Budgeting Pt. 1 Flashcards
T/F: tactical plans are short-term and cover periods up to 18 months
True; aka single-use plans they are developed to apply to specific circumstances during a specific time frame
What is an annual budget?
a type of single-use 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
To effectively budget, an organization should implement formal budget policies that include the following key features:
management participation and budget guidelines (the guidelines should include evaluation of current conditions and management instructions)
T/F: budgets frequently revolve around the development of standards
True; standards have been referred o as per-unit budges and are integral to the development of flexible budgets; the best standard is the one that leads to the accomplishment of strategic goals
What are ideal standards?
the costs that result from perfect efficiency and effectiveness in job performance; are generally not historical; are forward-looking; no provision is made for normal spoilage or downtime
advantage: the implied emphasis on continuous quality improvement to meet the ideal
disadvantage: the demotivation of employees by the use of unattainable standards
What are currently attainable standards?
costs that result from work performed by employees with appropriate training and experience but without extraordinary effort; provisions are made for normal spoilage and downtime
advantage: fosters the perception that standards are reasonable
disadvantage: required use of judgment and potential manipulation
What are authoritative standards?
they are set exclusively by management
advantage: can be implemented quickly and will likely include all costs
disadvantage: workers might not accept imposed standards
What are participative standards?
they are set by both managers and the individuals who are held accountable to those standards
advantage: workers are more likely to accept participative standards
disadvantage: they are slower to implement
What is a master budget?
it is prepared to provide comprehensive and coordinated budget guidance for an organization consistent with overall strategic objectives
it generally comprises operating and financial budgets prepared in anticipation of achieving a single level of sales volume for a specified period
limitations: it is confined to one year at a single level of activity and the pro forma financial statements may not provide the type of information most useful to management’s decision making
it produces two different types of budgets: operating (established to describe the resources needed and the manner in which those resources will be acquired) and financial budgets (the detailed sources and uses of funds to be used in operations)
T/F: the sales budget is the foundation of the entire budget process
True; it is the first budget prepared and it drives the development of most other components of the master budget (cash and revenue, inventory levels, purchases, operating expenses)
the sales budget is based on the sales forecast which is derived from input received from sales staff, statistical analysis of correlation between sales and economic indicators, and opinions of line management
What is the production budget?
one is prepared for each product or each department based on the amount that will be produced, stated in units; the production budget is made up of the amounts spent for DM, DL, and MOH; the amount of the production budget is based on the amounts of inventory on hand and the inventory necessary to sustain sales
formula: budgeted sales + desired ending inventory - beginning inventory = budgeted production
formula: units of DM needed for a production period + desired EI at the end of the period - BI at the start of the period = units of DM to be purchased for the period
formula: units of DM to be purchased for the period * cost per unit = cost of DM to be purchased for the period (purchases at cost)
formula: BI at cost + purchases at cost - EI at cost = DM usage (cost of materials used)
formula: budgeted production (in units) * hours (or fractions of hours) required to produce each unit = total number of hours needed
total number of hours needed * hourly wage rate = total wages
MOH is applied to inventory based on a representative statistic (cost driver); DL is the common application
formula: COGM + beginning FG inventory - ending FG inventory = COGS
What is the selling and administrative expense budget?
it represents the fixed and variable nonmanufacturing expenses anticipated during the budget period
variable selling = sales commissions, delivery expenses, bad-debt expense
fixed selling = sales salaries, advertising, depreciation
general admin (all fixed) = admin salaries, accounting and data processing, depreciation, other admin expenses
selling and admin expenses are not inventoried and are budgeted as period costs; budgeted selling and admin expenses are matched in their entirety against budgeted sales
