chp. 9 master budget

collections on credit sales made to customers in prior periods plus collections on sales made in the current budget period equals expected _______ collections

cash

Information from the sales budget, selling and administrative expense budget, and the manufacturing cost budgets all influence the preparation of the...

cash budget

the master budget culminates

cash budget, budgeted income statement, budgeted balance sheet

Direct Materials Budget

details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories

merchandise purchases budget

example of it

Control

involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

The sales budget is based on

the company's sales forecast

The production budget in turn is used to determine

the direct materials, direct labor, and manufacturing overhead budgets.

The budgeting process is also influenced by...

the fact that bonuses are often based on meeting and exceeding budgets.

The receipts section lists all of the cash inflows, except from financing, expected during the budget period.

....

ending finished goods inventory budget

a budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet

cash budget

a detailed plan showing how cash resources will be acquired and used over a specific time period

Production Budget

a detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs

Sales Budget

a detailed schedule showing the expected sales for the budget period

manufacturing company

a production budget

required borrowings on a cash budget is calculated by:

adding the desired ending cash balance to the amount of the cash deficiency

Advantages of Budgeting

1. Budgets communicate management's plans throughout the organization. 2. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. 3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. 4. The budgeting process can uncover potential bottlenecks before they occur. 5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

First, a master budget for a manufacturing company is designed to answer 10 key questions as follows:

1. How much sales revenue will we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing cost (including direct materials, direct labor, and manufacturing overhead) will we incur? 5. How much cash will we pay to 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 cost of goods sold? 7. How much selling and administrative expense will we incur and how much cash will we pay related to those expenses? 8. How much money will we borrow from or repay to lenders—including interest? 9. How much net operating income will we earn? 10. What will our balance sheet look like at the end of the budget period?

Advantages of self-imposed budgets

1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.

The cash budget is composed of four major sections:

1. The receipts section. 2. The disbursements section. 3. The cash excess or deficiency section. 4. The financing section.

If budgeted sales are 10,000 units, the desired ending inventory of finished goods is 5,000 units, and the beginning inventory of finished goods is 2,000 units, required production is

13,000 units (10,000 + 5,000 - 2,000)

Because the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain an example of this is:

the manager will build slack into the budget

The master budget concludes with

the preparation of a cash budget, income statement, and balance sheet.

The sales budget influences

the variable portion of the selling and administrative expense budget and it feeds into the production budget

The success of a budget program is largely determined by

the way a budget is developed

Rather than the budget being used as a weapon it should...

be used as a positive instrument to assist in establishing goals, measuring operating results, and isolating areas that need attention.

master budget

consists of a number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals

the ending finished goods inventory budget computes the:

cost of unsold units

planning

developing goals and preparing various budgets to achieve those goals.

The budgeted _________ ________ shows a company's planned profit.

direct labor

Working hours required to satisfy the production budget are shown on the _________ _________ budget.

direct labor

In a manufacturing company, which budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories?

direct materials budget

All costs of production other than direct materials and direct labor are shown on the _____ _____ budget:

manufacturing overhead

an essential management tool that communicates management's plans throughout the organization, allocates resources and coordinates activities is the...

master budget

the amount of goods for resale to be purchased from suppliers during the period is shown on the ____________ ___________ budget.

merchandise purchases

merchandising company

merchandise purchases budget

The budgeted income statement provides an estimate of

net income for the budget period and it relies on information from the sales budget, ending finished goods inventory budget, selling and administrative expense budget, and the cash budget.

Budgets are used for two distinct purposes:

planning and control

The first step in the budgeting process

preparation of the sales budget

Responsibility Accounting

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

the key to the entire budgeting process

An accurate sales budget

Which of the following budgets are needed to calculate unit product costs? (check all that apply) A. selling and administrative budget B. manufacturing overhead budget C. cash budget D. direct labor budget E. direct materials budget

B, D, E

Which of the following budgets is affected by the sales budget? A. direct labor budget B. cash receipts and payments budget C. selling and administrative budget D. all of the above

D.

What does not help a company?

Imposing expectations from above and then penalizing employees who do not meet those expectations will generate resentment rather than cooperation and commitment. In fact, many managers believe that being empowered to create their own self-imposed budgets is the most effective method of budget preparation.

more info on continuous budget

In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focused at least one year ahead so that they do not become too narrowly focused on short-term results.

