Management Accounting - BUDGETING

To determine the cost of the direct materials to be purchased:

(Direct materials to be Purch x Expected cost per unit of direct material)

Tthere are three ways of making estimates for the sales budget:

1 . Make a statistical forecast on the basis of an analysis of general business conditions, market conditions, and product growth curves. 2. Make an internal estimate by collecting the opinions of executives and salespersons. 3. Analyze the several factors that affect sales revenue and then predict the future behavior of each of these factors.

4 Advantages of Budgeting: include the following:

1 Budgets force managers to plan. 2 Budgets provide information that can be used to improve decision making. 3 Budgets provide standards used for performance Evaluation and Control. 4 Budgets improve communication and coordination

The 7 steps involved in the Planning and Control Process are as follows:

1 Develop a strategic plan. A strategic plan identifies strategies for future activities and operations, generally covering at least five years. 2 Translate the strategic plan into long-term and short-term objectives. 3 From the objectives, develop short-term plans. 4 Develop budgets based upon the short-term plans. 6 Compare Actual results with Planned (Budgeted) amounts. 7 Take Corrective Action, if necessary.

Financial Budgets - examples

1 cash budget 2 budgeted balance sheet 3 budget for capital expenditures

Operating Budgets --> examples

1 sales budget 2 production budget 3 direct materials purchases budget 4 direct labor budget 5 overhead budget 6 selling and administrative exps budget 7 ending finished goods inventory budget 8 cost of goods sold budget 9 budgeted income statement

The steps involved in preparing a direct materials purchases budget are as follows:

1. Determine the amount of direct materials necessary to manufacture the number of units to be produced. 2. Determine the quantity of direct materials to be purchased. 3. Determine the cost of the direct materials to be purchased by multiplying the quantity of direct materials to be purchased by the expected cost per unit of direct material.

The major steps in preparing the Master Budget are:

1. Prepare a sales forecast. 2. Determine production volume. 3. Estimate manufacturing costs and operating expenses. 4. Determine cash flow and other financial effects. 5. Formulate projected financial statements.

The financial budgets are:

1. the cash budget 2. the budgeted balance sheet, and 3. the budget for capital expenditures

How many months are in a quarter?

3 Months

Master Budget- structure--->

A Operating Budgets --> B Financial Budgets

Budget consists

It consists basically of a pro forma income statement, a pro forma balance sheet, and a cash budget.

Some of the reasons why the budgeted balance sheet must be prepared are:

It could disclose some unfavorable financial conditions that management might want to avoid. - It serves as a final check on the mathematical accuracy of all the other budgets. - It helps management perform a variety of ratio calculations. It highlights future resources and obligations.

TRUE/ FALSE: A firm may desire or be required to maintain a minimum cash balance. Excess cash should be invested to earn a return.

TRUE

TRUE/ FALSE: Bad debt expense is included in the selling and administrative expenses budget; however, it is not included in the cash budget.^^^^ Instead, bad debt expense is shown as a reduction in the amount the firm expects to collect on accounts receivable.

TRUE

TRUE/ FALSE: If the property or equipment purchase was financed by long-term debt, cash repayments of the debt would be shown as a cash payment in the cash budget.

TRUE

True/ False: Estimated Sales volume influences nearly all other items appearing throughout the master budget

TRUE

True/ False: Generally, the sales budget includes a computation of expected cash collections from credit sales, which will be used later for cash budgeting

TRUE

True/ False: Most budgets are for a ONE-YEAR Period, further broken down into Quarterly and/or Monthly Budgets.

TRUE

True/ False: The sales budget is the Starting Point in preparing the master budget

TRUE

Budgeted Balance Sheet

The budgeted balance sheet is developed by beginning with the balance sheet for the year just ended and adjusting it, using all the activities that are expected to take place during the budgeting period.

Budgeted Income Statement

The budgeted income statement calculates net income

THE SALES BUDGET

The sales forecast is the basis for the sales budget and is usually the responsibility of the marketing department.

Selling and Administrative Expenses Budget

The selling and administrative expenses budget is a budget of planned expenditures for non-manufacturing activities, such as sales commissions and office salaries.

True/False - A budget is a tool used for both planning and control

True

Budgeted variable overhead costs are based on

a budgeted variable overhead rate multiplied by budgeted activity. Budgeted fixed overhead costs remain unchanged as the activity level changes within the relevant range.

Depreciation is

a fixed cost; however, it is not a cash outflow. Therefore, depreciation would not be included in the cash budget

Direct Materials Purchases Budget

budget is a budget of the expected usage of materials in production and the purchase of the direct materials required

Financial Budgets

budgets concerned with cash flows and financial position at end of period

Operating Budgets -->

budgets concerned with income-generating activities

Cost of Goods Sold Budget

calculates the expected costs of the goods to be sold

Only purchases of property and equipment requiring cash would be shown on the

cash budget

cash budget is prepared for the purpose of

cash planning and control. It presents the expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding unnecessary idle cash and possible cash shortages. The cash budget consists typically of four major sections:

B-Advtgs: Control involves

comparing Actual results with Budgeted amounts and taking Corrective Action whenever Actual performance deviates significantly from Planned performance.

The disbursement section

comprises all cash payments made by purpose/function

The financing section

detailed account of the borrowings and repayments expected during the budgeting period

Production Budget

indicates the number of units of finished product to be produced in order to meet: sales needs inventory requirements

Direct Labor Budget

is a budget of planned expenditures for direct labor. The direct labor budget indicates the rate per hour and the number of hours necessary to meet production requirements

Master Budget

is a comprehensive financial plan consisting of various individual budgets.

A Master (comprehensive) budget

is a formal statement of Management's EXPectation regarding (SCO) Sales, Costs, Output, and other Financial transactions of the firm for the coming period.

A continuous budget

is a moving twelve-month budget. As a month expires in the budget, an additional month is added so that the company always has a twelve-month plan on hand.

Cash Budget

is a summary of planned cash receipts and cash payments

If production is related to sales of the next period

production needs for a manufacturer can be calculated

The sales budget involves:

quantity of each product expected to be sold

cash surplus or deficit section

shows the difference between the cash receipts section and the cash disbursements section

Overhead Budget

shows the expected cost of all manufacturing costs other than DIRECT MATERIAL & DIRECT LABOUR.

Complete the sentence: At the beginning of the period.....................

the budget is a plan or standard; at the end of the period it serves as a control device to help management measure its performance against the plan so that future performance may be improved

The receipts section

which includes cash sales, cash collections on accounts receivable, and other cash receipts

Budgeting is a planning and control tool used by managers. - Control Tool

a) Compare actual results with budgeted (planned) amounts. b) Corrective action can be taken, if needed.

1. Budgeting is a planning and control tool used by managers. - Planning Tool

a) Identify objectives b) Identify actions needed to achieve objectives.

a Budget - Simply put

is a set of projected or planned financial statements.

The sales budget 2

is the Projection of Expected Sales in units and dollars

the sales budget is constructed by

multiplying the expected sales in units by the expected unit sales price, i.e (S in units x Un S price)