Budgeting Part I_M5 Flashcards
What are the standards used to create budgets?
- Participative budgeting requires input from multiple stakeholders and spreads the decision-making process over multiple layers of managers and individuals. Implementing this approach effectively is time consuming.
- Promotes empowerment of a wide range of individuals in the organization, and motivation will likely increase.
- Requires buy-in by a wide range of individuals in the organization, and acceptance will likely increase.
- Requires input from the individuals most responsible for the details of the operation. Thus, it tends to be more accurate.
- Authoritative (top down) budgeting is faster.
What are the facts about standards?
- The best standard is one that the ultimate goal of setting standards and preparing budgets is to facilitate
the accomplishment of the company’s strategic goals. - Ideal standards do not make any provisions for normal spoilage or downtime. They assume perfect efficiency and effectiveness, which is helpful as an initial benchmark but is often unrealistic and unattainable.
- Standards are thought of as per unit budgets.
- Because they involve managers and their employees, participative standards take longer to implement than authoritative standards which are set solely by management.
- Currently attainable standards assume an appropriate level of training for the employees who are to be held accountable in achieving those standards
What are the budget drivers?
- The sales budget is the primary driver of most components of the master budget, which includes both operating and financial budgets.
- The sales budget will drive the production budget, which in turn drives budgets for direct materials, direct labor, and factory overhead. All three of these budgets combine to form the cost of goods sold budget.
- The Sales Budget drives the The selling and administrative expense budget which is a part of the operations master budget
- The Production and The Selling and Administrative Expense Budgets drives the cash budgets
What are the Variable and Fixed Expenses in the Selling and Administrative Budgets?
FIXED EXPENSES
- Depreciation expense can be included as a fixed selling expense, a general administrative expense, or both.
VARIABLE EXPENSES
- Shipping and delivery charges are appropriate to include as a variable selling expense.
- Commissions based on sales will be a variable selling expense.
- Bad-debt expense (write-offs for uncollectible accounts) is a variable selling expense.
Master Budgets Vs. Flexible Budgets
The Master Budget:
- The master budget is the quantification of the company’s
overall plan. - Based on one production level.
Flexible Budget:
- Designed to reflect any production level within a relevant range of production activities.
- Used before and during the budget period.
- Based on fixed standards which are appropriately developed for the relevant range of production activity.
- Developed for single departments and for the production facility as a whole.
Participative Budget
- Involves people throughout the organization in the budgetary process.
What is Budgetary Control?
It is the process of developing plans for a company’s expected operations and controlling the operations to help carry out those plans.
What order are the budgets prepared in?
The order of budget preparation begins with the sales budget, which logically drives the production budget (to support sales), which in turn drives the direct materials purchases (to support production), from which the cash disbursements budget is derived.
1. Sales
2. Production
3. Direct Materials purchases
4. Cash disbursements.
What is the Master Budget process?
The Financial Budget process includes:
1. Cash and capital purchase budgets.
2. Balance sheet and statement of cash flows.
The Operating Budget Process includes:
1. All budgets except cash and capital purchases.
2. The pro forma income statement.
