Budgeting- B4

Direct Material Price Variance -

focuses on spending What's inside the parenthesis is the focus of the variance Actual Quantity Purchased x ( Actual Price - STD Price) **were comparing actual price to the standard price** then multiply it by the actual quantity purchased.

2 Main Types of Cash Disbursement

1) Cash paid for current period expenses 2) Cash paid on accounts payable - IGNORE DEPRECIATION - ITS A NON CASH EXPENSE

Cash Budgets Consider

Begin Cash Cash Collections from Sales Cash Disbursement for purchases and operating expenses Computed ending cash cash requirements to sustain operations (subtract)-

Standards and Benchmarking

Budgets revolve around the development of standards. Standards

Financial Budget

Cash Budget Budgeted Statement of Cash Flows Budgeted Balance Sheet Can't develop a pro forma financial statements until we have budgeted cash

Cash Budgets

Cash Budgets are generally divided into 3 MAJOR sections 1) cash available - we might have started the period with some cash. 2) cash disbursements 3) Financing during the period - for a shortfall if necessary

Pro Forma Statement of Cash Flows

Cash budgeting has the benefits of displaying the cash effects of the master budget on actual cash flows, assisting in the determination of whether additional sources of financing are required, and evaluating the optimal use of trade credit.

Direct Materials - THERE ARE 2 VARIANCES

Direct Materials Price Variance - Did we spend more or less than we budgeted? Direct Material Price Variance = (Actual Price - STD Price) x Actual Quantity Direct Materials Usage Variance - Did we use more or less material than we should have? (Actual Quantity Used - Standard Quantity) x Standard price With direct materials, once variance focuses on spending, the other variance focuses on usage of materials.

Flexible Budgeting

Flexible budgeting answers the question, what should our revenue and expenses be given an output change from the master budget. Budgeted Unit Sales 12,000 (master) Actual Units Sold 8,000 (Actual) The reason why we prepare flexible budgets is because the number of units actual sold won't match up with the actual number of units that we expected to sell in the master budget

Pass key

Flexible budgets are prepared using the per unit amount from the master budget. Use the same fix cost from the master budget

Direct Material Usage Variance

Focus is on usage of materials, rather than cost. If higher quality materials are purchased, the material price variance will be unfavorable (spent more on better quality) but the material usage variance should be favorable, (Higher Quality means less waste and more efficiency.

Budget Policies

Management Participation Budget Guidelines Evaluation of Current Conditions - changes to the environment since the adoption of the strategic plan. Management Instructions

Pro Forma Financial Statements (Done Last)

Once cash budget is developed, the entity can move into the next step of the financial budget process, which is to develop proforma financial statements - Proforma income statement - Pro Forma Balance Sheet - Pro Forma Statement of Cash flows

Product Costs are subject to variance analysis

Product costs generally consist of direct materials, direct labor and manufacturing overhead. Variances are typically calculated for the following cost elements: - Direct Materials - Direct Labor - Fixed Overhead - Variable Overhead

True or False. Sales Budget, Production, Direct Materials, Direct labor, Factory Overhead , Cost of Goods Manufactured, Cost of Goods Sold, Proforma Income Statement - Are all OPERATING BUDGETS.

TRUE - THEY ARE ALL OPERATING BUDGET ONLY THE CASH BUDGET AT THE END IS A FINANCIAL BUDGET

Operational and Tactical planning

Tactical plans also called single use plan - short term and covers period up to 18 mons Annual Budget is a type of single use tactical plan

Flexible Budget

The Blue column and red column will help us determine if there is something else that we can learn besides volume.

Pass Key

The cash budget provides information concerning the need for external financing, not internal financing

Pass Key

The cash budget shows itemized cash receipts and disbursements during the period, including the financing activities and the beginning and ending cash balances

Financial Budget - Cash Budget

The main reason for preparing cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing. A firm develops its annual cash budget in order to avoid the opportunity costs of non invested excess cash and minimize the cost of interim financing. we don't want an emergency situation - going out to grab a loan is expensive

The benefits a company could realize from improved cash budgeting includes:

The optimal use of trade credits

Proforma Financial statements are part of the budgeting process, Normally the last proforma statement prepared is. A) Capital Expenditure plan B) Statement of COGS C. Statement of Cash Flow D. Income Statement

The statement of cash flows is usually the last proforma statement prepared. This is because everything affects cash. Only when everything has been estimated can cash flow be projected.

Which of the following budget provides information for preparation of the owners equity section of a budgeted balance sheet? A) Sales Budget B) Cash Budget C) Capital Expenditure Budget D) Budgeted income statement

ans. Budgeted Income statement

Question

ans: 1,300 Favorable Variance Material price variance is favorable because we spent less than the standard price.

The Cash budget must be prepared before you can complete the A) Forecasted Income statement B) Production Budget C) Capital Expenditure Budget D) Forecasted Balance Sheet

ans: The cash budget must be prepared before you can complete the forecasted balance sheet.