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A convenient and up-to-date reference tool for today's financialand nonfinancial managers in public practice and privateindustry If the very thought of budgets pushes your sanity over thelimit, then this practical, easy-to-use guide is just what youneed. Budgeting Basics and Beyond, Fourth Edition equips youwith an all-in-one resource guaranteed to make the budgetingprocess easier, less stressful, and more effective. The new editioncovers rolling budgets (forecasts), activity-based budgeting,life-cycle budgeting. Cloud computing, Balanced Scorecard,budgeting for nonprofit organizations, business simulations forexecutive and management training, and much more! * Includes several new software packages, computer-based modelsand spreadsheet applications, including Value Chain Managementsoftware, Financial Planning and Performance software, Web 2.0,Cloud computing, and capital budgeting software * Features case studies, illustrations, exhibits, forms,checklists, graphs, samples, and worked-out solutions to a widevariety of budgeting, planning, and control problems * Offers financial planning and new types of financial modeling,variance analysis, Web-based budgeting, active budgetingilluminating "what-if" analyses throughout, spreadsheetapplications, break-even analysis, project analysis, and capitalbudgeting Budgeting Basics and Beyond, Fourth Edition is apractical, easy-to-use problem-solver and up-to-date reference toolfor today's financial and nonfinancial managers in public practiceand private industry.
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Contents
Cover
Series Page
Title Page
Copyright
Dedication
About the Authors
Preface
Chapter 1: The What and Why of Budgeting: An Introduction
Planning
Types of Budgets
Budgetary Process
Budget Coordination
Departmental Budgeting
Actual Costs versus Budget Costs
Budget Revision
Budget Weaknesses
Budgetary Control and Audit
Computer Applications
Motivation
Advantages and Disadvantages of Budgets
Budgetary Slack: Padding the Budget
Summary
Chapter 2: Strategic Planning and Budgeting: Process, Preparation, and Control
Budgeting
Strategic Planning
Short-Term Plans
Long-Term Plans
Choosing a Budget Period
Administering the Plan
Profit Plan
Operational Plan
Development Plan
Contingency Planning
Budget Process
Departmental Budgets
Budget Accuracy
Reports
Budget Revision
Performance Measures
Control and Analysis
Summary
Chapter 3: Administering the Budget: Reports, Analyses, and Evaluations
Types of Reports
Budget Manual
Budget Sheet
Performance Reports
Budget Audit
The Budget Committee
Budget Calendar
Chapter 4: Break-Even and Contribution Margin Analysis: Profit, Cost, and Volume Changes
Questions Answered by Break-Even and Contribution Margin Analysis
Applications of the CVP Model
Contribution Margin Income Statement
Impact of Income Taxes
Some Applications of Contribution Margin Analysis and What-If Analysis
Sales Mix Analysis
CVP Analysis with Step-Function Costs
Importance of Identifying Variable and Fixed Costs—CVP-Based Strategies
Summary
Chapter 5: Profit Planning: Targeting and Reaching Achievable Goals
Goal Congruence
Profit Targets
Objectives in the Profit Plan
Role of Nonfinancial Managers
Assumptions
Alternatives
Responsibility
Participation
Subordinates
Coordination
Scheduling
Problems
Control, Evaluation, and Analysis
Internal Controls
Real-Life Illustrations in Profit Planning
Summary
Chapter 6: Master Budget: Genesis of Financial Forecasting and Profit Planning
Comprehensive Sales Planning
Sales Budget
Monthly Cash Collections from Customers
Production Budget
Inventory Purchases, Merchandising Firm
