Chapter 10 PPT Flashcards
What is a budget
- a formal written statement of management’s plans for a specific future time period, expressed in financial terms
- primary way to communicate agreed0upon objectives to all parts of the company
- Control device - important basis for performance and evaluation
- promotes efficiency
What does budgets promote
efficiency
What is a budget useful for once adopted
performance evaluation
What is used to formulate the data for budgets?
historical accounting data on revenues, costs, and expenses help formulate it
Who’s responsibility is the budget and its administration
management’s
who is responsible for presenting the management’s goals in financial terms?
accountants
What are the benefits of budgeting
- Requires all levels of management to plan ahead and formulize goals on a recurring basis
- provides definite objectives for evaluating performance at each level of responsibility
- Creates an early warning system for potential problems
- facilitates cooridination of activities witin the business
- results in greater management awareness of the entity’s overall operations and the impact of external factors
- motivates personnel throughout organization to meet planned objectives
What is an effective budget
- depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined
- is based on research and analysis with realistic goals
- is accepted by all levels of management
What should the length of budget be
- may be prepared for any period of time
- long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations
- short enough for reliable estimates
- continuous 12 month bduget
What is the most time frame for a budget
one year
- usually supplemented with monthy or quarterly budgets
- different budgets cover different time periods
define continuous twelve month budget
- drop the month just ended and add a future month
- keeps management planning a fully year ahead
What is the budgeting process
- base budget goals on past performance
2. develop budget within the framework of a sales forecast
Define base budget goals on past performance
- collect data from organizational units
- begins several months before end of current year
Describe develop budget within the framework of a sale forecast
- shows potential industry sales
- shows company’s expected share
What are the 7 factors considered in sales forecasting
- general economic conditions
- industry trends
- market research studies
- Anticipated advertising and promotion
- previous market share
- price changes
- technological developments
How are budgets different in small vs large companies
usually informal in small companies
- assigned to a budget committee in a larger companies
What does a budget committee include
- president, treasurer, chief accountant (controller), and management personnel from each major area of the company
- review board where managers defend budget goals and requests
What can budgets do to people
What does it depend on
- may inspire higher levels of performance or discourage additional effort
depends on how budget developed and administered
- should invite each level of management to participate
What bottom -to -top approach called and what is it
it is called participative budgeting
- invite each level of management to participate
What are the advantages of a participative budgeting
1 . more accurate budget estimates because lower level managers have more detailed knowledge of tier area
2. tendency to perceive process as fair due to involvement of lower level management
What is the goal for participative budgeting
produce a budget considered fair and achievable by managers while still meeting corporate goals
Risk of unrealisable budgets are greater when ………
they are top-down
What are the disadvantages of a participative budget
- can be time consuming and costly
- can foster budgetary “gaming” through budgetary slack
(situation where managers intentionally under-estimate budgeted revenues or overestimate budgeted expenses so that budget goals are easier to meet
what is the time period difference in the short term and long range planning
short term - usually one year
long range planning - usually at least 5 years
what is the emphasis in the short term vs the long range planning
short term - achievement of specific short term goals
long range = identifies long term goals, selects strategies to achieve goals, and develops policies and plans to implement strategies
What is the detail presented in short term vs long term
short term - very detailed
long range - contains less detail review of progress toward long term goals
what is the master budget
a set of interrelated budgets that constitutes a plan of action for a specific time period
2. contains two classes of budgets
what are the two classes of budgets in a master budget
- operating budgets
2. financial budgets
Define operating budgets
individual budgets that result in the preparation of the budgeted income statement - establish goals for sales and production personnel
define financial budgets
the capital expenditure budget, the cash budget, and the budgeted balance sheet - focus primarily on cash needs to fund operations and capital expenditures
What are the compoents of the master budget
- sales budget
- production budget
- dire materials budget, direct labour budgt, MOH budget
- selling and admin exp budget
- budget income statement
- capital expenditure budget
- cash budget
- budgeted balance sheet
what are the operating budgets
sales, production, dM, DL, MOH, selling and Admin exp, I.s>
What are the financial budgets
capital expenditure, cash, balance sheet
What is the first budget prepared
sales budget
what is the sales budget derived from
sales forecast
- management’s best estimate of sales revenue form the budget period
- every other budget depends on the sales budget
How is the sales budget prepared
by multiplying expected unit sales volume for each product and anticipated units selling price
What does the production budget show
shows units that must be produced to meet anticipated sales
What is the required production in units formula
desired sales units + Desired Ending FG units - Beg FG units = Required production units
What does the direct material budget show
shows both the quantity and cost of direct materials to be purchased
What is the formula for the direct materials budget
units required for production + Desired ending DM units - Beg DM units = Required DM units to be purchased
budgeted cost of DM to be purchased required units of DM x anticipated cost per unit
What does the direct labour budget show
both the quantity of hours and the cost of direct labour necessary to meet production requirements
What is the direct labour budget critical for
critical in maintaining a labour force that can meet expected production
what is the formula for direct labour
units to be produced x DL time per unit x DL cost per hour = Total DL Cost
What does the manufacturing overhead budget show
the expected manufacturing overhead costs for the budget period
What does the manufacturing overhead budget distinguish between?
