Ch. 8 Master Budgeting

The final schedule of the master budget is the

Budgeted balance sheet

When profit targets are set by top managers

Too much slack may be allowed, waste may occur, and goals may be unrealistically high

Planning

involves developing goals and preparing various budgets to achieve those goals

Manufacturing Overhead Budget

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

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

manufacturing overhead

Direct labor budget

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

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.

Self-imposed budget advantages

1. Individuals at all levels of the organization are recognized as members of the team whose views and judgements are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Self-imposed budgets create commitment.

Self-imposed budgeting 2 important limitations

1. Lower-level managers May make suboptimal budgeting recommendations if they lack the broad strategic perspective possessed by top managers 2. Self-imposed budgeting May allow lower-level managers to create too much budgetary slack

Why is the computation of the absorption unit product cost for the units produced during the year needed? 2 reasons:

1. To help determine cost of goods sold on the budgeted income statement and 2. To value ending inventories on the budgeted balance sheet

If a cash budget if prepared by quarter, the beginning cash balance for the year is the same as the beginning cash balance for the ___ quarter and the ending cash balance for the year is the same as the ending cash for the ____ quarter.

1st, 4th

Master budget

A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet.

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 annual master budget file includes the ___ from last year because it is needed for the schedule of expected cash collections

Balance sheet

ending finished goods inventory budget computed the:

Cost of unsold units

A significant noncash manufacturing overhead cost from many companies is:

Depreciation

The section on the cash budget that summarizes all cash payments that are planned for the budget period is the cash ____ section:

Disbursements

The amounts under the year column in the cash budget always equal the sum of the amounts for the months or quarters of the budget

False

A company's planned net profit that serves as a benchmark against which subsequent company performance can be measured is shown on the budgeted___ ____

Income statement

Control

Involves gathering feedback to ensure that the plan is being executed or modified as circumstances change

If inventory levels are insufficient, the results can lead to

Lost sales or last minute, high cost production efforts

Highly achievable budget targets:

May generate greater commitment to the budget, help build manager confidence and they are used in most companies

A company with adequate cash balances at the beginning and end of the year:

May still have cash deficiency issues during the year

Operating budget generally covers a __ period

One year

Budgets are used for 2 distinct purposes:

Planning and control

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

Production

The budgeted income statement does not rely on information from the ____ budget

Production

What number does the direct materials budget take directly from the production budget?

Required production

In large organizations, many smaller individual budgets submitted by dept. heads and other responsable people comprise the ___ budget.

Selling and administrative

A company can consider making investments or repay outstanding principal and interest when:

The cash excess is greater than the minimum required cash balance

continuous or perpetual budget

a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, 1 month (or quarter) is added to the end of the budget as exact month (or quarter) comes to a close.

ending finished goods inventory budget

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

Self-imposed budget (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

merchandise purchases budget

a detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period

Sales budget

a detailed schedule showing expected sales expressed in both dollars and units

Direct materials budget

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