Final Exam

Advantages of budgeting

- Budgeting forces management to plan for the future. It encourages managers to develop an overall direction for the organization, foresee problems, and develop future policies. - Budgets improve decision making. - Budgets set standards that can control the use of a company's resources and motivate employees. - Budgets also serve to communicate and coordinate the plans of the organization to each employee.

Features that promote a reasonable degree of positive behavior include:

- frequent feedback on performance - monetary and nonmonetary incentives - participative budgeting - realistic standards - controllability of costs - multiple measures of performance

Three potential problems of participative budgeting include:

- setting standards that are either too high or too low - building slack into the budget (often referred to as padding the budget) - pseudoparticipation

How can a budget help in planning and control?

A budget requires a plan. It also sets benchmarks that can be used to evaluate performance.

Sales budget

A budget that describes expected sales in units and dollars for the coming period.

Budget committee

A committee responsible for setting budgetary policies and goals, reviewing and approving the budget, and resolving any differences that may arise in the budgetary process.

Why would a company want a minimum cash balance? Suppose that the minimum cash balance is $1,000 and that the projected cash surplus is $500. What would a company have to do to achieve the desired minimum?

A minimum cash balance is needed to reduce the risk of insufficient funds and satisfy account agreements with the banks. In the event of a shortage, it is necessary to borrow the difference.

Continuous budget

A moving 12-month budget with a future month added as the current month expires.

Realistic budgeting standards include:

Actual Levels of Activity: Flexible budgets are used to ensure that budgeted costs can be realistically compared with costs for actual levels of activity. Seasonal Variations: Interim budgets should reflect seasonal effects. Efficiencies: Budgetary cuts should be based on planned increases in efficiency and not simply arbitrary across-the-board reductions. General Economic Trends: General economic conditions also need to be considered.

Participative budgeting

An approach to budgeting that allows managers who will be held accountable for budgetary performance to participate in the budget's development.

Budgeted balance sheet

The budgeted balance sheet depends on information contained in the current balance sheet and in the other budgets in the master budget.

Cash excess

The cash available is greater than the firm's cash needs. The firm has the ability to repay loans and perhaps to make some temporary investments.

Cash disbursements

The cash disbursements section lists all planned cash outlays for the period. All expenses that do not require a cash outlay are excluded from the list (e.g., depreciation is never included in the disbursements section).

Cash deficiency

The cash on hand is less than the cash needed. In such a case, a short-term loan will be needed.

Master budget

The collection of all area and activity budgets representing a firm's comprehensive plan of action. The master budget is for a 1-year period.

Budget director

The individual responsible for coordination and directing the overall budgeting process.

Strategic Plan

The long-term plan for future activities and operations, usually involving at least five years.

Minimum cash balance

The minimum cash balance is simply the lowest amount of cash on hand that the firm finds acceptable.

Incentives

The positive or negative measures taken by an organization to induce a manager to exert effort toward achieving the organization's goals.

Cash excess or deficiency

The preliminary ending cash balance when lines are added to show any borrowing or repayment necessary to achieve a minimum desired cash amount. The cash excess or deficiency line is compared to the minimum cash balance required by company policy.

Control

The process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates significantly from planned performance.

Why is the sales budget not necessarily the same as the sales forecast?

The sales forecast is a starting point and an important input to the budgetary process. However, it is usually adjusted up or down, depending on the strategic objectives and plans of management.

Monetary incentives

The use of economic rewards to motivate managers.

Nonmonetary incentives

The use of psychological and social rewards to motivate managers.

Month of sale: 40% Month following sale: 60% All sales are on credit. If credit sales for January and February are $100,000 and $200,000, respectively, the cash collections for February are a. $140,000. b. $300,000. c. $120,000. d. $160,000. e. $80,000.

a. $140,000.

Which of the following is not an advantage of participative budgeting? a. It encourages budgetary slack. b. It tends to lead to a higher level of performance. c. It fosters a sense of responsibility. d. It encourages greater goal congruence. e. It fosters a sense of creativity in managers.

a. It encourages budgetary slack.

In the last quarter of the fiscal year, a divisional manager chose to delay budgeted preventive maintenance expenditures so that the budgeted income goals could be achieved. Is this an example of goal congruent behavior or dysfunctional behavior?

Assuming that the budgeted maintenance expenditures were well specified, the manager is sacrificing the long-run well-being of the division to achieve a short-run benefit (dysfunctional behavior).

Myopic behavior

Behavior that occurs when a manager takes actions that improve budgetary performance in the short run but bring long-run harm to the firm.

Operating budgets

Budgets associated with the income-producing activities of an organization; sales, production, and finished goods inventories. The ultimate outcome of the operating budgets is a pro forma or budgeted income statement.

Cash available

Cash available = beginning cash balance + expected cash receipts

Controllable costs

Costs that managers have the power to influence.

Financial budgets

Detail the inflows and outflows of cash and the overall financial position. Planned cash inflows and outflows appear in the cash budget. The expected financial position at the end of the budget period is shown in a budgeted, or pro forma, balance sheet.

What is the first step in creating a sales budget?

Develop the sales forecast. One approach to forecasting sales is the bottom-up approach, which requires individual salespeople to submit sales predictions. Some companies use more formal approaches, such as time-series analysis, correlation analysis, and econometric modeling.

Ending cash balance

Ending cash balance = cash available - expected cash disbursements

Expected cash receipts

Expected cash receipts include all sources of cash for the period being considered. The principal source of cash is from sales.

Factors to consider when determing the accuracy of the sales forecast.

General economic climate, competition, advertising, pricing policies, and so on.

