Introduction to Managerial Planning

& Control
• Managerial accounting involves planning and control.
• * Budgeting is a key tool for formalizing management plans.
• * Standards provide benchmarks for measuring performance.
• * Variance analysis helps evaluate performance by comparing actual
results to plans/standards.
• * These concepts are integrated for effective management.
What is a Budget?**
• A budget is a comprehensive formal management plan expressed in
quantitative terms.
• * It describes expected operations over a future time period.
• * Key elements of a budget:
• * Deals with a **specific entity**.
• * Covers a **specific future time period**.
• * Expressed in **quantitative terms** (money, units, etc.).
Planning Horizons
• Managers consider two time horizons for planning:
• * **Short-term planning:** Deciding objectives for a near-future
period (usually one year) and how to achieve them. The typical short-
term budget covers one year, often broken down monthly or
quarterly.
• * **Long-term planning (Strategic planning):** Setting long-term
goals (2 to 10 years, sometimes up to 20) and determining how to
attain them. Addresses broad issues like new product development or
plant replacement. The capital budget is a key part of long-term
planning.
Types of Short-Term Budgets
• Annual Budget:** A typical short-term budget covering one year.
• * **Continuous Budget (Rolling Budget):** Starts with an annual
budget broken into 12 units. As each period passes, it's dropped, and
a new period is added, so there's always a 12-period budget. Provides
continuous guidance.
What are Budgeting and Budgetary
Control?**
• Budgeting:** The act of preparing a budget.
• * **Budgetary Control:** The use of budgets to control a firm's
activities.
Principal Advantages of Budgeting
(Part 1)**
• **Requires Periodic Planning (Formalization of Planning):** Forces
managers to think ahead and prepare for changes. Makes planning an
explicit responsibility.
• * **Fosters Coordination, Cooperation, and Communication:** Pulls
together plans from different managers. Communicates goals top-
down and plans bottom-up.
Principal Advantages of Budgeting
(Part 2)**
• **Provides a Framework for Performance Evaluation:** Serves as a
benchmark for judging actual results. Generally a better basis than
past performance, which may hide inefficiencies.
• * **Means of Allocating Resources:** Helps ration limited resources
by comparing costs/benefits of potential projects.
Principal Advantages of Budgeting
(Part 3)**
• **Satisfies Legal and Contractual Requirements:** Required by law
for some organizations, or by lenders/agreements for others.
• * **Creates an Awareness of Business Costs:** Requires managers
to convert plans into costs and benefits, providing common ground
for communication across functions.
The Master Budget Overview
• The master budget is the **total budget package** for an
organization.
• * It aggregates all individual budgets into one overall budget.
• * It consists of two major components: the operating budget and the
financial budget.
Components of the Master Budget
• **Operating Budget:** Focuses on the **income statement** and
supporting schedules. Also called a profit plan, though it may show a
loss or be used for non-revenue entities.
• * **Financial Budget:** Focuses on the effects of operations and
other plans on **cash**. Includes capital budget, cash budget,
budgeted balance sheets, and budgeted statement of cash flows.
Master Budget Preparation Flow
• (Diagrammatic flow based on Exhibit 4-1)
• * Sales Budget is typically the starting point.
• * Operating budgets lead to the Budgeted Income Statement.
• * Operating and Financial budgets combine to create the Budgeted
Balance Sheet.
• * The Cash Budget is a critical link, often prepared after operating
budgets but before the balance sheet.
Operating Budgets - The Sales
Budget
• The sales budget is the **starting point** for operating budgets.
• * It determines production requirements and affects most other
budgets.
• * Usually based on a sales forecast.
• * Sales Forecast: A prediction of sales under given conditions.
• * Sales Budget: Combines projected sales volume with estimated
selling prices.
Factors Influencing Sales Budgets
(Sales Forecasting)**
•* Past patterns of sales.
•* Estimates made by the sales force.
•* General economic conditions.
•* Competitive actions.
•* Changes in the firm's prices.
•* Changes in product mix.
•* Market research studies.
•* Advertising and sales promotion plans.
Sales Budget Example (Blue Nile
Company - Merchandising)
• (Based on Schedule 1(a) from Example 1)
• * Shows budgeted sales in units (if applicable) and revenue by period
(e.g., month, quarter).
• * Breaks down sales into cash vs. credit components for cash
collection planning.
Schedule of Expected Cash
Collections (Blue Nile Company)
• (Based on Schedule 1(b) from Example 1)
• * Shows cash expected to be collected each period.
• * Includes cash sales from the current period and collections of
credit sales from previous periods.
Production Budget (Manufacturing
Companies)
• Developed **after** the sales budget.
• * Determines the number of units that need to be produced to meet
sales demand and inventory requirements.
• * Formula: Budgeted Sales (units) + Desired Ending Inventory (units)
- Beginning Inventory (units) = Required Production (units).
Production Budget Example (Great
Company)**
• * (Based on Schedule 1(c) from Example 2)
• * Illustrates the production budget calculation by quarter.
• * Shows how sales units are converted to production units needed.
Direct Materials Budget**
• * Developed **after** the production budget.
• * Details the raw materials that must be purchased.
• * Needed to fulfill production requirements and provide for
adequate raw materials inventory.
• * Formula: Raw Materials Needed for Production + Desired Ending
RM Inventory - Beginning RM Inventory = Raw Materials to be
Purchased.
Direct Materials Budget Example
(Great Company) - Pounds
• * (Based on Raw Materials to be purchased (in pounds) from
Example 2)
• * Shows the calculation of required raw material pounds by quarter.
• * Production units are converted to pounds needed based on
standard material per unit.
Direct Materials Budget Example (Great Company) -
Birrs**

