Chapter 22: Master Budget and planning

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Activity-based budgeting (ABB)
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is most often found in cost accounting. Managers prepare budgets and spending propositions based on past production activities. In other words, management examines the costs of performing certain activities, like bending a fender for a car, to budget the overall costs of producing a product.
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Budget
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is a document that management makes to estimate the revenues and expenses for an upcoming period based on their goals for the business.
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Budgeted balance sheet
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Accounting report that presents predicted amounts of the company’s assets, liabilities, and equity balances as of the end of the budget period.
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Budgeted income statement
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Accounting report that presents predicted amounts of the company’s revenues and expenses for the budget period.
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Budgeting
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Process of planning future business actions and expressing them as formal plans.
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Capital expenditures budget
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Plan that lists dollars amount to the both received from disposal of plant assets and spent to purchase plant assets.
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Cash budget
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Plan the shows expected cash inflows and outflows during the budget period, including receipts from loans needed to maintain a minimum cash balance and repayments of such loans.
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Continuous budgeting
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Practice of preparing budgets for a selected number of future periods and revising those budgets as each period is completed.
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general and administrative expense
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Expenses that support the operating activities of a business.
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Manufacturing budget
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Plan the shows the predicted costs for direct materials, direct labor, and overhead to be incurred in manufacturing units in the production budget.
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Master budget
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comprehensive business plan that includes specific plans for expected sales, units products to be produced, merchandise (or materials) to be purchase, expenses to be incurred, plan assets to be purchased, and amounts of cash to be borrowed or loans to be repaid, as well as a budgeted income statement and balance sheet.
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Merchandise purchases budget
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plan that shows the units of costs of merchandise to be purchase by a merchandising company during the budget period.
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Production budget
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Plan that shows the units to be produced each period.
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Rolling budgets
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New set of budgets a firm adds for the next period (with revision) to replace the ones that has lapsed. lapse=expire, decline
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Safety stock
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market conditions and manufacturing processes for some products do not allow use of just-in-time system. Companies in these cases maintain sufficient inventory to reduce risk and the cost of running short. This practice requires enough purchases to satisfy the budgeted sales amount and to maintain a safety stock.
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sales budget
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plan showing the units of goods to be sold or services to be provided; the starting point for most departments.
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Selling expense budget
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Plan the lists the types and amounts of selling expenses expected in the budget period.
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Capital Expenditure
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an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.
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Strategic plan
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usually set a company’s long-term direction. They provide a road map for the future about potential opportunities such as new products, markets, and investments.
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Short term financial plans are called budgets
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and typically cover a one-year period. Medium and short-term plans r more operational and translate strategic plans into actions.
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Benchmarking Budgets
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Evaluation involves comparing actual results against one of two usual alternatives: 1. Past performance 2. Expected performance
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Participatory budgeting
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it is the practice of involving employees in the budgeting process.
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The budgeting process has three important guidelines:
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1. Employees affected by a budget should be consulted when it is prepared (participatory budgeting). 2. Goals reflected in a budget should be attainable. 3. Evaluations should be made carefully with opportunities to explain any failures.
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Point
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under participatory budgeting, some employees might understate sales budget and overstate expense budgets to allow them a cushion, or budgetary slack, to aid meeting targets. For some businesses pressure to meet budgeted results might lead employees to engage in unethical behavior or commit fraud. Finally some employees might always spend their budgeted amounts, even on unnecessary items, to ensure their budgets aren’t reduced for the next period.
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Point 1
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a large company developing a budget through a bottom-up process can involve hundreds of employees and take several weeks to finalize.
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Budget Reporting
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To provide specific guidance, the annual budget usually is separated into quarterly or monthly budgets. this short-term budgets allows management to periodically evaluate performance and take needed corrective action.
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The budget Variance
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is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount. It is favorable when the actual revenue is higher than the budget or when the actual expense is less than the budget.
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Many companies apply continuous budgeting by preparing rolling budgets.
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as each monthly or quarterly budget period goes by, these companies revise their entire set of budgets for the months or quarters remaining and add new monthly or quarterly budgets to replace the ones that have lapsed.
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A master budget
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is a formal, comprehensive plan for a company’s future. It contains several individual budgets that r linked with each other to form a coordinated plan.
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Master budget components:
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include individual budgets for sales, purchases, production, various expenses, capital expenditure, and cash.
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Managers often express the expected financial results of these planned activities
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with both a budgeted income statement for the budget period and a budgeted balance sheet for the end of the budget period.
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Operating Budgets:
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1. Sales budget 2. For merchandisers add: Merchandise purchase budget (unit to be purchase) 3. For manufacturers add: * production budget (units to be produced); * manufacturing budget (manufacturing costs) * Selling expense budget * general and administrative expense budget
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Capital expenditure budget
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expenditures for plant assets
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Financial Assets
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* Cash budget (cash receipts and disbursement) * Budgeted income statement * Budgeted balance sheet
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Sales Budget
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The first step in preparing the master budget.
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The selling expense budget
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is a plan listing the type and amounts of selling expenses during the budget period.
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Interest expense and income tax expense
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r often classified as general and administrative expenses in published income statements, but normally cannot be planned at this stage of the budgeting process. The predicted income tax expense depends on the budgeted amount of pretax income.
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A master budget 1
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it is prepared with a process starting with the operating budgets and continues with the capital expenditure budget and then financial budgets.
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What r the three primary categories of budgets in the master budget?
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it includes operating budgets, the capital expenditures budget, and financial budgets.
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how do the operating budgets for merchandisers and manufacturers differ?
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merchandisers prepare merchandise purchases budgets; manufacturers prepare production and manufacturing budgets.
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How does a just-in-time inventory system differ from a safety stock system?
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a just-in-time inventory keeps level of inventory to a minimum and orders merchandise or materials to meet immediate sales demand. A safety stock system maintain an inventory that is large enough to meet sales demands plus an amount to satisfy unexpected sales demands and an amount to cover delayed shipments from suppliers.
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Capital budgeting
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is the process of evaluating and planning for capital (plant asset) expenditure. This is an important manage task because these expenditure often involve long-run commitments of large amounts. Affect predicted cash flow, and impact future debt and equity financing. This means that it is always link to management’s evaluation of the company’s ability to take on more debt.
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Financial budget
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three financial budgets: 1. The cash budget 2. budgeted income statement 3. Budgeted balance sheet
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Cash budget 1
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which shows expected cash inflows and outflows during the budget period. It is specially important to maintain a cash balance necessary to meet ongoing obligations. By preparing a cash budget, management can prearrange loans to cover anticipated ahs shortages before they r needed. A cash budget also helps management avoid a cash balance that is too large.
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In preparing a budgeted balance sheet:
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plant assets r determined by analyzing the capital expenditures budget and the balance sheet from the beginning of the budget period.
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What sequence is followed in preparing the budgets that constitute the master budget?
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a. Operating budgets * sales * Selling expense * Administrative budgets b. Capital Expenditure Budget c. Financial budgets: * Cash budget * Budgeted income statement * Budgeted balance sheet

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