Exam 3 Flashcards
strategic planning
5-7 years, long term decisions like defining the scope of a business, determining which products to develop or discontinue, and identifying most profitable markets
capital budgeting
1-5 years, intermediate-range planning, buying or leasing equipment, whether to stimulate sales, increase company’s assets
operations budget
1 year, short-term objectives: sales targets, production goals, and financing plans
Advantages of Budgeting:
promotes planning and coordination
enhances performance measurement and corrective actions
Evaluation of goals cocreated by ______ to be attainable but ______
employees and management
challenging
sales budget shows
expected sales for coming periods and expected collection on those sales
critical to success of entire budgeting process because it affects everything else
Sales Budget looks like
months —>
Section 1: Projected Month's Sales Sales Cash Sales Cash on Acct Total Budgeted Sales
Section 2: Schedule of cash receipts
current cash sales
collection of AR
Total budgeted collections
Operating Budgets
Sales budget -> Inventory purchases budget -> SGA Expense budget
cash budget
Proforma financial statements _____ come from ____ budget
income statement, balance sheet and statement of cash flows
inventory purchases
Cash receipts come from ____ budget
sales
Cash payments for inventory come from ___ budget
inventory purchases
cash payments for SGA come from ____ budget
SGA Expense
Cash payments for SGA go into ____ budget
cash
Inventory purchases budget looks like
months —->
Section 1: Projected Purchases Budgeted Cost of Goods Sold Plus: Desired EI Total Inventory Needed Less: Beginning Inventory Required Purchases (on acct)
Section 2: Schedule of Cash Payments for Inventory purchases
Pay % of current month’s AP
Pay % of prior month’s AP
Total Budgeted Collections
inventory needed per month is calculated by
adding desired ending inventory to estimated COGS and subtracting beginning inventory
S&A expense budget looks like
months —->
Section 1: Projected S&A Expenses Salary expense Sales commision, % of sales Supplies expense, % of sales Utilities expense Depreciation expense Rent Expense Misc Expense Total S&A before Interest
Section 2: Schedule of cash payments Salary Expense 100% of prior month's sales commission Supplies expense, 1% 100% prior month's untilities expense Rent expensea Misc expense Total Payments for S&A Expenses
Cash budget looks like
months —->
Section 1: Cash receipts
Beginning cash balance
Add: cash receiots
Total cash available
Section 2: Cash Payments For Inventory Purchases For S&A Expense For Interest Expense For Purchase of Store Fixtures Total Budgeted Disbursement
Section 3: Financing Activities
Surplus (shortage)
Borrowing (Repayment)
Ending Cash Balance
Pro Forma Income Statement and where to get info
Sales ------ Sales budget (COGS) ------ inventory purchases budget Gross Margin (Operating Expenses) ----- S&A budget Operating Income (Interest Expense) ------ cash budget Net Income
Pro Forma Balance Sheet
Assets Cash ------ cash budget AR ----- sales budget Inventory ----- inventory purchases budget Store Fixtures --- cash budget Total Assets
Liabilities AP ----- Inv purchases Sales comm payable --- S&A Utilities payable --- S&A Line-of-credit borrowing ----- cash budget
Equities
Retained earnings ——- pro forma income statement
Total Liabilities and Equities
Pro forma Statement of cash flow
Cash flow from operating activities
Cash receipts from customers —- cash receipts budget
cash payments for inventory — inventory purchases
Cash payments for S&A —- S&A budgets
cash payments for interest —- cash budget
Net Cash flows from operating activities
Cash flows from Investment activities
Payment for Fixtures —- cash budget
Cash flows from Financing activities
inflow from borrowing on line-of-credit —- cash budget
Net Change in Cash —- cash budget
Plus: Beginnning cash balance
Ending cash balance — cash budget
flexible budget
compares what we aimed for vs. how much we actually sold
shows expected variance at a variety of volume levels
Flexible Budget looks like
units –>
Sales Rev Variable manufacturing costs materials, labor, overhead Variable GSA CM Fixed costs manufacturing, GSA Net Income
static budget
get definition from book
variances
=standard cost - actual cost
comparing expectations with reality
standard cost does not equal actual cost
variances favorable if
spend/use less or sell more than expected
variances unfavorable if
spend/use more or sell less than expected
sales volume variance
difference between static budget sales amount/volume and flexible budget sales amount/volume
Who is usually responsible for volume variances?
marketing managers
production managers have little control
flexible budget variances
compare actual results with what should have been achieved at that activity level
standard cost system
everyone collaborates to encourage efficient future productions, benchmarks against which actual performance can be judged
management by exception
focuses on material differences b/w actual and expected results
When selecting which variances to investigate:
1) Materiality
2) how frequently it occurs
3) capacity to control variance
4) characteristics of items behind variance
Materials price variance
actual Q x Actual P per lb + Actual Q x standard P per lbl
actual cost + variance dividing column
Materials usage variance
actual Q x standard P + standard Q x Standard P
variance dividing column + standard cost
Actual cost (materials)
Actual Q x Actual P
variance dividing column (materals)
Actual Q x standard P
Standard cost (materials)
Standard Q x Standard P
Total materials variance
materials price variance + materials usage variance
Price variance (materials)
(Actual price - standard price) x actual Q
Usage Variance (materials)
(Actual Q - Standard Q) x Standard P
Actual cost (labor)
Actual hours x actual price per hour
variance dividing (labor)
actual hours x standard p
standard cost (labor)
standard hours x standard p
actual cost + variance dividing
labor price variance
variance dividing + standard cost
labor usage variance
Price variance
actual p - standard p
x actual hours
Usage variance
Actual hours - standard hours
x standard p
production manager controls:
skill level assigned to work leels, employee motivation, quality, and training
Time allows you the opportunity to and
postpone consumption and earn interest
Examples of capital investments
purchases of long-term operational assets
not as liquid, the company will be committed for an extended period of time
PV of $ received in the future is ____ today’s dollar
less than
When a company invests in capital assets, it is sacrificing ____ for the opportunity to _____
present money
receive future money
annuity
constant payment at the end of each year
- equal pymt amounts
- equal time intervals b/w payments
- constant rate of return
Today, 200000 is worth less/more than in the future
less
Higher interest rates mean a ____ future cash value
lower
Net Present Value
inflows - outflows
PV of future cash inflows - cost of investment
helps you decide whether or not to invest
a positive NPV means
yields a higher rate of return than required
a negative NPV means
yields a lower rate of return than required
examples of cash inflows
salvage value, incremental revenue, cost savings, release of working capital
Examples of outflows
initial investment, increases in op expenses, increasing working capital requirements
PV Index:
PV of cash inflows/PV of cash outflows
comparing capital investment alternatives
