chapter 10: budgetary planning Flashcards
budget
formal written statement in financial terms of management’s plans for a specified future time period
promotes efficiency
discourages waste and wankers
the primary benefits of budgeting
- management can plan ahead and formalize goals on a recurrent basis
- provides definitive objectives for evaluating performance
- creates early warning system for potential problems
- easier to coordinate activities within the business
- greater management awareness of overall operations
- motivates personnel to meet objectives
the most common budget period
one year
sales forecast
the framework on which the budget is developed
shows potential sales for the industry and the company’s expected shares of these sales
budget commitee
has the responsibility of coordinating the preparation of the budget in large companies
participative budgeting
each level of management is invited in developing the budget
starts from lower management, to top
advantages of participative budgeting
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
disadvantages of participative budgeting
more time consuming
more costly
can encourage budgetary gaming through budgetary slack
budgetary slack
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
what are the differences between budgeting and long-range planning?
the time period involved
emphasis on goals t achieve
the amount of detail presented
the time period involved for budgeting and long-range planning
usually, maximum period of budget is one year
lang-range planning usually over 5 years
emphasis on goals to achieve for budgeting and long-range planning
budgeting focuses on short-term goals
lang-range planning identifies long term goals, strategies to achieve them, and policies and plans development
amount of detail presented for budgeting and long-range planning
budgets much more detailed than long range planning
the master budget
combination of all budget documents
set of interrelated budgets that create a plan of action for a specified time period
two classes of budgets in the master budget
operating budgets
financial budgets
in the master budget, what is the first budget prepared?
why?
the sales budget
each of the other budgets depends on the sales budget and sales forecast
how do you find the sales budget?
expected sales volume in units · anticipated selling price
production budget
second step of master budget
shows units that must be produced to meet expected sales
formula of production budget
Expected Sales in units + Desired Finished Goods in units - Beginning Finished Goods in units
= Required Production Units
third step of the master budget planning
finding the manufacturing budget
what is part of the operating budget
direct materials budget
direct labour budget
MOH budget
direct materials budget
shows quantity and cost of direct materials to be purchased
what is first step in determining the direct materials budget?
how do you do it?
calculate the direct material units required
units to be produced · direct materials per unit produced
= Direct Material Units Required for Production
what is the second step in determining the direct materials budget?
how do you do it?
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
what is the last step in determining the direct materials budget?
how do you do it?
find the cost of direct materials purchases
Required Direct Materials Units to be Purchased · Cost per Direct Material Units
= Cost of Direct Materials Purchases
how to calculate the total direct labor budget?
Units to be produced · Direct Labour Time per Unit · Direct Labour Cost per Hour
= total direct labor cost
what determined the direct labor budget?
the production budget
MOH budget
expected MOH cost fir budget period
selling and administrative expenses budget
projects selling and administrative expenses for budget period
what is the fourth step of finding the master budget?
selling and administrative expenses budget
what is the fifth step of finding the master budget?
finding the budgeted income statement
the budgeted income statement
indicates the expected profitability of operations for the budget period
provides basis for evaluating company performance
what is the sixth step of finding the master budget?
finding the financial budget
what is part of the financial budget?
cash budget
capital expenditure budget
balance sheet
the cash budget
shows expected cash flows
considered the most important output in financial budgets
cash receipts section of cash budget
cash from sales on cash or credit
receipt of dividends and interests
proceed from sales of investments, plant assets, and capital stock
cash disbursements section of cash budget
shows expected cash payments
direct materials, direct labor, MOH, selling and administrative expenses
projected payments for income tax, dividends, investments, and plant assets
financing section of cash budget
shows expected borrowings
shows expected repayments of funds plus interests
benefits of a cash budget
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
the budgeted balance sheet
a projection of the company’s financial position at the end of the budget period
two major differences in master budgets between merchandiser and manufacturer
- a merchandiser uses a merchandise purchases budget instead of a production budget
- a merchandiser does not use the manufacturing budgets (DM, DL, MOH)
the merchandise purchases budget
shoes estimated costs of goods to be purchased to meet expected sales
formula for merchandise purchases budget
budgeted COGS + Desired Ending Merchandise Inventory - Beginning Ending Merchandise Inventory
required merchandise purchases
several problems regarding budgeting with service companies when the staff is too big
- labour costs will be disproportionally high
- profits will be lower because of additional salaries
- staff turnover may increase because there is not enough challenging work
for non-profit organizations, how is budget based on most of the time?
based on cash receipts and expenditures rather than revenue and expense
the starting point is usually expenditure¡, not receipt
