4 Flashcards
What is a master budget
A master budget is a comprehensive plan summarizing management’s operating and financial plans for a specific period, typically one year.
what are the benefits of a master budget to an organization?
Compels systematic planning and strategy implementation.
Provides benchmarks for performance evaluation.
Enhances coordination and communication across departments.
Aligns organizational activities with strategic goals.
What are the major components of the master budget? (operating and financial budget)
- Operating Budget:
Revenue Budget: Projects sales and revenues.
Production Budget: Determines units to produce.
Direct Materials, Direct Labor, and Overhead Budgets: Detail resource requirements.
Non-Manufacturing Costs Budget: Includes selling and administrative expenses.
Budgeted Profit and Loss (P&L) Statement: Summarizes expected profits. - Financial Budget:
Capital Budget: Plans for fixed asset investments.
Cash Budget: Tracks cash inflows and outflows.
Budgeted Balance Sheet and Cash Flow Statement: Forecast financial position and liquidity.
How is a budgeted profit statement prepared?
Step 1: Calculate budgeted revenues from the revenue budget.
Step 2: Compute the cost of goods sold (COGS) using production costs and inventory adjustments.
Step 3: Subtract operating expenses (fixed and variable) from gross profit to determine operating profit.
What are the uses of computer-based financial planning models?
These models simulate financial scenarios and interdependencies between operations and finance. They reduce computational burdens, provide sensitivity analysis (“what-if” scenarios), and enhance decision-making by showing the impact of changes in key variables (e.g., pricing, costs).
What is Kaizen budgeting, and why is it important for cost management?
Kaizen budgeting incorporates continuous improvement into the budgeting process. It systematically reduces resource use or costs over time.
Importance:
Promotes efficiency by setting cost reduction targets.
Aligns with lean management principles.
Example: Labor hours per unit may decrease from 3.00 hours in January to 2.85 hours by December.
What are responsibility centers, and what types exist?
Responsibility centers are organizational units where managers are accountable for specific financial results.
Types:
Cost Centers: Focus on controlling costs.
Revenue Centers: Focus on generating revenue.
Profit Centers: Responsible for profits (revenues - expenses).
Investment Centers: Responsible for profit and the efficient use of assets.
What is responsibility accounting?
Responsibility accounting evaluates managers based on financial outcomes they can control. It focuses on accountability and excludes uncontrollable costs in performance evaluations.
What is controllability, and how does it relate to responsibility accounting?
Controllability refers to the degree of influence a manager has over costs or revenues. Responsibility accounting emphasizes decision-useful information, excluding uncontrollable costs to ensure fair performance evaluation. However, determining what is controllable can be challenging.
