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Handbook of Budgeting, 6th Edition

ISBN: 978-1-118-17061-8
1152 pages
December 2011
Handbook of Budgeting, 6th Edition (111817061X) cover image
No other management tool provides the operational direction that a well-planned budget can. Now in a new edition, this book provides updated coverage on issues such as budgeting for exempt organizations and nonprofits in light of the IRS' newly issued Form 990; what manufacturing CFOs' budgeting needs are; current technology solutions; and updated information on value-based budgets. Controllers, budget directors, and CFOs will benefit from this practical "how-to" book's coverage, from the initial planning process to forecasting to specific industry budgets.
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Foreword xv

Preface xvii

PART ONE: INTRODUCTION TO THE BUDGETING PROCESS

Chapter 1: Integrating The Balanced Scorecard for Improved Planning and Performance Management 3

Overview 3

Elements of a Balanced Scorecard 5

Use of Strategy Maps 11

Scorecard Cascading 12

Bringing It All Together 13

Integrating the Scorecard with Planning and Performance 14

Balanced Scorecard and Annual Planning 15

Continuous Strategic Management with the Scorecard 22

Summary 24

Chapter 2: Strategic Balanced Scorecard–Based Budgeting and Performance Management 25

Introduction: Why Most Companies Fail to Implement Their Strategies 25

Why a few Companies Produce Exceptional Results 26

Measure your Strategy with Balanced Scorecard 34

Balanced Scorecard-Based Budgets 37

Performance Management 38

Summary 39

Chapter 3: Budgeting and the Strategic Planning Process 41

Definition of Strategic Planning 41

Planning Cycle 42

Strategic Planning Process: A Dynamic Cycle 44

Situation Analysis 46

Business Direction/Concept 58

Alternative Approaches 61

Operational Plan 62

Measurement 66

Feedback 66

Contingency Planning 68

Problems in Implementing Formal Strategic Planning Systems 69

Summary 70

Chapter 4: Budgeting and Forecasting: Process Tweak or Process Overhaul? 71

Introduction 71

Survey Methodology 72

Findings: Budgeting Process 72

Findings: Forecasting Process 86

Report Summary 89

Developing a Road Map for Change 90

Chapter 5: The Budget: An Integral Element of Internal Control 93

Introduction 93

The Control Environment 94

Planning Systems 96

Reporting Systems 98

Summary 102

Chapter 6: Relationship Between Strategic Planning and the Budgeting Process 103

Introduction 103

How to Plan 103

The Audience for Whom the Plan Is Designed 104

Strategic Business Planning and Its Role in Budgeting 105

Planning Differences among Small, Medium, and Large Organizations 106

Components of Strategic Planning 107

Management and Organization 108

Market Analysis 110

Formulation of Marketing Strategies 111

Operations Analysis 112

Summary 114

Chapter 7: The Essentials of Business Valuation 115

Introduction 115

Understanding the Valuation Assignment 117

Research and Information Gathering 120

Adjusting and Analyzing the Financial Statements 123

Three Approaches to Valuing a Business 125

Income Approach 125

Market Approach 132

Asset Approach 135

Making Adjustments to Value 136

Reaching the Valuation Conclusion 141

Chapter 8: Moving Beyond Budgeting: Integrating Continuous Planning and Adaptive Control 145

Introduction 145

Annual Budgeting Trap 146

Why Some Organizations Are Going Beyond Budgeting 147

Beyond Budgeting: Enabling a More Adaptive Performance Management Process 148

Climbing the Twin Peaks of Beyond Budgeting 152

Beyond Budgeting: Enabling Radical Decentralization 153

Chapter 9: Moving Beyond Budgeting: An Update 161

Introduction 161

Beyond Budgeting Round Table (BBRT) 162

Guardian Industries Corporation 163

PART TWO: TOOLS AND TECHNIQUES

Chapter 10: Implementing Forecasting Best Practices 169

Introduction 169

Budgeting versus Forecasting 170

Implementing Forecasting Best Practices 170

Forecasting Best Practices: Process 171

Forecasting Best Practices: Organization 174

Forecasting Best Practices: Technology 176

Conclusion 178

Chapter 11: Calculations and Modeling in Budgeting Software 181

Introduction 181

Why Companies Use Budgeting Software 181

Calculations in Accounting Systems and Spreadsheets 183

Budgeting Software 184

OLAP Databases 186

Modeling and Budgeting 188

Processes 189

More Complex Budgeting Calculations 190

Conclusion 192

Chapter 12: Cost-Accounting Systems: Integration with Manufacturing Budgeting 193

