Chapter 10: Budget Making Flashcards
What is a budget?
- formal written statement for future period
- primary way to communicate objectives to company
- promote efficiency and discourage waste
- Performance Evalustion
Historical accounting data on revenues, costs, and
expenses help in formulating future budgets
Accountants are responsible for presenting management’s
budgeting goals in financial terms
also prepare periodic budget reports used in performance
measurement and to compare plans with actual results
The budget and its administration are management’s
responsibility
benefits of Budget
- plan ahead
- definite obejctives
- early warning system
- coordination of activities
- management awareness of external factors
- motivates personnel
BUDGET IS AID TO MGMT NOT SUBSITITUTRE!!!!
-> sound org structure
-> research anda nalysis
-> must be accepted by all levels of mgmt
budgets can be prepared for which period of time
any!! common: year, and supplemented with monthly and quarterly
budgets need to be long enough to provide attainable goals/minmize seasonal fluctuations
short enough for reliable esitmates
what are continuous twelve month budget
drop the month just ended and add future moth!!!
Steps in budgeting process
- sales forecast: including potential sales/expected share of firm. CONSIDER external factors!! like trens, price changes, etc.
- Overall process is usually informal in small companies; but in bigger firms assigned to a BUDGET COMMITTEE
- bottom up or top down!!!
Budget committee
Include the president, treasurer, chief accountant
(controller), and management personnel from each
major area of the company
o Committee acts as a review board where managers
defend budget goals and requests
Bottom Up/Participative Budgeting
- talking to lower level managers to produce a budget!!1
- PROS:
-> accurate budget estiamtes (low level maangers now the details)
-> overall process is seemed more fair - CONS:
-> can be time consuming and costly
-> can foster budgetary gaming through slack (ppl intentionally udnersestimate revenues or overestimate expenses!)
top down budgeting
no real buy in from lower level maangers
budgeting vs long range planning differences
TIME PERIOD INVOLVED: short term vs long term (1 vs 5 years)
EMPHASIS: Achievement of specific short term goal vs identify long term goals/select strategies etc.
DETAIL PRESENTED: very detailed vs contrain less detail
What is master budget
interrelated budgets for plan of action; has TWO CATEGORIES OF BUDGETS!
- Operating Budget: individual budgets that result in the preparation of income statements
- Financial Budgets: budgets that focus on cash to fund operations, uses info for operating budgets, FINAL BUDGET IS THE BALANCE SHEEt
visual!!!
OPERATING BUDGETS ———-> FINANICIAL BUDGETS
OB( sales > production > DM/DL/MOH > Selling/Admin > BUdgeted income_
FB( Cap ex > Cash BUdget > BUdgeted balance sheet)
Sales budget
number of units sold driving production budget
———> take mgmt estimate of sales revenue for budget period;
EXPECTED UNIT SALES VOLUME FOR EACH PRODUCT x ANTICIPATED UNIT SELLING PRICE
———>
Expected Unit Sales
Unit Selling Price__________________
Total Sales
Production Budget
units products is NOT # units sold
beginning and ending invenotires must be considered
Budgeted sales revenue dollars used in the Budgeted Income Statement and Cash Budget
Budgeted unit sales used in the Production budget – which drives all other operating budgets
Production Budget
-> shows units produced in order to meet budgeted sales and inventory targets
-> production budget drives DM,DL,MOH
-> Production budget does not include $$ value, only units
-> Production budget calculation:
Expected Sales Units + Desired Ending FG units - Beginning FG units = Required Production Units
Direct Materials Budget
reports 3 things
Units of DM needed to meet production and inventory
needs
—->Target ending inventory for DM key component to the DM budget
Direct materials to be purchased
Cost of the direct materials to be purchased which is
also part of the Cash Flow Budget
DL
units to be produced * DL hours per unit * DL cost per hour = dl cost total
MOH budget
just calc with logic
moh rate: sum total MOH budgeted/sum total unit
S&A expense budget
fixed is fixed; but VARIABLE is = BASED ON UNITS SOLD
Budgeted income statement
- Important end-product of the operating budgets
- Indicates expected profitability of operations
- Provides a basis for evaluating company performance
- Prepared from operating budget information
elements in budgeted income statmeent coming from other budgets?