Direct Material Budget
Direct Labor Budget
Factory Overhead Budget
Ending Finished Goods Inventory Budget
The Cost of Goods Sold Budget
Selling and Administrative Expense Budget
Cash Budget
Budgeted Income Statement
Budgeted Balance Sheet
Some Financial Calculations
Using an Electronic Spreadsheet to Develop a Budget Plan
Financial Forecasting: The Percent-of-Sales Method
Summary
Chapter 7: Cost Behavior: Emphasis on Flexible Budgets
A Look at Costs by Behavior
Analysis of Mixed (Semivariable) Costs
High-Low Method
Regression Analysis
Fixed Budgets versus Flexible Budgets and Performance Reports
Summary
Chapter 8: Evaluating Performance: The Use of Variance Analysis
Usefulness of Variance Analysis
Standard Setting
Planning Variance
Sales Variances
Cost Variances
Material Variances
Labor Variances
Overhead Variances
Interrelationship of Variances
Mix and Yield Variances for Material and Labor
Profit Variance Analysis
Nonmanufacturing Activities
Illustrative Variance Analysis Report for a Service Business
Variances to Evaluate Marketing Effort
Illustrative Marketing Performance Report
Variances in Administrative Expenses
Capital Expenditures
Variance Analysis Reports
Summary
Chapter 9: Manufacturing Costs: Sales Forecasts and Realistic Budgets
Illustration
Planning and Control of Material Purchases and Usage
Materials Budgets
Materials Purchase Budget Illustrated
Planning and Control of Direct Labor
Planning and Control of Factory Overhead
Summary
Chapter 10: Marketing: Budgeting for Sales, Advertising, and Distribution
Marketing Budgets
Selling Expenses
Advertising and Sales Promotion
Distribution Costs
Analysis and Evaluation of Distribution Costs
Control over Distribution Costs
Packaging
Travel and Entertainment
Budget Meetings
Summary
Chapter 11: Research and Development: Budgets for a Long-Term Plan
R&D Costs
R&D Planning
Funding Level
R&D Budget
Coordination
Analysis and Evaluation
Control over R&D
R&D Risk
Summary
Chapter 12: General and Administrative Costs: Budgets for Maximum Productivity
Budget Process
Analysis and Evaluation
Cost Control
Employees
Summary
Chapter 13: Capital Expenditures: Assets to Be Bought, Sold, and Discarded
Budget Process
Authorization of Capital Budget
Capital Budget Forms
Capital Budget
Capital Expenditure Reports
Budget Revisions
Special Projects
Analysis of Capital Projects
Control over Capital Expenditures
Summary
Chapter 14: Forecasting and Planning: Reducing Risk in Decision Making
Who Uses Forecasts?
Forecasting Methods
Selection of Forecasting Method
Qualitative Approach
Common Features and Assumptions Inherent in Forecasting
Steps in the Forecasting Process
Summary
Chapter 15: Moving Averages and Smoothing Techniques: Quantitative Forecasting
Naive Models
Smoothing Techniques
Summary
Chapter 16: Regression Analysis: Popular Sales Forecast System
Least-Squares Method
A Word of Caution
Regression Statistics
Using Regression on Excel
Summary
Chapter 17: Cash Budgeting and Forecasting Cash Flow: Two Pragmatic Methods
Account Analysis
Cash Budget
Cash Variance Analysis
Cash Flow Software
A Caveat—Perils of Spreadsheets
Summary
Chapter 18: Financial Modeling: Tools for Budgeting and Profit Planning
A Financial Model
Budgeting and Financial Modeling
Use of Financial Modeling in Practice
Developing Financial Models
Summary
Chapter 19: Using Software Packages and E-Budgeting: Computer-Based Models, Spreadsheets, and Web-Based Systems
Use of a Spreadsheet Program for Financial Modeling and Budgeting
Budgeting Software Packages
Latest Generation of Budgeting and Planning Software and E-Budgeting
Summary
Chapter 20: Capital Budgeting: Selecting the Optimum Long-Term Investment and Real Options