Borrowings and repayments

If a company converts its preliminary cash balance line to a cash excess (deficiency) line, it may be borrowing or repaying money. If there is a deficiency, this section shows the necessary amount to be borrowed. When excess cash is available, this section shows planned repayments, including interest expense.

Dysfunctional behavior

Individual behavior that conflicts with the goals of the organization.

What is the main objective of continuous budgeting?

It forces managers to plan ahead constantly—something especially needed when firms operate in rapidly changing environments.

Sales for a month totaled $10,000. Cash receipts for the same month were $15,000. How is it possible for cash receipts to be more than sales?

Money can be collected from credit sales of prior month(s).

The __________ budget is prepared first.

Operating

A master budget can be divided into __________ and __________ budgets.

Operating; financial

Assume that a company evaluates and rewards its managers based on their ability to achieve budgeted goals. Why would the same company ask its managers to participate in setting their budgeted standards?

Participation encourages managers to internalize the goals and make them their own, leading to improved performance.

Planning v. controlling

Planning is looking ahead to see what actions should be taken to realize particular goals. Control is looking backward, determining what actually happened and comparing it with the previously planned outcomes.

Budgets

Plans of action expressed in financial terms.

Goal conguence

The alignment of a manager's personal goals with those of the organization.

Cash budget

The basic structure of a cash budget includes cash receipts, disbursements, any excess or deficiency of cash, and financing. At its simplest, a cash budget is cash inflows minus cash outflows.

The percentage of accounts receivable that are uncollectible can be ignored for cash budgeting because a. no cash is received from an account that defaults. b. it is included in cash sales. c. it appears on the budgeted income statement. d. for most companies, it is not a material amount. e. none of the above is correct.

a. no cash is received from an account that defaults.

The first step in preparing the sales budget is to a. prepare a sales forecast. b. review the production budget carefully. c. assess the desired ending inventory of finished goods. d. talk with past customers. e. increase sales beyond the forecast level.

a. prepare a sales forecast.

Which of the following is needed to prepare a budgeted income statement? a. The production budget b. Budgeted selling and administrative expenses c. The budgeted balance sheet d. The capital expenditures budget e. Last year's income statement

b. Budgeted selling and administrative expenses

Select the one budget below that is not an operating budget. a. Cost of goods sold budget b. Cash budget c. Production budget d. Overhead budget e. All of these are operating budgets.

b. Cash budget

An ideal budgetary system is one that a. encourages dysfunctional behavior. b. encourages goal-congruent behavior. c. encourages myopic behavior. d. encourages subversion of an organization's goals. e. does none of these.

b. encourages goal-congruent behavior.

A company requires 100 pounds of plastic to meet the production needs of a small toy. It currently has 10 pounds of plastic inventory. The desired ending inventory of plastic is 30 pounds. How many pounds of plastic should be budgeted for purchasing during the coming period? a. 80 pounds b. 110 pounds c. 120 pounds d. 130 pounds e. None of these.

c. 120 pounds

Which of the following is needed to prepare the production budget? a. Direct materials needed for production b. Direct labor needed for production c. Expected unit sales d. Units of materials in ending inventory e. None of these.

c. Expected unit sales

Which of the following is not an advantage of budgeting? a. It forces managers to plan. b. It provides information for decision making. c. It guarantees an improvement in organizational efficiency. d. It provides a standard for performance evaluation. e. It improves communication and coordination.

c. It guarantees an improvement in organizational efficiency.

The cash budget serves which of the following purposes? a. Documents the need for liberal inventory policies. b. Reveals the amount of depreciation expense. c. Reveals the amount lost due to uncollectible accounts. d. Provides information about the ability to repay loans. e. None of the above.

d. Provides information about the ability to repay loans.

Which of the following is not part of the operating budget? a. The direct labor budget b. The cost of goods sold budget c. The production budget d. The capital budget e. The selling and administrative expenses budget

d. The capital budget

A moving, 12-month budget that is updated monthly is a. not used by manufacturing firms. b. a waste of time and effort. c. a master budget. d. a continuous budget. e. always used by firms that prepare a master budget.

d. a continuous budget.

A budget a. is a long-term plan. b. covers at least 2 years. c. is only a control tool. d. is a short-term financial plan. e. is necessary only for large firms.

d. is a short-term financial plan.

Which of the following is part of the control process? a. Monitoring of actual activity b. Comparison of actual with planned activity c. Investigating d. Taking corrective action e. All of these.

e. All of these.

Which of the following items is a possible example of myopic behavior? a. Failure to promote deserving employees b. Reducing expenditures on preventive maintenance c. Cutting back on new product development d. Buying cheaper, lower-quality materials so that the company does not exceed the materials purchases budget e. All of these.

e. All of these.

A company plans to sell 220 units. The selling price per unit is $24. There are 50 units in beginning inventory, and the company would like to have 20 units in ending inventory. How many units should be produced for the coming period? a. 250 b. 200 c. 230 d. 220 e. None of these.

e. None of these.

Some key budgetary features that tend to promote positive managerial behavior are a. frequent feedback on performance. b. participative budgeting. c. realistic standards. d. well-designed monetary and nonmonetary incentives. e. all of these.

e. all of these.

Before a direct materials purchases budget can be prepared, you should first a. prepare a sales budget. b. prepare a production budget. c. decide on the desired ending inventory of materials. d. obtain the expected price of each type of material. e. do all of these.

e. do all of these.

The budget committee a. reviews the budget. b. resolves differences that arise as the budget is prepared. c. approves the final budget. d. is directed (typically) by the controller. e. does all of these.

e. does all of these.