- Sales budget → Total sales revenue
- Production, Direct materials, Direct labour and
Manufacturing overhead budgets → Cost per unit
o To determine Cost of Goods Sold and Gross Profit
COGS FORMULA
UNIT SOLD X UNIT COST
unit cost = dm + dl + moh + other costs
budgeted income statemetn- period expsense
S&A
Other expenses: interest, income tax, misc.
2 types of financial budgets
a) cash budget
b) balance sheet budget
cash budget
MOST IMPORTANT AND MOST OVERLOOKED!
-> reports cash flows, plan for short term financing,
CASH RECIEPETS
CASH DISBURSMENTs
FINANCING
begin and end balances
Section 1: Cash Receipts
includes expected receipts from the principal sources of
revenue – usually cash sales and collections on credit sales
* Includes any other expected cash inflows such as:
o interest and dividend receipts
o proceeds from planned sales of investments, plant assets,
and share capital
Section 2: Cash Disbursements
Includes expected cash payments for:
o Direct material purchase (typically accounts payable
payments)
o Direct and indirect labour costs, fixed and variable overhead
costs
o All other period expenses
o All other non expense disbursements including income tax
instalments, dividends, plant assets acquisitions, investment
purchases
Section 3: Financing Section
Financing section
* Shows expected borrowings and repayments of borrowed
funds plus interest
o Funds will need to be borrowed when there is a cash
deficiency or when the cash balance is below
management’s minimum required balance
o Borrowed funds can be repaid when there is a cash surplus,
or the cash balance is greater than the minimum required
cash balance
what is a budgeted balance sheet
A projection of financial position at the end of the budget period;
how do you develop a budgeted balance sheet?
- RETAINED EARNINGS: net income from budgeted income statement added
- FG inv: from production budget
- Building and equipment accounts: updated using
information from the Capital Expenditure Budget
budgeting in non anufacturers
Sales budget will apply to all
o Not-for-profit will create a revenue budget for
donations
Budgeting for Merchandisers
uses sales budget, has no manufacturing budgets (dm/dl/moh) only merchandising budgets
budgeted merchandise purchase:
budgeted COGS + end desired merch inv - begin merch inv = required purhcases
budgeting for service enterprise
critical factor in budgeting is coordinating professional
staff needs with expected services
* Problems if overstaffed:
o Disproportionately high labour costs
o Lower profits due to additional salaries
o Increased staff turnover due to no challenging work
* Problems if understaffed:
o Lost revenue because existing and prospective client needs
for service cannot be met
o Loss of professional staff due to excessive work loads
budgeting for NFP
- Important process that differs significantly from that
of a profit-oriented company - Budget on the basis of cash flows (expenditures and
receipts), rather than on a revenue and expense basis - The starting point is expenditures, not receipts
- Unlike for-profit organizations, budget must be strictly
followed
master budget conssits of
Sales budget ( and other cost driver budget when necessary)
2. Production budget
3. Direct materials purchases budget
4. Direct labour budget
5. Manufacturing overhead budget
6. Ending Finished goods inventory budget
7 Selling and administrative budget
8. Cash budget
9. Budgeted income statement
10.Budgeted balance sheet
budget administration
Budget officer/Chief budget officer-specifies the process by which budget
data will be compiled
*Budget manual-specifies who is responsible for the information, when it
is required, and what form the information should take
*Budget committee-a committee appointed to advise the budget director
during the budget process.
other key terms
Participative budgeting-have managers and employees participate in the
budgeting process.
Padding the budget- managers setting goals that are easy to attain.
Difference between those and the realistic goals is called budgetary
slack.
Zero based budgeting-Analyzing and developing a budget for each activity
within the company as if it was the company’s first year of operations
(not in textbook)
CORNERSTONE FO ALL BUDGETING
sales forceast!! used in all
sales forecast shows potential sales and forecasts!!!
the sales budget is picking one forecast and outlining the bduget