• * Converts raw materials to be purchased in pounds into purchase

cost in Birrs.
• * Uses the standard cost per pound.
Schedule of Expected Cash Disbursements for
Purchases (Great Company)**

• * Shows the cash expected to be paid out for raw material purchases
each quarter.
• * Based on the company's payment terms (e.g., portion paid in
purchase quarter, portion in following quarter).
Direct Labor Budget
• Developed **from** the production budget.
• * Determines direct labor time needed to meet production
requirements.
• * Allows planning for labor force adjustments.
• * Calculated by multiplying units to be produced by the standard
direct labor hours per unit.
• * Direct labor hours are then converted to direct labor cost using the
standard wage rate.
Direct Labor Budget Example (Great Company)**

• Shows direct labor hours needed and the corresponding cost by

quarter.
Manufacturing Overhead (MOH)
Budget
• * Provides a schedule of all production costs **other than direct
materials and direct labor**.
• * Includes indirect materials, indirect labor, and other indirect costs.
• * Often broken down by cost behavior (variable/fixed).
• * Used to develop a predetermined overhead rate for applying costs
to units.
Manufacturing Overhead (MOH)
Budget Example (Great Company)**
• * Shows budgeted variable and fixed overhead costs by quarter.
• * Identifies non-cash items (like depreciation) for cash flow planning.
Ending Finished Goods Inventory
Budget
• * Prepared to determine the cost of unsold units.
• * Needed for the Budgeted Income Statement (Cost of Goods Sold)
and Budgeted Balance Sheet (Inventory Asset).
• * Calculated by multiplying the desired ending finished goods units
by the unit product cost.
Unit Product Cost Calculation**
• * Needed for the Ending Finished Goods Inventory Budget and Cost
of Goods Sold.
• * Includes standard costs for direct materials, direct labor, and
manufacturing overhead per unit.
• * Example (Great Company): Direct Materials Cost + Direct Labor
Cost + MOH Cost Per Unit. The MOH rate is usually calculated based
on a chosen activity base (e.g., direct labor hours).
Ending Finished Goods Inventory & Unit Product Cost
Example (Great Company)**

• * Shows the calculation of the standard unit product cost.

• * Shows the calculation of the ending finished goods inventory value.
Operating Expense Budgets (Selling
& Administrative)**
• * Budgets for costs incurred outside of manufacturing.
• * Include selling expenses (e.g., commissions, advertising) and
administrative expenses (e.g., salaries, insurance, property taxes,
depreciation).
• * Often broken down by cost behavior (variable/fixed).
Operating Expense Budget Example
(Blue Nile Company)
• * Shows various operating expenses by month.
• * Includes both variable (e.g., wages/commissions, miscellaneous
based on sales) and fixed (e.g., rent, insurance, depreciation)
components.
Selling and Administrative Expenses
Budget Example (Great Company)
• * Shows selling and administrative expenses by quarter, separating
variable and fixed items.
Schedule of Cash Disbursements for Operating
Expenses (Blue Nile Company)**

• Shows the cash payments expected for operating expenses.

