Chapter 10 - Budgeting Flashcards
Planning and evaluation process
>>> Planning steps: 1) Mission statement (the reason for existing) “Provide an accessible and practical healthy meal for our customers”. Elaborated by board of directors. 2) Strategic plan (long term objectives) “Be the market leader in all our geographies” “Keep a sustainability footprint in our operations”. Elaborated by Senior Mgmt. 3) Priorities. “Set up warehouses optimally, focus on NPS recipes, optimize CAC, etc” 4) Short-term objectives “Build marketing teams, build warehouses in key regions, etc…” >>> Evaluate progress BUDGET COMES IN TO QUANTIFY THE PROGRESS OF THE PLANNING AS A STRATEGIC CONTROL TOOL. The budget committee/department is the FPA team in HF.
Top-down vs Bottom-up Budgeting
Top-down (authoritative): easier to assure consistency cross company and less time consuming. (harder acceptance) Bottom-up (participative): general guidance from higher level followed by extensive input from middle and lowr magmt. (takes more time and costs more, but higher acceptance). ALSO INCREASES CHANCE OF BUDGETARY SLACK. BUDGETARY SLACK CAN ALSO BE GOOD SINCE IT ENCOURAGES MANAGERS TO INVEST MONEY/ IMPLEMENT NEW PROJECTS.
Time frames of budget
Operational (low manager) - 1month to 1 year Intermediate (middle manager) - Up to 2 years Strategic (senior manager)- Up to 10 years.
Static Vs Flexible
Stat - budget for one level of activity Flex - flexible budget for different levels of activity.
Controllability
CONTROLLABILITY is the extent to which a manager can influence activities and related revenue and costs. Controllable costs are those under the discretion of a particular manager.
Limitations/critics of budget
Across-the-board cuts from higher management when expenses are too high (do not look into specific, not effective). Budgeting is usually based on months, quarters, and years and things can be more dynamic than that. A static budget can lead to late variance checks. Preferably to have a rolling, continuous budget. Many companies are reluctant to change the budget.
Standard cost
o Standard costs are predetermined expectation of a unit of output cost. > Setting standard in a bottom-up approach can be called team development approach. > Are usually set for one year > Based on accounting, engineering or statistical quality control studies.
Idea/Theoretical/Tight vs Practical/Attainable Standards
o Ideal/theoretical standards (OR TIGHT STANDARDS) is like theoretical capacity and set standard costs under optimal conditions. Work of the most skilled workers and with no allowance for waste, spoilage, machine breakdowns or other downtime. Ideal standards are originally replaced by currently attainable standards for cash budgeting, product costing, and budgeting department performance, otherwise it would be impossible/innacurate/unrealistic o Practical (currently attainable) standards are defined as the performance to be achieved by reasonable well-trained workers with an allowance for normal spoilage, waste and downtime. Possible but difficult.
Master Budget
> Also called comprehensive or annual profit plan encompasses the organization plan for a year or operating cycle. > Composed by Operating and Financial Budget
Operating budgets
> Sales budget: FIRST PREPARED BECAUSE IT DEFINES OPERATION LEVEL REQUIRED TO FULFILL. You need unit sales and dollar sales. > Production budget: stated in UNITS and is based on sales plus + minus desired inventory build up or reduction. When ready, prepare three additional budgets: raw material purchase, direct labor budget, and factory overhead budget. > Purchases budget: to prevent stockouts and minimize carrying costs. > Expense budget: based on sales budget and is usually rolled out from previous year (wages, volume estimates, marketing campaigns).
Financial budget
Capital budget: capital expenditure planning and is usually prepared before operating budget is began to have enough lead time. Cash budget: the last to be prepared and is probably the most important. Combines the results of the operating budget with the cash collection and disbursement schedules to produce a comprehensive view of sources and uses of cash.
Budget methodologies
- PROJECT BUDGET: all costs expected to attach to a particular project, and they can require cross department expenses. 2. Activity-based budgeting: a cost pool is established for each activity and a cost driver is identified for each pool. The key to success is selecting a driver for each pool that has a direct cause-and-effect relationship with the level of activity in the pool. ONE MAIN ACTIVITY LAYOUT: 1. Product design 2. Product setup 3. Machining 4. Inspection & Testing 5. Customer maintenance 3. ZERO-BASED BUDGETING a. Zero-based budgeting requires that each manager must justify his or her department’s entire budget every budget cycle. b. Differs from the traditional concept of incremental budgeting, in which the current year’s budget is simply adjusted to allow for changes for the coming year. c. More time and effort to prepare 4. Rolling budget : revised on a continuous basis to a keep a set horizon available. “Like quarterly in HF”. Can require a lot of work.
Variable overhead
>> Indirect materials.
>> Indirect labor.
>> Variable factory operating costs.
Examples of variable overhead include production supplies, utilities for the equipment, wages for handling, and shipping of the product.
Breakeven point
Breakeven point = total fixed costs/ contribution margin per unit. Every sale beyond breakeven provides operating profit.
Pro-forma statements
>> PRO FORMA (according to form, or as if) REFLECT PROJECTED RESULTS. 1. PRO FORMA BALANCE SHEET IS PREPARED USING THE CASH AND CASH CAPITAL BUDGETS AND PRO FORMA INCOME STATEMENT. 2. PRO FORMA STATEMENT OF CASHFLOWS CLASSIFIES CASH RECEIPTS AND DISBURSEMENTS DEPENDING ON WHETHER THEY ARE FROM OPERATING EXPENSE , INVESTING OR FINANCING ACTIVITY.
