what is a budget?
a formal written statement of managements plans for a specified future time period
When are budget reports prepared and who prepares them?
accountants take the plans and turn them into monetary terms
reports prepared periodically
Who is responsible for the budget itself and the administration of the budget?
management
The six primary benefits of budgeting? (plan, object, warn,coordinate, awareness, motivate)
1.Plan Ahead
2. Definite objectives
3.early warning system
4. coordination of activities
5. management awareness
6. motivates personnel
How does budget help to plan ahead?
requires all levels of management to plan and formalize goals on a reoccurring basis
How does budget provided definite objectives?
allows for the evaluating of performance on every level of responsibility
How does budget create and earl warning signal?
it reveals potential problems so that management can make changes before things get out of hand
How does a budget help coordinate activities?
correlates the goals of each segment with overall company objectives.
company can integrate production and sales promotion with expected sales
How does a budget help manage awareness?
management has better knowledge of overall operations and the impact on operations of external factors
how does a budget motivate personnel?
it motivates them to reach their planned objectives
What are essential for effective budgeting? (3) structure. research. accept
1. sound organizational structure within the company
2. Budgets based on research and analysis -> allows for realistic goals
3. Acceptance of the budget by all levels of management
What is the length of the budget period?
a budget can be prepared for any period of time
What influences the length of budget period?
type of budget
nature of organization
the need for periodic appraisal
prevailing business conditions
How long should the budget period be? (attainable, seasonal, reliable)
long enough to provide an attainable goal under normal business conditions
long enough to withstand seasonal changes and short enough to make reliable estimates
What length is the most common budget period?
one year but the annual budget is often supplemented by quaterly or monthly budgets
When does the budget for the coming year generally start?
several months before the end of the current year and often based on past performances
What is a sales forecast?
framework for a budget
shows potential sales for the industry and the company's expected share of such sales
What factors must be considered in sales forecast? (7) (conditions, trends, studies, advertise,share,price,tech)
1. general economic conditions
2. industry trends
3. market research studies
4. anticipated advertising
5. previous market share
6. changes in price
7. technological developments
What is a budget committee?
committee responsible for coordinating the preparation of the budget
Who is usually apart of the budget committee?
President
Treasurer
chief Accountant
management personnel
Who finalizes, approves and distributes the budget?
the budget committee
What is participative budgeting?
A budgeting process that involves the input and negotiation of several layers of management. (bottom up approach)
Benefits of participative budgeting?
lower level managers have more detailed knowledge of the specific area and thus are able to provide more accurate budget estimates
more likely to reach a budget that is considered fair in all areas
provides positive motivation for managers
what are downfalls to participative budget?
time consuming and more costly
can foster budgetary slack
What is Budgetary slack?
occurs when managers intentionally underestimate budgeted revenues or overestimate budgeted expenses in order to make it easier to achieve budget goals
How do we minimize budgetary slack?
top management must thoroughly review the budget projections provided to them by the employees the supervise
What is top-down budget approach?
the budget is developed by top management and dictated to lower managers
What is long-range planning?
identifies long-term goals and selects strategies and policies to achieve these goals and less detailed
a budget focuses on short term goals and are very detailed
How long does long range planning usually last?
different from budgeting because last about 5 years
What is the master budget?
set of interrelated budgets that constitutes a plan of action for a specified time perod
What two classes of budgets are contained in the master budget?
operating budgets
financial budgets
what are operating budgets?
the individual budgets that result in the preparation of the budgeted income statement
establish goals for the company's sales and production personnel
what are financial budgets?
focus primarily on the cash resources needed to fund expected operations and capital expenditures
ex. capital expenditure budget, cash budget, and budgeted balance sheet
The order of preparation of budgets
Sales Budget --> Production Budget
Production budget -->. (DM Budget, DL Budget, MO budget)
(DM Budget, DL Budget, MO budget) --> Selling/Admin Exp Budget
Selling/Admin Exp Budget--> Budgeted income statement
Budgeted income statement --> Cash Budget (cap
what is the sales budget?
derived from sales forecast
prepared first
represents managements best estimates of sales revenue for the budget period
What could an overly optimistic sales budget result in?
in excessive inventory that may have to sold at reduced prices
What would a unduly pessimistic sales budget result in?
loss of sales revenues due to shortages in inverntory
How is sales budget prepared?
Expected units sales volume * unit selling price
What is the sales budget prepared first?
because it sets the level of activity for other functions such as production and purchasing
What is the production Budget?
shows the number of units of a product to produce to meet anticipated sales demand
Production budget formula? required production units =
Budgeted sales Units + desired ending finished goods units - beginning finished goods units
What is essential in scheduling production requirements?
a realistic estimate of ending inventory
excessive inventories in one quarter can lead to layoffs and cutback in a different quarter
what is The direct materials budget?
shows the quantitiy and cost of materials to be purchased
Formula for direct material budget? Required DM units to be purchased
Direct Material Units required for production + Desired ending direct material units - beginning DM units
How to compute the budgeted cost of purchasing the DM?
Required DM units to be purchased * cost per unit
what is the direct labor budget?
contains the quantity (hours) and cost of direct labor necessary to meet production requirments
Formula for Direct Labor cost: Total Direct Labor cost =
Units to be produced
direct labor time per unit
Direct labor cost per hour
What is the manufacturing overhead budget?
shows the expected manufacturing overhead costs for the budget period
distinguishes between variable and fixed overhead costs
What helps improve the accuracy of budgeted overhead cost estimates?
activity based costing
What is the selling/admin budget?
projects anticipated selling and administrative expenses for the budget period
classifies expenses as either variable (ex. frieght-out and sales commission) or fixed cost
What is the budgeted income statement?
important end product of the operating budgets.
The budget indicates the expected profit of operations for the budget period while the income statement provides and analysis of performance
Where does all the information come from on budgeted income statement?
operating budgets EXCEPT interest expense and income taxes estimates
What is a cash budget?
shows anticipated cash flows
cash is so vital
often considered most important budget
Why is the cash budget prepared after the other budgets are prepared?
bc the info generated by the other budgets dictates the expected inflows and outflows of cash
What does the cash receipts section of cash budget include?
expected receipts from company's principal source of revenue
cash sales and credit sales
receipts from interest and dividends
receipts from sales of investments plant assests and capital stock
What does the cash disbursements section of cash budget include?
expected cash payments
include payments for DM DL MO and selling/admin expenses
projected payments for income taxes, interest expense , dividends, investments and plant assests
What does the financing section on cash budget show?
expected borrowings and repayment of the borrowed funds plus interest
note: THE ENDING CASH BALANCE OF ONE PERIOD BECOMES THE BEGINNING CASH BALANCE OF THE NEXT PERIOD
...
What is the budgeted balance sheet?
projection of financial position at the end of the budget period
developed from budgeted balance sheet from the preceding year
What are the major differences bxt the master budget for merchandising vs manufacturing company?
Merchandiser uses a purchases budget instead of a production budget
A mechandiser does not use the manufacturing budgets (DM, DL, MO)
Formula for determining the budgeted merchandise purchases is:
Budgeted COGS + desired ending merchandise inventory - beginning merchandise inventory
What occurs when merchandiser is departmentalized?
each department prepares a separate budget then combines them into master budget
How do service companies budget?
must coordinate professional staff needs with anticipated services
overstaffed --> labor cost too high. not enough work for each worker
understaffed --> lose new clientele, too much work for each worker
How do not for profit budget?
on the basis of cash flows rather than revenues and expenses
starting point is expenditures NOT reciepts