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Budgeting Basics and Beyond THIRD EDITION Jae K. Shim Joel G. Siegel John Wiley & Sons, Inc. ffirs.indd iii 9/9/08 10:10:11 AM ffirs.indd ii 9/9/08 10:10:11 AM Budgeting Basics and Beyond THIRD EDITION ffirs.indd i 9/9/08 10:10:10 AM ffirs.indd ii 9/9/08 10:10:11 AM Budgeting Basics and Beyond THIRD EDITION Jae K. Shim Joel G. Siegel John Wiley & Sons, Inc. ffirs.indd iii 9/9/08 10:10:11 AM This book is printed on acid-free paper. Copyright © 2009 by John Wiley & Sons, Inc.. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at http://www.wiley.com. Library of Congress Cataloging-in-Publication Data: Shim, Jae K. Budgeting basics and beyond/Jae K. Shim, Joel G. Siegel.—3rd ed. p. cm. Includes index. ISBN 978-0-470-38968-3 (pbk.) 1. Budget in business. I. Siegel, Joel G. II. Title. HG4028.B8S558 2009 658.15'4—dc22 2008025013 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd iv 9/9/08 10:10:11 AM Contents About the Authors Preface vii ix 1 The What and Why of Budgeting: An Introduction 1 2 Strategic Planning and Budgeting: Process, Preparation and Control 21 3 Administering the Budget: Reports, Analyses, and Evaluations 35 4 Break-even and Contribution Margin Analysis: Profit, Cost, and Volume Changes 45 5 Profit Planning: Targeting and Reaching Achievable Goals 61 6 Master Budget: Genesis of Financial Forecasting and Profit Planning 75 7 Cost Behavior: Emphasis on Flexible Budgets 95 8 Evaluating Performance: The Use of Variance Analysis 105 9 Manufacturing Costs: Sales Forecasts and Realistic Budgets 155 10 Marketing: Budgeting for Sales, Advertising, and Distribution 167 11 Research and Development: Budgets for a Long-term Plan 185 12 General and Administrative Costs: Budgets for Maximum Productivity 197 13 Capital Expenditures: Assets to Be Bought, Sold, and Discarded 201 v ftoc.indd v 9/9/08 10:10:42 AM vi ftoc.indd vi / Contents 14 Forecasting and Planning: Reducing Risk in Decision Making 225 15 Moving Averages and Smoothing Techniques: Quantitative Forecasting 233 16 Regression Analysis: Popular Sales Forecast System 243 17 Cash Budgeting and Forecasting Cash Flow: Two Pragmatic Methods 253 18 Financial Modeling: Tools for Budgeting and Profit Planning 265 19 Software Packages: Computer-based Models and Spreadsheet Software 277 20 Capital Budgeting: Selecting the Optimum Long-term Investment 289 21 Zero-base Budgeting: Priority Budgeting for Best Resource Allocation 321 22 Managers’ Performance and Balanced Scorecard: Evaluation on the Division Level 329 23 Budgeting for Service Organizations: Special Features 359 24 Budgeting for Nonprofit Organizations: Diverse Types 367 25 Using Management Games for Executive Training 387 Appendix I Present and Future Value Tables 405 Appendix II Statistical Table 411 Glossary of Budgeting and Planning Terms 413 Index 427 9/9/08 10:10:43 AM About the Authors J AE 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 M.B.A. and Ph.D. degrees from the University of California at Berkeley (Haas School of Business). Dr. Shim has been a consultant to commercial and nonprofit organizations for over 30 years. Dr. Shim has over 50 college and professional books to his credit, including, Managerial Accounting, Barron’s Accounting Handbook, Barron’s Dictionary of Accounting Terms, 2009 GAAP, Encyclopedic Dictionary of Accounting and Finance, 2008–2009 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 Vest-Pocket MBA. Twenty-six 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 Thompson-Southwestern, John Wiley, McGraw-Hill, Barron’s, Commercial Clearing House (CCH), PrenticeHall, 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, Ph.D., 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, vii fbetw.indd vii 9/9/08 7:29:39 PM viii / About the Authors Harper Collins, John Wiley & Sons, Inc., 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, The Financial Analysts Journal, The 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. fbetw.indd viii 9/9/08 7:29:40 PM