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How and why are budgets used?

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Budgets help to plan for the future and control the revenues and costs related to those plans.

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The steps in the on going budgeting cycle are

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develop a strategy, plan, act, and control

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Strategic Planning

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setting long term goals that may extend 5 to 10 years into the future

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Rolling Budget

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budget that is continuously updated so that the next 12 months of operations are always budgeted

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Who is involved in the budgeting process

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participative budgeting involves participation of many levels of management, and is used by most companies

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Advantages of Participative Budgeting

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more beneficial because lower level managers are closer to the action and have more knowledge for creating their budgets, and they are more likely to accept budget if they were part of creating them

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Disadvantages of budgeting

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the process becomes more complex and time consuming with more people involved, and the tendency to build slack in the budget

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Budget committees

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often review the submitted budgets and give final approval

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Budget starting point

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typically begin with the prior years actual figures as the starting point

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The budget starting point is adjusted for

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New products, Customers, or Geographical areas. Changes in the market place caused by competitors. Changes in labor contracts, Raw materials, and Fuel costs. General inflation, and New strategies

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Benefits of budgeting

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planning, coordination/communication, benchmarking

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Planning

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requires managers to spend time planning for the future, and establishing company goals and objectives

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Coordination and Communication

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requires managers to consider relations among the entire value chain

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Benchmarking

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budgets provide a benchmark that motivates employees and helps managers evaluate performance

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Master Budget

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a planning document for the entire organization that is comprised of many supporting budgets that create the company's budgeted financial statements

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Manufacturer's Master Operating Budgets include:

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sales budget, production budget, DM budget, Dl budget, OH budget, operating expenses budget, and the budgeted income statement

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Manufacturer's Master Financial Budgets

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capital expenditures budget, cash collections budget, cash payments budget, combined cash budget, and the budgeted balance sheet

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Capital expenditures budget

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budgets the company's intentions to invest in new property

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Cash collections ( receipts) budget

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budgets the amount of cash the company expects to receive from sales: Cash sales in the current month ( sales budget) +Collection on credit sales from prior months = Total cash collections

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Cash Payments (disbursements) budget

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budgets the amount of payments the company expects to make for its expenses

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Cash payments budget expenses

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Direct materials, direct labor, MOH, operating expenses, capital expenditures, income taxes, and dividends

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Combined cash budget

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merges the budgeted cash collections, and cash payments to project the company's ending cash balance: Beginning cash balance Plus: Cash Collections Total cash available Less: Cash Payments Ending cash balance before financing Financing: Plus: New borrowings Less: Debt repayments Less: Interest payments Ending cash balance

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Budgeted Balance sheet

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final part of the financial budgets that looks just like a regular balance sheet, except it contains budgeted data, not actual

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Sensitivity analysis

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technique that allows managers to find results by changing underlying assumptions and is used when the predicted amount is not achieved or the underlying assumptions change

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Flexible Budget

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budget prepared for different levels of volume and helps measure the efficiency of operations at the actual activity level

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Sales budget

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expected number of unit sales * unit selling price =total budgeted sales revenue Type of sale: cash sales percentage +credit sales percentage = total sales revenue

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Production budget

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budgets the number of units a company needs to produce, based on how many are expected to be sold: Expected number of unit sales + desired ending inventory = total units needed - beginning inventory in units = budgeted units to produce

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Safety stock

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inventory kept on hand in case demand is higher than expected, or factory problems slow down production

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Direct materials budget

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budgets the quantity and cost of direct materials to be purchased: Budgeted units to be produced * Direct materials needed per unit = budgeted DM needed for production + Desired ending DM inventory = Total quantity of DM needed -Beginning DM inventory = Budgeted quantity of DM to purchase * cost of DM per unit of measure = Budgeted cost of DM purchases

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Direct Labor Budget

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budgets the quantity (hours) and cost of direct labor necessary to meet production requirements: Budgeted units to produce * DL hours per unit =Budgeted DL hours required * DL cost per hour =Budgeted Direct labor cost

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Manufacturing Overhead budget

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budgets the variable and fixed manufacturing overhead budgets for the period and will depend on each items cost behavior

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Operating expenses budget

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budgets all other costs incurred throughout the value chain, besides production and are separated between variable and fixed. They are expensed during the period in which they are incurred

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Budgeted income statement

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final part of the operating budget and looks like a regular income statement, except it contains budgeted data, not actual

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Cost of goods sold, inventory, and purchases budget for a Merchandising company

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essentially is the same as a maunufacturers productions budget, except that it is calculated at cost rather than units budgeted cost of goods sold + Desired ending inventory =Budgeted total inventory needed - beginning inventory = total budgeted purchases

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Gross margin

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= revenue - cost of goods sold

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Static Budget

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prepared for only one level of activity and does not change with changes in activity level. It is set for a specific period of time and then may be adjusted during the next period.