• * Excludes non-cash expenses like depreciation.
Schedule of Cash Disbursements for
Selling & Administrative Expenses
(Great Company)**
• * (Based on Disbursement for Selling & Administrative Expenses
from Example 2)
• * Shows the cash payments expected for selling and administrative
expenses.
• * Excludes non-cash expenses like depreciation.
Financial Budgets - The Cash
Budget**
• * A crucial financial budget.
• * Projects the company's cash position over the budget period.
• * Determines if the company will have excess cash to invest or a
deficiency requiring borrowing.
Cash Budget Components
• * **Beginning Cash Balance:** Cash on hand at the start of the period.
• * **Cash Receipts:** Cash collected from customers and other sources.
• * **Cash Available:** Sum of beginning balance and cash receipts.
• * **Cash Disbursements:** Cash paid out for purchases, expenses,
equipment, dividends, etc..
• * **Cash Excess or Deficiency:** Cash available minus cash
disbursements.
• * **Financing Activities:** Borrowing or repaying loans, including
interest payments.
• * **Ending Cash Balance:** Cash available adjusted for financing. Often
includes a minimum required balance.
Cash Budget Example (Blue Nile
Company) -
• * Shows Cash Inflows (Beginning Balance, Collections) and major
Cash Outflows (Purchases, Operating Expenses, Truck Purchase).
Cash Budget Example (Blue Nile
Company)
• Shows Cash Excess/Deficiency and Financing Activities (Borrowing,
Repayments, Interest) to reach the desired ending cash balance.
Cash Budget Example (Great
Company)
• * Shows Cash Inflows (Beginning Balance, Collections) and major
Cash Outflows (Direct Materials, Direct Labor, MOH, S&A).
Cash Budget Example (Great
Company)
• * Shows remaining Cash Outflows (Equipment, Dividends), Total
Needs (with minimum balance), Cash Excess/Deficiency, and
Financing Activities (Borrowing, Repayments, Interest).
Budgeted Income Statement
• * Summarizes the results from the operating budgets.
• * Presents the expected revenues, cost of goods sold, operating
expenses, and net income for the budget period.
Budgeted Income Statement
Example (Blue Nile Company)
• * Shows budgeted sales, cost of goods sold, gross profit, operating
expenses, operating income, and net income. Includes calculation for
interest expense.
Budgeted Income Statement
Example (Great Company)
• Shows budgeted sales, cost of goods sold, gross margin, selling &
administrative expenses, net operating income, interest expense, and
net income.
Budgeted Balance Sheet
• * Forecasts the company's financial position (Assets, Liabilities,
Equity) at the end of the budget period.
• * It is the culmination of all the individual budgets.
Budgeted Balance Sheet Example
(Blue Nile Company)
• * Shows projected current assets (Cash, AR, Inventory, Unexpired
Insurance), plant assets, liabilities (AP, Loan Payable, Interest Payable),
and owners' equity. Values are derived from the various budget
schedules and beginning balance sheet.
Budgeted Balance Sheet Example
(Great Company)
• * Shows projected current assets (Cash, AR, RM Inventory, FG
Inventory), plant assets (Land, Building/Equipment, Accumulated
Depreciation), liabilities (AP), and stockholders' equity (Common
Stock, Retained Earnings). Values are derived from budget schedules
and beginning balance sheet.
Performance Evaluation: Static vs.
Flexible Budgets
• The **master budget (static budget)** is prepared *before* the
period for a *single* activity level. It serves as a benchmark for
performance evaluation.
• * A **flexible budget** is prepared *after* the period, using the
**actual output level** but the *same per-unit cost and revenue
assumptions* as the static budget.
• * When actual activity differs significantly from budgeted activity, a
static budget may not be effective for evaluating performance. A
flexible budget provides a better basis for comparison.
Flexible Budgets: Definition &
Characteristics
• * Flexible Budget (also called Variable Budget or Dynamic Budget).
• * Easily adjusted for differences in activity level.
• * **Characteristics:**
• * Cover a range of activity.
• * Are dynamic ("what is" vs. "what was expected").
• * Facilitate performance measurement.
Flexible Budgeting Process Steps
• 1. Determine the range of activity to cover.
• * 2. Determine the cost behavior pattern for each cost
(fixed/variable per unit). (These formulas are based on the static
budget assumptions).
• * 3. Select activity levels for which budgets will be prepared
(including the actual level).
• * 4. Prepare flexible budgets using cost behavior data and selected
activity levels.
Flexible Budget Example
• * Shows the flexible budget prepared for multiple activity levels (e.g.,
7,000, 8,000, 9,000 units) using the standard per-unit variable costs
and total fixed costs.
• * Allows comparison of expected results at different activity levels.