ACC TEST 2!!!!!!!

What are some benefits of a budget?

Budgets force managers to think about and plan for the future. The budgeting process can also uncover potential problems before they occur. Budgets communicate management's plans throughout the organization. Budgets coordinate the activities of the entire organization by integrating the plans of all of its functional areas. If properly implemented, budgets should help motivate employees to work toward the organization's objectives. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

The cash budget consists of what three sections?

- Budgeted cash receipts (also called collections) - Budgeted cash payments (also called disbursements) - Cash borrowed or repaid (also called financing)

Why do we include direct fixed cost in the keep or drop decisions?

Even though these costs are fixed, or independent of the number of units produced or sold, they relate to only one segment and could be avoided if the segment were eliminated. Unlike direct fixed costs that relate to a specific segment, common fixed costs are shared by multiple segments and thus will be incurred even if a segment is eliminated.

Examples of direct fixed costs that are related specifically to one segment:

Examples include a machine used to produce only one type of product, a supervisor who is responsible for a specific division, and advertising aimed at a specific region or product line.

______________ costs may not be relevant because they do not change with the number of units produced or sold.

Fixed

_____________ costs that are directly related to the decision, may be avoidable and thus relevant.

Fixed (or direct fixed)

Would "fixed overhead" be included in relevant or irrelevant costs?

Fixed overhead costs are irrelevant to the decision because they will be incurred regardless. Fixed manufacturing overhead costs are items like rent, insurance, and supervision that will be incurred regardless.

Example equation for a sales budget:

Foretasted Unit Sales x Sales Price (per unit) = Sales Revenue

What is the "general rule" for sell-or-process-further decisions?

If the increased revenue is enough to offset the incremental cost, the company should process further; otherwise it is better off selling the product as is.

What are some options a company has, in the long run, to fix a problem with a constrained resource?

In the long term, companies can manage constrained resources by eliminating non-value-added activities, such as rework and waiting, or by increasing the capacity of the constrained resources by hiring more workers, buying bigger or faster machines, or leasing additional space. All of these actions take time, however, and may result in higher costs.

What are some options a company has, in the short run, to fix a problem with a constrained resource?

In the short run, managers can maximize profit by prioritizing products or customers based on the amount of contribution margin generated by the most constrained resource, called the bottleneck. The bottleneck limits the system's overall output and therefore determines how much contribution margin is lost due to limited resources.

When at max capacity, you should run a special order through a _____________________ __________________________ to determine whether there is profit to be made.

Incremental Analysis

What kind of fixed costs are shared by multiple products or services and are generally not relevant?

Common or allocated

Why is "control" important in the budgeting process?

Control involves the steps taken by management to ensure that we attain these goals, or at least that we are moving in the correct direction.

What costs are irrelevant (sunk) regarding sell-or-process-further decisions?

Costs of manufacturing the product up to the sell-or-process decision point are sunk and therefore irrelevant.

Budgeted Manufactured cost per unit equation:

DM+DL+MOH+FMOH=COST PER UNIT

Planning:

Developing objectives for acquisition and use of resources. Planning is the future-oriented part of the planning and control cycle, during which managers set short-term and long-term objectives or goals for the future.

What are the three benefits of budgeting?

Thinking ahead, communication, motivation.

What should a company do to maximize profits, in the short run, if one of their resources are bottleneck resources?

To maximize profits in the short run, a company with a bottleneck must prioritize its products or services so as to maximize contribution margin per unit of the constrained resource.

In the production budget, the relationship between budgeted production, sales, and finished goods inventory is summarized in the following formula:

Unit Sales + Ending Finished Goods Inventory - Beginning Finished Goods Inventory = Budgeted Production Units

_____________ costs are usually relevant to the decision because they vary with the number of units produced or sold.

Variable

What is the first step of the sales budget?

We prepare the sales budget by multiplying the number of units we expect to sell times the budgeted unit price. This gives us the budgeted sales revenue.

What does a production budget look like?

We start the production budget for each period with budgeted unit sales for the period. Next we incorporate the finished goods inventory policy by adding the budgeted ending inventory and subtracting the budgeted beginning inventory.

What costs are relevant when analyzing a special order?

When analyzing a special order, only the incremental (RELEVENT) costs and benefits are relevant.

What happens when a company is operating at idle capacity?

When idle capacity exists, additional work may be added without sacrificing existing work. With idle capacity, there is NO opportunity cost to the additional work.

What happens when a company is operating at capacity?

When operating at capacity, adding additional work requires giving up a portion of the existing work. The benefit of the existing work given up is an opportunity cost.

