BEC 2 Planning Techniques Budgeting and Analysis Flashcards Preview

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Operational and tactical planning

the process of determining the specific objectives and means by which strategic plans will be achieved. Tactical plans are short term and cover periods up to 18 months.


Single use plans

Tactical plans are also called single use plans because they are developed to apply to specific circumstances during a specific time frame.


Annual budget

an annual budget is a type of single use tactical plan. Budgets translate the strategic plan and implementation into a period specific operational guide. Placing responsibility for achievement of strategic goals in the hands of managers promotes routine accomplishment of strategy as part of the manager's job function.


Budget policies

1. Formal budget policies
2. Management participation
3. budget guidelines
- evaluation of current conditions
- management instructions


Standards and benchmarking

1. Ideal standards - perfect efficiency and effectiveness, forward looking
2. Currently attainable standards - work performed by employees with appropriate training and experience but without extraordinary effort
3. Authoritative standards - set exclusively by management
4. Participative standards - set by both managers and the individuals who are held accountable


Master budgets

- annual business plan documents specific short term operating performance goals for a period, a year or less,
- communicates the criteria for performance
- called: static budget, annual business plans, profit planning or targeting budgets
- useful in manufacturing settings that require coordinating of financial and operating budgets


Components of master budgets

- operating budget and financial budget prepared in anticipation of achieving a single level of sales volume for a specified period
- Pro forma financial statements - the ultimate output of the annual business plan is a series of pro forma financial statements
- pro forma financial statements are supported by schedules that reflect the underlying operating assumptions that produce those statements.


Limitations of master budgets

1. Confined to one year at a single level of activity
2. Reporting output


Mechanics of master budgeting

1. Operating budgets - established to describe the resources needed and the manner in which those resources will be acquired. Include:
- sales budgets
- production budgets
- selling and admin budgets
- personal budgets
2. Financial budgets
- pro forma financial statements
- cash budgets


Sales budget

- foundation of the entire budget process
- anticipated sales of the org
- first budget prepared and it drives the number of units required by the production budget


Sales forecasting and budgeting

- sales budget based on the forecast
- sales forecast derived from input received from numerous org resources and staff opinion


Factors affecting sales forecasting and budgeting

1. Past patterns and budgeting
2. Sales force estimates
3. General economic conditions
4. Competitors' actions
5. Changes in the firm's prices
6. Changes in product mix
7. Results of market research studies
8. Advertising and sales promotion plans


Operating budgets - Production budget

- prepared for each product or each department based on the amount that will be produced
- made up of the amounts spent for direct labor, direct materials, and factory overhead


Production budget - establishing levels of production

Budgeted sales
+ Desired ending inventory
- Beginning inventory
= Budgeted production


Factors impacting the production budget

1. Company policies regarding stable production
2. Condition of production equipment
3. Availability of productive resources
4. Experience with production yields and quality


Direct materials budgets

1. Direct materials purchases budget represents the dollar amount of purchases of direct materials required to sustain production requirements.
a. Number of units to be purchases
Units of direct materials needed for a production period
+ Desired ending inventory at the end of the period
- Beginning inventory at the start of the period
= Units of direct materials to be purchased for the period
b. Cost of direct materials to be purchased

Units of direct materials to be purchased for the period
x Cost per unit
= Cost of direct materials to be purchased for the period
2. Direct materials usage budget
Beg inventory at cost
+ Purchases at cost
- Ending inventory at cost
= Direct materials usage
3. Direct labor budget

Budgeted production
x Hours required to produce each unit
= Total number of hours needed
x Hourly wage rate
= Total wages


Factory overhead budget

- fixed and variable production costs that are not direct labor or direct materials
- applied to inventory based on a representative statistic


Cost of goods manufactured and sold budget

- accumulates the info from the direct labor, direct material, and factory overhead budgets


Components of the costs of goods manufactured and sold budget

The cost of goods manufactured represents the sum of the budgets for each element of manufacturing as follows:
- direct labor
- direct material
- factory overhead

Cost of goods manufactured
+ Beg finished goods inventory
- Ending finished goods inventory
= Cost of goods sold


Operating budgets - Selling and admin exp budget

1. Variable selling expense
2. Fixed selling expense
3. General admin expense


Financial budgets - Cash budgets

Cash budgets represent detailed projections of cash receipts and disbursements. The cash budget is derived from other budgets based on cash collection and disbursement assumptions. Cash budgets provide management with info regarding the availability of funds for distribution to owners, for repayment of debt, and for investment.
- cash available
- cash disbursement
- financing


Cash available

1. Cash balances - the amounts of cash on hand that can be used to liquidate expenses.
2. Cash collections - cash that will be received from sales based on the sales budget and from anticipated loan proceeds.


Cash disbursements

Represent the cash outlays associated with purchases and with operating expenses.
1. Purchases indicate the anticipated amount that will be paid for purchases
- cash purchases for the current period
- credit purchases for the current period
- cash disbursements required to pay accounts payable during the current period
2. Operating expenses
- cash disbursements budgets eliminate noncash operating expenses
- cash disbursements budgets consider: % of prior month exp, current month exp paid in a following and current month



considers the manner in which operating (line of credit) financing will be used to maintain minimum cash balances or the manner in which excess or idle cash will invested to ensure both liquidity and adequate returns


Cash budget formats

cash budgets represent statements of planned cash receipts and disbursements and are primarily affected by the amounts used in the budgeted income statement. Cash budgets consider:
Beg cash
+ Cash collections from sales
- Cash disbursements for purchases and operating exp
- Computed ending cash
- Cash requirements to sustain operations
- Working capital loans to maintain cash requirements


Financial budgets - Pro forma financial statements

1. Pro forma income statements - key components of the budgeted income statements include the data described in the operating budgets:
- sales budget
- cost of goods sold budget
- selling and admin exp budget
- interest exp budget
2. Pro forma balace sheet - displays the balances of each balance sheet account consistently with the income statement and cash budget plans developed.
3. Pro forma statement of cash flows - the budgeted statement of cash flows is derived from the budgeted income statement


Capital budgets

Capital purchases budgets identify and allow management to evaluate the capital additions of the organization, often over a multiyear period. Financing is a significant component of the capital purchases budget. Capital budgets detail the planned expenditures for capital items. Capital budgets are highly dependent on the availability of cash or credit and they generally involve long-term commitments by organization.
a. Pro forma balance sheet
b. Pro forma income statement
c. Cash budget


Flexible budgeting

a financial plan prepared in a manner that allows for adjustments for changes in production or sales and accurately reflects expected costs for the adjusted output. Analysis focuses on substantive variances form standards rather than simple changes in volume or activity. Flexible budgets represent adjustable economic models that are designed to predict outcomes and accommodate changes in actual activity. Revenues and expenses are adjusted to display anticipated levels for achieved outputs.


Flexible budgeting
Assumptions and uses

Flexible budgets include consideration of revenue per unit, variable costs per unit, and fixed costs over the relevant range where the relationship between revenues and variable costs will remain unchanged and fixed costs will remain stable.
1. Yield - flexible budgets consider the amount of cost per unit allowed for units of output.
2. Variance analysis - flexible budgets derive the expenses and revenues allowed from the output achieved for purposes of comparison to actual activity and performance evaluation.


Flexible budgeting
Benefits and limitations of the flexible budget

1. Benefits - displays different volume levels within the relevant range to pinpoint areas where efficiencies have been achieved or where waste has occurred.
2. Limitations - dependent on the accurate identification of fixed and variable costs and the determination of the relevant range.