Budgeting Flashcards
Budget policies
to effectively budget, an organiztion should implement formal budget policies that include the following key features: management participation and budget guidelines
T/F: budgets frequently revolve around the development of standards
True; standards have been referred to as per-unit budgets and are integral to the development of flexible budgets
standards are often set below expectations to motivate productivity and efficiency, but those standard costs must be revised periodically (generally once a year) to reflect changes in previously determined standards
What are ideal standards?
they represent the costs that result from perfect efficiency and effectiveness in job performance; no provision is made for normal spoilage or downtime
advantage: the implied emphasis on continuous quality improvement to meet the ideal
disadvantage: the demotivation of employees by the use of unattainable standards
What are currently attainable standards?
they represent costs that result from work performed by employees with appropriate training and experience but without extraordinary effort; provisions are made for normal spoilage and downtime
advantage: fosters the perception that standards are reasonable
disadvantage: required use of judgment and potential manipulation
What are authoritative standards?
these are set exclusively by management
advantage: they can be implemented quickly and will likely include all costs
disadvantage: workers might not accept imposed standards
What are participative standards?
these are set by both managers and the individuals who are held accountable to those standards
advantage: workers are more likely to accept these standards
disadvantage: these are slower to implement
What is a master budget?
it documents specific short-term operating performance goals for a period, normally one year or less; the plan normally includes an operating budget as well as a financial budget that outlines the sources of funds and detailed plans for their expenditure
it generally comprises operating budgets and financial budgets prepared in anticipation of achieving a single level of sales volume for a specified period
limitations of the master budget include: being confined to one year at a single level of activity and reporting output (pro forma financial statements may not provide the type of management information most useful to decision making)
the master budget produces the following budgets:
operating budgets - these are established to describe the resources needed and the manner in which those resources will be acquired
financial budgets - these define the detailed sources and uses of funds to be used in operations
What is the sales budget?
it is the foundation of the entire budget process; it represents the anticipated sales of the organization in units and dollars; the sales budget is the first budget prepared and it drives the development of most other components of the master budget
sales budget units drive the number of units required by the production budget; sales budget dollars drive the anticipated cash and revenue figures; inventory levels, purchases, and operating expenses are coordinated with sales levels
the sales budget is based on the sales forecast; sales forecasts are derived from input received from numerous organizational resources
What is the production budget?
it is prepared for each product or each department based on the amount that will be produced, stated in units; the production budget is made up of the amounts spent for direct labor, direct materials, and factory overhead; the amount of the production budget is based on the amounts of inventory on hand and the inventory necessary to sustain sales
desired levels of inventory are normally a function of sales volume and seek to balance the risk of stockouts with the cost of maintaining inventory
the direct materials purchases budget represents the dollar amount of purchases of direct materials required to sustain production requirements
the direct materials usage budget represents the number of units of direct materials required for production along with the related cost of those direct materials
the direct labor budgets anticipate the hours and rates associated with workers directly involved in meeting production requirements; direct labor hours are computed based on the hours necessary to produce each unit of finished goods
the factory overhead budget includes the fixed and variable production costs that are not DM or DL; factory overhead is applied to inventory based on a representative statistic (cost driver); frequently, the rate is applied using DL hours
the COGM/COGS budget accumulates the information from the DM, DL, and MOH budgets
What is the SG&A budget?
SG&A expenses represent the fixed and variable nonmanufacturing expenses anticipated during the budget period; they are not inventoried and are budgeted as period costs
What are cash budgets?
they represent detailed projections of cash receipts and disbursements; the cash budget is derived from other budgets based on cash collection and disbursement assumptions; cash budgets provide management with information regarding the availability of funds for distribution to owners, for repayment of debt, and for investment; cash budgets are generally divided into 3 major sections:
cash available - cash available for use by the organization is normally associated with both balances available at the beginning of the period and cash collections
cash disbursements - this represents the cash outlays associated with purchases and with operating expenses
financing - this considers the manner in which operating (line of credit) financing will be used to maintain minimum cash balances or the manner in which excess or idle cash will be invested to ensure liquidity and adequate returns
What are capital budgets?
capital purchases budgets identify and allow management to evaluate the capital additions of the organization, often over a multiyear period; financing is a significant component of the capital purchases budget
capital budgets detail the planned expenditures for capital items; capital budgets are highly dependent on the availability of cash or credit, and they generally involve long-term commitments by the organization
What are flexible budgets?
it is a financial plan prepared in a manner that allows for adjustments for changes in production or sales and accurately reflects expected costs for the adjusted output
they represent adjustable economic models that are designed to predict outcomes and accommodate changes in actual activity; revenues and expenses are adjusted to display anticipated levels for achieved outputs
benefits - they can display different volume levels within the relevant range to pinpoint areas in which efficiencies have been achieved or waste has occurred
limitations - they are highly dependent on the accurate identification of fixed and variable costs and the determination of the relevant range
