Budgeting Flashcards
What is a financial planning and analysis system?
A system to track and provide data in a format useful to managers
A Financial Planning and Analysis system includes
- Planning (budgeting)
- Measuring and Recording results
- Evaluating performance (variance analysis)
Purposes of budgeting
- Planning
- Facilitating communication and coordination
- Allocating resources
- Controlling profit and operations
- Evaluating performance and providing incentives
What is a master budget?
- A collection of budgets: sales, operational, financing budgets
- The principle output of a budgeting system that ties together all phases of an organization’s operations
What is the first budget to prepare in the budgeting process?
Sales budget:
- Organized by revenue source or product lines and Time.
- Starts from the number of customers forecasted based on historical sales data which is adjusted based on internal and external factors. Also a basis to forecast ancillary revenues
What do operational budgets do?
Specify how the operations will meet the demand: Based on sales budget. Every expense account on the income statement should be supported by a budget
How are operational budgets divided?
- Purchase budget (service firms) or Production and inventory budget (manufacturing firms)
- Budget for conversion cost
- Selling, general, and administrative budget
What is the basis for the estimation of production budgets?
Shows the number of units to be produced, not sold: Sales in units + desired ending inventory = total units required. Total units required - expected beginning inventory = units to be produced
What does a direct material budget show?
Shows the number of units and the cost of material to be purchased and used. Links production, purchases of raw material, and inventory
What are conversion costs?
Costs of the resources to convert purchased inputs into marketable products or services.
- Direct labor budget: The cost of salaries, wages, and benefits for personnel who make a product or service
- Production overhead budget: The costs of production other than purchases and direct labor
What system do we follow?
We follow the Uniform System of Accounts for restaurants and the lodging industry. Cost of goods sold (cost of sales) includes only food and/or beverage cost. Direct labor costs are recorded as salaries and wages and employee benefits as one of the operating expenses.
What are Overhead, General and Administrative budgets?
- Both are indirect cost
- Overhead costs directly support revenue generating activities of the company. If the company had no business, they would have no overhead expenses
- G&A costs support the overall management and operation of the business. A company would still have G&A even if there were no billable work.
What are controllable expenses?
Cost of sales, labor Direct operating expenses Music and Entertainment Marketing Utilities G&A Repairs and Maintenance
What are noncontrollable expenses?
Occupancy costs Equipment leases Depreciation and amortization Corporate overhead Interest expense Other (income)/Expense
What are key points of financing budgets?
Money on the record does not mean cash on hand
Cash receipts budget: Timing of collection, noncollectable accounts receivables
Cash disbursements budget: Depends on the operational budgets, timing issue
Cash budget: Summarize cash inflows and outflows
What are the three points of budgeting for new businesses?
- Start with fixed expenses, not revenues: Double your estimates for advertising, triple estimates for legal, insurance, and licensing fees, budget a salary for yourself even if you are not paying yourself
- Forecast the revenue for a conservative case and then an aggressive case
- Check the key ratios to make sure the projections are sound: Profitability ratios, asset management ratios, debt management ratios
What are the accounts included in the SGandA budget?
Accounting Legal Credit card charges Office supplies Franchise fees Licenses and permits Liability and general insurance
What are the two types of overhead budgets?
Direct production overhead - traceable to the unit or event
Allocated production overhead - incurred centrally within the company