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Flexible budget variance

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is the difference between the flexible budget and the actual quantity at standard prices = ( SQ * SP ) - ( AQ * AP )

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Sales volume variance

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is the difference between he number of units actually sold and the number of units expected to be sold according to the static budget

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There is no conceptual difference between a budget amount and standard amount if:

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standards are currently attainable

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Participative budgeting

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helps managers having more detailed knowledge for creating realistic budgets, however, they are much more complex and time consuming as more people participate in the process. Results in manages intentionally building slack into the budget for their areas of operation by over-budgeting expenses or under-budgeting revenues.

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What are the main flexible budget variances?

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price and usage

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main material variances

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price and quantity

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main labor variances

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rate and efficiency

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main over-head variances

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spending and efficiency

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main fixed over-head variances

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spending and production volume

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Price, rate, and spending variances =

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Price

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Quantity and efficiency variances =

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usage

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A summary of performance showed three amounts for variable cost: actual ($210,000); static ($195,000); and flexible ($183,000). What is the static budget variance?

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the static budget variance = static budget - actual costs = $195,000 - $210,000 = $15,000 unfavorable

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Actual operating income for the year is $50,000. The flexible budget operating income for actual volume is $40,000 while the static budget operating income is $53,000. What is the sales volume variance for operating income?

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The sales volume variance for operating income is $13,000 unfavorable b/c: $40,000- $53,000 = 13,000 AND, is unfavorable b/c the income at actual volume was less than that budgeted

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A summary of performance showed three amounts for variable cost: actual ($210,000); static ($195,000); and flexible ($183,000). What is the sales activity variance?

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the sales activity variance is the difference between the static and flexible budget: $195,000 - $183,000 = $12,000 favorable, BUT, it has no cost control implications due to sales activity

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Projected sales for 2013 of 10,000 units at $15/unit and actual sales for the year were 12,000 units at $14/unit, the actual variable expenses, budgeted at $6/unit, amounted to $5/unit. Actual fixed expenses budgeted at $60,000, totaled $65,000. What is the flexible budget variance for total cost?

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The flexible budget variance for total total cost is the difference in the actual total cost and the fixed budget total cost: flexible total cost= $6( 12,000units)+ $60,000= $132,000 actual total cost= $5( 12,000units)+ $65,000= $125,000 $132,000-$125,000= $7,000 favorable

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Projected sales for 2013 of 10,000 units at $15/unit and actual sales for the year were 12,000 units at $14/unit, the actual variable expenses, budgeted at $6/unit, amounted to $5/unit. Actual fixed expenses budgeted at $60,000, totaled $65,000. What is the flexible budget variance for operating income?

answer

Flexible budget operating income variance = (actual budget operating income) - ( flexible budget operating income) = ( Flexible budget sales revenue-flexible budget VC- flexible budget FC) -( Actual SR - actual VC - actual FC) =(180,000-72,000-60,000) - (168,000-60,000-65,000) =$48,000 - $43,000) = $5,000 Unfavorable

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Master Budget for Service Company

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Sales budget operating expenses budget budgeted income statement Capital expenditures budget Cash budgets Budgeted balance sheet

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Master Budget for Merchandising Company

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Sales Budget Cost of goods sold, inventory, and purchases budget Operating expense budget Budgeted income statement Capital expenditures budget Cash budgets Budgeted balance sheet

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What is the key to preparing the cash collections and cash payments budgets?

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The timing of cash collections and payments often defers from the period in which the related revenues and expenses are recognized on the income statement

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What can be done to prepare for possible changes in key, underlying budget assumptions?

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management uses sensitivity analysis to understand these changes and how might they affect the company's financial results, it is this awareness that helps managers cope with changing business conditions when they occur

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How does sustainability impact budgeting?

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Companies that are planning on adopting any sustainable practice will want to capture those plans in their budgets. Any and all of the budgets could be impacted by plans to adopt sustainable practices.

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How does a the master budget of a service company differ from that of a manufacturer?

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service companies have no inventory to make or sell, thus their operating budgets are less complex, and include: sales budget operating expense budget budgeted income statement

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How does the master budget of a merchandising company differ from that of a manufacturer?

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they use a cost of goods sold, inventory, and purchases budget instead of a production budget (since they only buy their inventory rather than make it) and follows the same basic formant as the production budget except the amounts are budgeted at cost rather than units

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How does acceptance of debit and credit card payments affect a merchant's budget?

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merchants must budget for transaction fees charged by the credit card companies and their issuing banks and needs to be shown in the operating expense budget. The amount of the net transaction fees will be shown on the cash receipts budget

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How are credit and debit card fees calculated?

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the transaction fee is usually set a set dollar amount per transaction, plus a percentage of the amount of the sale charged on a credit card or debit card

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How does acceptance of debit and credit cards affect the cash collections budget?

answer

the amount of cash shown on the cash collections budget will be the net amount deposited; cash deposited = amount charged on CC - transaction fee

Managerial Accounting Chapter 9: The Master Budget – Flashcards

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