Chapter 8

operating budget

covers a one year period (fiscal year), can be divided quaterly

Production budget

must be adequate to meet budgeted sales and to provide for the desired ending inventory

The BRS Corporation makes collections on sales according to the following schedule: 40% in month of sale57% in month following sale3% in second month following sale The following sales have been budgeted: SalesApril$210,000May$140,000June$130,000 Budgeted cash collections in June would be:

$138,100

Advantages of self-imposed budgets

1. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.

Human Factors in Budgeting

1. Top management must be enthusiastic and committed to the budget process 2. Top management must not use the budget to pressure employees or blame them when something goes wrong 3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets

Sales budget three estimates/assumptions

1. What are the budgeted unit sales? 2. What is the budgeted selling price per unit? 3. What percentage of accounts receivable will be collected in the current and subsequent periods

Parwin Corporation plans to sell 23,000 units during August. If the company has 8,000 units on hand at the start of the month, and plans to have 9,000 units on hand at the end of the month, how many units must be produced during the month?

24,000

Which of the following explains why operating budgets generally span a period of one year? Accounting regulations mandate that all operating budgets be prepared for one year. Operating budgets, by definition, are prepared for one-year periods. Companies choose a span of one year to correspond to their fiscal years. Operating budgets need to correspond with the calendar year. Explanation

Companies choose a span of one year to correspond to their fiscal years.

Which of the following is a major factor that should be taken into consideration while planning the desired level of inventories?

Costs of carrying inventory.

What are the advantages of budgeting

Define goal and objective, think about and plan for the future, means of allocating resources, uncover potential bottlenecks, coordinate activities, communication plans

There are various budgets within the master budget. One of these budgets is the production budget. Which of the following BEST describes the production budget?

It is calculated based on the sales budget and the desired ending inventory.

Which of the following is not a benefit of self-imposed budgets? A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. Budget estimates prepared by front-line managers are often more accurate and reliable. Lower-level managers are encouraged to create budgetary slack since they are more knowledgeable of day-to-day operations. Motivation is generally higher.

Lower-level managers are encouraged to create budgetary slack since they are more knowledgeable of day-to-day operations.

Responsibility Accounting

Managers should be held responsible for only the items they can control to a significant extent

Which of the following is not a benefit of budgeting? The budgeting process enables managers to uncover bottlenecks as they occur. Budgets communicate management's plans throughout the organization. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

The budgeting process enables managers to uncover bottlenecks as they occur.

responsibility accounting

The system of accountability in which managers are held responsible for those items of revenue and costs—and only those items—over which they can exert significant control is referred to as ________.

Continuous budget

a 12-month budget that rolls forward one month as the current month is completed. (one month added to end of budget as each month closes)

self-imposed budget

a budget that is prepared with the full cooperation and participation of managers at all levels (low, middle and top level managers)

Budget

a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period

master budget

a presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period

For a production budget, the ______ is the beginning inventory for the year.

beginning inventory for the first quarter

Companies prepare direct labor budgets to ________.

avoid labor shortages

Limitations of self imposed budgets

budgetary slack allowing lower management to prepare budgets

In a direct materials budget, the desired ending raw materials inventory for the year is equal to the ________.

desired ending raw materials inventory for the last period

The purpose of preparing a direct materials budget is to ________.

estimate the quantity of raw materials to be purchased

Planning

involves developing objectives and preparing various budgets to achieve those objectives

Control

involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal

seeing the big picture

keep in mind that the 10 schedules in the master budget are designed to answer the 10 questions

When preparing a direct materials budget, the required purchases of raw materials in units equals:

raw materials needed to meet the production schedule + desired ending inventory of raw materials − beginning inventory of raw materials.

Responsibility accounting enables organizations to

react quickly to deviations from their plans and to learn from feedback

The budgeting process begins with the preparation of the ______ budget.

sales

Budgeting

the act of preparing a budget

The usual starting point for a master budget is:

the sales forecast or sales budget

Budgetary control

the use of budgets to control an organization's activities

The value of the ending inventory is calculated by multiplying the number of units in ending inventory by the ________.

unit product cost

A master budget is based on

various estimates and assumptions