Topic 4: Profit planning and the role of budgeting (FINAL) Flashcards
What is the definition of a budget?
A budget is a detailed plan for the acquisition and use of financial and other resources over a specific time period.
What are two types of budget periods?
- One year operating budget: Follows a company’s fiscal year
- Rolling budget: A 12-month budget that adds a new month or quarter as each period concludes, maintaining a continuous one-year horizon.
What is the purpose of budgeting?
- Communicates management’s plans throughout the organization.
- Allocates resources effectively.
- Coordinates activities and identifies potential bottlenecks.
- Provides benchmarks for performance evaluation.
Why is sales forecasting critical in budgeting?
Accurate sales forecasts provide the foundation for other budgets, ensuring alignment between sales, production, and financial planning.
What is the master budget?
A summary of a company’s plans that sets specific targets for sales, production, distribution, and financing, culminating in a cash budget, a budgeted statement of profit or loss, and a budgeted statement of financial position.
What are the two main sections of a master budget?
- Operating Budgets: Includes sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative expense, and ending inventory budgets.
- Financial Budgets: Includes the cash budget and budgeted financial statements.
What are the main components of the master budget?
- Sales budget
- Production budget
- Direct materials budget
- Direct labor budget
- Manufacturing overhead budget
- Ending finished goods inventory budget
- Selling and administrative expense budget
- Cash budget
What is responsibility accounting?
A system that assigns budgetary control to specific managers, holding them accountable for variances between budgeted and actual results.
What is a participative budget?
A budgeting approach where managers who are responsible for specific budget items actively participate in setting their budget estimates, promoting ownership and accuracy.
What is the pupose of the the sales budget? And what is included?
The sales budget forecasts the number of units to be sold, the selling price, and the schedule of expected cash receipts.
Sales budget = Budgeted sales in units × Selling price
All following parts of the master budget is dependent on the sales budget.
What is the purpose of the production budget? And what is included?
The production budget ensures that enough units are produced to meet the sales budget.
Total needs:
- Budgeted sales in units.
- (Add) Desired ending inventory of finished goods.
Required production:
Total needs minus beginning inventory of finished goods.
Required Production = Budgeted Sales + Desired Ending Inventory − Beginning Inventory
What is the purpose of the direct materials budget? And what is included?
The direct materials budget determines the raw materials needed to meet production schedules and maintain inventory levels.
- Raw materials needed to meet the production schedule
- Add desired ending inventory of raw materials
- Total raw materials needs
- Less beginning inventory of raw materials
- Raw materials to be purchased
What is the purpose of the direct labour budget? And what is included?
The direct labor budget ensures that enough labor hours are available to meet production needs.
- Units (cases) to be produced (from production budget)
- Direct labour time per unit (hour)
- Total hours of direct labour time needed
- Direct labour cost per hour
- Total direct labour cost
What is the purpose of the the manufacturing overhead budget? And what is included?
The manufacturing overhead budget estimates all production-related costs that are not directly tied to raw materials or labor.
Seperated into variable and fixed costs.
- Budgeted direct labour-hours
- Variable overhead rate
- Variable manufacturing overhead
- Fixed manufacturing overhead
- Total manufacturing overhead
- Less depreciation
- Cash disbursements for manufacturing overhead
Depreciation is deducted from the total to get the disbursements.
What is the purpose of the ending finished goods inventory budget? And what is included?
The ending finished goods inventory budget determines the value of unsold units at the end of a budget period.
This information is used to:
- Calculate the Cost of Goods Sold (COGS) for the budgeted statement of profit or loss.
- Determine the inventory value for the budgeted statement of financial position.
- Ensure proper inventory levels to balance production efficiency and storage costs.
Production cost per unit:
- Direct materials
- Direct labour
- Manufacturing overhead
- Unit product cost
Budgeted finished goods inventory:
- Ending finished goods stock in units
- Unit product cost
- Ending finished goods stock