What is the underlying idea behind responsibility accounting?

Someone must be held responsible for each cost or the cost will grow out of control.

What happens if actual results do not measure up to the budgeted goals?

The manager is not necessarily penalized. However, the manager should take the initiative to understand the sources of significant favorable or unfavorable discrepancies, should take steps to correct unfavorable discrepancies and to exploit and replicate favorable discrepancies, and should be prepared to explain discrepancies and the steps taken to correct or exploit them to higher management.

the first line of the direct labor budget consists of the budgeted units expected to be _______ during the period.

produced

In a manufacturing company, the ______ budget shows the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory.

production

In a manufacturing company, the ______________ budget is prepared after the sales budget.

production

Both the production and selling and administrative expense budgets are prepared using information directly from the _______ budget:

sales

merchandise purchases budget

shows the amount of goods to be purchased from suppliers during the period

Direct Labor Budget

shows the direct labor-hours required to satisfy the production budget

Many companies divide their budget year into

4 quarters

Self-imposed budgeting has two important limitations:

First, lower-level managers may make suboptimal budgeting recommendations if they lack the broad strategic perspective possessed by top managers. Second, self-imposed budgeting may allow lower-level managers to create too much budgetary slack.

Second, it is important to understand that many of the schedules in a master budget hinge on a variety of estimates and assumptions that managers must make when preparing those schedules.

Sales budget: What are the budgeted unit sales? What is the budgeted selling price per unit? What percentage of accounts receivable will be collected in the current and subsequent periods? Production budget: What percentage of next period's unit sales needs to be maintained in ending finished goods inventory? Direct materials budget: How many units of raw material are needed to make one unit of finished goods? What is the budgeted cost for one unit of raw material? What percentage of next period's production needs should be maintained in ending raw materials inventory? What percentage of raw material purchases will be paid in the current and subsequent periods? Direct labor budget: How many direct labor-hours are required per unit of finished goods? What is the budgeted direct labor wage rate per hour? Manufacturing overhead budget: What is the budgeted variable overhead cost per unit of the allocation base? What is the total budgeted fixed overhead cost per period? What is the budgeted depreciation expense on factory assets per period? Selling and administrative expense budget: What is the budgeted variable selling and administrative expense per unit sold? What is the total budgeted fixed selling and administrative expense per period? What is the budgeted depreciation expense on non-factory assets per period? Cash budget: What is the budgeted minimum cash balance? What are our estimated expenditures for noncurrent asset purchases and dividends? What is the estimated interest rate on borrowed funds?

why should budgets prepared by lower-level managers be scrutinized by higher levels of management?

Without such a review, self-imposed budgets may fail to support the organization's strategy or may be too slack, resulting in suboptimal performance.

continuous or perpetual budget

a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed

self-imposed or participative budget

a budget that is prepared with the full cooperation and participation of managers at all levels

budget

a detailed plan for the future that is usually expressed in formal quantitative terms.

what is listed in the receipts section of the cash budget?

all cash flows, except from financing

To calculate raw materials to be purchased on the direct materials budget, add the desired _______ inventory of raw materials to the raw materials needed based on the ________ budget and ________ the beginning inventory of raw materials to arrive at raw materials to be purchased.

ending ; production ; deduct

production budget

example of it

Operating budgets ordinarily cover a one-year period corresponding to the company's

fiscal year

what is added to the variable selling & admin expenses to get the total selling & admin expenses?

fixed selling & admin expenses

the major source of receipts is

from sales

Since there are 10 schedules contained in the master budget it can be confusing...

it is broken into two respects

Manufacturing Overhead Budget

lists all costs of production other than direct materials and direct labor

selling and administrative expense budget

lists the budgeted expenses for areas other than manufacturing. In large organizations, this budget would be a compilation of many smaller, individual budgets submitted by department heads and other persons responsible for selling and administrative expenses. For example, the marketing manager would submit a budget detailing the advertising expenses for each budget period.

in the most successful budget programs

managers actively participate in preparing their own budgets.

The point of an effective responsibility accounting system

to make sure that nothing "falls through the cracks," that the organization reacts quickly and appropriately to deviations from its plans, and that the organization learns from the feedback it gets by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets.

The final schedule of the master budget is the balance sheet

which estimates a company's assets, liabilities, and stockholders' equity at the end of a budget period.