.

 _{Total cost variance equals actual cost}

less standard cost

 _{The fexible budget is geared toward a}

range of activities rather than a single level of activity. A fexible budget

employs budgeted fgures at diferent capacity levels. It allows you to

choose the best expected (normal) capacity level (100%) and to assign pessimistic (80%), optimistic (110%), and full (150%) capacity levels

CHAPTER 9

MANUFACTURING COSTS: SALES

 _{In order to budget for manufacturing}

costs, a production budget needs to be established, which in turn requires a

sales budget.

 _{Manufacturing costs are subdivided}

into direct materials, direct labor, and factory overhead.

After determining the number of units to be

produced, the company prepares the materials requirement budget and the materials purchase budget. Purchase of materials depends on

production requirements and inventories. The direct materials budget involves a balancing of raw material needed for production, the raw

material inventory balances, and the purchase of raw materials. The budget may provide for

allowances for waste and spoilage.

Planning and Control of

Material Purchases and

CHAPTER 10

 _{The sales budget is the starting point}

in preparing the master budget, since estimated sales volume infuences

nearly all other items appearing in the master budget. The sales budget,

which ordinarily indicates the quantity of each product expected to be sold, allows all departments to plan their needs.



_{Sales forecasts are especially}

crucial aspects of many fnancial

management activities, including

budgets, proft planning, capital

expenditure analysis, and

acquisition and merger analysis. It

is the key to other forecasts and

plans.



_{Percentage of sales or}

proft



_{Unit sales method}



_{Objective-task method}

 _{Trend in advertising cost to sales}  _{Advertising cost per unit sold}

 _{Advertising cost per sales dollars}  _{Advertising cost per customer}

 _{Advertising cost per transaction}

 _{Advertising cost by product, media, and}

territory

CHAPTER 11



_{Research and development (R&D)}

is needed to develop new

products and services or to

signifcantly improve existing

ones in order to remain

competitive and grow

The R&D budget may be based on:

_{Estimated cost of specifc projects}

_{A percentage of expected sales}

_{A percentage of current year and/or prior year}

sales

_{A percentage of proft}

_{A percentage of operating income}

_{A percentage of investment in capital assets}

_{A percentage of cash fow}

_{R&D per unit}



_{There are direct and indirect costs}

associated with R&D projects



_{Any project limitations have to be}

noted



_{In R&D, individual projects have to}

be planned, appraised, and

controlled

CHAPTER 12



_{Administrative departments}

include general administration,

personnel, accounting, legal,

insurance, computer services, and

treasury. Administration is

personnel existing because of the

organization structure. Examples

are ofce managers and staf.

 _{In the nonmanufacturing functions of a}

business (such as general

administration, R&D, marketing, and product engineering), the most

signifcant expense usually is salaries. Some companies have developed

formal procedures for projecting and controlling such expenses. These

methods are known as headcount forecast algorithms.

CHAPTER 13

 _{Capital expenditures include replacing}

machinery to economize on costs, expanding production to increase

volume, marketing of a new product, improving the quality of products or

services, and manufacturing under proposed contracts. Capital

expenditures should take into account current and needed facilities.

The four steps in the capital

expenditure budgetary process are:



_{Approving the project}



_{Approving the estimate}



_{Authorizing the project}



_Follow-up

CHAPTER 14

 _{Forecasts are needed for marketing,}

production, purchasing, manpower, and

fnancial planning. Further, top management needs forecasts for planning and implementing long-term strategic objectives and planning for capital expenditures. More specifcally,

marketing managers use sales forecasts to determine optimal sales force allocations, set sales goals, and plan promotions and

advertising. Market share, prices, and trends in new product development are also required.

Qualitative approach—forecasts

based on judgment and opinion



_{Expert opinions}



_{Delphi technique}



_{Sales force polling}



_{Consumer surveys}

a. Forecasts based on historical data

_{Naive methods}

_{Moving average}

_{Exponential smoothing}

_{Trend analysis}

_{Classical decomposition}

b. Associative (causal) forecasts

_{Simple regression}

_{Multiple regression}

_{Econometric modeling}

CHAPTER 15

MOVING AVERAGES AND SMOOTHING TECHNIQUES: QUANTITATIVE



_{Naive models}



_{Moving averages}



_{Exponential smoothing}

 _{Exponential smoothing is a popular technique for}

short-run forecasting by managers. It uses a weighted average of past data as the basis for a forecast. The procedure gives heaviest weight to more recent

information and smaller weight to observations in the more distant past. The reason is that the future is more dependent on the recent past than on the distant past.

