Chapter 9 - Financial Planning and Analysis: The Master Budget

e-budgeting

An electronic and enterprise-wide budgeting process in which employees throughout the organization can submit and retrieve budget information electronically via the Internet. (e stands for both electronic and enterprisewide)

financial budgets

budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals, projects cash flow and identifies likely cash shortfalls and surpluses

planning

quantify a plan of action - the process of creating a budget forces the individuals who make up an organization to plan ahead

budgeted financial statements

show how the organization's financial statements will appear at a specified time if operations proceed according to plan, includes: budgeted income statement, budgeted balance sheet, and a budgeted statement of cash flows

budgeted income statement

shows expected revenues and expenses

direct-material budget

shows the number of units and the cost of material to be purchased and used during a budget period

purchases budget

A statement prepared to show the projected amount of purchases that will be required during a budget period

why do people pad budgets with budgetary slack?

- people often perceive that their performance will look better in their superiors' eyes if they can "beat the budget" - used to cope with uncertainty (supervisor may feel unforeseen events may lead to unanticipated costs) - budgets cuts are often required when early drafts of the budget show that resources are not adequate to cover all planned spending

key features of a master budget

-consists of a series of budget schedules - operational assumptions are specifically identified and incorporated into the budget - the budget schedules are heavily interdependent, with outputs of one schedule serving as inputs to another -follow a logical sequence, beginning with sales budget, and building to the budgeted financial statements - all key types of master budget schedules are present: sales, operational, financing, and financial statement

financial planning and analysis (FP&A) system

A coordinated set of tools that helps managers assess the company's future and know if they are reaching their performance goals; includes subsystems for (1) planning (2) measuring and recording results (3) evaluating performance

budgeted statement of cash flows

Follows directly from the cash budget. The dollar amounts will be the same, but the grouping and sequence will usually be different.

Parts of the Master Budget Unique to only Manufacturing firms

Production budget, Direct-Material budget, Budgeted Schedule of Cost of Good Manufactured and Sold, Budgeted Balance Sheet

budgeted balance sheet

Shows the expected end-of-period balances for the company's assets, liabilities, and owners' equity.

budgetary slack

The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals.

budget director (or chief budget officer)

The individual designated to be in charge of preparing an organization's budget.

controlling profit and operations

a budget is a plan, and plans are subject to change

cash budget

a budget that estimates cash inflows and outflows during a particular period like a month or a quarter

master budget (profit plan)

a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time

direct-labor budget

a detailed plan that shows the direct labor-hours required to fulfill the production budget

budget

a detailed plan, expressed in quantitative terms that specifies how resources will be acquired and use during a specified period of time

sales budget

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

capital budget

a plan for the acquisition of capital assets, such as buildings and equipment

financing budget

a plan that shows how the organization will acquire

cash disbursement budget

a schedule of the amounts and timings of payments of cash out of a business

financial planning model

a set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determine the overall results of an organization's activities

activity based costing

allocation of overhead to specific jobs based on their percentage of activities stage 1: overhead costs are assigned to costs pools that represent the most significant activities stage 2: overhead costs are allocated from each activity cost pool to cost objects in proportion to the amount of activity consumed

allocating resources

an organization's resources have limited capacity and budgets provide one means of allocating resources among competing use

activity-based budgeting

applying activity based costing concepts to the budgeting process first step is to specify the products or services to be produced and the customers to be served; then the activities that are necessary to produce these products and services are determined; finally the resources necessary to perform the specified activities are quantified

evaluating performance and providing incentives

comparing actual results with budgeted results also helps managers evaluate the performance of individuals, departments, divisions, or entire companies

rolling budget

continually updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed

sales forecasting

critical step in the budgeting process: - past sales levels and trends (for the firm developing forecast and entire industry) - General economic trends - Economic trends in the company's industry and more!

cash receipts budget

details the expected cash collections during a budget period

facilitating communication and coordination

for any organization to be effective, each manager throughout the organization must be aware of the plans made by other managers

selling, general and administrative expense (SG&A) budget

includes the sales and marketing costs of the company

padding the budget

intentionally underestimating revenue or overestimating costs so there's always enough money to pay for what department needs - also looks more cost-effective

participative budgeting

involving employees throughout an organization in the budgetary process

production budget

shows the number of units that are to be produced during a budget period (sales in units + desired ending inv. of finished goods = total units required - expected to begin. inv. of finished goods = units to be produced)

budgeted schedule of cost of goods manufactured and sold

shows the production costs that are expected to flow through the inventory accounts, and identifies the portion of production costs expected to be in work-in-process inventory, finished-goods inventory, and cost of goods sold at the end of the period

budget manual

states who is responsible for providing various types of information, when the information is required, and what form the information is to take

production overhead budget

summarizes the cost of production other than purchases and direct labor

operational budget

that specify how its operations will be carried out to meet the demand for its goods or services

Conversion Cost

the costs of the resources needed to convert purchased inputs into a marketable product or service (Direct Labor + Manufacturing Overhead)