If a company is operating at without excess capacity, and the unit variable cost is $170 and the unit sales price is $300. Will the company gain or loss profit?

Without excess capacity, the special order will result in a loss when the opportunity cost of regular sales ($300) is considered.

A budget:

a comprehensive financial plan for achieving the financial and operational goals of an organization.

The master budget:

a comprehensive set of budgets which consists of a number of separate but interdependent budgets that cover all phases of an organization's planned activities for a specific period of time.

sunk costs:

a cost that has already been incurred and cannot be recovered.

operating budget - Raw materials purchases budget:

a function of budgeted production requirements, budgeted raw materials and desired inventory levels of materials

financial budget - Cash budget

a future-oriented version of the statement of cash flows, which summarizes the cash flowing into and out of the business during a given period of time. - It helps managers plan ahead to make certain they have enough cash on hand to meet their operating needs, including paying suppliers, employees, landlords, and other stakeholders.

Capacity:

a measure of the LIMIT placed on specific resources

Special order:

a one-time order that is outside the scope of normal sales.

manufacturing overhead:

all manufacturing costs, other than direct materials and direct labor, that the company incurs to make the product and sell it to customers.

Continuous budgets:

automatically add a budget period as one budget period expires, keeping managers in continuous planning mode and always looking into the future.

Relevant costs are also sometimes called __________________ or ______________ costs—costs that will change based on the decision made.

avoidable, differential

The relationship between budgeted cash collections and budgeted cash payments from operating activities and cash balances is summarized in the following formula:

beginning cash balance + budgeted cash receipts - budgeted cash payments +- cash borrowed or repaid = ending cash balance

-- When a limited resource restricts a company's ability to satisfy demand, the company is said to have a constrained resource that is referred to as a _____________________.

bottleneck

An important part of the planning process is the development of a _____________ that translates the company's objectives into financial terms.

budget

Financial Budget:

budgets focus on the financial resources needed to support operations. The primary financial budget that we prepare in this chapter is the cash budget.

We focus primarily on the _____________ budget because it provides critical information for managing daily operations.

cash

The constrained resource could be anything that is needed to operate the business, such as?

cash, employees, machines, or facilities.

Note that both the __________________ budget and the ____________________ _______________ budget will impact the budgeted balance sheet, which shows the expected balance of assets, liabilities, and owner's equity at the end of the budget period.

cash; capital expenditures

With constrained or bottleneck resources, the focus is on _________________________ ___________________ because fixed costs will not change in the short run, and are not relevant.

contribution margin

The changes made during the ______________ phase of the process will be reflected in future plans, starting the cycle over again.

control

Operating budgets:

cover the organization's planned operating activities for a particular period of time, including expected sales, production, raw materials purchases, direct labor, manufacturing overhead, and selling and administrative expenses. When all of these operating budgets are combined, they form a budgeted income statement, which represents management's expectation of net operating income.

operating budget - The production budget:

directly related to the sales budget and to the quantity of finished goods inventory the company wants to have on hand at the beginning and end of each period.

If a particular business segment is not performing as well as expected, managers may decide to _______________ it

eliminate

The ______________ inventory for each quarter becomes the beginning inventory for the next quarter.

ending

Budgets must be perceived to be __________________ and ________________ by employees whose performance will be compared to budgeted goals.

fair, reasonable

If the company is planning to reduce its finished goods inventory, they should produce?

fewer units than they plan to sell.

the sales forecast or sales budget begins with a?

forecast of unit sales for each period. - it is an operating budget

Relevant costs and benefits occur in the _____________ and ____________ between the decision alternatives.

future, differ

If the company is planning to build its inventory of materials, purchases will need to be?

greater than production requirements.

Relevant Costs:

have the potential to influence a decision.

Segment Margin:

is calculated as sales revenue less all costs that are directly attributable to the segment, including variable costs and direct fixed costs. A direct fixed cost is one that can be attributed to a specific segment of the business.

Therefore, managers must find the ________-___________ level of difficulty in setting budgetary goals so that they motivate.

just-right

If the company is planning to reduce its inventory of materials, then purchases need to be?

less than production requirements.

If the company is planning to build its finished goods inventory, they need to produce?

more units than they plan to sell.

Within the master budget, individual budgets can be classified as either _________________ budgets or _________________ budgets.

operating ; financial

Managers must also address whether the elimination of one segment will affect the cost and revenues of ___________ ___________________________.

other segments.

