Ch 7 Flashcards
define budget
formal statement of company’s future plans
define budgeting
processing of planning formal business actions and expressing them as formal plans
what three things must mgmt focus on for budgetary analysis?
- future transactions
- future events
- future opportunities available
define control function
requirement of mgmt to evaluate (benchmark) business operations against some norm
what are the two usual alternatives that evaluating business operations involves comparing actual results against?
- past performance
2. expected performance
when is budgeted performance computed?
after careful analysis and research that attempts to anticipate and adjust for changes in important company, industry and economic factors
What are the three important guidelines in budgeting process?
- Participatory budgeting (employees affected by budget should be consulted when its prepared
- goals reflected in budget should be attainable
- evals should be made carefully when opps explain any failures
what are some potential negative outcomes of budgeting? (4)
- some employees might understate sales budgets and overstate expense budgets to allow cushion
- employees overstate expense budgets for budgetary slack (or cushion) to aid in meeting targets
- pressure to meet budgets might lead employees in unethical behavior or commit fraud
- some employees might spend entire budget even if not needed to ensure budgets aren’t reduced next year
Which departmental budget drives all other budgets?
sales
Budgets figures and estimates developed through what process are usually more useful?
bottom-up process
define continuous budgeting
practice of preparing budgets for a selected number of future period and revising those budgets as each period is completed
define rolling budgets
new set of budgets a firm adds for the next period (with revisions) to replace the ones that have lapsed
what three groups usually determine or influence the budgets
creditors
directors
management
define master budget
formal, comprehensive plan for company’s future.
contains several individual budgets that are linked with each other to form a coordinated plan
how do mgrs often express the expected financial results of planned budgeted activities
wth budgeted income statement for budget period and
budgeted balance sheet for end of budget period
what are the three overall categories that should be included in a master budget
operating budgets
capital expenditures budget
financial budgets
what are the six budgets that should be included in the master operating budget
- sales budget
- merchandise purchases budget (for merchandisers)
- production budget (for manufacturers)
- manufacturing budget (for manufacturers)
- selling expense budget
- general and admin expense budget
what is the merchandise purchases budget
units to be purchased
define capital expenditures master budget
expenditures for plant assets
what are the three budgets that should be included in the master financial budget?
- cash budget (receipts & disbursements)
- budgeted income statement
- budgeted balance sheet
What are the five steps in creating a master budget?
- prepare sales budget
- develop production budget
- prepare manufacturing, selling and general admin & expense budgets
- prepare capital expenditures budgets
- consolidate operating and capital expenditures budgets into financial budgets (cash budget, budget income statement, budgeted balance sheet
define sales budget
- plan showing the units of goods to be sold or services to be provided
- the starting point in budgeting process for most departments
What two various merchandise purchasing/budgeting decisions take into account?
- the number of units added to inventory depends on budget sales volume
- inventory system
define safety stock
quantity of inventory or materials over minimum needed to satisfy budgeted demand
define merchandise purchases budget
plan that shows the units or costs of merchandise to be purchased by merchandising company during budget period
in what two ways is a merchandise purchases budget expressed?
- units
2. dollars
Merchandise purchases budget in equation form
inventory to be purchased = budgeted ending inventory + budgeted cost of sales for the period - budgeted beginning inventory
How to compute number of dollars of inventory to be purchased for budget if merchandise purchases budget is expressed in units and only one product is involved
of dollars of inventory = units to be purchased * cost per units
Merchandise Purchases Budget spreadseet
Next month's budget sales (units) * Ratio of inventory to future sales (*%) =Budget ending inventory (units) \+ budgeted sales = required units of available merchandise - beginning inventory (units) = units to be purchased ... budget cost per unit (* units to be purchased) =budgeted cost of merchandise purchases
define selling expense budget
plan that lists the types and amounts of selling expenses expected in the budget period
selling expense budget spreadsheet formula
budgeted sales * sales commission percent = sales commissions \+ salary for sales manager = total selling expenses
define general and admin expense budget
plan that shows predicted operating expenses not included in the selling expenses budget
Why is predicted income tax not included in general and admin budget?
- not able to figured estimated tax yet as cash has not yet been estimated.
define capital expenditures budget
plan that lists dollar amounts to be both received from disposal of plan assets and spent to purchase plan assets
at what point in the sequence of budget planning is the capital expenditures budget created?
after operating budgets
define capital budgeting
process of evaluating and planning for capital (plant asset) expenditures
what does the capital expenditures budget link to in regards to planning
the mgmt’s eval of company’s ability to take on more debt
When is the financial budget created
after the operating and capital expenditures budgets
Define cash budget
shows expected cash inflows and outflows during the period
What is the general formula for cash budget?
beginning cash balance + budgeted cash receipts - budgeted cash disbursements = preliminary cash balance
What two other budgets hold information needed to prepare the cash budget
operating budget
capital expenditures budget
define budgeted income statement
accounting report that presents predicted amounts of company’s revenues and expenses for budget period
Where is information needed for preparing a budgeted income statement found?
primarily from already prepared budgets
define budgeted balance sheet
accounting report that presents predicted amounts of company’s assets, liabilities and equity balances as of end of the budget period
Where is information needed for preparing a budgeted balance sheet found?
primarily from the other budgets
define activity-based budgeting (ABB)
budget system based on expected activities
define general and administrative expense budget
plan that shows predicted operating expenses not included in the selling expenses budget
define manufacturing budget
plan that shows the predicted costs for direct materials, direct labor and overhead to be incurred in manufacturing units in production budget
