Chapter 10: Budget Making

Question 1

What is a budget?

Answer 1

• formal written statement for future period
• primary way to communicate objectives to company
• promote efficiency and discourage waste
• Performance Evalustion

Question 2

Historical accounting data on revenues, costs, and
expenses help in formulating future budgets

Question 3

Accountants are responsible for presenting management’s
budgeting goals in financial terms

Answer 3

also prepare periodic budget reports used in performance
measurement and to compare plans with actual results

Question 4

The budget and its administration are management’s
responsibility

Question 5

benefits of Budget

Answer 5

1. plan ahead
2. definite obejctives
3. early warning system
4. coordination of activities
5. management awareness of external factors
6. motivates personnel

Question 6

BUDGET IS AID TO MGMT NOT SUBSITITUTRE!!!!

Answer 6

-> sound org structure
-> research anda nalysis
-> must be accepted by all levels of mgmt

Question 7

budgets can be prepared for which period of time

Answer 7

any!! common: year, and supplemented with monthly and quarterly

Question 8

budgets need to be long enough to provide attainable goals/minmize seasonal fluctuations

short enough for reliable esitmates

Question 9

what are continuous twelve month budget

Answer 9

drop the month just ended and add future moth!!!

Question 10

Steps in budgeting process

Answer 10

1. sales forecast: including potential sales/expected share of firm. CONSIDER external factors!! like trens, price changes, etc.
2. Overall process is usually informal in small companies; but in bigger firms assigned to a BUDGET COMMITTEE
3. bottom up or top down!!!

Question 11

Budget committee

Answer 11

Include the president, treasurer, chief accountant
(controller), and management personnel from each
major area of the company

o Committee acts as a review board where managers
defend budget goals and requests

Question 12

Bottom Up/Participative Budgeting

Answer 12

• talking to lower level managers to produce a budget!!1
• PROS:
  -> accurate budget estiamtes (low level maangers now the details)
  -> overall process is seemed more fair
• CONS:
  -> can be time consuming and costly
  -> can foster budgetary gaming through slack (ppl intentionally udnersestimate revenues or overestimate expenses!)

Question 13

top down budgeting

Answer 13

no real buy in from lower level maangers

Question 14

budgeting vs long range planning differences

Answer 14

TIME PERIOD INVOLVED: short term vs long term (1 vs 5 years)

EMPHASIS: Achievement of specific short term goal vs identify long term goals/select strategies etc.

DETAIL PRESENTED: very detailed vs contrain less detail

Question 15

What is master budget

Answer 15

interrelated budgets for plan of action; has TWO CATEGORIES OF BUDGETS!

1. Operating Budget: individual budgets that result in the preparation of income statements
2. Financial Budgets: budgets that focus on cash to fund operations, uses info for operating budgets, FINAL BUDGET IS THE BALANCE SHEEt

Question 16

visual!!!

Answer 16

OPERATING BUDGETS ———-> FINANICIAL BUDGETS

OB( sales > production > DM/DL/MOH > Selling/Admin > BUdgeted income_

FB( Cap ex > Cash BUdget > BUdgeted balance sheet)

Question 17

Sales budget

Answer 17

number of units sold driving production budget

———> take mgmt estimate of sales revenue for budget period;

EXPECTED UNIT SALES VOLUME FOR EACH PRODUCT x ANTICIPATED UNIT SELLING PRICE

———>

Expected Unit Sales
Unit Selling Price__________________
Total Sales

Question 18

Production Budget

Answer 18

units products is NOT # units sold

beginning and ending invenotires must be considered

Question 19

Budgeted sales revenue dollars used in the Budgeted Income Statement and Cash Budget

Answer 19

Budgeted unit sales used in the Production budget – which drives all other operating budgets

Question 20

Production Budget

Answer 20

-> shows units produced in order to meet budgeted sales and inventory targets
-> production budget drives DM,DL,MOH
-> Production budget does not include $$ value, only units
-> Production budget calculation:

Expected Sales Units + Desired Ending FG units - Beginning FG units = Required Production Units

Question 21

Direct Materials Budget

reports 3 things

Answer 21

Units of DM needed to meet production and inventory
needs
—->Target ending inventory for DM key component to the DM budget

Direct materials to be purchased

Cost of the direct materials to be purchased which is
also part of the Cash Flow Budget

Question 23

DL

Answer 23

units to be produced * DL hours per unit * DL cost per hour = dl cost total

Question 24

MOH budget

Answer 24

just calc with logic

moh rate: sum total MOH budgeted/sum total unit

Question 25

S&A expense budget

Answer 25

fixed is fixed; but VARIABLE is = BASED ON UNITS SOLD

Question 26

Budgeted income statement

Answer 26

- Important end-product of the operating budgets * Indicates expected profitability of operations * Provides a basis for evaluating company performance * Prepared from operating budget information

Question 27

elements in budgeted income statmeent coming from other budgets?

