Chapter 7: Budgeting

Question 1

Budgeting

Answer 1

The process used by businesses to describe, in financial terms, how they intend to achieve their desired financial and nonfinancial objectives.

Question 2

Budget

Answer 2

A detailed plan for acquiring and using financial and other resources over a specified period.

A quantitaive plan

Question 3

Plan

Answer 3

A set of objectives and budgets to achieve those objectives.

Question 4

Controls

Answer 4

Those steps taken by management to increase the likelihood that the objectives and targets described in the budgeting stage are attained and to ensure that all parts of the organization function in a manner consistent with organizational policies.

Question 5

Master budget

Answer 5

A summary of a company’s plans in which specific targets are set for sales, production, distribution, and financing activities and that generally culminates in a cash budget, budgeted income statement, and budgeted balance sheet.

Question 6

Planning

Answer 6

Developing objectives and preparing budgets to achieve those objectives.

Question 7

Control

Answer 7

Taking steps to increase the likelihood that the objectives and targets described in the budgets are attained and all parts of the organization function in a manner consistent with organizational policies.

Question 8

To be effective, a good budgeting system must provide for both ____ and _____

Answer 8

Planning and control

Question 9

Budget Committee

Answer 9

A group of key managers who are responsible for overall policy matters relating to the budget program and for coordinating the preparation of the budget.

Question 10

Why should we budget?

Answer 10

Simple answer: Resources are Scarce!

Question 11

Sales budget

Answer 11

A detailed schedule showing the expected sales for coming periods; these sales are typically expressed in both dollars and units.

• Based on sales forecast
• Service organization must estimate the demand for their services

Every part of the master budget relies on the sales budget in some way, a sloppy sales budget calls for a shitty master budget

After sales budget you produce the production budget

Consist of sales (selling price x quantity), schedule of expected cash collections, and prices collected during month and during the next month

Question 12

After sales budget you produce the________ budget

Answer 12

production

Question 13

Production budget

Answer 13

Used to determine the budget for manufacturing costs, including the direct materials budget, the direct labour budget, and the manufacturing overhead budget.

These are than combined with the data from the sales budget and the selling and administrative expense budget to determine cash budget

Lists the number of nits that must be produced during each budget period to meet sales needs and to provide for the ending inventory

Production needs can be determined as: Budgeted sales in units + desired ending inventory = total needs, then - beginning inventory = required production)

Ex: 20,000 + 30,000 = 50,000 - 10,000 = 40,000 required

Question 14

Cash Budget

Answer 14

A detailed plan showing how cash resources will be acquired and used over some specific period.

Question 15

Operating budget (is a financial budget)

Answer 15

Used to refer to the budget that pertains to such activities as sales, production, purchasing, selling, and administration that the firm undertakes in the course of operating the business

All operating budgets have an impact on the cash budget

Question 16

Operating budgets, including the cash budget, ordinarily cover the company’s _____ year

Answer 16

Fiscal

Question 17

Many companies divide their budget into _______

Answer 17

Four quarters

The first quarter is divided into months and each month has its own budget

Question 18

zero-based budget

Zero based budget

Answer 18

A method of budgeting in which managers are required to justify all costs as if the programs involved were being proposed for the first time.

You start at 0 rather than last years leftovers

Not very popular, but the occasional zero based review can be helpful

Often used in governmental and not-for-profit sectors

Managers are required to justify all budgeted expenditures, not just changes from the previous year

Question 19

Issues with zero-based budget

Answer 19

Too time consuming

Too expensive

Question 20

The sales budget is constructed by ______ the budgeted sales in units by the selling price

Answer 20

multiplying

Question 21

Production budget

Answer 21

A detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. See slide 13 for more info

Question 22

Production is determined as follows:

Answer 22

1) Budgeted sales in units (in units or $)
2) Add: Desired ending inventory
3) (1+2) = Total needs
4) Deduct: Beginning inventory
5) Required production

Question 23

Merchandise purchases budget

Answer 23

A budget used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.