 _{The method is known to be efective when there is}

randomness and no seasonal fuctuations in the data. One disadvantage of the method, however, is that it does not include industrial or economic factors such as market conditions, prices, or the efects of

competitors’ actions.

CHAPTER 16

 _{The least-squares method is widely}

used in regression analysis for

estimating the parameter values in a regression equation. The regression

method includes all the -observed data and attempts to fnd a line of best ft. To fnd this line, a technique called the

least-squares method is used.

 _{Correlation coefcient (r) and}

coefcient of determination (R2)

 _{Standard error of the estimate (Se) and}

prediction confdence interval

 _{Standard error of the regression}

coefcient (Sb) and t-statistic

Excel has an easy-to-use

regression routine. To utilize Excel

2010, for example, for regression

analysis, three steps need to be

followed:



_{Click the}

_Data

_menu.



_Click

_{Data Analysis}

_.



_Click

_Regression.

SUMMARY OUTPUT           

Adjusted R Square

ents rd ErrorStanda t Stat value P-*

Lower

95% Upper 95%  

Intercept 10.583 643

97 0.1429 3.94140.0028 0.2448 0.8816 

*The P-value for X Variable = .0028 indicates that we have a 0.28% chance that the true

value of the variable coefcient is equal to 0, implying a high level of accuracy about the

estimated value of 0.563197.

CHAPTER 17

CASH BUDGETING AND FORECASTING CASH FLOW: TWO PRAGMATIC



_{A forecast of cash collections and}

potential write-ofs of accounts

receivable is essential in

cash

budgeting

and in judging the

appropriateness of current credit and

discount policies. The critical step in

making such a forecast is estimating

the cash collection and bad debt

percentages to be applied to sales or

accounts receivable balances.



_{The cash budget presents the}

amount and timing of the expected

cash infow and outfow for a

designated time period. It is a tool

for cash planning and control and

should be detailed so that your

know how much is needed to run

your business

 _{The cash receipts section, which is cash}

collections from customers and other cash receipts such as royalty income and

investment income.

 _{cash disbursements section, which comprises}

all cash payments made by purpose.

 _{cash surplus or defcit section, which simply}

shows the diference between the total cash available and the total cash needed including a minimum cash balance if required

 _{fnancing section, which provides a detailed}

account of the borrowings, repayments , and interest payments

CHAPTER 18

A fnancial model is one in which:

_{One or more fnancial variables appears}

(expenses, revenues, investment, cash fow, taxes, and earnings).

_{The model user can manipulate (set and alter)}

the value of one or more fnancial variables.

_{The purpose of the model is to infuence}

strategic decisions by revealing to the decision maker the implications of alternative values of these fnancial -variables.

 _{The use of fnancial modeling,}

especially a computer-based fnancial modeling system, is in wide use. The simple reason is the growing need for improved and quicker support as a

decision support system (DSS) and

enterprise resource planning (ERP) and wide and easy availability of computer software.

CHAPTER 19

USING SOFTWARE PACKAGES AND E-BUDGETING: COMPUTER-BASED MODELS, AND SPREADSHEETS, AND

 _{Spreadsheet programs such as Excel and a}

stand-alone package such as Up Your Cash Flow

can be used to develop a fnancial model. These packages are an efective tool for sensitivity

analysis. Sensitivity analysis is a "what-if" technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption

changes. to For illustrative purposes, we

present some examples of projecting an income statement.

Use of a Spreadsheet Program

for Financial Modeling and

 _{A Rolling budget, often called continuous or perpetual} budget is a 12-month (four-quarter) budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focused at least one year ahead so that they do not become too narrowly focused on

short-term results. Also, markets are changing so fast that the traditional budget is quickly out of date within weeks of its publication. Many companies adopt a

rolling-forecast process so that budget allocations can be constantly adjusted to meet changing market

conditions.

