BUDGETING Flashcards
What is a Budget?
What is a Budget?
A detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
The Purpose of a Budget
The Purpose of a Budget
• A budget is a formal estimate of future revenues and costs
•A detailed breakdown of all costs and revenues is necessary for attaining profit goals
•Institutions must analyze operations to develop reliable estimates of revenues and costs.
•If budgeting is done right, it forces better thinking about the firm’s goals and purpose and how to achieve them. It forces management to ask what to be done if certain target levels of sales and costs are to not being realized.
•Making realistic budgets requires clear thinking; As a financial plan of firm’s expectations over time, it should be an assessment of what each part of the firm can accomplish
The Stages of Budgeting
- Planning
- Control
Planning: the budget process forces managers to consider carefully their goals and objectives and to specify means of achieving them.
Control: Budgets provide a means of evaluating performance. Potential causes of significant deviations from budgets include:
●Budget was poorly conceived.
●Conditions have changed since the budget was prepared.
●Managers have done a particularly good or poor job.
Developing the Budget
1.The Budget Committee
2.The Budget Time Period
3.Zero Base Budgeting
- The Budget Committee:-Various budgets are approved by a budget committee that is composed of senior managers such as the president, CFO, VP of operations, and the controller.
Budgets may be developed with either a top-down or bottom-up approach. - The Budget Time Period:-Budgets may cover a variety of time periods including a month, quarter, year, or even longer. Generally, longer budget periods provide less detail.
- Zero Base Budgeting:- Budgets are often adjusted up or down on the basis of a previous period adjusted for current conditions. Zero base budgeting requires that all budget amounts be currently justified even if they were supported in prior budgets. Due to the cost of the process, this zero base budgeting is often not used in business.
The Master Budget and Budget Formats
The Master Budget and Budget Formats: coordinates the organizations activities
A.A Formal Summary of an institution’s Plans
B.Selected Budget Formats
A. A Formal Summary of and institution’s Plans:
It sets specific targets for sales, production, selling and admin., and capital acquisitions.
•It culminates a budgeted income statement, balance sheet, and cash receipt and disbursement summary.
B. Selected Budget Formats
A.Sales Budget
B.Production Budget
C.Direct Materials Budget
D.Direct Labor Budget
E.Overhead Budget
F.Cash Receipts and Disbursements Budget
A. Sales Budget formula
Projected sales x Selling price per unit
= Budgeted sales revenue
B. Production Budget
Budgeted sales in units. + Desired ending inventory of finished goods
= Total needs
- Beginning inventory of finished goods
= units to be produced
C. Direct Materials Budget
C. Direct Materials Budget
Units to be produced
x Cost of parts per unit
= Cost of parts needed for production
+ Desired ending inventory of parts
= Total needed
- Beginning inventory of parts
= Cost of purchases
D. Direct Labour Budget
Direct labor hours per unit
x Labour rate per hour
= Direct labour cost per unit
x unit to be produced
= total direct labour cost
E. Overhead Budget
E. Overhead Budget
Units to be produced
x Variable costs per unit
= Total variable overhead
+ Budgeted fixed overhead
= Total budgeted overhead
- Noncash expenses
= Cash disbursements for overhead
F. Cash Receipts and Disbursements Budget
Cash receipts
- Cash disbursements
= Excess (deficiency) of cash
available over disbursements
+ Beginning cash balance
= ending cash balance
Static v. Flexible Budget
Static v. Flexible Budget
A.Static Budget
B.Static Budget Illustration
C.Flexible Budget
D.Flexible Budget Illustration
A. Static Budget
E.g in slides
A. Static Budget
A budget designed for only one level of activity. Differences from the budget can be misleading when an organization actually operates at a different level of activity.
B. Static Budget Illustration
Slides
C. Flexible Budget
C. Flexible Budget
•A budget designed to cover a range of activity.
•It can be used to compare actual costs incurred to budgeted costs around that level of activity.
