Module 6: Budgets and Variances (Chp 10)

Question 1

2 things that occur in short run

Answer 1

1) Capacity related costs are fixed

2) The only relevant costs are controllable costs, which are variable costs

Question 2

what does budgeting process determine

Answer 2

determines the planned level of most variable costs

Question 3

define budgeting process

Answer 3

approach used to determine how to allocate financial resources to each part of an organization based on planned activities and short run objectives of that part of the org

Question 4

define budget

Answer 4

a quantitative expression of the money inflows and outflows that reveal whether the current operating plan will meet org financial objectives

Question 5

5 things budgets do

Answer 5

1) Budget serve as a control for managers within business units of an org
2) Budgets play central role in relationship between planning and control
3) Budgeting is process of preparing budgets
4) Budgets provide a way to communicate the org short-term goals to employees
5) Budgeting also serves to coordinate the many activities of an org

Question 6

2 things that budgeting activities of each unit can do

Answer 6

1) Reflect how well managers understand org goals

2) Provide opportunity for org senior planners to correct misperceptions about org goals

Question 7

2 ways budgeting helps to anticipate potential problems

Answer 7

1) Borrowing needs - budget reflects cash cycle and provides info to anticipate cash shortages
2) If budget planning indicates that the org sales potential exceeds its manufacturing potential then the org can develop a plan to put more capacity in place or to reduce planned sales

Question 8

once authorized, what are discretionary spending budgets?

Answer 8

committed or fixed, they do not vary with levels of production or service

Question 9

3 things in planning

Answer 9

1) Identify org objectives and short term goals
2) Develop long term strategy and short term plan
3) Develop master budget

Question 10

2 things in control

Answer 10

1) Measure and assess performance against budget

2) Reevaluate objectives, goals, strategy and plans

Question 11

budgeting involves forecasting the demand for 4 types of resources over different time periods. The resources are:

Answer 11

1) Flexible resources that create variable costs
2) Intermediate-term capacity resources that create fixed costs
3) Resources that, in the intermediate and long run, enhance the potential of the organization’s strategy
4) Long-term capacity resources that create fixed costs

Question 12

what are short term flexible resources (4)

Answer 12

1) disposed of and acquired in short run
2) Committed for less than several weeks
3) Provides ability to use existing capacity
4) Raw materials, supplies, hourly paid labour
5) create variable cost

Question 13

what are Resources that, in the intermediate and long run, enhance the potential of the organization’s strategy

Answer 13

discretionary expenses like R&D, employee training, advertising, promotion, maintenance of capacity resources - do not provide capacity, do not vary with level of org activity

Question 14

what is inherent in budgeting process?

Answer 14

game playing

Question 15

explain game playing in budgeting process

Answer 15

If budgets are used to evaluate actual performance, managers have the incentive to misrepresent their info

Question 16

example of game playing in budgeting process

Answer 16

sales manager might understate sales potential in a region to look better when it is higher

Question 17

2 major types of budgets comprising master budget

Answer 17

1) operating budget

2) financial budget

Question 18

explain operating budget

Answer 18

Summarize the level of activities such as sales, purchasing, and production

Question 19

explain financial budget

Answer 19

Identify the expected financial consequences of the activities summarized in the operating budgets

Question 20

3 examples of financial budget

Answer 20

income statement, balance sheet, cash flow statement

Question 21

what happens if initial budgets are infeasible or financially unacceptable

Answer 21

planners repeat budgeting cycle with new set of decisions until results are feasible and financially acceptable

Question 22

step 1 of master budget

Answer 22

organization goals

Question 23

master budget - operating budget parts, step 2 - 9

Answer 23

2. Sales plan
3. Capital spending plan
4. Inventory policy
5. . Production plan
6. Productive capacity plan
7. Materials purchasing plan
8. Labor hiring and training plan
9. Administrative and discretionary spending plan

Question 24

explain sales plan

Answer 24

1) Identifies the planned level of sales for each product at a specific selling price
2) Provides basis for production plans: labour, materials, production capacity, cash

Question 25

explain capital spending plan

Answer 25

Specifies the long-term capital investments that must be paid in the current budget period to meet activity objectives

Question 26

explain production plan

Answer 26

1) Prepared by matching completed sales plan with organization’s inventory policy and capacity level
2) Identifies intended production during each of the interim periods comprising the annual budget period

Question 27

explain materials purchasing plan

Answer 27

Schedules required purchasing activities

Question 28

explain labour hiring and training plan

Answer 28

Specifies the number of people the organization must hire or release to achieve its activity objectives

Question 29

explain admin and discretionary spending plan

Answer 29

Includes administration, staffing, research and development, and advertising

Question 30

2 ways operations personnel uses operating budgets

Answer 30

1) use the operating budget to guide and coordinate the level of various activities during the budget period.
2) record data from current operations that can be used to develop future budgets.

