chapter 10: budgetary planning

Question 1

budget

Answer 1

formal written statement in financial terms of management’s plans for a specified future time period

promotes efficiency

discourages waste and wankers

Question 2

the primary benefits of budgeting

Answer 2

1. management can plan ahead and formalize goals on a recurrent basis
2. provides definitive objectives for evaluating performance
3. creates early warning system for potential problems
4. easier to coordinate activities within the business
5. greater management awareness of overall operations
6. motivates personnel to meet objectives

Question 3

the most common budget period

Answer 3

one year

Question 4

sales forecast

Answer 4

the framework on which the budget is developed

shows potential sales for the industry and the company’s expected shares of these sales

Question 5

budget commitee

Answer 5

has the responsibility of coordinating the preparation of the budget in large companies

Question 6

participative budgeting

Answer 6

each level of management is invited in developing the budget

starts from lower management, to top

Question 7

advantages of participative budgeting

Answer 7

lower managers have more detailed knowledge of their specific area so that they can provide better budgetary estimates

lower managers will see the budget as fair

Question 8

disadvantages of participative budgeting

Answer 8

more time consuming

more costly

can encourage budgetary gaming through budgetary slack

Question 9

budgetary slack

Answer 9

occurs when managers intentionally under-estimate budget revenues or over estimate budget expenses for their department

they want to make their goals easier to achieve

Question 10

what are the differences between budgeting and long-range planning?

Answer 10

the time period involved

emphasis on goals t achieve

the amount of detail presented

Question 11

the time period involved for budgeting and long-range planning

Answer 11

usually, maximum period of budget is one year

lang-range planning usually over 5 years

Question 12

emphasis on goals to achieve for budgeting and long-range planning

Answer 12

budgeting focuses on short-term goals

lang-range planning identifies long term goals, strategies to achieve them, and policies and plans development

Question 13

amount of detail presented for budgeting and long-range planning

Answer 13

budgets much more detailed than long range planning

Question 14

the master budget

Answer 14

combination of all budget documents

set of interrelated budgets that create a plan of action for a specified time period

Question 15

two classes of budgets in the master budget

Answer 15

operating budgets

financial budgets

Question 16

in the master budget, what is the first budget prepared?

why?

Answer 16

the sales budget

each of the other budgets depends on the sales budget and sales forecast

Question 17

how do you find the sales budget?

Answer 17

expected sales volume in units · anticipated selling price

Question 18

production budget

Answer 18

second step of master budget

shows units that must be produced to meet expected sales

Question 19

formula of production budget

Answer 19

Expected Sales in units + Desired Finished Goods in units - Beginning Finished Goods in units

= Required Production Units

Question 20

third step of the master budget planning

Answer 20

finding the manufacturing budget

Question 21

what is part of the operating budget

Answer 21

direct materials budget

direct labour budget

MOH budget

Question 22

direct materials budget

Answer 22

shows quantity and cost of direct materials to be purchased

Question 23

what is first step in determining the direct materials budget?

how do you do it?

Answer 23

calculate the direct material units required

units to be produced · direct materials per unit produced

= Direct Material Units Required for Production

Question 24

what is the second step in determining the direct materials budget?

how do you do it?

Answer 24

we calculate the direct materials to be purchased

Direct Material Units Required for Production + desired Ending Direct Material Units - Beginning Direct Materials Units

= Required Direct Materials Units to be Purchased

Question 25

what is the last step in determining the direct materials budget? how do you do it?

Answer 25

find the cost of direct materials purchases Required Direct Materials Units to be Purchased · Cost per Direct Material Units = Cost of Direct Materials Purchases

Question 26

how to calculate the total direct labor budget?

Answer 26

Units to be produced · Direct Labour Time per Unit · Direct Labour Cost per Hour = total direct labor cost

Question 27

what determined the direct labor budget?

Answer 27

the production budget

Question 28

MOH budget

Answer 28

expected MOH cost fir budget period

Question 29

selling and administrative expenses budget

Answer 29

projects selling and administrative expenses for budget period

Question 30

what is the fourth step of finding the master budget?

Answer 30

selling and administrative expenses budget

Question 31

what is the fifth step of finding the master budget?

Answer 31

finding the budgeted income statement

Question 32

the budgeted income statement

Answer 32

indicates the expected profitability of operations for the budget period provides basis for evaluating company performance

Question 33

what is the sixth step of finding the master budget?

Answer 33

finding the financial budget

Question 34

what is part of the financial budget?

Answer 34

cash budget capital expenditure budget balance sheet

Question 35

the cash budget

Answer 35

shows expected cash flows considered the most important output in financial budgets

Question 36

cash receipts section of cash budget

Answer 36

cash from sales on cash or credit receipt of dividends and interests proceed from sales of investments, plant assets, and capital stock

Question 37

cash disbursements section of cash budget

Answer 37

shows expected cash payments direct materials, direct labor, MOH, selling and administrative expenses projected payments for income tax, dividends, investments, and plant assets

Question 38

financing section of cash budget

Answer 38

shows expected borrowings shows expected repayments of funds plus interests

Question 39

benefits of a cash budget

Answer 39

more effective management shows management when additional funding is necessary a long time before the money is needed can indicate when cash will be in excess for investments of other purposes

Question 40

the budgeted balance sheet

Answer 40

a projection of the company's financial position at the end of the budget period

Question 41

two major differences in master budgets between merchandiser and manufacturer

Answer 41

1. a merchandiser uses a merchandise purchases budget instead of a production budget 2. a merchandiser does not use the manufacturing budgets (DM, DL, MOH)

Question 42

the merchandise purchases budget

Answer 42

shoes estimated costs of goods to be purchased to meet expected sales

Question 43

formula for merchandise purchases budget

Answer 43

budgeted COGS + Desired Ending Merchandise Inventory - Beginning Ending Merchandise Inventory required merchandise purchases

Question 44

several problems regarding budgeting with service companies when the staff is too big

Answer 44

1. labour costs will be disproportionally high 2. profits will be lower because of additional salaries 3. staff turnover may increase because there is not enough challenging work

Question 45

for non-profit organizations, how is budget based on most of the time?

Answer 45

based on cash receipts and expenditures rather than revenue and expense the starting point is usually expenditure¡, not receipt