Ch. 10 - Budgets

Question 1

Master budget

Answer 1

A comprehensive budget for a specific period

Question 2

The master budget consists of _______ _________ and a set of ___________ _________ and _________ _________

Answer 2

the master budget consists of a capital budget and a set of interrelated operating and financial budgets

Question 3

Sales Budget

Answer 3

A schedule showing forecasted sales, in units and dollars, for an upcoming period.

Question 4

What is sometimes called teh cornerstone of the entire master budget because of its affect on other budgets?

Answer 4

The sales budget

Question 5

What is the starting point in preparing a sales budget?

Answer 5

The sales forecast

Question 6

What factors should be included in sales forecasting?

Answer 6

-Current sales levels ans sales trends of the past few years
-General economic and industry conditions
-Competitors’ actions and operating plans
-Pricing policies
-Credit policies
-Advertising and promotional activities
-The level of unfulfilled back order

Question 7

production budget

Answer 7

A budget showing planned output (production) for an upcoming period.

Question 8

For manufacturers, planned production in a given period depends on what three factors?

Answer 8

-budgeted sales
-the desired ending inventory (in units)
-The units in finished goods inventory on hand at the beginning of the period

budgeted production (in units) = budgeted sales (in units) + desired ending inventory (in units) – beginning inventory (in units)

Question 9

direct materials usage budget

Answer 9

A plan that shows the amount and budgeted cost of direct materials required for planned production.

Question 10

direct materials purchases budget

Answer 10

A budget that shows the physical amount and cost of planned purchases of direct materials.

Question 11

manufacturing cells

Answer 11

A set of machines, typically laid out in the form of a semicircle, needed to produce a particular product or part.

Question 12

merchandise purchases budget

Answer 12

A budget that shows the amount (and cost) of merchandise a firm plans to purchase during the budget period.

Question 13

cash budget

Answer 13

A schedule depicting the effects on cash of all budgeted activities.

Question 14

What three major sections does a cash budget contain?

Answer 14

1. Net cash from operating activities
2. Net cash flows from investing activities
3. Net cash from financing activities

Question 15

What is one of the primary advantages of conducting sensitivity analysis?

Answer 15

The ability to isolate risks associated with particular components of operations and to develop contingency plans for dealing with those risks.

Question 16

What is the main difference in budgeting for a service company versus manufacturing or merchandising?

Answer 16

The absence of production or merchandise purchases budgets and their ancillary budgets.

Question 17

zero-base budgeting (ZBB)

Answer 17

A budgeting process that requires managers to prepare budgets each period from a base of zero.

Question 18

activity-based budgeting (ABB)

Answer 18

A budgeting process that is based on activities and associated activity costs to support production and sales; an extension of the traditional form of activity-based costing (ABC).

Question 19

time-driven activity-based budgeting (TDABB)

Answer 19

A method of budget preparation used in conjunction with a time-driven activity-based cost (TDABC) system.

Question 20

practical capacity

Answer 20

Theoretical capacity reduced by normal output losses due to personal time, normal maintenance, and so on; the measure of capacity often recommended for estimating cost-driver rates under ABC and TDABC systems.

Question 21

kaizen budgeting

Answer 21

A budgeting approach that incorporates continuous improvement expectations in the budget.

Question 22

budgetary slack

Answer 22

The difference between budgeted performance and expected performance; a “cushion” managers intentionally build into budgets to help ensure success in meeting the budget.

Question 23

goal congruence

Answer 23

The consistency among the goals of the firm, its subunits, and its employees. It is achieved when the manager acts independently in such a way as to simultaneously achieve personal objectives and those of top management.

Question 24

fixed-performance contract

Answer 24

An incentive compensation plan whereby compensation (reward) is a function of actual performance compared to a fixed (budgeted) target.

Question 25

gaming the performance measure

Answer 25

Non-value-adding actions taken by managers to improve indicated performance.

Question 26

relative-performance (or relative-improvement) contracts

Answer 26

Contracts that reward managers for performance based on a comparison of actual results with specified benchmarks, not budgeted (fixed) targets; contrast with fixed-performance contracts.

Question 27

rolling financial forecast

Answer 27

A constant planning horizon with the use of regularly updated forecasts.

Question 28

What budgets does the master budget consist of (for manufacturers)?

Answer 28

-sales budget
-production budget
-direct materials budget
-direct labor budget
-factory overhead budget
-selling & admin expense budgets
-cash budget
-budgeted financial statements

Question 29

Budgets include estimates for key inputs such as….

Answer 29

sales volume, sales mix, total fixed costs, variable costs per unit, and seling price per unit

Question 30

What are the benefits of budgeting?

Answer 30

-Planning
-Coordination
-Feasibility