23-123-2Learning ObjectivesState the essentials of effective budgeting and the components of the master budget.1Prepare budgets for sales, production, and direct materials.2Prepare budgets for direct labor ,manufacturing overhead, and selling and administrative expenses, and a budgeted income statement.3Prepare a cash budget and a budgeted balance sheet.4Apply budgeting principles to nonmanufacturing companies.5Budgetary Planning2323-3Budget: a formal written statement of managements plans for a specified future time period, expressed in financial terms.uPrimary method of communicating agreed-upon objectives throughout the organization.uPromotes efficiency.uControl device - important basis for performance evaluation once adopted.LEARNING OBJECTIVEState the essentials of effective budgeting and the components of the master budget.1LO 123-4uHistorical accounting data on revenues, costs, and expenses help in formulating future budgets.uAccountants normally responsible for presenting managements budgeting goals in financial terms.uThe budget and its administration are the responsibility of management.Budgeting and AccountingLO 123-5Primary benefits of budgeting:1.Requires all levels of management to plan ahead.2.Provides definite objectives for evaluating performance.3.Creates an early warning system for potential problems.4.Facilitates coordination of activities within the business.5.Results in greater management awareness of the entitys overall operations.6.It motivates personnel throughout organization to meet planned objectives.The Benefits of BudgetingLO 123-6Which of the following is not a benefit of budgeting?a.Management can plan ahead.b.An early warning system is provided for potential problems. c.It enables disciplinary action to be taken at every level of responsibility.d.The coordination of activities is facilitated. QuestionThe Benefits of BudgetingLO 123-7uDepends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined.uBased on research and analysis with realistic goals.uAccepted by all levels of management.Essentials of Effective BudgetingLO 123-8uMay be prepared for any period of time.Most common - one year.Supplement with monthly and quarterly budgets.Different budgets may cover different time periods.uLong enough to provide an attainable goal and minimize seasonal or cyclical fluctuations.uShort enough for reliable estimates. LENGTH OF THE BUDGET PERIODEssentials of Effective BudgetingLO 123-9Businesses Often Feel Too Busy to Plan for the FutureA study by Willard Stu Woo, “Californias Plans to Close Gap Become More Drastic,” Wall Street Journal Online (January 8, 2009); and John Hechinger, “Princeton Cuts Budget as Endowment Slides,” Wall Street Journal Online (January 9, 2009).Service Company Service Company InsightInsightLO 523-76Becker Company estimates that 2017 sales will be $15,000 in quarter 1, $20,000 in quarter 2, and $25,000 in quarter 3. Cost of goods sold is 80% of sales. Management desires to have ending finished goods inventory equal to 15% of the next quarters expected cost of goods sold. Prepare a merchandise purchases budget by quarter for the first six months of 2017.LO 5DO IT!Merchandise Purchases Budget523-77“Copyright 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”Copyright