Budgeting Part II_M6

Question 1

What is a flexible budget?

Answer 1

• Where the budgeted amounts are adjusted for the actual level of activity.
• Are adjusted for inflation the same way as static budgets.

Question 2

How to due a Flexible Budget?

Answer 2

• A flexible budget allows for adjustments for changes in production or sales and reflects expected costs for the adjusted output.
• Essentially, it is built on the assumption that all costs
  will be in line with expectations and the only thing that changes is the amount of production or sales.
• Adjusted Flexible Revenues Static Budget Revenues / Static Budget Units = Static dollar rate apply that to actual units for flex budget revenue.
• Adjusted Flexible VC take static budget % of revenues used for the VC and apply that to the flexible budget revenues for new flex budget VC.
• Same theory as above for CM.
• FC remains the same as static budget.
• Operating Income = Flex Revenue - VC - FC

Question 3

What are the COMPONENTS OF THE MASTER BUDGET?

Answer 3

OPERATING BUDGETS

• All of the operating budgets (like the sales budget, production budget, selling and administrative expense budget, etc.) are used to create financial budgets like the cash budget and the proforma financial statements.
• The Production Budget is used to derive the factory overhead budget.

FINANCIAL BUDGETS

• The capital budget is used to create the cash budget.

Question 4

What are the components of the cash budget?

Answer 4

• The simplest (most direct) cash budget would include the components of cash collections (sales and percentage of collection) and cash disbursements (purchases and terms of payment).
• Main objective for creating the cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing.

Question 5

What information does cash budgets provide management?

Answer 5

• Availability of funds for distribution to owners.
• The need for external financing.
• Availability of funds for the repayment of debt.
• Availability of funds for investment purposes.

Question 6

Which budgets must be performed before which task?

Answer 6

• The cash budget must be prepared before you can complete the forecasted balance sheet.
• The production budget must be done before purchases, labor and overhead budgets can be prepared.
• The capital expenditure budget must be done before the cash budget.