Purposes of Budgeting Systems

Budgeting system - procedures used to develop a budget. Budgeting systems have five major purposes:

• Planning.
• Facilitating communication and coordination.
• Allocating resources.
• Controlling profit and operations.
• Evaluating performance and providing incentives.

The Master Budget - Definition

Master budget - a financial plan of an organization for the coming year or other planning period.  It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet.

What is Responsibility Accounting

Responsibility accounting is based on the notion that managers should be held responsible for those (and only those) cost/revenue items that the manager can control to a significant extent.

Overhead Budget

Amounts of labor and overhead expected to be consumed are based on the production budget.

These amounts are also used to forecast staffing levels.

Overhead estimates tie back to estimated capital budgeting expenditures for capacity.

Materials Purchase Budget

We use the following relationship to forecast material purchase requirements:

• Required purchases in units= Materials to be used in production + Budgeted ending inventory- Budgeted beginning inventory

Ending Inventory and Production Budgets

We use the following relationship to forecast production requirements:

• Required production in units= Budgeted sales in unites + Budgeted ending inventory – Budgeted in beginning inventory

Sales Budget

The sales budget is the basis for all other budget components.
Units to be sold are a function of the forecasted selling price.
The budget requires a forecast of sales, typically involving sales staff and market research.  Various statistical techniques may also be used.  Sales may be forecasted in units and in dollars.
Budgeted revenues can be computed as:

• Forecasted sales (in units) x Forecasted selling price.

What is a Budget?

A budget is a detailed plan for the acquisition and use of financial and other resources over a specified period of time.  Good budgeting practice should provide for both planning and control.

Types of Fixed Costs

Committed fixed costs - relate to the investment in facilities, equipment, and the basic organizational structure of the firm.  Examples include depreciation of buildings and equipment, taxes on real estate, insurance, etc.

What is Value Chain Analysis?

The value chain for any firm in any business is the linked set of value-creating activities all the way from basic raw material sources for component suppliers through to the ultimate end-use product delivered into the final customers’ hands.

The value-chain focus of management today is largely internal to the firm (its purchases, its processes, its functions, its products, its customers).  This perspective is too narrow if considered in a strategic context.

Strategic/competitive advantage is gained through managing the entire value chain from raw material supplier to the end user.