Accounting (Simple) Rate of Return
Payback Period
Payback Reciprocal
Discounted Payback Period
Net Present Value
Profitability Index
Internal Rate of Return (Time-Adjusted Rate of Return)
Nondiscretionary Projects
Comparison of Methods
Capital Budgeting Process
Real Options
Discovery-Driven Planning
Capital Budgeting and Inflation
Postaudit Project Review
Capital Budgeting and Nonprofit Organizations
Risk and Uncertainty
Summary
Chapter 21: Budgeting for Cost Management: Activity-Based Budgeting and Life-Cycle Budgeting
Activity-Based Budgeting
Activity-Based Management
Life-Cycle Budgeting
Kaizen Budgeting
Summary
Chapter 22: Zero-Base Budgeting: Priority Budgeting for Best Resource Allocation
Zero-Base Budgeting Process
Zero-Base Budgeting Effects
Activity Units
Decision Packages
Ranking Proposals
Project (Program) Budgets
Summary
Chapter 23: Managers' Performance and Balanced Scorecard: Evaluation at the Division Level
Appraising Manager Performance
Responsibility Center
Revenue Center
Cost Center
Profit Center
Investment Center
The Balanced Scorecard
Applying the Balanced Scorecard to a School District
Budgeting and the Balanced Scorecard: An Oxiteno Case Study 1
Summary
Chapter 24: Budgeting for Service Organizations: Special Features
Airlines
Hotels
Summary
Chapter 25: Budgeting for Nonprofit Organizations: Diverse Types
Planning
Funds
Recordkeeping and Reporting
Government Budgets and Accounting Bases
Budget Development
Budgeting Revenue
Budgeting Expenditures
Encumbrances
Budgetary Control
Effectiveness and Control Measures
Organizational Structure
Functional or Program Reporting
Budget Adaptability
Budget Participants
Budgeting Aspects for Specific Nonprofits
Summary
Chapter 26: Using Management Games for Executive Training
The Capstone Business Simulation 1
Appendix I: Future and Present Value Tables
Appendix II: Statistical Table
Glossary of Budgeting and Planning Terms
Index
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The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management.
Copyright © 2012 by Jae K. Shim, Joel G. Siegel, Allison I. Shim. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Shim, Jae K.
Budgeting basics and beyond/Jae K. Shim, Joel G. Siegel, Allison I. Shim. — 4th ed.
p. cm. — (Wiley Corporate F&A series)
Includes index.
ISBN 978-1-118-09627-7 (hardback); ISBN 978-1-118-12796-4 (ebk);
ISBN 978-1-118-12797-1 (ebk); ISBN 978-1-118-12798-8
1. Budget in business. I. Siegel, Joel G. II. Shim, Allison I., 1984–III. Title.
HG4028.B8S558 2011
658.15′4—dc22
2011015866
To Chung Shim, dedicated wife and mother; Roberta M. Siegel, loving wife and colleague; and Sylvia and Arnold Siegel, loving mother and brother
About the Authors
Jae K. Shim is a professor of accounting and finance at California State University, Long Beach and CEO of Delta Consulting Company, a financial consulting and training firm. Dr. Shim received his MBA and PhD degrees from the University of California at Berkeley (Haas School of Business). Dr. Shim has been a consultant to commercial and nonprofit organizations for more than 30 years.
Dr. Shim has more than 50 college and professional books to his credit, including Managerial Accounting, Barron's Accounting Handbook, Barron's Dictionary of Accounting Terms, 2012 GAAP, Encyclopedic Dictionary of Accounting and Finance, 2011–2012 Corporate Controller's Handbook of Financial Management, U.S. Master Finance Guide, Dictionary of Personal Finance, Investment Sourcebook, Dictionary of Real Estate, Dictionary of International Investment Terms, Dictionary of Business Terms, The Vest-Pocket CPA, The Vest-Pocket CFO, and the best-selling The Vest-Pocket MBA.