What are some examples of business segments?

product line, service offering, or geographic region

After the ____________ budget is completed, we can prepare the raw materials purchases budget.

production

After the ______________ budget is completed, we can prepare the direct labor budget.

production

Just as with direct material and direct labor, we can also prepare the manufacturing overhead budget once the _______________ budget is completed.

production

Financial Budget - Cash Budget:

provides information about budgeted cash receipts and payments.

The quantitative analysis provides a starting point for making decisions but must be balanced against other _____________ factors.

qualitative

Financial Budget - The capital expenditures budget:

relates to the purchase of long-term assets, such as buildings and equipment.

Zero-based budgeting:

requires that the entire budget must be constructed from zero each period, rather than starting with the last period's actual results.

The starting point for preparing the master budget is the?

sales budget or sales forecast. All other parts of the master budget are dependent on the sales budget.

Businesses can be ____________________ in a number of ways

segmented (divided)

If labor is the most constrained resource, managers should focus on maximizing?

the amount of contribution margin earned per direct labor hour

If a machine is the most constrained resource, they should focus on maximizing?

the amount of contribution margin per machine hour.

Opportunity costs:

the foregone benefit that is given up when one alternative is selected over another.

What is the starting point of the planning process?

the management's strategic plan or vision of what they want the organization to accomplish over the long term. Next the tactics necessary to achieve those objectives are developed.

forecasting:

the process of making predictions about the economy

Contribution margin (CM):

the selling price per unit minus the variable cost per unit.

operating budget - Selling and administrative expense budget:

variable selling expenses + fixed admin expenses = Selling and administrative expense budget - includes all the costs related to selling the product (such as advertising and promotion) and managing the business (such as franchise fees, legal counsel, accounting services, and insurance).

Irrelevant costs:

will not influence a decision.

What are the second Budget Problems? (2)

• Building budget slack into budgets. • A "use-it-or-lose-it" mentality.

What is some solutions to budgeting problems like having budget slack budgets or a use-it or lose-it mentality?

• Different budgets for planning and for performance evaluation. • Continuous, or rolling budgets. • Zero-based budgeting.

Relevant costs are also called:

• Differential costs • Incremental costs • Avoidable costs - Avoidable costs can be eliminated in whole or in part by choosing one alternative over another.

What is some solutions to budgeting problems like setting unrealistic goals or poor communication?

• Have Reasonable and attainable budgets. • Have Employee participation in budgeting process.

The forecast of unit sales might come from one or more of the following sources: (5)

• Last period's actual sales. • Research on overall industry trends. • Input from top management about overall sales objectives (for example, market share goals). • Input from research and development about new product introductions and/or new features of existing products. • Planned marketing activities (for example, advertising and sales promotions).

What are the first Budget Problems? (2)

• Perceived unfair or unrealistic goals. • Poor management-employee communications.

What are the three steps to the planning and control cycle?

Plan, Implement, and Control

In deciding whether to eliminate a business segment, managers should ask the what kinds of questions?

- How much will total revenue and total costs change if the segment is eliminated? - Will other segments or product lines be affected? - Are there opportunity costs associated with keeping the segment? For example, could resources be deployed to more profitable uses if the segment were eliminated? - Are there other qualitative factors to consider, such as the impact on employees and the company's reputation in the community?

We need two criteria to identify a relevant cost, what is the criteria?

- Occurs in the future - Differs between decision alternatives

What two criteria deems a cost irrelevant?

- Sunk costs which have already been incurred and cannot be avoided regardless of the decision. - Costs that do not differ between alternatives and therefore are never relevant to a decision. (cannot change, does not matter)

Budgeted material purchases will depend on what two things?

- budgeted production needs - on planned levels of beginning and ending raw materials inventory

Examples of Capacity:

- the number of people that can fit into an airplane - the number of employees that are available to serve clients - the amount of machine time that is available to make a product.

With maximizing profits of constrained resources, _________________________ results in the highest possible short-term profit.

Prioritizing

Budgeting - Thinking ahead:

Budgeting forces managers to look ahead and state their goals for the future. This provides lead time to solve potential problems.

Budgeting - Motivation:

Budgeting provides motivation for employees to work towards organizational objectives. It also provides a benchmark for evaluating performance.

What is the problem with "use-it-or-lose-it" mentalities of managers?

Budgets can also create a "use-it-or-lose-it" mentality among managers, who may feel they need to spend their entire budgets to avoid a reduction in the next budget period. This attitude is most prevalent at the end of periods when managers have unused resources.

What three questions should managers ask when analyzing a make-or-buy decision?