Six-Month Budget (March through August)

  March April May June July August Total Sales $210,0₀₀ $216,0₀₀ $224,0₀₀ $208,0₀₀ $190,0₀₀ $180,00₀ $1,228,0₀₀ Cost of goods

sold 84,000 86,400 89,600 83,200 76,000 72,000$491,200 Gross margin 126,00₀ 129,60₀ 134,40₀ 124,80₀ 114,00₀ 108,000$736,800

Selling

expenses 52,000 53,000 55,000 51,000 49,000 47,000 307,000 G&A expenses 26,000 27,000 27,000 25,000 24,000 24,000 153,000 Operating

income 48,000 49,600 52,400 48,800 41,000 37,000 276,800 Interest

expenses 1,000 1,000 1,200 1,200 900 900 6,200 Income (before

taxes) 47,000 48,600 51,200 47,600 40,100 36,100 270,600 Income taxes

(40%) 18,800 19,440 20,480 19,040 16,040 14,440 108,240

Net income $28,20₀ $29,16₀ $30,72₀ $28,56₀ $24,06₀ $21,660 $162,360

Revised Six-Month rolling Budget (April through September)

  April May June July August Septem_ber Total

Sales $220,0₀₀ $225,0₀₀ $210,0₀₀ $192,0₀₀ $182,0₀₀ $195,00₀ $1,224,₀₀₀ Cost of goods

sold 88,000 90,000 84,000 76,800 72,800 78,000$489,600 Gross margin 132,00₀135,00₀126,00₀115,20₀109,20₀117,000 $734,40₀

Selling

expenses 53,000 55,000 51,000 49,000 47,000 50,100 305,100 G&A expenses 27,000 27,000 25,000 24,000 24,000 25,000 152,000 Operating

income 52,000 53,000 50,000 42,200 38,200 41,900 277,300 Interest

expenses 1,000 1,000 1,200 1,100 1,100 1,100 6,500 Income (before

taxes) 51,000 52,000 48,800 41,100 37,100 40,800 270,800 Income taxes

(40%) 20,400 20,800 19,520 16,440 14,840 16,320 108,320

Net income $30,60₀ $31,20₀ $29,28₀ $24,66₀ $22,26₀ $24,480 $162,48₀

 _{The e in e-budgeting stands for both electronic}

and enterprisewide; employees throughout an organization, at all levels and around the globe, can submit and retrieve budget information

electronically via the Internet.

 _{Budgeting software is utilized and made}

available on the Web (in a cloud computing

environment), so that budget information

electronically submitted from any location is in a consistent companywide format.

_{There are much user-oriented software}

specifcally designed for corporate

planners, treasurers, budget preparers, managerial accountants, CFOs, and

business analysts.

_{Web-based (Web-enabled)} _{Intranet or Internet}

_{Cloud computing}

_{Enterprise Resource Management (ERM)}

CHAPTER 20

CAPITAL BUDGETING: SELECTING THE OPTIMUM LONG-TERM INVESTMENT

 _{Rate of return}  _{Budget ceiling}

 _{Probability of success}  _Competition

 _{Tax rate}

 _{Dollar amounts}

 _{Time value of money}

 _Risk

 _Liquidity

 _{Long-term business strategy}  _{Forecasting errors}

Factors to Consider in

Determining Capital

 _{Accounting Rate of Return (ARR)}  _{Payback Period}

 _{Payback Reciprocal}

 _{Net Present Value (NPV)}

 _{Internal Rate of return (IRR)}  _{Probability Index}

 _{Almost all capital budgeting proposals}

can be viewed as real options. Also,

projects and operations contain implicit options, such as the option as to when to take a project, the option to expand, the option to abandon, and the option to suspend or contract operations.

Deciding when to take a project is called the investment timing option.