Thirty of his publications have been translated into foreign languages such as Chinese, Spanish, Russian, Polish, Croatian, Italian, Japanese, and Korean. Professor Shim's books have been published by Thomson-Reuters, John Wiley & Sons, McGraw-Hill, Barron's, CCH, Prentice-Hall, American Management Association (AMACOM), and the American Institute of CPAs (AICPA).
Dr. Shim has been frequently quoted by such media as the Los Angeles Times, Orange County Register, Business Start-Ups, Personal Finance, and Money Radio. Dr. Shim has also published numerous articles in professional and academic journals. He was the recipient of the Financial Management Association International's 1982 Credit Research Foundation Award for his article on cash flow forecasting and financial modeling.
Joel G. Siegel, PhD, CPA, is a financial consultant and professor of accounting and finance at Queens College of the City University of New York.
He was previously employed by Coopers and Lybrand, CPAs, and Arthur Andersen, CPAs. Dr. Siegel has acted as a consultant to many organizations, including Citicorp, International Telephone and Telegraph, United Technologies, American Institute of CPAs, and Person-Wolinsky Associates.
Dr. Siegel is the author of 67 books and about 300 articles on accounting and financial topics. His books have been published by Prentice Hall, McGraw-Hill, HarperCollins, John Wiley & Sons, Macmillan, International Publishing, Barron's, Southwestern, Aspen, Richard Irwin, Probus, American Management Association, and the American Institute of CPAs.
Dr. Siegel's articles have been published in many accounting and financial journals, including Financial Executive, Financial Analysts Journal, CPA Journal, Practical Accountant, and the National Public Accountant.
In 1972, he was the recipient of the Outstanding Educator of America Award. Dr. Siegel is listed in Who's Where among Writers and Who's Who in the World. His international reputation led to his appointment in 1992 as chairperson of the National Oversight Board.
Allison I. Shim is CFO of Delta Consulting Company. She is a finance expert and a PhD candidate at the University of California, Irvine.
Preface
Better budgets can boost your department and your career to higher levels of performance and success. Savvy executives use the budgeting process to take stock of their direction, refine their goals, and share their mission with their staff. Their budgeting reveals their position in the market, places untapped resources at their command, and motivates all employees to greater levels of productivity. They use their budgets to propel them toward the top of their industry. This book will show you how to get there.
Budgeting Basics and Beyond shows you how the budget can be your most powerful tool for strategy and communications. It points out that the budget brings into stark relief all of the factors that every manager must consider, such as industry conditions, competition, degree of risk, stability of operations, capacity limitations, pricing policies, turnover rates in assets, production conditions, product line and service considerations, inventory balances and condition, trends in the marketplace, number of employees and their technical abilities, availability and cost of raw materials, available physical resources, technological considerations, economy, and political aspects. Then it uncovers the role each of those factors plays in achieving your corporate goals. And since those goals cannot be achieved single-handedly, this book suggests ways to use the budget to help employees appreciate how they will contribute to the division's profitability. Aside from playing a vital role in creating and achieving a sound business strategy, this book shows how budgets can increase your effectiveness every day of the week. In particular, it delivers these on-the-job budgeting tools:
Techniques for preparing more accurate, realistic, and reliable estimates
Control and variance analysis devices that signal revenue, cost, and operations thresholds
Pricing guidelines for products and services
Planning and scheduling production and related costs
Profit planning and identifying looming problems
Financial models that show the relationship among all facets of the business
Spreadsheet applications for planning, budgeting, and control purposes
Sales and financial forecasting methodology
Balanced scorecard and performance metrics
We follow the example of each of these tools with examples of how you can use them to make a difference in your work right away. And we use step-by-step guidelines to pinpoint what to look for, what to do, how to do it, and how to apply it on the job. Through step-by-step illustration, we show how you can put these tools to use.