distinguishes between fixed and variable overhead costs
What does the selling and admin expense budget show
projection of anticipated operating expenses
What does the selling and admin expense budget distinguish between
fixed and variable costs
what is the important end-product of the operating budgets
the budgeted income statement
What does the budgeted income statement indicate
Expected profitability of operations
What does the budgeted income statement provide a basis for
evaluating company performance
What is used to create the budgeted income statement
the operating budgets (sales, production, DM, DL, MOH, and Sell & Admin)
What does the cash budget show
anticipated cash flows
What is the most important output in preparing financial budgets
the cash budget
what are the sections in the cash budget
- cash receipts
- cash disbursements
- financing
What does the cash budget show
beginning and ending cash balances
what does the cash budget cash creipts section show
- includes expected receitps form the principal sources of revenue (cash collections on credit sales)
- shows expected interest and dividend receipts, as well as proceeds form planned sales of investments, plant assets, and capital stock
What does the cash disbursement section show in the cash budget
includes expected cash payments for DM, DL, taxes, Dividends, plant assets etc.
What does the financing section of the cash budget show
expected borrowings and repayments of borrowed funds plus interest
in the cash budget, ending cash balance of one period = what|?
beginning cash balance for the next period
Where does the cash budget get its information
from other budgets form management
How often is a cash budget prepared
usually prepared for the year on a monthly basis
What are some benefits of the cash budget
- contributes to more effective cash management
- shows managers need for additional financing before actual need arises
- indicates when excess cash will be available
What is a budgeted balance sheet
a projection of finaical position at the end of the budget period
How is the budgeted balance sheet developed
developed form the budgeted balance sheet for the preceding year and the budgets for the current year
Which of the following would necver appear on a cash budget
a. delivery expense
b. . deprecation expense
c. cost of material purchases
d. cash received from customers
b
depreciation expense
In merchandising company how do they develop the budget
- sales budget: starting point and key factor in developing the mater budget
- uses a pruchases budget instead of a production budget
- does not sue the manufacutirng budgets (DM, DL and MOH)
- to determine budgeted merchandise pruchases the formula is
budgeted cost of goods sold + desired ending merchandise inventory - beginning merchandise inventory = required merchandise purchases
Budgeting in a service company
what is the critical factor
is coordinating professional staff needs with anticipated services
In a service company what happens if they are overstaffed
- disproportionately high labour costs
- lower profits due to additional salaries
- increased staff turnover due to no challenging work
In a service company what happens if they are understaffed
- lost revenue because existing and prospective clients needs for service cannot be met
- loss of profiessional staff due to excessive work loads
How does a not for profit company basis its budget on
basis of cash flows (expenditures and receipts) , rather than on revenue and expenses
What is the starting point in a not-for -profit company
expenditures not receipts
What is an important difference with not-for profit
significantly different activity index
The budget for a merchandiser differs from a budget for a manufacturer because:
A merchandise purchases budget replaces the production budget.
The manufacturing budgets are not applicable.
None of the above.
Both a. and b. above.
Both a. and b. above
