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)
Direct materials budget
A detailed plan showing the amount of raw materials that must be purchased during a period to meet both production and inventory needs.
This is done after production budget
The required purchase of raw materials are computed as:
1) Raw materials needed to meet the production schedule
2) Add: Desired ending inventory of raw materials
3) Total raw materials needs (add 1+2)
4) Deduct: Beginning inventory of raw materials
5) Raw materials to be purchases
The direct materials budget is usually accompanied by a schedule of ___________________ for raw materials
expected cash disbursements
Direct labour budget
A detailed plan showing labour requirements over a specific period.
Developed from the production budget
Direct labour requirements must be computed so that…
The company will know whether sufficient labour time is available to meet production needs and plan accordingly
To compute direct labour requirements
The number of units of finished product to be produced each period (month, quarter, etc) is multiplied by the number of direct labour-hours required to produce a single unit
50 workers x 480 hours per worker x $7.50 per hour = $180,000
manufacturing overhead budget
A detailed plan showing the production costs, other than direct materials and direct labour, that will be incurred over a specified period.
Need to compute unit produce cost for two reasons
1) To determine the cost of goods sold (COGS) on the budgeted income statement
2) To know what amount to put on the balance sheet inventory account for unsold units
Ending finished goods inventory budget
A budget showing the dollar amount of cost expected to appear on the balance sheet for unsold units at the end of a period.
Selling and administrative expense budget
A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period.
Lists fixed expense such as advertising, executive salaries, insurance, property taxes, depreciation (accounted then unaccounted for)
The cash budget is comprised of four major sections
1) Receipts
2) Disbursements
3) Cash excess or deficiency
4) Financing
1) Receipts
Consists of listing all of the cash inflows, except for financing, expected during the budget period
Major source of receipts will be from sales
2) Disbursements
Consists of all cash payments that are planned for the budget period
These payments will include raw materials purchases, direct labour payments, manufacturing overhead costs, etc
Other cash disbursements – Such as equipment purchases, dividends, and other cash withdrawals by owners – are listed
Cash excess of deficiency section is computed as follows:
1) Cash balance, beginning
2) Add: Receipts (aka collecting from customers)
3) = total cash available before financing (1+2)
4) Deduct: Disbursements (DL, DM, MOH, Sell and admin, equiptment purchases, dividends)
5) = Excess (deficiency) of cash available over disbursements (3-4)
If there is a cash deficiency during any budget period,
The company will need to borrow funds
If there is a cash excess during any budget period,
Funds borrow in previous periods can be repaid or the excess funds can be invested
The budgeted income statement is one of the key
schedules in the budget process
Prepared using schedules 1-8
The success of the budget program will be determined, in large part by two factors
1) How the budget is developed
2) How and to what purpose the budget is used
participative budget (aka self-imposed budget.)
A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager’s supervisor, and any issues are resolved by mutual agreement.
participative budgeting
Managers preparing their own budgets, which are then reviewed by the manager’s supervisor, and any issues are resolved by mutual agreement.
responsibility accounting
A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which the manager can exert significant control. The managers are held responsible for differences between budgeted goals and actual results.
Beyond budgeting model
- Set challenging relative performance targets
- Adopt continuous and inclusive planning
- Use rolling forecasts
- Use market0like structure for coordination
- Decentralize resource management
- Control through self-regulation and transparent information
- Use low-powered incentives aligned to group or organizational performance
The usual starting point in budgeting is to forecast sales.
TRUE
Incremental Budgeting
Incremental budgeting bases a period’s expenditure level on the amount spent during the previous period
periodic budgeting
In a periodic budget cycle, the planners prepare budgets periodically for each planning period –Periodic budgeting is typically performed once per budget period—usually once a year–Planners may, however, update or revise the budgets
Continuous Budgeting
In continuous budgeting, as one budget period passes (usually a month), planners drop that budget period from the master budget and add a future budget period in its placeThe length of the budget period reflects the competitive forces, skill requirements, and technology changes that the organization faces
Self-Imposed (Participatory) Budgeting
Budgets are prepared with the full cooperation and participation of managers at all levels
Responsibility Accounting
Managers should be held responsible for those items —and only those items —that the manager can actually control to a significant extent.
The master budget can be confusing or scary, however if you can answer these 10 questions you are fine
1) How much sales revenue will we earn?
2) How much cash will we collect from our customers?
3) How much raw material will we need to purchase
4) How much manufacturing costs will we need to add to production
5) How much cash will we need to pay our suppliers and our direct laborers, and how much will we pay for manufacturing overhead resources
6) What is the total cost that will be transferred from finished goods inventory to costs of goods sold
7) How much selling and admin expense will be incur, and how much cash will we pay related to these expenses
8) How much cash will we pay for equipment purchases
9) How much will we pay for cash dividends
10) How much money will we repay or borrow from lenders, including interest
The budgeted income statement shows
The company’s planned profit for the upcoming budget period, and it serves as a benchmark against which subsequent company performance can be measured
Master budget for Merchandise company (how it is different)
Merchandise company will not require the production, direct labour, direct materials, and overhead budgets
Rather a merchandise purchase budget is prepared
Budgeted income statement contains data from
Sales budget, ending finished goods inventory budget, the manufacturing overhead budget, the selling and admin expense budget, and the cash budget
Forecast
A forecast is based upon assumptions reflecting the conditions the business expects to exist and the course of action reasonably expected to be followed
Can utilize a specific monetary amount or a reasonable range based on the various assumptions in place.
Management expects the goals in a forecast to be met and believes them to be reasonably attainable
Projection
A projection is prepared to present one or more hypothetical courses of action that the business might follow
It is typically prepared for a restricted specific party, often internal management
This type of analysis can definitely be thought of as less realistic, even referred to as ‘pie in the sky’ … In a projection the assumptions are more of the desired scenario, not necessarily what is most likely to occur
Neither a forecast or a projection is a ______
budget
Budget constraints
Describe the combination of limitations on nonfinancial and financial resources within a company’s management control
It is because resources are constrained that choices must be made to obtain the maximum benefit of the resources available for use
Cost of goods sold is determined from schedules 1 and 6
that is the sales budget and ending finished goods inventory budget
Budgeted income statement calculations
Sales - COGS = gross margin - Selling and admin = net operating - interest expense = net income