Several methods to incorporate risk into capital budgeting are

_Simulation

_{Sensitivity analysis}

_{Decision (probability) trees}

Other means of adjusting for uncertainty include

_{Decreasing the expected life of an investment} _{Use of pessimistic estimates of cash fow}

_{Comparison of the results of optimistic, pessimistic,}

and best-guess estimates of cash fows

CHAPTER 21

BUDGETING FOR COST MANAGEMENT: ACTIVITY-BASED BUDGETING AND



_{In contrast to functional budgeting,}

Activity-based Budgeting (ABB) is

activity-oriented. Activity-based

budgets focus on the budgeted cost

of activities required to produce and

sell products and services. An

activity-based budgetary system

emphasizes the planning and control

purpose of cost management.

  Quarter   _Year 1st 2nd 3rd 4th

Unit-Level Costs

Units 18,000 9,600 13,800 21,600 63,000 Indirect material ($.20 per unit) $3,600 $1,920 $2,760 $4,320 $12,600 Electricity ($.18 per unit) 3,240 1,728 2,484 3,888 11,340 Total unit-level costs $6,840 $3,648 $5,244 $8,208 $23,940 Batch-Level Costs

Production runs 30 16 23 36 105 Setup ($110 per run) $3,300 $1,760 $2,530 $3,960 $11,550

Purchasing and material handling

($125 per unit) 3,750 2,000 2,875 4,500 13,125 Inspection ($75 per run) 2,250 1,200 1,725 2,700 7,875 Total batch-level costs $9,300 $4,960 $7,130 $11,16₀ $32,550 Product-Level Costs+A42

Engineering designs 3 3 3 3 12 Design ($600 per design) $1,800 $1,800 $1,800 $1,800 $7,200 Total product-level costs $1,800 $1,800 $1,800 $1,800 $7,200 Facility-Level Costs

Supervisory salaries $14,00₀ $14,00₀ $14,00₀ $14,00_{0 $56,000} Insurance 1,400 1,400 1,400 1,400 5,600 Property taxes 1,000 1,000 1,000 1,000 4,000 Maintenance 2,600 2,600 2,600 2,600 10,400 Utilities 2,500 2,500 2,500 2,500 10,000 Depreciation 15,000 15,000 15,000 15,000 60,000 Total facility‑level costs $36,50₀ $36,50₀ $36,50₀ $36,50₀ $146,00₀ Total Factory Overhead $54,44₀ $46,90₈ $50,67₄ $57,66₈ $209,69₀

A relatively recent focus of the budgeting process is to plan for all of the costs that will be incurred throughout a product's life cycle, before a

commitment is made to the product. Product life-cycle costs encompass the following three phases in a product's life cycle.

_{Development (product planning, concept design} _{preliminary design. detailed design, and testing)} _{Manufacturing (conversion activities)}

_{Logistics (distribution and customer service)}

Budgeted Costs

Item

Item   2X12 2X13 2X14 Total

Units produced 40,000 60,000

Development costs $195,000 $195,000

Manufacturing costs 240,000 360,000 600,000

Logistics costs   80,000 120,000 200,000 Annual subtotal $195,000 $320,000 $480,000$995,000

After-purchase costs  

Annual total $195,000 $400,000 $600,000

$1,195,0 00

 _{Kaizen budgeting incorporates}

expectations for continuous

improvement into budgetary estimates. Kaizen costing determines target cost reductions for a period, such as a

month. Thus, variances are the diferences between actual and

targeted cost reduction. The objective is to reduce actual costs below

standard costs.

CHAPTER 22

ZERO-BASE BUDGETING: PRIORITY BUDGETING FOR BEST RESOURCE

ZBB begins with a zero balance and

formulates objectives to be achieved.

All activities are analyzed for the current year. The manager may decide to fund an existing project as last year after his or her yearly review. However, it is most likely that funding will be increased or decreased based on new information. It is also possible that an alternative way may be used for that project based on current cost or time considerations



_{Developing assumptions}



_{Ranking proposals}



_{Appraising and controlling}



_{Preparing the budget}



_{Identifying and evaluating}

decision units

CHAPTER 23

MANAGERS’ PERFORMANCE AND



_{With responsibility must come}

authority to carry out decisions.

Proft planning requires that

managers be held accountable for

their results as long as they have

authority over the items in question.

If responsibility is assigned without

authority, the proft planning system

fails and manager frustration occurs

.

 _{Responsibility accounting is the system}

for collecting and reporting revenue and cost information by areas of

responsibility.