Answer 27

* Sales budget → Total sales revenue * Production, Direct materials, Direct labour and Manufacturing overhead budgets → Cost per unit o To determine Cost of Goods Sold and Gross Profit

Question 28

COGS FORMULA

Answer 28

UNIT SOLD X UNIT COST unit cost = dm + dl + moh + other costs

Question 29

budgeted income statemetn- period expsense

Answer 29

S&A Other expenses: interest, income tax, misc.

Question 30

2 types of financial budgets

Answer 30

a) cash budget b) balance sheet budget

Question 31

cash budget

Answer 31

MOST IMPORTANT AND MOST OVERLOOKED! -> reports cash flows, plan for short term financing, CASH RECIEPETS CASH DISBURSMENTs FINANCING begin and end balances

Question 32

Section 1: Cash Receipts

Answer 32

includes expected receipts from the principal sources of revenue – usually cash sales and collections on credit sales * Includes any other expected cash inflows such as: o interest and dividend receipts o proceeds from planned sales of investments, plant assets, and share capital

Question 33

Section 2: Cash Disbursements

Answer 33

Includes expected cash payments for: o Direct material purchase (typically accounts payable payments) o Direct and indirect labour costs, fixed and variable overhead costs o All other period expenses o All other non expense disbursements including income tax instalments, dividends, plant assets acquisitions, investment purchases

Question 34

Section 3: Financing Section

Answer 34

Financing section * Shows expected borrowings and repayments of borrowed funds plus interest o Funds will need to be borrowed when there is a cash deficiency or when the cash balance is below management’s minimum required balance o Borrowed funds can be repaid when there is a cash surplus, or the cash balance is greater than the minimum required cash balance

Question 35

what is a budgeted balance sheet

Answer 35

A projection of financial position at the end of the budget period;

Question 36

how do you develop a budgeted balance sheet?

Answer 36

1. RETAINED EARNINGS: net income from budgeted income statement added 2. FG inv: from production budget 3. Building and equipment accounts: updated using information from the Capital Expenditure Budget

Question 37

budgeting in non anufacturers

Answer 37

Sales budget will apply to all o Not-for-profit will create a revenue budget for donations

Question 38

Budgeting for Merchandisers

Answer 38

uses sales budget, has no manufacturing budgets (dm/dl/moh) only merchandising budgets budgeted merchandise purchase: budgeted COGS + end desired merch inv - begin merch inv = required purhcases

Question 39

budgeting for service enterprise

Answer 39

critical factor in budgeting is coordinating professional staff needs with expected services * Problems if overstaffed: o Disproportionately high labour costs o Lower profits due to additional salaries o Increased staff turnover due to no challenging work * Problems if understaffed: o Lost revenue because existing and prospective client needs for service cannot be met o Loss of professional staff due to excessive work loads

Question 40

budgeting for NFP

Answer 40

- Important process that differs significantly from that of a profit-oriented company * Budget on the basis of cash flows (expenditures and receipts), rather than on a revenue and expense basis * The starting point is expenditures, not receipts * Unlike for-profit organizations, budget must be strictly followed

Question 41

master budget conssits of

Answer 41

Sales budget ( and other cost driver budget when necessary) 2. Production budget 3. Direct materials purchases budget 4. Direct labour budget 5. Manufacturing overhead budget 6. Ending Finished goods inventory budget 7 Selling and administrative budget 8. Cash budget 9. Budgeted income statement 10.Budgeted balance sheet

Question 42

budget administration

Answer 42

Budget officer/Chief budget officer-specifies the process by which budget data will be compiled  *Budget manual-specifies who is responsible for the information, when it is required, and what form the information should take  *Budget committee-a committee appointed to advise the budget director during the budget process.

Question 43

other key terms

Answer 43

Participative budgeting-have managers and employees participate in the budgeting process.  Padding the budget- managers setting goals that are easy to attain. Difference between those and the realistic goals is called budgetary slack.  Zero based budgeting-Analyzing and developing a budget for each activity within the company as if it was the company’s first year of operations (not in textbook)

Question 44

CORNERSTONE FO ALL BUDGETING

Answer 44

sales forceast!! used in all

Question 45

sales forecast shows potential sales and forecasts!!! the sales budget is picking one forecast and outlining the bduget