1. How much will costs and revenue change depending on whether the company makes or buys the product or service? 2. Are there opportunity costs associated with either alternative? For example, what else could we do with internal resources if we bought the product or service from an external party? 3. Are there other qualitative factors to consider, such as corporate strategy, sustainability goals, employee morale, risk, quality, and reliability?

Sell-or-Process-Further Decisions:

Businesses are often faced with the decision to sell a product "as is" or add additional features (refine) it so that it can be sold for a higher price.

_______________ leads to greater acceptance of the budgeted goals.

Participation -Participation in the budgeting process is an important part of the employee-management communication process.

A company should only use incremental analysis for what kind of orders?

A company should only use this analysis for one-time or special orders. In the long-term, all costs, including fixed costs, must be covered.

What is a make-or-buy decision?

A decision to perform a particular activity or function in-house or purchase from an outside supplier has traditionally been called a make-or-buy decision but could also be called an in-sourcing versus outsourcing decision. (in other words should the company make the product themslevs or buy the product)

Why should while evaluating segment profitability managers focus on the segment margin rather than the bottom-line profit margin?

Because the segment margin tells managers how much incremental profit a segment generates to help cover common fixed costs and contribute to company wide profit.

Budgeted COGS Equation:

Budgeted Unit Sales + Budgeted Manufacturing Cost per unit = Budgeted COGS

budgeted merchandise purchases equation:

Budgeted sales + budgeted ending merchandise inventory - budgeted beginning merchandise inventory = budgeted merchandise purchases

What is part of the planning process and helps us formalize our objectives and goals?

Budgeting

Budgeting - Communication:

Budgeting communicates management's expectations and priorities. Also, it promotes cooperation and coordination between functional areas of the organization.

What is the problem with adding Budget slack to a budget?

Managers may build a little extra cushion, or budget slack, into their budgets. This is generally done by understating expected sales or overstating budgeted expenses, making it more likely that actual results will come in under budget for expenses or over budget for revenues.

Keep-or-Drop Decisions:

Managers must sometimes decide whether to eliminate a particular division or segment of the business. These decisions are called keep-or-drop decisions or continue-or-discontinue decisions.

If a company is deciding to make or buy a product and their unit cost is $6, and the manufacturers unit cost is $4, should the company make or buy?

Not enough information, the company should run a make or buy incremental analysis to determine whether they should make or buy. Managers should also consider other qualitative factors like will it be as good as what we could make, is this a main factor of our company that we should not outsource, are there safety and liability issues to consider, etc.

_____________________ costs are relevant and occur when capacity is reached or resources are constrained.

Opportunity

The relationship between budgeted raw material purchases, budgeted production, and raw materials inventory is summarized in the following formula:

Raw materials needed for production + budgeted ending raw materials inventory - budgeted beginning raw materials inventory = budgeted raw materials purchases

operating budget- Budgeted income statement:

Sales rev - budgeted COGS = gross margin - selling and admin expenses = net operating income

What happens to the other costs that do not change when accepting additional business (like accepting a special order)?

Some costs may not change if we accept additional business. Those costs are not relevant as they do not differ between the alternative to accept or reject the additional business.

Describe the five steps in the decision-making process.

Step 1. Identify the decision problem. Step 2: Determine the decision alternatives. Step 3: Evaluate the costs and benefits of the alternatives. Step 4: Make the decision. Step 5: Review the results of the decision.

Control:

Steps taken by management to ensure that objectives are attained. Monitoring results to determine if the plan and plan goals are being achieved. If the goals have not been met, managers can take corrective action to improve future results.

Tactics:

Tactics are specific actions that must be taken to meet the objectives.

Implementation:

Take action to implement the plan. Motivate others to achieve results. Implementing occurs when managers put the plan into action.

What does it mean to have "excess capacity"?

The company is not working at capacity and has the availability to work on special orders or side projects

How does the first and last off the beginning and ending inventory work?

The ending inventory for the year is equal to the ending inventory for Quarter 4. The beginning inventory for the year is equal to the beginning inventory for Quarter 1.

How do you compute the fixed manufactured overhead?

The fixed manufacturing overhead per unit is computed by dividing the total budgeted fixed manufacturing overhead for the year by the total budgeted production in units for the year for budgeted manufacturing cost per unit of $$$$

Important note to help remember the formulas:

The formula for the raw materials purchases budget is very similar to the formula for the production budget. The only differences are that we start with production instead of sales and we adjust for beginning and ending raw materials inventory instead of finished goods inventory. Also, the ending raw materials are multiplied by next quarters production needs instead of multiplying by current like in the production budget. And beginning inventory is by current instead of previous like in the production budget.