Question 31

how do financial planners use projected balance sheet and income statement

Answer 31

to estimate the financial consequences of investment, production, and sales plans

Question 32

2 ways planners use projected statement of cash flows

Answer 32

1) To plan when excess cash will be generated to make short term investments
2) To plan how to meet any cash shortages

Question 33

steps in budgeting process

Answer 33

sales plan -> production plan -> spending plan -> choosing capacity levels

Question 34

3 types of resources determine capacity

Answer 34

1) short term flexible resources
2) intermediate term capacity resources
3) long term capacity resources

Question 35

3 points to intermediate term capacity resources

Answer 35

1) Committed for several weeks to 6 months
2) General purpose capacity transferable among organizations
3) Employees, general purpose equipment

Question 36

3 points to long term capacity resources

Answer 36

1) Committed for more than 6 months
2) Special purpose capacity customized for the organization’s use
3) Buildings, special purpose equipment

Question 37

why are capacity resources considered committed?

Answer 37

because they are the same regardless of much of facility is used and because level of capacities and fixed cost is difficult to change in short term

Question 38

what is the result of capacity resources being committed?

Answer 38

imposes financial risk on org

Question 39

what to planners use forecasted demand for?

Answer 39

to plan activity levels and provide required capacity

Question 40

what does it mean if production plan is infeasible?

Answer 40

demand exceeds capacity

Question 41

2 things planners can do if production plan is infeasible

Answer 41

1) acquire more capacity or 2) reduce planned level of production

Question 42

formula for production

Answer 42

lesser of 1) total demand 2) production capacity

Question 43

what is demand

Answer 43

quantity customers are willing to buy at stated price

Question 44

formula for production capacity

Answer 44

minimum of 1) long term capacity 2) intermediate term capacity 3) short term capacity

Question 45

3 factors that drive planning

Answer 45

1) demand
2) capacity levels chosen
3) production output quantity

Question 46

what is projected balance sheet (2)

Answer 46

1) An overall evaluation of the net effect of operating and financing decisions during the budget period
2) General assessment of operating efficiencies

Question 47

what is projected income statement (2)

Answer 47

1) An overall test of the profitability of the proposed activities
2) General assessment of operating efficiencies

Question 48

what is projected cash flow statement (2)

Answer 48

1) Helps an organization identify if and when it will require external financing
2) Determines if any projected cash shortage will be temporary or cyclical, or permanent

Question 49

3 sections of cash flow statement

Answer 49

1) Cash inflows from cash sales and collections of receivables
2) Cash outflows
3) results of financing operations

Question 50

explain cash outflows (2)

Answer 50

1) For flexible resources that are acquired and consumed in the short term
2) For capacity resources that are acquired and consumed in the intermediate and long term

Question 51

explain results of financing operations (2)

Answer 51

1) Summarizes the effects on cash of transactions that are not a part of the normal operating activities
2) Includes the effects of:
- Issuing or retiring stock or debt
- Short-term financing

Question 52

formula for net cash flow

Answer 52

cash inflow - cash outflow

Question 53

formula for ending cash

Answer 53

operating cash flow + opening cash + effects of financing operations

Question 54

what is budget info used for? (using projected results) (3)

Answer 54

1) Identify broad resource requirements
2) Identify potential problems
3) Compare projected operating and financing results

Question 55

formula for production plan - purchases needed

Answer 55

units to produce (production) + desired units in ending inventory - units in beginning inventory

Question 56

Determine the sales level in dollars at which the use of the new machine results in a 10% profit on sales (profit/sales) ratio formula

Answer 56

x (sales revenue) = fixed costs / 10%