ACCT 202 Chapter 23: Budget Planning

long-range planning

-identifies long-term goals, selects strategies to achieve the goals, and develops policies and plans to implement the strategies -management considers anticipated trends in the economic and political environment and how the company should cope with them -data intended more for review of progress toward LT goals -objective is to develop best strategy to max. company's performance over an extended future period

sales budget

-is derived from the sales forecast -prepared first and all other budgets are dependent upon it -represents management's best estimate of sales rev for the budget period -innacurate may adversely affect NI (overly optimistic may result in excessive invs that may have to be sold for less and pessimistic may result in loss of sales rev due to inv shortages)

accountants

-present management's budget goals in fin. terms -translate plans and communicate budget to employees -prepare periodic budget reports that provide basis for measuring performance and comparing actual results with planned objectives

cash reciepts

-section of cash budget that includes expected receipts from the company's principal source(s) of rev -usually cash sales and collections from customers on credit -shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock

cash disbursement

-section of cash budget that shows expect cash payments -including DM, DL, MOH, and S&Admin exps -includes projected payments for income taxes, dividends, investments, and plant assets

financing

-section of cash budget that shows expected borrowings and the repayment of the borrowed funds plus interest -needed when there is a cash deficiency or when cash balance is below management's min required balance

cash budget

-shows anticipated cash flows -most important financial budget -contains 3 sections: cash receipts, cash disbursements, and financing -also contains beg and end cash balances

plan ahead, define objectives, warn, coordinate activities, management awareness, and personnel motivation

6 benefits of budgeting

required production units

budgeted sales units + desired end FG units - beg FG units = ______ for production budget

research and analysis

budgets based on ____ are more likely to result in realistic goals that will contribute to the growth and profitability of a company

service company

critical factor in budgeting is coordinating professional staff needs with anticipated services

structure

effective budgeting depends on sound organizational ____ where authority and responsibility for all phases of operations are clearly defined

management

effectiveness of a budget program is directly related to its acceptance by all levels of ____

total sales

expected unit sales x unit selling price = ____ for sales budget

management

the budget itself and the administration of the budget are entirely _____ responsibilities

budgeted income statement

the important end-product of the operating budgets -indicates the expected profitability of operations for the budget period -provides the basis for evaluating company performance -act as a call to action -is prepared from various operating budgets

planning

the process of establishing company-wide objectives

total DL cost

units to be produced x DL hours per unit x DL cost per hour = _____

past performance

usual starting point from which future budget goals are formulated

output

when expected ____ is used for service companies, it is necessary to determine the expected billings of clients for service performed

input

when expected _____ data is used for service companies, each professional staff member projects his or her billable time; then firm applies rates to billable time to produce expected service revenue

master budget

-a set of interrelated budgets that constitutes a plan of action for a specified time period -contains operating budgets and fin. budgets

motivates personnel

-benefit of budgeting -_____ throughout the organization to meet planned objectives

early warning system

-benefit of budgeting -creates an ______ for potential problems so that management can make changes before things get out of hand

coordination of activities

-benefit of budgeting -facilitates the _____ within the business by correlating goals of each segment with overall company objectives so company can integrate production and sales promotion with expected sales

definite objectives

-benefit of budgeting -provides ____ for evaluating performances at each level of responsibility

plan ahead

-benefit of budgeting -require all levels of management to ____ and to formalize goals on a recurring basis

sales forecast

-the framework for budget development -shows potential sales for the industry and the company's expected share of such sales -consideration of general economic conditions, industry trends, market research studies, anticipated advertising and promotion, previous market share, changes in prices, and technological developments -input of sales personnel and top management also essential

operating budgets

-the individual budgets that result in the preparation of the budgeted income statement -establish goals for the company's sales and production personnel

merchandiser

-uses a merchandise purchases budget instead of a production budget -does not use the man. budgets (DM, DL, MOH)

time period, emphasis, and detail

2 main differences between long-range planning and budgeting

accounting

___ info makes major contributions to budgeting process -from these record companies can obtain historical data on revs, costs, and exps to formulate future budget goals

financial

____ budgets consist of capital expenditure budget, cash budget, and budgeted balance sheet

not-for-profit

_______ entities budget on the basis of cash flows (expenditures and receipts) rather than on a revenue and expense basis -starting point usually expenditures -management task is to find the receipts needed to support the planned expenditures

