Chapter 10 Slides Flashcards
(40 cards)
Two parts of the Budgeting Process
- Plan
- The Master Budget - Check
- What-if Analysis
- Sensitivity Analysis
- Flexible Budgets
- Variance Analysis
What is a Budget?
A quantitivative expression of the money inflows and outflows
- Reveals whether a financial plan will meet the organization’s financial objectives
Why make a Budget?
It is a planning tool (“plan” in PDCA)
- its a communication device
- helps in the coordination of activities
- allows for the anticipation of problems and development of (cross-functional) solutions
It is also a control tool (“Check” in PDCA)
Planning Role of Budgets
- Identify organization objectives and short-term goals
- Develop long-term strategy and short-term plans
- Develop master budget
Control role of a budget
- Measure and asses performance against budget
- reevaluate objectives, goals, strategy, and plans
The Master Budget
Comprised of TWO budgets
- Operating Budget
- Financial budget
- often for a one-year period
Operating Budget
summarize the level of activities such as sales, purchasing, production, and capital spending
Financial Budget
projected balance sheet, projected income statement, statement of expected cash flows
Organizational Goals
- The 1st part of the master budget
- the most important input into the master budget because these drive every subsequent decision
- provide the starting point and the framework for evaluating the budgeting process
Sales Plan
- The second part of the master budget
- identifies the planned level of sales for each product
- estimate demand at a specified selling price via:
- market surveys
- statistical models based on treneds and economic forecasts
- historical or estimated growth percentage
- calculate for each major line of goods or services:
Budgeted # of units x Budgeted selling price/unit = Total Sales
Capital Spending Plan
- Specifies the long-term capital investments, such as buildings and equipment, that must be made to meet activity level objectives
Inventory Policy
- Inventory policy and the sales plan shape the production plan
- Example inventory policies:
Producing to maintain a pre-specified level of inventory
producing to meet demand (ex. JIT)
Inventory Accounts
(Budgeted)
Budgeted:
OUT
+ EI
Total needs
- BI
IN
Production Plan (Manufacturing Only)
- Schedules required production
Budgeted sales (units) from #2 (sales plan)
+ Desired ending FG inventory (units)
Total FG inventory needs (units)
- Beginning FG inventory (units)
Budgeted production (units)
Production Capacity Plan
- 4 types of resources that determine productive capacity
> Flexible resources that create variable costs
> Intermediate-term capacity resources that create fixed costs
> Resources that, in the intermediate and long run, enhance the potential of the organization’s strategy
>Long-term capacity resources that create fixed costs
Manufacturing FIrm Materials Purchasing Plan
- Schedules required purchasing activities
Budgeted production (units) (from #5; production plan)
x RM needed per unit produced
Needs for production (units of input)
+ Desired ending RM inventory (units of input)
total inventory needs (units of input)
- beginning RM inventory (units of input)
Budgeted purchases of input (units)
x RM cost per unit
Budgeted cost of purchases ($)
Merchandise Firm Purchasing Plan
Budgeted sales (units) (from #2)
_+ Desired ending MI (units) _
Total inventory needs (units
_- Beginning MI (units) _
Budgeted purchases (units)
_x MI cost per unit _
Budgeted cost of purchases ($)
Labor Hiring and Training Plan
- Specifies the number of people the organization must hire or release to achieve its activity level objectives, and based on those numbers, the needed hiring, training, and counseling out policies requirements
Administrative and Discretionary Spending Plan
- Identifies the planned level of spending for administration, staffing, research and development, and advertising
Statement of Expected Case Flows
- Panners use this statement in two ways
>> To plan when excess cash will be generated so that it can be used to make short-term investments rather than simply holding cash during the short term
>> to plan how to meet any cash shortages
- For external financial reporting, GAAP approach: group cash flows by operating investing, and financing activities
- For internal use, aggregating cash inflows and cash outflows
GAAP Statement of Expected Cash Flows
Net Cash Flows from Operating Activities
+ Net Cash Flows from Investing Activities
+ Net Cash Flows from Financing Activities
+ Beginning Cash
= Ending Cash
Internal Statement of Expected Cash Flows
(Cash Budget)
Cash inflows
- Cash outflows
+ Beginning cash balance
= ending case balance
>> Depreciation is NOT a cash flow!!
Projected Income Statement
- For external financial reporting, GAAP approach: group costs by product and nonproduct functions
For internal use, such as for cost-volume-profit analysis, group costs by cost behavior (variable and fixed)
GAAP - Income Statement
- Simple functional income statement:
Sales (Sales Revenue)
-Cost of Goods Sold (expense) –> Product
Gross Margin of Gross Profit
- Selling & Admin (GS&A, Op exps.) –> Period
Net Income (before interexted exp, taxes… etc)