Introduction 193

Decision Factors in the Selection Process 194

Cost-Accounting System Options 195

Costs Associated with a Product 195

Labor Cost 196

Variable Costing and Budgeting 197

Full Costing and Budgeting 217

Cost-Accumulation Procedures 219

Valuation: Actual versus Standard 221

Actual Costing 223

Actual Costing, Budgeting, and Cost Control 226

Standard Costing 226

Variance Reporting 231

Variances and Budgeting 236

Manufacturing Overhead 236

Manufacturing Overhead, Budgeting, and Cost Control 247

Chapter 13: Break-Even and Contribution Analysis as a Tool in Budgeting 249

Introduction 249

Break-Even Analysis 249

Price/Volume Chart 254

Contribution Analysis 255

Cost–Volume–Price and the Budgeting Process 261

Chapter 14: Profitability and the Cost of Capital 263

Introduction 263

A Market Gauge for Performance 265

Coping with the Cost of Equity 266

Building Company-Wide Profit Goals 268

Building Divisional Profit Goals 270

Information Problems and Cost of Capital 276

Summary 276

Chapter 15: Budgeting Shareholder Value 279

Introduction 279

Long-Term Valuation 281

Economic Value Added 285

Complementary Measures of Valuation 290

Budgeting Shareholder Value 293

Summary 296

Chapter 16: Applying the Budget System 297

Introduction 297

Initial Budget Department Review of Divisional Budget Packages 299

Divisional Review Meetings 302

Budget Consolidation and Analysis 303

Preliminary Senior Management Review 303

Final Revision of Operating Group Plans 304

Second Budget Staff Review of Operating Group Plans 304

Revised Consolidated Budget Preparations 305

Final Senior Management Budget Review Sessions 305

Operating Groups’ Monthly Submissions 306

Effective Use of Graphics 306

Summary 306

Chapter 17: Budgets and Performance Compensation 307

Introduction 307

Measures of Executive Performance 308

Structuring Reward Opportunities 316

Pitfalls of Linking Incentives to Budgets 317

An Optimal Approach 320

Adjusting Operating Unit Targets 324

Budgets and Long-Term Incentive Plans 326

Summary 328

Chapter 18: Predictive Costing, Predictive Accounting 329

Internet Forces the Need for Better Cost Forecasting 329

Traditional Budgeting: An Unreliable Compass 330

Activity-Based Costing as a Foundation for Activity-Based Planning and Budgeting 331

Budgeting: User Discontent and Rebellion 331

Weary Annual Budget Parade 333

ABC/M as a Solution for Activity-Based Planning and Budgeting 334

Activity-Based Cost Estimating 335

Activity-Based Planning and Budgeting Solution 336

Early Views of Activity-Based Planning and Budgeting Were Too Simplistic 337

Important Role of Resource Capacity Causes New Thinking 337

Major Clue: Capacity Exists Only as a Resource 339

Measuring and Using Cost Data 340

Usefulness of Historical Financial Data 341

Where Does Activity-Based Planning and Budgeting Fit In? 344

Activity-Based Planning and Budgeting Solution 345

Risk Conditions for Forecasting Expenses and Calculated Costs 350

Framework to Compare and Contrast Expense-Estimating Methods 352

Economics 101? 355

Chapter 19: Cost Behavior and the Relationship to the Budgeting Process 357

Introduction 357

Cost Behavior 357

Break-Even Analysis 360

Additional Cost Concepts 365

Differential Cost Concepts 368

Maximizing Resources 370

Estimating Costs 373

Summary 375

PART THREE: PREPARATION OF SPECIFIC BUDGETS

Chapter 20: Sales and Marketing Budget 379

Introduction 379

Overview of the Budget Process 379

Special Budgeting Problems 384

Pertinent Tools 389

Unique Aspects of Some Industries 392

Summary 394

Chapter 21: Manufacturing Budget 395

IIntroduction 395

Concepts 400

Changing to a Cost-Management System 402

Problems in Preparing the Manufacturing Budget 407

Three Solutions 410

Technique 410

Determining Production Requirements 411

Step 1: Developing the Plannable Core 413

Step 2: Obtaining Sales History and Forecast 413

Step 3: Scheduling New and Revised Product Appearance 415

Step 4: Determining Required Inventory Levels 416

Step 5: Establishing Real Demonstrated Shop Capacity 418

Step 6: Publishing the Master Schedule 424

A Total Quality Program—The Other Alternative 425

Inventory and Replenishment 431

More on the Manufacturing Budget 434

Determining Raw-Material Requirements 434

Determining Other Indirect-Material Costs 436

Determining Direct-Labor Costs 437

Establishing the Manufacturing Overhead Functions and Services 440

Quality Control Economics Review Questions 447

Plant Engineering Buildings and Equipment Maintenance

Review Questions 449

Floor and Work-in-Process Control Review Questions 450

Summary 451

Chapter 22: Research and Development Budget 455

Relationship of Research and Development and Engineering to the Total Budgeting Process 455

