Chapter 6: Master Budgeting and Responsibility Accounting Flashcards
What is a budget?
What is an advantage of budgeting?
What does a budget include?
A plan for a specific period of time with numbers.
Its a tool to communicate company and individual department goals to all employees.
The desired result is that employees will coordinate (align) their efforts with other departments and the company.
The plan includes financial and nonfinancial data.
What are the 4 steps in the budgeting cycle (budget process)?
- Make a plan (company and departments) based on past performance and expectations for the future
- Senior managers set expectations that will be benchmarked (budget vs. actual)
- Variances are investigated (manage by exception)
- Plan for next period with new data
What are the advantages of budgets?
- Sets standard for measuring performance
- Provides motivation to employees
- Promotes coordination and communication among deparments
What are the components of the master budget?
- Operating budget
- Budgeted Income Statement
- Financial budget
- Budgeted Balance Sheet
- Budgeted Statement of Cash Flows
What are the 9 general steps to creating an operating budget?
- Set sales target with revenue budget
- Determine units needed to achieve sales target with production budget
- Determine how much direct materials need to be purchased and used in production to achieve sales target with direct materials usage budget and direct materials purchases budget
- Determine how much labor is needed to produce units to achieve sales target with direct manufacturing labor budget
- Determine overhead costs needed with manufacturing overhead costs budget
- Determine inventory already on hand and the amount you need for the next period with ending/beginning inventories budget
- Determine how much all of this is going to cost you with cost of goods sold budget
- Determine the period costs with operating expense budget
- Prepare the budgeted income statement
What are the 4 general steps to creating the financial budgets?
All of these are based on the operating budgets:
- Prepare the capital expenditures budget
- Prepare the cash budget
- Prepare the budgeted balance sheet
- Prepare the budgeted statement of cash flows
What is a sensitivity analysis?
What is its purpose with budgeting?
A technique used to arrive at some conclusion by examining the results of various hypothetical situations when inputs change.
It tells managers what can happen if their assumptions during budgeting are wrong.
What is Kaizen budgeting?
Continuously trying to find efficiencies by evaluating variances in the budget.
What is Activity-Based Budgeting?
Costing cost objects by activity and using this data in the budget process.
What is a responsibility center?
A unit of an organization that is responsible and held accountable for specific activities.
What is responsibility accounting?
Setting expectations and measuring performance for each responsiblity center.
What are the 4 types of responsiblity centers?
- Cost center - responsible for keeping cost down
- Revenue center - responsible for producing revenue
- Profit center - responsible for keeping cost down and producing revenue, thus maximizing profit
- Investment center - responsible for investing profits, thus minimizing costs and maximizing revenue on a project
What type of feedback does budgets provide?
What specific information is provided to managers?
Budgets id variances, deviations from budget targets.
Specifically variance provide:
- Early warnings of problems
- Basis for performance evaluation
- Basis for strategy evaluation
What is controllability?
Why is this concept important in responsibility accounting?
The degree of influence a manager has over costs, revenues and profits.
You only want to hold someone accountable for something they can control, so you need to identify thoses items.
What is budgetary slack?
Underestimating budgeted revenues
Overestimating budgeted costs
To make achieveing budgeted targets easier.
