Accounting 7 budgetting

Question 1

What is a budget and what is it used for?

Answer 1

A budget is a detailed plan for acquisition and use of financial and other resources over a specified time period

= Budget is based on estimation. This is how we want to budget the money.

Used for:
- Planning and control to achieve the goals.

Purpose:
The reason we do costing in most cases is also because you want to know what to budget for the next period. You want to know how to control the expenditure for the next period. Is the product worth producing or not?

Help with:
- What are the goals next year?
- What are the expends?
- Set benchmark for the organizational goals - helps us to set the goals. We always have to stick to the budget! So in case more money comes in, the we cannot change the goals that year. The costing comes in there - labor etc. we budget.
- Allocate ressources
- Uncover the bottleneck before the occur - the blame game? Ex: if the department want more budget to perform more. But then we need to take it from another department. It is a balance.

Question 2

What types of budgets are there and what are their functions?

Answer 2

Operating budget: divided in to quaters
Rolling budget: Rolling budget are 12 month that rolls one month forward.
The purpose of this is in theory that things change, so rather than waiting at the end at the month, you can make the change quickly
Strategic budget: Long range budget - helps develop a plan that supports a long-range vision for future position - 5-6 year budget
Master budget: A master budget is a comprehensive financial plan that consolidates all the individual budgets of a company into one overarching framework. The master budget provides an overall view of the company’s financial goals and is typically prepared for a full fiscal year. It helps coordinate and align all parts of the organization towards achieving the same objectives

Question 2

What entails in a master budget? And what is it used for?

Answer 2

Sales budget: information about the sales - such as selling price and units expected sold

Production budget: the projection for the production - such as total production for the year.

Direct material bugdet: Raw material needed to meet production.

Ending stock budget: The desired ending inventory.

Direct labor budget: Estimated labor - and cost of it.

MOH budget: The manufactoring bugdet.

ALL THESE ARE RELATED TO PRODUCTION

Selling and adm. expense budget: The expense in selling the units - NOT produced.

Cash budget: The inflow and outflow of cash. Helps to see if we have the money in the account to pay bills.

They are linked. Ex if sales budget change, then production budget will change, that will affect direct materials and labor budget etc.

HELP:
Helps evaluate performance for different departments
Helps make valid decisions and plan and control.
Identify problems and control them¨
How to allocate resources

Question 2

What is a income statement?

Answer 2

Income statement based on all the operating budgets - expected profitability.

2 approaches:
Absorption:
- Revenue - manufactoring cost = gross margin
- non-manufactoring cost = EBIT

Based on this: CEO will have an overview and decided if they have to borrow money or not. Takes this to the bank.

Variable costing:
Revenue - variable cost = contribution margin
- fixed cost = EBIT - depreciation = EBITDA

Question 3

What is a balance sheet? And why do we have it?

Answer 3

A balance sheet is a forecast of the companys financial position at the end of the budget period. Asset, liabilities and equity. Always need to balance out. Think house example