Budgets (Master Budgets)

The direct sources of information that can be used in preparation of the budgeted income statement of a merchandising company?

- Cash Budget - Sales Budget To prepare a budgeted income statement, a user would need to reference the sales budget and the cash budget would be needed to estimate the interest expense. The direct materials budget is a manu

Technology makes it easier to

- Combine Individual Unit Budgets -Create a Company Wide Master Budget -Conduct Sensitivity Analysis

How do managers motivate their employees to accept the budget's goals?

-Managers must support the budget themselves or no one else will -Managers must show employees how budgets can help them achieve better results -Managers must have employees participate in developing the budget so employees feel the goals are realistic and achievable

Spend it or Lose it

A Budgetary game If a business segment has a budgeted expense item and does not spend as much as expected for the item, there is fear the budgeted item will have a lower amount in future budget periods.

What's an example of the coordination function of the budgeting process?

A budget demands integrated input from different business units and function

Static Budget

A budget for only one level of sales volume

Flexible Budget

A budget prepared for various levels of sales volumes

Zero-based Budget (ZBB)

A budget technique that requires managers to justify all revenue and expenses for each new period.

Participative Budget

A budgeting process where those individuals who are directly impacted by a budget are involved in the development of the budget

Budget

A financial plan that managers use to coordinate a business's activities with its goals and strategies

Strategic Budget

A long-term financial plan used to coordinate the activities needed to achieve the long long-term goals of the company.

Operational Budget

A short-term financial plan used to coordinate the activities needed to achieve the short-term goals of the company.

Budgets provide a __________ that motivates employees and helps managers evaluate performance.

Benchmark

What's an example of the benchmarking function of the budgeting process?

Budget numbers are used to evaluate the performance of managers.

An international understatement of expected revenues or overstatement of expected expenses by managers in order to have a favorable performance evaluation is known as __________

Budgetary Slack

Which budgets would be part of the financial budget of a merchandising company?

Capital Expenditures Budget Cash Budget Budgeted Income Statement Budgeted Balance Sheet

Budgeting Objectivities

Develop Strategies -> Plan -> Direct -> Control -> (Repeat)

The budgeted balance sheet is part of which part of the master budget?

Financial Budget

What are some examples of expenses that appear on a Cash Budget?

Interest Expense Wages Expense Utilities Expense An expense such as Depreciation is a noncash expense and would NOT appear on the cash budget.

Continuous Budget

Involves continuously addisng one additional month to the budget as each month goes by

Why would a manager build in budgetary slack? And what is the negative consequence from adding budgetary slack?

Managers may want to budget fewer sales and higher expenses than they expect. This increases the chances that their actual performance will be better than the budget and then they will receive a good evaluation. But adding slack into the budget makes it less accurate - and less useful for planning and control.

The set of budgeted financial statements and supporting schedules for the entire organization is called the

Master Budget

Would a direct materials budget be considered for a budgeted income statement?

No, a Direct Materials budget is a manufacturing budget and would not be considered.

Would a Budgeted Balance Sheet be considered while creating a Budgeted Income Statement?

No, it is not a source document tied to a budgeted income statement in fact, the budgeted income statement would need to be prepared before the budgeted balance sheet as net income would need to be known to estimate the ending balance of retained earnings, one of the equity accounts on the balance sheet.

Budgetary Slack

Occurs when managers intentionally understate expected revenues or overstate expected expenses to increase the chances of receiving favorable performance evaluations

What does Budgeting require and promote?

Promotes coordination and communication Requires planning

Which budget is prepared first and is the cornerstone of the master budget?

Sales Budget

In a company with different business​ units, individual managers make decisions by changing various assumptions of its budget in order to determine how the modifications would affect the operational and financial results. This is an example of​ ________.

Sensitivity Analysis

What are the sales budget and the selling and administrative expense budgets apart of ?

The Operating Budget for a merchandising company

What's an example of the planning function of the budgeting process?

The budget outlines a specific course of action for the coming period

Cash Budget

The budget that details how the business expects to go from the beginning cash balance to the desired ending cash balance

Production Budget

The budget that determines the number of units to be produced to meet projected sales.

Direct Materials Budget

The budget that estimates the amount of materials to purchase to meet the company's production needs.

Sales Budget

The budget that estimates the amount of sales revenue

Cost of Goods Sold Budget

The budget that estimates the cost of goods sold based on company's projected sales.

Inventory, Purchases, and Cost of Goods Sold Budget

The budget that estimates the cost of goods sold, ending Merchandise Inventory, and merchandise inventory purchases needed for the company's projected sales.

Direct Labor Budget

The budget that estimates the direct labor hours and related cost needed to meet the company's production needs.

Selling and Administrative Expense Budget

The budget that estimates the selling and administrative expenses needed to meet the company's projected sales

Manufacturing Overhead Budget

The budget that estimates the variable and fixed manufacturing overhead needed to meet the company's production needs.

Financial Budget

The budget that includes the cash budget and the budgeted financial statements.

Capital Expenditure Budget

The budget that presents the company's plan for purchasing property, plant equipment, and other long-term assets.

This helps in planning to ensure the business has adequate cash

The cash budget

Delicious Food Products is famous for its trail mix. The main ingredient of the trail mix is dried​ fruit, which Delicious purchases by the pound. In​ addition, the production requires a certain amount of direct labor. Delicious uses a standard cost​ system, and at the end of the first​ quarter, there was an unfavorable direct materials efficiency variance. Which of the following is a logical explanation for that​ variance?

The factory lost two experienced workers at the beginning of the​ quarter, and their replacements wasted a large amount of dried fruits during their training period.

Benchmarking

The practice of comparing a company with its prior performance or with best practices from other companies

What is the production budget a part of?

The production budget is a part of the Operating Budget for a Manufacturing company

Master Budget

The set of budgeted financial statements and supporting schedules for the entire organization, includes the operating budget, captial expenditures budget, and financial budget

Operating Budget

The set of budgets that projects sales revenue, cost of goods sold, and selling and administrative expenses, all of which feed into cash budget and then the budgeted financial statements.

To identify performance standards, is a reason a company should?

To ensure the accuracy of the financial records

The flexible budget variance is the difference between the​ ________.

actual results and the expected results in the flexible budget for the actual units sold

The Sales Volume Variance is the difference between the __________.

expected results in the flexible budget for the actual units sold and the static budget

The purchasing manager was able to bring down the cost of direct materials by purchasing direct materials of a slightly lower grade quality than the company had used previously. The lower grade of direct​ materials, however, meant a higher defect rate on the assembly line and a higher waste of direct materials during​ production, which in turn lowered operating income. This situation would lead to​ a(n) ________.

favorable direct materials cost variance

What does a cost variance​ measure?

how well the business keeps unit costs of material and labor inputs within standards

The purchasing manager was able to bring down the cost of direct materials by purchasing direct materials of a slightly lower grade quality than the company had used previously. The lower grade of direct​ materials, however, meant a higher defect rate on the assembly line and a higher waste of direct materials during​ production, which in turn lowered operating income. This would have led to​ a(n) ________.

unfavorable direct materials efficiency variance