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Accounting 211 > Chapter 10 Slides > Flashcards

Chapter 10 Slides Flashcards

1
Q

Two parts of the Budgeting Process

A
  1. Plan
    - The Master Budget
  2. Check
    - What-if Analysis
    - Sensitivity Analysis
    - Flexible Budgets
    - Variance Analysis
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2
Q

What is a Budget?

A

A quantitivative expression of the money inflows and outflows

  • Reveals whether a financial plan will meet the organization’s financial objectives
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3
Q

Why make a Budget?

A

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)

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4
Q

Planning Role of Budgets

A
  • Identify organization objectives and short-term goals
  • Develop long-term strategy and short-term plans
  • Develop master budget
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5
Q

Control role of a budget

A
  • Measure and asses performance against budget
  • reevaluate objectives, goals, strategy, and plans
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6
Q

The Master Budget

A

Comprised of TWO budgets

  • Operating Budget
  • Financial budget
  • often for a one-year period
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7
Q

Operating Budget

A

summarize the level of activities such as sales, purchasing, production, and capital spending

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8
Q

Financial Budget

A

projected balance sheet, projected income statement, statement of expected cash flows

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9
Q

Organizational Goals

A
  • 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
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10
Q

Sales Plan

A
  • 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

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11
Q

Capital Spending Plan

A
  • Specifies the long-term capital investments, such as buildings and equipment, that must be made to meet activity level objectives
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12
Q

Inventory Policy

A
  • 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)

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13
Q

Inventory Accounts

(Budgeted)

A

Budgeted:

OUT

+ EI

Total needs

  • BI

IN

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14
Q

Production Plan (Manufacturing Only)

A
  • 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)

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15
Q

Production Capacity Plan

A
  • 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

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16
Q

Manufacturing FIrm Materials Purchasing Plan

A
  • 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 ($)

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17
Q

Merchandise Firm Purchasing Plan

A

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 ($)

18
Q

Labor Hiring and Training Plan

A
  • 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
19
Q

Administrative and Discretionary Spending Plan

A
  • Identifies the planned level of spending for administration, staffing, research and development, and advertising
20
Q

Statement of Expected Case Flows

A
  • 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
21
Q

GAAP Statement of Expected Cash Flows

A

Net Cash Flows from Operating Activities

+ Net Cash Flows from Investing Activities

+ Net Cash Flows from Financing Activities

+ Beginning Cash

= Ending Cash

22
Q

Internal Statement of Expected Cash Flows

(Cash Budget)

A

Cash inflows

  • Cash outflows

+ Beginning cash balance

= ending case balance

>> Depreciation is NOT a cash flow!!

23
Q

Projected Income Statement

A
  • 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)

24
Q

GAAP - Income Statement

A
  • 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)

25
Q

Income Statements for Internal Use &

Cost-Volume-Profit Analysis

A

Sales (Sales Revenue)

- Variable Costs (Expenses)

Contribution Margin

_- Fixed Costs _

Net Income

26
Q

Projected Balance Sheet

A
  • Your basic balance sheet
27
Q

Desirable Model Attributes

A
  • Complete (include all critical elements)
  • Reflect [capacity, cost and revenue] relationships accurately
  • use accurate estimates (-> sensitivity analysis)
28
Q

Sensitivity Analysis: Accuracy of Estimates

A
  • It is the process of selectively varying key estimates to analyze the effect on decisions – identify over what range a decision option is prefered

>> If inaccurate estimates lead to sever consequences, may invest in resources to improve the estimates accuracy.

>> if consequences of inaccurate estimates are not sever (will not change the decision), may choose not to invest in resources to improve the estimate’s accuracy

29
Q

Sensitivity Analysis: Example

A

Option 1 Option 2

Revenues 900,000 700,000

Costs 650,000 500.000

Net _ 250,000 _ <<< 200,000

  • If Option 1’s revenue estimates decreases by less than 50,000 and cost remain the same, they will not change the decision
  • If Option 1’s cost estimate increases by less than 50,000 (to a maximum of 700,000) and revenues remain the same, they will not change the decision
30
Q

Sensitivity: Expected Value

A
  • Suppose Option 1’s costs are uncertain

>> 750,000 cost with probability p=1/3

>> 600,000 cost with probability (1-p) = 2/3

Expected value = $650,000;

>> 1/3(750,000) + (2/3)(600,000)

What is the maximum probability p at which a risk-neutral decision maker would still choose Option 1 over Option 2?

31
Q

Sensitivity: Probability

A

What is the maximum probability p (of the high cost for Option 1) at which a risk-neutral decision maker would still choose Option1 over Option 2?

  • Want expected cost less than or equal to 700,000

(= 650,000 + 50,000 allowable margin of error)

>> 750,000 cost with probability p

>> 600,000 cost with probability (1-p)

>> Expected value = 700,000

>> p(750,000) + (1-p)(600,000) < 700,000

>> p < 2/3

32
Q

Sensitivity: NPV Analysis

A
  • Can use sensitivity approach in NPV analysis for capital budgeting - approval for a new project or investment

>> How high would projected revenues have to be to approve the project?

>> How low would costs have to be or how large would the cost savings have to be, to approve the project?

33
Q

What is a (an Accounting) Variance?

A
  • A variance is the difference between an actual amount (for example, cost or revenue) and a target or planned amount
  • Variance analysis is a set of procedures managers use to help them understand why variances occurred, using budgets or standards (“budget per unit”) in the control or evaluation process
34
Q

How are Standards Developed?

A
  • Established by industrial engineers (materials or labor per unit)
  • Use previous period’s performance (materials or labor required last period)
  • Benchmarking (performance level achieved by an efficient competitor)
35
Q

First-Level Variances

A
  • the first-level variance for a cost (revenue) item is the difference between the actual and master budget (planned) costs (revenues)
36
Q

Favorable/ Unfavorable Variances

A
  • Variances are “favorable” (F) if the actual results have a favorable effect on income (actual costs less than estimated costs; actual revenues greater than estimated revenue)
  • Variances are “unfavorable” (U) if the actual results have an unfavorable effect on income (actual costs greater than estimated costs; actual revenues less that estimated revenue)
37
Q

Flexible Budgets

A
  • Goal: Compare actual results to targets based on the achieved level of production
  • they recast cost targets in the planned or master budget to reflect the actual level of production (prepare budgets “after the fact” - master budget is “static”)
  • to achieve goal stated above, compare actual results to flexible budget
38
Q

Second Level Variances

A
  • The difference between the planning variance and the flexible budget variance
39
Q

Decomposing First-Level Variances into Second-Level Variances

A
  • Planning variances reflect the effect of the volume change between the master budget and actual activity level achieved (Flexible budget - Master budget; for costs: +/U: -/F)
  • Flexible budget variances compare the flexible budget amounts and actual results (Acutual results - Flexible budget; for costs: +/U; -/F)
  • Planning variance + flexible budget variance = first-level variance
40
Q

Third-Level Variances

A
  • The direct material, direct labor, and variable overhead flexible budget variance are often decomposed further into third-level variances:

>> Quantity (efficiency) variances

-- Reflect the difference between the planned (standard) and actual use of inputs (e.g. DM & DL; similar variance for variable overhead (support))

>> Price (rate) variances

-- Reflect the difference between the planned (standard) and actual price (cost) per unit of inputs (similar variance for variable overhead (supports))

Accounting 211 (12 decks)

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