Chapter 13: Planning and Budgeting

• Budgeting 


  is a process that is widely used and necessary, at least in form, for success, yet it is one of the least popular management processes practiced.
• Budget


  a plan, stated in financial terms, of how the organization expects to carry out its activities and meet the financial goals established in planning process.
• Critical success factors


  strengths of a company that enable it to outperform competitors
• Critical success factors


  by identifying these factors and ensuring that they are incorporated into the strategic plan, companies are able to maintain an edge over competitors.
• Master budget 


  part of an overall organization plan for the next year made up of three components
• Three components of master budget

  1. the organization goals
  2. the strategic long-range profit plan
  3. the tactical short-range profit plan
• Organization Goals


  company's broad objectives established by management that employees work to achieve.
• Organization Goals


  provide a philosophical statement that the company is expected to follow in its operations.
• Strategic long-range plan 


  statement detailing steps to take to achieve a company's organization goals.
• Strategic plan


  discuss the major capital investments required to maintain present facilities, increase capacity, diversify products and/or processes, and develop particular markets.
• Budgeting


  dynamic process that ties together goals, plans, decision making, and employee performance evaluation.
• Profit plan


  income statement portion of the master budget.
• Master budget


  indicates the level of sales, production, and cost as well as income and cash flows anticipated for the coming year
• Participative budgeting or grass roots budgeting


  use of input from lower- and middle-management employees
• Sales Forecasting


  the most difficult aspect of budgeting because it involves considerable subjectivity.
• Salespeople


  possess the best information and best knowledge about the customers' immediate and near-term needs.
• Market researchers


  they may know little about customers' immediate needs, but they can predict long-term trends in attitudes and effects of social and economic changes on the company's sales, potential markets and products.
• Delphi technique


  members of the forecasting group prepare individual forecasts and submit then anonymously. Used to enhance forecasting and reduce bias in estimates.
• Trend analysis


  simple visual extrapolation of points on a graph to a highly sophisticated computerized time series analysis, also can be helpful in preparing sales forecast.
• Trend analysis


  this approach is also relatively economical because only a list of past sales figures is needed.
• Econometric models


  statistical methos of forecasting economic data using regression models.
• Artificial intelligence


  simulation of human intelligence and behavior by computers.
• Production budget


  production plan of resources needed to meet current sales demand and ensure that inventory levels are sufficient for future sales.
• Budgeted COGS


  primary job of this budget is to estimate the costs of direct materials, direct labor and manu. overhead at budgeted levels of production.
• Marketing and Administrative Budget


  Creating budgets this accounts is more difficult than creating the production cost budget because managers have discretion about how much money they spend and the timing of these expenditures.
• Assembling the master budget demonstrates some key relations among sales, account receivable, and cash flows in the sales cycle.
• budgeted balance sheets


  Statements of budgeted financial position, combine an estimate of financial position at the beginning of the budget period with the estimated results of operations for the period and estimated changes in assets and liabilities.
• Key difference in the master budget of service enterprise


  the absence of product or materials inventories.
• budget for service is developed around:

  strategy, operations and information systems.
• major benefit of formal planning models

  is that they allow you to explore many alternatives and options in the planning process.
• spreadsheets


  extremely helpful in preparing budgets
• cash budget


  Statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period.
• zero-based budgeting


  process to assist management in choosing among alternative levels of effort in different units of the organization.
• Zero-based budgeting


  can help companies manage costs by rethinking what activities are important and the best way to accomplish them.