Problems in Establishing Research and Development and Engineering Objectives 459

Developing a Technological Budget 465

Preparing a Departmental Budget 481

Managing a Budget 484

Coordinating Project Budgets 490

Chapter 23: Administrative-Expense Budget 493

Introduction 493

Role and Scope of the Administrative-Expense Budget 493

Methods Used for Preparing the Administrative-Expense Budget 498

Factors that Impact the Administrative-Expense Budget 502

Unique Issues Impacting the Administrative-Expense Budget 503

Tools and Techniques for Managing the Administrative-Expense Budget 504

Summary 506

Chapter 24: Budgeting the Purchasing Department and the Purchasing Process 507

Description and Definition of the Process Approach 507

Role of Process Measures 512

Process Measures 513

Creating the Procurement Process Budget 517

Chapter 25: Capital Investment Review: Toward a New Process 519

Introduction 519

Context of the Revised Capital-Investment Review Process 520

Benchmarking Capital-Investment Review Best Practices 523

Revised Capital-Investment Review Process: Overview 527

Implementation: What Bonneville Learned in the First Three Years 541

Summary 544

Chapter 26: Leasing 545

Introduction 545

Overview of the Leasing Process 546

Possible Advantages of Leasing 549

Possible Disadvantages of Leasing 550

Types of Lease Sources 550

Lease Reporting 552

Lease versus Purchase Analysis 560

Financial Accounting Standards Board Rule 13 Case Illustration 564

Negotiation of Leases 565

Selecting a Lessor 566

Lease-Analysis Techniques 566

Lease Form 572

Summary 579

Chapter 27: Balance-Sheet Budget 581

Introduction 581

Purpose of the Balance-Sheet Budget 582

Definition 582

Responsibility for the Budget 583

Types of Financial Budgets 587

Preparing Financial Budgets 588

Preparing the Balance-Sheet Budget 591

Adequate Cash 620

Financial Ratios 620

Analyzing Changes in the Balance Sheet 628

Chapter 28: Budgeting Property and Liability Insurance Requirements 635

Introduction 635

Role Risk Management Plays in the Budgeting Process 637

Types of Insurance Mechanisms 638

Role of Insurance/Risk Consultants 639

Use of Agents/Brokers 639

Self-Insurance Alternatives 640

Identifying the Need for Insurance 643

Key Insurance Coverages 645

Identifying Your Own Risks 650

How to Budget for Casualty Premiums 653

Summary 656

PART FOUR: BUDGETING APPLICATIONS

Chapter 29: Budgeting: Key to Corporate Performance Management 659

Future of Budgeting 659

Adding Value to the Organization 660

Corporate Performance Management 661

Developing a Budget Process Focused on Implementation of Strategy 662

Role of Technology 666

Overcoming Organizational Resistance 669

Planning and Controlling Implementation of a New System 670

Conclusion 675

Chapter 30: Zero-Based Budgeting 677

Introduction 677

Problems with Traditional Techniques 678

Zero-Based Approach 679

Zero-Based Budgeting Procedures 680

Decision Package 681

Ranking Process 687

Completing the Profit and Loss 689

Preparing Detailed Budgets 692

Summary 695

Chapter 31: Bracket Budgeting 697

Introduction 697

Application of Bracket Budgeting 698

Premises to Profi ts? 699

Developing a Tactical Budgeting Model 700

Bracket Budgeting in Annual Planning 719

Consolidating Income Statements 720

Summary of Benefits 720

Summary 722

Chapter 32: Program Budgeting: Planning, Programming, Budgeting 723

Introduction 723

Description of Program Budgeting 724

History 728

Framework of Program Budgeting 734

Program Structuring 747

Types of Analysis 751

Installation Considerations 759

Summary 763

Chapter 33: Activity-Based Budgeting 767

Introduction 767

Traditional Budgeting Does Not Support Excellence 768

Activity-Based Budgeting Defi nitions 771

Activity-Based Budgeting Process 774

Linking Strategy and Budgeting 775

Translate Strategy to Activities 780

Determine Workload 781

Create Planning Guidelines 783

Identify Interdepartmental Projects 783

Improvement Process 787

Finalizing the Budget 787

Performance Reporting 788

Summary 790

PART FIVE: INDUSTRY BUDGETS

Chapter 34: Budgeting For Corporate Taxes 793

Introduction 793

Taxation of C Corporations 794

Personal Holding Company Tax 799

Net Operating Loss Utilization 799

Charitable Contributions 800

Taxation Budget 802

Federal Corporate Tax 803

Purposes 804

Tax Return 804

Chapter 35: Budgeting in the Global Internet Communication Technology Industry 805

Overview 805

Essentials from Earlier Chapters 806

Freemium Strategies 808

Volunteer Services 809

Enterprise Risk Management 811

About the Editor 813

About the Contributors 815

Index 825

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