 _{It operates on the premise that}

managers should be held responsible for their performance, the performance of their subordinates, and all activities within their responsibility center.

Responsibility centers can be one of the following types:

 _{Cost center. A cost center is the unit within the}

organization which is responsible only for costs

 _{Investment center. An investment center is}

the unit within the organization which is held responsible for the costs, revenues, and related investments made in that center

 _{Proft center. A proft center is the unit which}

is held responsible for the revenues earned and costs incurred in that center

A Balanced Scorecard (BSC) is a set of performance measures --constructed for

four dimensions of performance.

_Financial _Customer

_{Internal processes}

_{Learning and growth.}

  Description Measures  

Financial  

Is the company achieving its

fnancial goals?

 

Operating income Return on assets Sales growth

Cash fow from operations

Reduction of administrative expense

 

Customer Is the company meeting customer expectations?

 

Customer satisfaction Customer retention New customer acquisition Market share

On-time delivery Time to fll orders

 

Internal Processes  Is the company improving critical internal processes?

 

Defect rate Lead time

Number of suppliers Material turnover

Percent of practical capacity  

Learning and Growth

 

Is the company

improving its ability to innovate?

 

Amount spent on employee training Employee satisfaction

Employee retention Number of new products

New product sales as a percent of total sales

Number of patents  

Web resources that you can log on to learn more about industry “best practices” or

examples of successful implementations at other frms when developing measurement program

_{The Balanced Scorecard Institute}

(www.balancedscorecard.org).

_{American Productivity and Quality Center}

(www.apqc.org).

_{Management Help (www.managementhelp.org).} _{Performance Measurement Association (PMA)}

(www.performanceportal.org).

CHAPTER 24

BUDGETING FOR SERVICE

There are two reasons why special attention should be devoted to budgetary planning and control techniques in the service

industry

 _{First, planning and control are critical}

functions in all business, whether they

produce and sell goods or provide services. Many service businesses have become more competitive in recent years

 _{Second, the practice of budgeting is}

probably not as well developed in service companies as it is in manufacturing frms

• A proft or target for the company is established. • An annual plan is developed that indicates

expected revenues and expenses by the

organizational segments and in total, by month. • The cash budget is established.

• A planned statement of fnancial position is

developed and tested against selected standards. • Actual performance is measured against plan by

specifc levels of management position.

• Corrective action is taken as deemed necessary.

CHAPTER 25

BUDGETING FOR NONPROFIT

Nonproft organizations can be broken down into three major types

 _{The frst is comprised of voluntarily supported}

organizations, such as hospi tals, churches, colleges, foundations, health and welfare agencies, and privately funded schools

 _{The second type includes organizations supported}

through tax assessments, such as government units and state-supported schools

 _{The third type operates primarily for the beneft}

of its supporters, such as cooperatives, country clubs, and other community-based organizations.

 _{The objective of fnancial reporting is}

accountability to the public rather than to investors. There is no proft distribution. The accounting equation associated with fund accounting is: Assets = Restrictions on Assets. A

nonproft entity may have a surplus or defcit depending on whether

revenues exceed expenditures

CHAPTER 26

 _{Improve decision making and analytical skills}

 _{Facilitate participants’ understanding of the external}

environment simulated

 _{Interactively apply the knowledge, concepts, and skills}

acquired in various business courses

 _{Develop awareness of the need to make decisions without}

complete -information

 _{Improvise appropriately and adapt constructively from}

previously learned concepts, theories, and techniques

 _{Develop ability to recognize the need for additional factual}

material

 _{Develop an understanding of the interrelationships of the}

various functions within the frm and how these interactions afect overall performance

Some Goals of

Students use a Capstone spreadsheet, called capstone.xls, to create and analyze decision tactics in each round. Capstone.xls provides the capability to evaluate alternate worst-case/best-case scenarios, to help students optimize planning.

The Strategy menu in the capstone.xls spreadsheet is organized around several primary functional areas:

_{Research and Development (R&D)} _Marketing

_Production _Finance

Several additional optional modules include:

_{Total Quality Management} _{Human Resources}

_{Labor Contract Negotiation} _{Advanced Marketing}

Sample Individual

END OF