Chapter 10: Strategy and the Master budget

Question 1

What is a budget?

Answer 1

detailed plan for acquisition and use of financial and other resources over specified time frame

Question 2

What is budgeting?

Answer 2

process of preparing one or more budgets

Question 3

What is a long-range plan?

Answer 3

plan that identifies actions required during five- to seven-year period coved by plan to attain organization’s strategic goals

Question 4

What is capital budgeting?

Answer 4

process of identifying, evaluating, selection and controlling organization’s capital investments

Question 5

What are strategic budget expenditures?

Answer 5

planned spending on projects and initiatives leading to long-term value and competitive advantage

Question 6

What is the master budget?

Answer 6

aggregation of all subunit budgets into an integrated plan of action for the budget period

Question 7

What is operating budget?

Answer 7

plans for all phases of operation, including production, purchasing , personnel and marketing budgets

Question 8

What are the 7 most important considerations of sales budgets?

Answer 8

• Current sales levels and sales trends
• General economic and industry conditions
• Competitor’s actions and operating plans
• Pricing policies
• Credit policies
• Advertising and promotional activities
• Level of unfilled back orders

Question 8

What is financial budget?

Answer 8

budgets identifying and relate to sources and uses of funds for planned operations and capital expenditures

Question 9

What are sales budgets?

Answer 9

Schedule showing forecasted sales, in units and dollars for an upcoming period.

Question 10

Name 5 steps in the budgeting process?

Answer 10

1. Budget committee
2. Budget period
3. Budget guidelines
4. Negotiation, review and approval
5. Revision

Question 11

Name the most important components of the manufacturing budget?

Answer 11

1. Production budget
2. Direct materials usage budget
3. Direct materials purchase budget
4. Direct labor budget
5. Merchandise purchases budget
6. Cash budget

Question 12

What is a production budget?

Answer 12

budget showing planned output for an upcoming period

Budgeted production = budgeted sales + desired ending INV – Beginning INV

Question 13

What is a direct materials purchases budget?

Answer 13

budget showing physical amount and cost of planned purchases of direct materials

Question 14

What are manufacturing cells?

Answer 14

set of machines, typically laid out in the form of a semicircle, needed to produce a particular product or part.

Question 15

What is a merchandise purchases budget?

Answer 15

budget that shows amount of merchandise a firm plans to purchase during the budget period

Question 16

What is a cash budget?

Answer 16

schedule depicting effects on cash of all budgeted activities. Includes three major sections:
1. Net cash flows from operating activities
2. Net cash flows from investing activities
3. Net cash flows from financing activities

Question 17

What is zero-base budgeting?

Answer 17

budgeting process that requires managers to prepare budgets for each period from a base of zero. Doesn’t allow activities or functions to be included unless managers can justify their needs.

Question 18

What is activity-based budgeting?

Answer 18

Budgeting process based on activities and associated costs to support production and sales; an extension of traditional form of activity-based costing

Question 19

What is time-driven activity-based budgetin?

Answer 19

method of budget preparation used in conjunction with a time-driven activity-based cost system

Question 20

What is practical capacity?

Answer 20

theoretical capacity reduced by normal output losses due to personal time, normal maintenance and so on. Measure of capacity often recommended for estimating cost-driver rates under ABC and TDABC systems.

Question 21

What is kaizen budgeting?

Answer 21

budgeting approach that incorporates continuous improvement expectations in the budget.

Question 22

What are the two behavioral issues in budgeting?

Answer 22

1. Budgetary slack: difference between budgeted performance and expected performance; cushion managers intentionally build into budgets to help ensure success in meeting the budget
2. Goal congruence: consistency among goals of the firm, its subunits and its employees. It is achieved when managers acts independently to simultaneously achieve personal objectives and those of top management.

Question 23

What three factors influence goal congruence?

Answer 23

• Extent to which employees participate in budgeting process
• Level of difficulty embedded in the budget
• Whether and how compensation is linked to budgeted performance

Question 24

What is the difference between authoritative and participative budgeting?

Answer 24

Authoritative budgeting: top management prepares budgets for entire organization. It is top-down Participative budgeting: bottom-up approach involving people affected by budget in the budget-preparation process.

Question 25

What is a fixed-performance contract?

Answer 25

incentive compensation plan whereby compensation is a function of actual performance compared to fixed target

Question 26

What is meant with gaming performance measures?

Answer 26

non-value-adding actions taken by managers to improve indicated performance.

Question 27

What is relative performance?

Answer 27

contracts rewarding managers for performance based on comparison of actual results with specified benchmarks

Question 28

What is a rolling financial forecast?

Answer 28

constant planning horizon with use of regularly updated forecasts.