Chapter 9 - Financial Planning and Analysis: The Master Budget
e-budgeting
An electronic and enterprise-wide budgeting process in which employees throughout the organization can submit and retrieve budget information electronically via the Internet. (e stands for both electronic and enterprisewide)
financial budgets
budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals, projects cash flow and identifies likely cash shortfalls and surpluses
planning
quantify a plan of action - the process of creating a budget forces the individuals who make up an organization to plan ahead
budgeted financial statements
show how the organization's financial statements will appear at a specified time if operations proceed according to plan, includes: budgeted income statement, budgeted balance sheet, and a budgeted statement of cash flows
budgeted income statement
shows expected revenues and expenses
direct-material budget
shows the number of units and the cost of material to be purchased and used during a budget period
purchases budget
A statement prepared to show the projected amount of purchases that will be required during a budget period
why do people pad budgets with budgetary slack?
- people often perceive that their performance will look better in their superiors' eyes if they can "beat the budget" - used to cope with uncertainty (supervisor may feel unforeseen events may lead to unanticipated costs) - budgets cuts are often required when early drafts of the budget show that resources are not adequate to cover all planned spending
key features of a master budget
-consists of a series of budget schedules - operational assumptions are specifically identified and incorporated into the budget - the budget schedules are heavily interdependent, with outputs of one schedule serving as inputs to another -follow a logical sequence, beginning with sales budget, and building to the budgeted financial statements - all key types of master budget schedules are present: sales, operational, financing, and financial statement
financial planning and analysis (FP&A) system
A coordinated set of tools that helps managers assess the company's future and know if they are reaching their performance goals; includes subsystems for (1) planning (2) measuring and recording results (3) evaluating performance
budgeted statement of cash flows
Follows directly from the cash budget. The dollar amounts will be the same, but the grouping and sequence will usually be different.
Parts of the Master Budget Unique to only Manufacturing firms
Production budget, Direct-Material budget, Budgeted Schedule of Cost of Good Manufactured and Sold, Budgeted Balance Sheet
budgeted balance sheet
Shows the expected end-of-period balances for the company's assets, liabilities, and owners' equity.
budgetary slack
The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals.
budget director (or chief budget officer)
The individual designated to be in charge of preparing an organization's budget.
controlling profit and operations
a budget is a plan, and plans are subject to change
cash budget
a budget that estimates cash inflows and outflows during a particular period like a month or a quarter
master budget (profit plan)
a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time
direct-labor budget
a detailed plan that shows the direct labor-hours required to fulfill the production budget
budget
a detailed plan, expressed in quantitative terms that specifies how resources will be acquired and use during a specified period of time
sales budget
a detailed schedule showing expected sales expressed in both dollars and units
capital budget
a plan for the acquisition of capital assets, such as buildings and equipment
financing budget
a plan that shows how the organization will acquire
cash disbursement budget
a schedule of the amounts and timings of payments of cash out of a business
financial planning model
a set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determine the overall results of an organization's activities
activity based costing
allocation of overhead to specific jobs based on their percentage of activities stage 1: overhead costs are assigned to costs pools that represent the most significant activities stage 2: overhead costs are allocated from each activity cost pool to cost objects in proportion to the amount of activity consumed
allocating resources
an organization's resources have limited capacity and budgets provide one means of allocating resources among competing use
activity-based budgeting
applying activity based costing concepts to the budgeting process first step is to specify the products or services to be produced and the customers to be served; then the activities that are necessary to produce these products and services are determined; finally the resources necessary to perform the specified activities are quantified
evaluating performance and providing incentives
comparing actual results with budgeted results also helps managers evaluate the performance of individuals, departments, divisions, or entire companies
rolling budget
continually updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed
sales forecasting
critical step in the budgeting process: - past sales levels and trends (for the firm developing forecast and entire industry) - General economic trends - Economic trends in the company's industry and more!
cash receipts budget
details the expected cash collections during a budget period
facilitating communication and coordination
for any organization to be effective, each manager throughout the organization must be aware of the plans made by other managers
selling, general and administrative expense (SG&A) budget
includes the sales and marketing costs of the company
padding the budget
intentionally underestimating revenue or overestimating costs so there's always enough money to pay for what department needs - also looks more cost-effective
participative budgeting
involving employees throughout an organization in the budgetary process
production budget
shows the number of units that are to be produced during a budget period (sales in units + desired ending inv. of finished goods = total units required - expected to begin. inv. of finished goods = units to be produced)
budgeted schedule of cost of goods manufactured and sold
shows the production costs that are expected to flow through the inventory accounts, and identifies the portion of production costs expected to be in work-in-process inventory, finished-goods inventory, and cost of goods sold at the end of the period
budget manual
states who is responsible for providing various types of information, when the information is required, and what form the information is to take
production overhead budget
summarizes the cost of production other than purchases and direct labor
operational budget
that specify how its operations will be carried out to meet the demand for its goods or services
Conversion Cost
the costs of the resources needed to convert purchased inputs into a marketable product or service (Direct Labor + Manufacturing Overhead)