SAME AS PRODUCTION BUDGET, BUT FOR MERCHANDISERS

Question 24

Merchandise purchases budget follows the same basic format as the production budget

Answer 24

1) Budgeted cost of goods sold (units or dollars)
2) Add: Desired ending merchandise inventory
3) (1+2) = Total needs
4) Deduct: Beginning merchandise inventory
5) Required production (units or dollars)

Question 25

Direct materials budget

Answer 25

A detailed plan showing the amount of raw materials that must be purchased during a period to meet both production and inventory needs. This is done after production budget

Question 26

The required purchase of raw materials are computed as:

Answer 26

1) Raw materials needed to meet the production schedule 2) Add: Desired ending inventory of raw materials 3) Total raw materials needs (add 1+2) 4) Deduct: Beginning inventory of raw materials 5) Raw materials to be purchases

Question 27

The direct materials budget is usually accompanied by a schedule of ___________________ for raw materials

Answer 27

expected cash disbursements

Question 28

Direct labour budget

Answer 28

A detailed plan showing labour requirements over a specific period. Developed from the production budget

Question 29

Direct labour requirements must be computed so that...

Answer 29

The company will know whether sufficient labour time is available to meet production needs and plan accordingly

Question 30

To compute direct labour requirements

Answer 30

The number of units of finished product to be produced each period (month, quarter, etc) is multiplied by the number of direct labour-hours required to produce a single unit 50 workers x 480 hours per worker x $7.50 per hour = $180,000

Question 31

manufacturing overhead budget

Answer 31

A detailed plan showing the production costs, other than direct materials and direct labour, that will be incurred over a specified period.

Question 32

Need to compute unit produce cost for two reasons

Answer 32

1) To determine the cost of goods sold (COGS) on the budgeted income statement 2) To know what amount to put on the balance sheet inventory account for unsold units

Question 33

Ending finished goods inventory budget

Answer 33

A budget showing the dollar amount of cost expected to appear on the balance sheet for unsold units at the end of a period.

Question 34

Selling and administrative expense budget

Answer 34

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period. Lists fixed expense such as advertising, executive salaries, insurance, property taxes, depreciation (accounted then unaccounted for)

Question 35

The cash budget is comprised of four major sections

Answer 35

1) Receipts 2) Disbursements 3) Cash excess or deficiency 4) Financing

Question 36

1) Receipts

Answer 36

Consists of listing all of the cash inflows, except for financing, expected during the budget period Major source of receipts will be from sales

Question 37

2) Disbursements

Answer 37

Consists of all cash payments that are planned for the budget period These payments will include raw materials purchases, direct labour payments, manufacturing overhead costs, etc Other cash disbursements -- Such as equipment purchases, dividends, and other cash withdrawals by owners -- are listed

Question 38

Cash excess of deficiency section is computed as follows:

Answer 38

1) Cash balance, beginning 2) Add: Receipts (aka collecting from customers) 3) = total cash available before financing (1+2) 4) Deduct: Disbursements (DL, DM, MOH, Sell and admin, equiptment purchases, dividends) 5) = Excess (deficiency) of cash available over disbursements (3-4)

Question 39

If there is a cash deficiency during any budget period,

Answer 39

The company will need to borrow funds

Question 40

If there is a cash excess during any budget period,

Answer 40

Funds borrow in previous periods can be repaid or the excess funds can be invested

Question 41

The budgeted income statement is one of the key

Answer 41

schedules in the budget process Prepared using schedules 1-8

Question 42

The success of the budget program will be determined, in large part by two factors

Answer 42

1) How the budget is developed | 2) How and to what purpose the budget is used

Question 43

participative budget (aka self-imposed budget.)

Answer 43

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager’s supervisor, and any issues are resolved by mutual agreement.

Question 44

participative budgeting

Answer 44

Managers preparing their own budgets, which are then reviewed by the manager’s supervisor, and any issues are resolved by mutual agreement.