cash budget

a _____ contributes to more effective cash management and shows managers when additional financing is necessary well before the actual need arises

emphasis

a difference between budgeting and long-range planning -b/c budgeting is short term goals like annual profit objectives while long-range planning is long term goals and strategies to achieve them and policies and plans to implement the strategies

detail

a difference between budgeting and long-range planning -budgets are very planned and long-range plans are not so much --long range plans intended for review of progress toward LT goals instead of basis of control for achieving specific results

budget

a formal written statement of management's plans for a specified future time period, expressed in financial terms -represents the primary method of communicating agreed-upon objectives throughout the organization -once adopted, it becomes an important basis for evaluating performance -promotes efficiency and serves as a deterrent to waste and inefficiency

budgeted balance sheet

a projection of financial position at the end of the budget period -developed from the budgeted balance sheet for the proceeding year and the budgets for the current year

end inv

a realistic estimate of ____ is essential in scheduling production requirements -excessive in one quarter may lead to cutbacks in production and employee layoffs in a subsequent quarter -inadequate may result in added costs for overtime work or in lost sales

income statement

all data for the ____ come from the individual operating budgets except for estimated interest expense and estimated income taxes

cash budget

beg cash balance + cash receipts = total available cash - cash disbursements = excess of available cash over cash disbursements + financing = end cash balance

1 year

budget period can be any length of time, but usually ____ -length influencers are type of budget, nature of organization, need for periodic appraisal, and prevailing business conditions

required merchandise purchase

budgeted COGS + desired end merch inv - beg merch inv = ____

sales

company first creates operating budgets, which starts with ___ budget, then does fin. budgets

DL budget

contains the quantity (hours) and costs of the DL necessary to meet production requirements

budget

is an aid to management, not a substitute

sales budget

is prepared by multiplying expected unit sales volume for each product by its anticipated unit selling price

5 years

long-range planning usually encompasses a period of at least ____

budgeting slack

occurs when managers intentionally underestimate budgeted revs or overestimate budgeted exps in order to make it easier to achieve budgetary goals -to minimize, higher level managers must review and question budget projections

time period

one difference between budgeting and long-range planning is ____ involved

reach agreement

overall goal of participative budgeting is to ____ on a budget that the managers consider fair and achievable but which also meets the corporate goals set by top management

selling and administrative expense budget

projects anticipated selling and administrative expenses for the budget period -classifies expenses as either variable or fixed

production budget

provides the basis for the budgeted costs for each manu, cost element

control

role of budgeting is a ____ device

output, input

service companies can obtain budget data for service revenue from expected ____ or expected ____

DM budget

shows both the quantity and cost of DM to be purchased

merchandise purchases budget

shows the estimated cost of goods to be purchased to meet expected sales

MOH budget

shows the expected MOH costs for the budget period -distinguished between variable and fixed overhead costs

production budget

shows the number of units of a product to produce to meet anticipated sales demand

continuous budgeting

-12 month budgeting -drop the month just ended and add a future month -keeps management planning a full year ahead

management awareness

-benefit of budgeting -results in greater _____ of the entity's overall operations and the impact on operations of external factors like economic trends

participative budgeting

-bottom-to-top approach -says that each level of management should be invited to help develop budget -benefit is that lower level managers have more detailed knowledge of their specific area and can provide more accurate budgetary estimates and when lower-level managers participate, they are more likely to perceive the resulting budget as fair

cash budget

-data prepared in sequence -end balance for one period becomes beg balance for next period -get info from management and other budgets -prepared for the year on a monthly basis

financial budgets

-focus on cash resources needed to fund expected operations and planned capital expenditures -include the capital expenditure budget, cash budget, and budgeted balance sheet

budget committee

-formal; for larger companies -has responsibility for coordinating the preparation of the budget -includes president, treasurer, chief accountant (controller), and management personnel from each major area of company (sales, production, research) -serves as review board where managers can defend their budget goals and requests (differences reviewed and modified and reconciled)

participative budgeting

-give and take of it is time-consuming and more costly -top-down approach = budget is developed by top management and then dictated to lower -can foster budgetary gaming through budgetary slack

production

DL hours are determined from the _____ budget

required DM units to be purchased

DM units required for production + desired end DM units - beg DM units = _____ for DM budget