Strat Cost (5)

• Budget


  Financial plan of resources needed to carry out task and meet financial goal
• Budgeting


  Act of preparing budget
• Budgetary control


  Use of budget to control a firm's activities
• Benefits of budgeting


  • Allows management to work out potential problems
  • Minimizes adverse effects of anticipated problems
  • Identifies current and potential bottlenecks
  • Helps firm run smoother operations and achieve better results
  • Makes decision making process more effective by helping meet uncertainties
  • Substitutes deliberate, well-conceived business judgement for accidental success in enterprise management
• Strategy


  Path chosen for obtaining long-term goals and mission, starting point in preparing plans and budgets
• Formulation of strategy


  1. Assessment of external factors affecting operation

  2. Evaluation of internal factors as strengths or weaknesses
• The management process of preparing the master budget

  1. TOP MANAGEMENT INVOLVEMENT

  2. BUDGETING PROCESS

  3. ORGANIZATION FOR BUDGET PREPARATION

  4. BUDGET GUIDELINES

  5. INITIAL BUDGET PROPOSAL

  6. BUDGET NEGOTIATION, Review and APPROVAL, REVISION
• Budget effectivity


  • Top management be involved and show strong interest in budget results
  • Good balance of top management involvement with lower manager is right and ensures budget guidelines are being followed through budget review and approving proposed budget
• Budget committee


  • Representation from different functional areas
  • Generally considered effective body to oversee budget preparation
  • Controller - head of committee
  • Independent from operating part of organization
  • Skills and expertise in dealing with intricacies of setting up a budget
  • Coordinator in budgeting operation
• Budget guidelines


  Responsibilities of the budget committee to provide initial budget guidelines and set and govern budget preparation
• Budget period


  • Master budget - overall financial and operating plan for a coming fiscal period
  • Long range budget (capital budgets) - plans for major expenditures for 5-10 years
  • Responsibility budget - responsibility of particular manager, prepared monthly
  • Cash budget - prepared day to day or monthly basis
• Continuous budgeting plan


  Budgets constantly reviewed and updated to suggest changes as a result of changing business and operating conditions
• Initial budget proposal


  Factors considered - internal factors (strengths & weaknesses), external factors (competitors, labor market, industry outlook)
• Budget negotiation, review and approval, revision

  1. Head of budget units examine initial budget proposal

  2. Budget committee may review and give final approval

  3. CFO approves entire budget and submits to BOD

  4. Periodic revisions, regular budget revision, systematic budget revision
• Master budget


  A comprehensive budget for a specific period, consisting of many interrelated operating and financial budgets, referring to the process as profit planning or targeting
• Steps in developing master budget


  1. Establish basic goal and long range plans

  2. Prepare a sales forecast

  3. Estimate cost of sales and operating expense

  4. Determine effect of budgeted operating results on assets, liabilities, and equity

  5. Summarize estimated data in form of projected income statements
• Sales budget


  Estimated sales units x price per unit, foundation on which all other short term budgets are built, provides revenue predictions
• Sales forecast


  Key stone of the budget structure, made after analysis of past sales volume, general economic and industry conditions, relationship of sales to economic indicators, relative product profitability, market research studies and competition
• Production budget


  Inventory is levelled, decision can be made on the level of production needed to support sales, production budget set as well
• Raw materials budget


  Units required for production + Desired ending inventory - Beginning inventory = Units to be purchased x Unit price = Total purchase
• Direct labor budget


  Arrived at by considering skill level of workers, labor rate per hour, time requirement, condition of union contract
• Overhead cost budget


  Study of past records to show how costs react to change in volume or in relation to other factors
• Budget cost of sales


  From production budget, raw materials budget, direct labor budget, overhead cost budget to prepare budgeted statement of cost of sales
• Marketing and administrative expense budget


  Overhead cost with fixed and variable marketing components
• Cash budget


  Budgeting cash receipts from customers and other sources, budgeting cash disbursements including prepayments, accruals, and extraneous items, determining minimum cash balance to be maintained
• Budgeted statement of financial position


  Developed by beginning with the current position and adjusting it for the data contained in other budgets
• Budgeting in service industries


  Similar to manufacturing or merchandising plans, budgeting is on resources available from operation and required resources, difference is the absence of product or merchandise and their ancillary
• Budgeting in personal planning


  Important focal point to ensure personnel with appropriate skills and competence to perform service required for budgeted sales revenue
• Budgeting in not-for-profit organizations


  Objective is to provide service efficiently and effectively while not spending more than the allowed expenditure level, different from for-profit organizations, master budget often becomes an authorization document for allowable expenditures and activities
• Budgeting in international setting


  Subsidiaries or subdivisions of multinational firms may have their own budgets, must follow the firm's budget procedure and coordinate their budget with other divisions
• Alternative approaches in budgeting

  1. Zero-based budgeting - requires managers to prepare budget from zero base, justify all activities and functions

  2. Activity-based budgeting - based on activities and cost drivers of operations

  3. Kaizen (continuous improvement) budgeting - explicitly demands continuous improvement in operating processes and incorporates improvement in budget
• Ethical issues in budgeting

  • Behavioral issues - difficulty level of budget targets, drawbacks and advantages of authoritative and participative budget processes
  • Employees breaching code of ethics by deliberately furnishing data for budget process that would lead to lower performance expectation
  • Budget padding - knowingly including higher expenditure in budget than truly needed
  • Spending the budget - using up all budgeted amounts to avoid future budget cuts
  • Goal congruence - consistency between goals of the firm and goals of its employees
• Authoritative budgeting


  Top-down process where top management prepares budget for the entire organization including lower level operations, provides better decision making control
• Participative budgeting


  Bottom-up approach involving people affected by the budget, including lower employees in preparing budget, a good communication device that gives top management a better grasp of problems their people face and enables employees to gain a better understanding of the organization's challenges
• Effective budgeting process usually combines top-down and bottom-up approaches, the final budget usually from more participation, not enforced negotiations
• Short term Objectives is goals that coming from short period desired for planning purposes
• Cash disbursement are prepayment accruals as as extraneous items that do not show up in any individuals budget already prepared
• Sales forecast

  • The important input from budget preparation. All Estimatesactivity depend upon this information
• Objective a quantity benchmark for measuring company achievement
• Responsibility accounting - a system that relates cost to organizational structure