Chapter 7: Budgeting Flashcards
Budgeting
The process used by businesses to describe, in financial terms, how they intend to achieve their desired financial and nonfinancial objectives.
Budget
A detailed plan for acquiring and using financial and other resources over a specified period.
A quantitaive plan
Plan
A set of objectives and budgets to achieve those objectives.
Controls
Those steps taken by management to increase the likelihood that the objectives and targets described in the budgeting stage are attained and to ensure that all parts of the organization function in a manner consistent with organizational policies.
Master budget
A summary of a company’s plans in which specific targets are set for sales, production, distribution, and financing activities and that generally culminates in a cash budget, budgeted income statement, and budgeted balance sheet.
Planning
Developing objectives and preparing budgets to achieve those objectives.
Control
Taking steps to increase the likelihood that the objectives and targets described in the budgets are attained and all parts of the organization function in a manner consistent with organizational policies.
To be effective, a good budgeting system must provide for both ____ and _____
Planning and control
Budget Committee
A group of key managers who are responsible for overall policy matters relating to the budget program and for coordinating the preparation of the budget.
Why should we budget?
Simple answer: Resources are Scarce!
Sales budget
A detailed schedule showing the expected sales for coming periods; these sales are typically expressed in both dollars and units.
- Based on sales forecast
- Service organization must estimate the demand for their services
Every part of the master budget relies on the sales budget in some way, a sloppy sales budget calls for a shitty master budget
After sales budget you produce the production budget
Consist of sales (selling price x quantity), schedule of expected cash collections, and prices collected during month and during the next month
After sales budget you produce the________ budget
production
Production budget
Used to determine the budget for manufacturing costs, including the direct materials budget, the direct labour budget, and the manufacturing overhead budget.
These are than combined with the data from the sales budget and the selling and administrative expense budget to determine cash budget
Lists the number of nits that must be produced during each budget period to meet sales needs and to provide for the ending inventory
Production needs can be determined as: Budgeted sales in units + desired ending inventory = total needs, then - beginning inventory = required production)
Ex: 20,000 + 30,000 = 50,000 - 10,000 = 40,000 required
Cash Budget
A detailed plan showing how cash resources will be acquired and used over some specific period.
Operating budget (is a financial budget)
Used to refer to the budget that pertains to such activities as sales, production, purchasing, selling, and administration that the firm undertakes in the course of operating the business
All operating budgets have an impact on the cash budget
Operating budgets, including the cash budget, ordinarily cover the company’s _____ year
Fiscal
Many companies divide their budget into _______
Four quarters
The first quarter is divided into months and each month has its own budget
zero-based budget
Zero based budget
A method of budgeting in which managers are required to justify all costs as if the programs involved were being proposed for the first time.
You start at 0 rather than last years leftovers
Not very popular, but the occasional zero based review can be helpful
Often used in governmental and not-for-profit sectors
Managers are required to justify all budgeted expenditures, not just changes from the previous year
Issues with zero-based budget
Too time consuming
Too expensive
The sales budget is constructed by ______ the budgeted sales in units by the selling price
multiplying
Production budget
A detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. See slide 13 for more info
Production is determined as follows:
1) Budgeted sales in units (in units or $)
2) Add: Desired ending inventory
3) (1+2) = Total needs
4) Deduct: Beginning inventory
5) Required production
Merchandise purchases budget
A budget used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.
SAME AS PRODUCTION BUDGET, BUT FOR MERCHANDISERS
Merchandise purchases budget follows the same basic format as the production budget
1) Budgeted cost of goods sold (units or dollars)
2) Add: Desired ending merchandise inventory
3) (1+2) = Total needs
4) Deduct: Beginning merchandise inventory
5) Required production (units or dollars)