Question 45

responsibility accounting

Answer 45

A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which the manager can exert significant control. The managers are held responsible for differences between budgeted goals and actual results.

Question 46

Beyond budgeting model

Answer 46

1. Set challenging relative performance targets 2. Adopt continuous and inclusive planning 3. Use rolling forecasts 4. Use market0like structure for coordination 5. Decentralize resource management 6. Control through self-regulation and transparent information 7. Use low-powered incentives aligned to group or organizational performance

Question 47

The usual starting point in budgeting is to forecast sales.

Answer 47

TRUE

Question 48

Incremental Budgeting

Answer 48

Incremental budgeting bases a period’s expenditure level on the amount spent during the previous period

Question 49

periodic budgeting

Answer 49

In a periodic budget cycle, the planners prepare budgets periodically for each planning period –Periodic budgeting is typically performed once per budget period—usually once a year–Planners may, however, update or revise the budgets

Question 50

Continuous Budgeting

Answer 50

In continuous budgeting, as one budget period passes (usually a month), planners drop that budget period from the master budget and add a future budget period in its placeThe length of the budget period reflects the competitive forces, skill requirements, and technology changes that the organization faces

Question 51

Self-Imposed (Participatory) Budgeting

Answer 51

Budgets are prepared with the full cooperation and participation of managers at all levels

Question 52

Responsibility Accounting

Answer 52

Managers should be held responsible for those items —and only those items —that the manager can actually control to a significant extent.

Question 53

The master budget can be confusing or scary, however if you can answer these 10 questions you are fine

Answer 53

1) How much sales revenue will we earn? 2) How much cash will we collect from our customers? 3) How much raw material will we need to purchase 4) How much manufacturing costs will we need to add to production 5) How much cash will we need to pay our suppliers and our direct laborers, and how much will we pay for manufacturing overhead resources 6) What is the total cost that will be transferred from finished goods inventory to costs of goods sold 7) How much selling and admin expense will be incur, and how much cash will we pay related to these expenses 8) How much cash will we pay for equipment purchases 9) How much will we pay for cash dividends 10) How much money will we repay or borrow from lenders, including interest

Question 54

The budgeted income statement shows

Answer 54

The company's planned profit for the upcoming budget period, and it serves as a benchmark against which subsequent company performance can be measured

Question 55

Master budget for Merchandise company (how it is different)

Answer 55

Merchandise company will not require the production, direct labour, direct materials, and overhead budgets Rather a merchandise purchase budget is prepared

Question 56

Budgeted income statement contains data from

Answer 56

Sales budget, ending finished goods inventory budget, the manufacturing overhead budget, the selling and admin expense budget, and the cash budget

Question 57

Forecast

Answer 57

A forecast is based upon assumptions reflecting the conditions the business expects to exist and the course of action reasonably expected to be followed Can utilize a specific monetary amount or a reasonable range based on the various assumptions in place. Management expects the goals in a forecast to be met and believes them to be reasonably attainable

Question 58

Projection

Answer 58

A projection is prepared to present one or more hypothetical courses of action that the business might follow It is typically prepared for a restricted specific party, often internal management This type of analysis can definitely be thought of as less realistic, even referred to as ‘pie in the sky’ ... In a projection the assumptions are more of the desired scenario, not necessarily what is most likely to occur

Question 59

Neither a forecast or a projection is a ______

Answer 59

budget

Question 60

Budget constraints

Answer 60

Describe the combination of limitations on nonfinancial and financial resources within a company’s management control It is because resources are constrained that choices must be made to obtain the maximum benefit of the resources available for use

Question 61

Cost of goods sold is determined from schedules 1 and 6

Answer 61

that is the sales budget and ending finished goods inventory budget

Question 62

Budgeted income statement calculations

Answer 62

Sales - COGS = gross margin - Selling and admin = net operating - interest expense = net income