Module 5-6

Pro Forma Financial Statements

Financial statements that show a forecast of a company's future performance based on certain assumptions rather than historical data.

Operating Capital

Funds available for use in financing the day-to-day activities of a business

What factors below contribute to a company's pattern of cash collections?

Industry, firm size, and the firm's credit policies

What label is given to a business unit in which the manager is responsible for costs, revenues, and assets?

Investment center

The Master Budget

Is a blueprint for the coming period's operations. It also serves as a framework for changes in plans if the events of the period are not exactly what was expect.

In what way does a cash budget allow a manager to take action now?

It allows the manager to identify cash shortages in advance.

Cash Disbursement Budget

Lists all forecasted cash outlays for the period of interest. This helps to plan accordingly for collections - payments.

Segments

Parts of an organization requiring separate reports for evaluation by management

What is capital budgeting?

Planning for the acquisition of property, plant, and equipment

What is the first thing an accountant should do to develop a master budget?

Prepare a sales budget

After the Sales Budget, what two "teams" are created?

Production Budget - direct materials, direct labor, and manufacturing. Selling and administrative budget

The chief financial officer (CFO) of JayBob Company is facing a cash flow crunch. He is being forced to very carefully plan all cash payments in order to avoid running out of cash during the next few months. A key payment each month is the cash payment to suppliers for raw materials purchases. The CFO must have a precise forecast of next month's purchases so that he can plan the timing of the payments to the suppliers. What are the factors the CFO should consider in forecasting next month's purchases?

Production needs, desired ending inventory, and amount of beginning inventory

When computing the production budget and direct materials budget, remember the following formula:

• Sales budget + ending finished goods inventory - beginning finished goods inventory = the production budget • Production budget × direct materials per unit = direct materials production budget • Direct materials production budget + ending direct materials inventory - beginning direct materials inventory = the direct materials purchases budget

On September 30 of Year 1, Burt Company had finished goods inventory of 1,000 units. Starting in October, Burt intends to have an inventory policy of maintaining ending inventory at the end of every month equal to the next month's sales. What additional information is needed in order to compute budgeted production for Burt Company for October?

Projected sales

Two of the three factors to be considered in preparing a production budget include the desired amount of ending inventory and the amount of inventory already on hand in the beginning inventory.

Projected sales volume

The production supervisor for Hannah Company is preparing for her quarterly meeting with the chief financial officer (CFO). The main topic of discussion will be production worker hiring needs for the upcoming months. Past experience has taught the production supervisor that the CFO will always insist on seeing a detailed production budget before even considering spending money to hire new workers. The production supervisor is assembling her numbers.

Projected sales, desired ending inventory, and amount of beginning inventory

Scott Pippen is the manager of Segment A in Chicago Company. Segment A is a profit center. Which two things should be used in developing a performance evaluation measure of Scott Pippen?

Revenues and controllable costs

Dennis Rodman is the manager of Segment C in Chicago Company. Jeannie Train, company CFO, is developing a measure to evaluate Dennis's quarterly performance. What should Jeannie keep in mind as she develops a measure to evaluate his performance?

She should include only controllable costs in the measure.

What is the segment margin?

The difference between segment revenue and direct segment costs

Segment Margins

The difference between segment revenue and direct segment costs; a measure of the segment's contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.

Segment-Margin Ratios

The segment margin divided by the segment's net sales revenue; a measure of the efficiency of the segment's operating performance and, therefore, its profitability.

According to a company's cash budget, when can management plan to repay the company's loans?

When excess cash is available

How does the master Budget start?

With a revenue or sales budget, generally prepared by the sales and marketing department.

Selling and administrative expense budget

A schedule of all nonproduction spending expected to occur during the budget period.

Direct Labor Budget

A schedule of direct labor requirements for budget period

Direct Materials Budget

A schedule of direct materials to be used during the budget period and direct materials to be purchased during that period

Manufacturing overhead budget

A schedule of production costs other than those for direct labor and direct materials.

Production Budget

A schedule of production requirements for the budget period

Cash Budget

A short-term schedule of expected cash inflows and outflows during a period of time.

Responsibility Accounting

A system of evaluating performance in which managers are held accountable for the costs, revenues, assets, or other elements over which they have control

The sales and administrative expense budget includes which expenses?

All expenses besides production-related expenses

Decentralized Company

An organization in which managers at all levels have the authority to make decisions concerning the operations for which they are responsible.

Profits Center

An organizational unit in which a manager has control over and is held accountable for both cost and revenue performance.

Cost Center

An organizational unit in which a manager has control over and is held accountable for cost performance.

Investment Center

An organizational unit in which a manager has control over and is held accountable for cost, revenue, and asset performance.

Responsibility Center

An organizational unit in which a manager has control over and is held accountable for its performance

What is a profit center?

An organizational unit in which a manager has responsibility for both costs and revenues

The manufacturing overhead cost budget includes which manufacturing costs?

Both fixed and variable manufacturing overhead costs

What are the principal sources of cash inflows?

Cash sales and the collection of cash from current and past sales made on credit.

What are the principal sources of a company's cash inflows?

Cash sales and the collection of cash from prior credit sales

What is the meaning of a significant cost variance?

Corrective action should be taken to eliminate the variance.

Which items does a manager have control over in a profit center?

Costs and revenues

Which items does a manager have control over in a cost center?

Costs only

Noncontrollable costs

Costs over which a manager does not have direct authority and cannot change

Controllable costs

Costs over which a manager has direct authority and can change.

Direct Costs

Costs that are specifically traceable to a business unit or segment being analyzed.

Indirect Costs

Costs that normally incurred for the benefit of several segments or activities; sometimes called common costs or joint costs.

Projecting accurate sales is very difficult because sales are a function of both uncontrollable external variables and controllable internal variables. Which variable below is an uncontrollable external variable?

Customer tastes

There are three important factors to be considered in preparing a production budget. Which item below is one of those factors?

Desired amount of ending inventory

What is the most important part of the Master Budget?

Determining the right sales estimate.

The production budget supplies the information required for which other budget in the master budgeting process?

Direct materials budget

Exception Reports

Efficient performance evaluation operates on the principle of management by exception. (managers do not have the time or energy to pay attention to everything)

Segment Margin Statement

A profits and loss statement that identifies costs directly chargeable to a segment and further divides them into variable and fixed cost behavior patterns.

What is an indirect cost?

A cost that a segment manager cannot control

How is a cost variance computed for a corporate budget?

A cost variance is the difference between the actual cost and the budgeted cost.

Cost Variance

A difference between the actual cost and the budgeted cost.

The master budgeting process begins with which forecast?

A forecast of sales

What is the concept behind responsibility accounting in management accounting?

A manager should be evaluated only on factors he or she can directly control.

WGU Define Master Budget

A network of many separate schedules and budgets that together constitute the overall operating and financing plan for the coming operating period.

Segment managers should be evaluated on which items included in a budget?

Only the items they can control or influence