While research shows that two-thirds of U.S. companies still rely on Microsoft Excel for their budgeting process, some companies are evolving to a more technologically advanced approach. As more and more companies operate globally, the Internet is playing an ever-greater role in the budgeting process. E-budgeting is an increasingly popular Internet- or intranet-based cloud-computing budgeting tool that can help streamline and speed up an organization's budgeting process. In addition, an increasing number of companies are turning to budgeting as a way to reduce costs for competitive advantage in a global environment.
In response to recent developments in budgeting, the fourth edition of the book features the following:
Updated and additional hands-on examples throughout the book.
Additional spreadsheet examples for budgeting, such as rolling budgets and probabilistic budgets.
In depth e-budgeting and Web-based budgeting systems discussions.
A new chapter, “Budgeting for Cost Management: Activity-Based Budgeting and Life-Cycle Budgeting.”
Budgeting in Action boxes in key chapters, offering a glimpse into how real companies use the budgeting tools and concepts discussed within the chapter.
A companion web site. Please visit www.wiley.com/go/budgetingbasics4e to download supplementary materials to use alongside this book.
We hope that you will keep Budgeting Basics and Beyond handy for easy, quick reference and daily use.
Chapter 1
The What and Why of Budgeting
An Introduction
A budget is defined as the formal expression of plans, goals, and objectives of management that covers all aspects of operations for a designated time period. The budget is a tool providing targets and direction. Budgets provide control over the immediate environment, help to master the financial aspects of the job and department, and solve problems before they occur. Budgets focus on the importance of evaluating alternative actions before decisions actually are implemented.
A budget is a financial plan to control future operations and results. It is expressed in numbers, such as dollars, units, pounds, and hours. It is needed to operate effectively and efficiently. Budgeting, when used effectively, is a technique resulting in systematic, productive management. Budgeting facilitates control and communication and also provides motivation to employees.
Budgeting allocates funds to achieve desired outcomes. A budget may span any period of time. It may be short-term (one year or less, which is usually the case), intermediate (two to three years), or long-term (three years or more). Short-term budgets provide greater detail and specifics. Intermediate budgets examine the projects the company currently is undertaking and start the programs necessary to achieve long-term objectives. Long-term plans are very broad and may be translated into short-term plans. The budget period varies according to its objectives, use, and the dependability of the data used to prepare it. The budget period is contingent on business risk, sales and operating stability, production methods, and length of the processing cycle.
There is a definite relationship between long-range planning and short-term business plans. The ability to meet near-term budget goals will move the business in the direction of accomplishing long-term objectives. Budgeting is done for the company as a whole, as well as for its component segments, including divisions, departments, products, projects, services, and geographic areas. Budgets aid decision making, measurement, and coordination of the efforts of the various groups within the entity. Budgets highlight the interaction of each business segment with the whole organization. For example, budgets are prepared for units within a department, such as product lines; for the department itself; for the division, which consists of a number of departments; and for the company.
Master (comprehensive) budgeting is a complete expression of the planning operations of the company for a specific period. It is involved with both manufacturing and nonmanufacturing activities. Budgets should set priorities within the organization. They may be in the form of a plan, project, or strategy. Budgets consider external factors, such as market trends and economic conditions. The budget should list assumptions, targeted objectives, and agenda before number crunching begins.
The first step in creating a budget is to determine the overall goals and strategies of the business, which are then translated into specific long-term goals, annual budgets, and operating plans. Corporate goals include earnings growth, cost minimization, sales, production volume, return on investment, and product or service quality. The budget requires the analysis and study of historical information, current trends, and industry norms. Budgets may be prepared of expected revenue, costs, profits, cash flow, production purchases, net worth, and so on. Budgets should be prepared for all major areas of the business.
The techniques and details of preparing, reviewing, and approving budgets vary among companies. The process should be tailored to each entity's individual needs. Five important areas in budgeting are planning, coordinating, directing, analyzing, and controlling. The longer the budgeting period, the less reliable the estimates.
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Lesen Sie weiter in der vollständigen Ausgabe!
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Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!
Lesen Sie weiter in der vollständigen Ausgabe!