Chapter 13: Budgeting ACC 220 Accounting for Small Business

Nandu Awatramani started one of India’s first Italian restaurants. He grew the business to 31 stores at its height, sold it in 2016, and then relocated to the US. Now he works as a growth coach, helping restaurant owners expand their businesses. Silicon Valley, a hotbed of innovation and entrepreneurship, is driven by a unique culture of risk-taking, an abundant talent pool, access to capital, and a strong sense of community. The region’s success is propelled by visionary leadership, resilience, innovation, risk-taking, and customer-centric approaches. An uncertain environment is one in which the possible outcomes are not known.

Step 9: Create the master budget

• Russon pays for 50% of a month’s purchases in the month of purchase and 50% in the month fol­lowing the purchase.
• Prepare a revised operating budget for the fourth quarter for the Mason Agency that Richard Howell will present to General Service Industries.
• When Awatramani recognized the link between budgeting and growth, he started to assess his budget more creatively.
• In the behavioral role, the management accountant is involved in assuring that employees are properly motivated to budget, control operations, and evaluate and reward performance.
• Try to identify specific actions you took to meet your projections, as well as what might have caused you to miss them.
• The question, therefore, was not whether to continue the activity, but rather how much the current level of funding should be increased.

Prepare the operating budgets for a manufacturing enter­prise. However, to be on the safe side and make themselves look good as the year progresses, operating manag­ers may further underestimate sales (or production) and overestimate costs. This “padding of the budget” increases the likelihood that the managers will be able to achieve the budget with less effort15. The second section lists nonoperational sources and uses of cash. The subtotal “Monthly Cash Flow” is used by IMAX management as a measure of the month’s cash profitability.

Step 3: Create a materials budget

• If operating personnel accept the budget as legitimate, they are likely to be better motivated to coordinate and control operations to achieve it.
• ABC Manufacturing Company is preparing its master budget for the next fiscal year.
• This allows enough time to gather relevant financial data, analyze historical trends, and make informed decisions about the budget’s revenue and expense forecasts.
• Closely tied to the sales budget, the production budget drills down a bit more into production, covering details such as the number of items you plan to produce or sell.
• Creating the smaller budgets using a standard budget format makes the creation of the master budget simpler and more accurate.

For manufacturing firms, it contains the sales, production, direct materials, direct labor, manufacturing overhead, and selling and administrative expense budgets. In merchandising firms, the budgets for manufacturing costs are replaced with budgets for merchandise purchases and pay­ments, as shown in Exhibit 17-2. The manufacturing overhead budget contains the expected cost of all indirect manufacturing elements necessary to meet the production budget. The manufacturing overhead budget summarizes the overhead costs of all the different responsibility centers. Like different direct materials, each responsibility center should have a separate overhead budget. Therefore, overhead cost equations are needed for each overhead resource, activity, service center, and production department.

How Budgets Work

• In conclusion, a master budget is a crucial tool businesses use to manage their finances effectively.
• This can occur when businesses base their revenue projections on unrealistic assumptions, such as assuming that sales will grow exponentially without considering market conditions or competitors.
• [CMA adapted] The Barker Corporation manufac­tures and distributes wooden baseball bats.
• Calculate the effect on the projected 19X4-X5 income if this proposed rate increase is implemented.
• In addition to the fiscal year, businesses should consider external factors that may impact their financial performance.
• Russon’s average markup on its products is 20% of the sales price.

To avoid this mistake, businesses should base their revenue projections on historical data, market research, and other relevant factors. One of the biggest challenges businesses face when preparing a master budget is a lack of accurate data. Creating accurate projections for sales, production, and other key areas can be challenging in that case. The first step in creating a master budget is establishing individual budgets for each department or area of the business. The business should create these budgets with input from the relevant stakeholders and reflect each area’s specific needs and goals. The labor and hiring budget contains employee salaries, benefits, and human resources expenditures.

Start with sales

The management accountant serves two responsibility accounting roles in the strategic planning and mas­ter budgeting process. The management accountant serves as a facilitator and coordinator in the master budget budgeting process. Especially in the absence of ICBISs, purchasing needs to know what production is planning. Production obviously needs to know what sales and marketing personnel are planning.

Then after that, we start developing operational and financial budgets. The operational budget includes revenue, variable costs, fixed costs, and non-cash expenses. Next in the financial budget, we develop a budgeted balance sheet, cash flow budget, and budgeted income statement. Next, we move to the preparation of a cash budget as well as a budget for expenditures unrelated to the services including overhead costs.

Translating Strategy into Targets and Budgets