Accounting Chapter 21

effective budget

-Budgets should provide realistic goals that contribute the growth and profitability of a company. -The budget should be accepted by all levels of management. -Once adopted, the budget should be closed followed and administered. -Variances between actual and budgets should be systematically and periodically reviewed to determine their causes. -The budget should be an important tool for evaluating performance.

correct statements about a budget

-It is a formal written statement of management's plans for a specified future time period. -It becomes an important basis for evaluating performance. -It promotes efficiency and serves as a deterrent to waste and inefficiency.

merchandising company budgets

-Merchandise purchases budget. -Cash budget -Capital expenditures budget

benefit of budgeting

-Requires all levels of management to plan ahead -Provides definite objectives for evaluating performance at each level of responsibility -Creates an early warning system for potential problems -Facilities coordination of activities within the organization -Results in greater management awareness of entity's overall operation -Motivates personnel throughout the organization to meet planned objectives

Master Budget

-Sales Budget -Production Budget -DM, DL, MOH -selling & administrating expense -budgeted income statement -Capital expenditure (financial budget) -cash budget (financial budget) -budget balance sheet (financial budget)

Budgeting Process

-Starts several months ahead Begins with the collected data (past performance is often used as a base from which future goals are formulated) Develop within the framework of a sales forecast (Not for profit organizations: develop to support the planned expenditures)

budget for a merchandiser differs from a budget for a manufacturer because

-a merchandise purchases budget replaces the production budget. -the manufacturing budgets are not applicable.

Operating budgets include

-budgeted income statement. -production budget. -sales budget

Financial budgets consist of

-capital expenditure budget. -cash budget. -budgeted balance sheet.

The cash budget contains sections for

-cash disbursements. -financing. -cash receipts.

budgets is used in preparing the budgeted income statement

-direct labor budget. -sales budget. -selling and administrative budget

budget

-is the primary method of communicating agreed-upon objectives throughout an organization -can be both short term and long term -Set forth the objectives of organization and proposed ways of accomplishing them

Budgets are used by

-merchandisers. -service enterprises. -not-for-profit organizations

necessary if a company expects its budget to be effective

The company must have a sound organizational structure, management acceptance, and research and analysis

production budget

a projection of units that must be produced to meet anticipated sales [INPUT] = Beginning Finished Goods Units + Production Units [OUTPUT] = Unit Sales + Ending Finished Goods Units [INPUT] =[OUTPUT] Beginning FG Units + Production Units = Unit Sales + Ending FG Units Thus, Required production units = Budgeted Sales Units + Desired Ending FG Units - Beginning FG Units

Manufacturing Overhead Budget

an estimate of expected manufacturing overhead costs for the budget period

Budgeted Income Statement

an estimate of expected profitability of operations for the budget period

DM Budget

an estimate of the quantity and cost of direct materials to be purchased [INPUT] = Beg. Direct Materials Units + Direct Materials purchases [OUTPUT] = Direct Materials used in production + End. Direct Materials Units [INPUT] = [OUTPUT] Beg. DM Units + DM purchases = DM used in production + End. DM Units Thus, Required Direct Materials purchases units = DM units required for production + Desired End. DM Units - Beg. DM Units

Cash Budget

an projection of anticipated cash flows

Long-range planning usually encompasses a period of

at least five years

In most cases, not-for-profit entities

begin the budgeting process by budgeting expenditures rather than receipts.

Coordinating the preparation of the budget is the responsibility of the

budget committee

In the merchandise purchases budget, required merchandise purchases are computed by adding

budgeted cost of goods sold and desired ending merchandise inventory together and deducting beginning merchandise inventory

The important end-product of the operating budgets is the

budgeted income statement

The budget that is often considered to be the most important financial budget is the

cash budget

In the direct materials budget, the quantity of direct materials to be purchased is computed by adding direct materials required for production to

desired ending direct materials less beginning direct materials

The formula for the production budget is budgeted sales in units plus

desired ending finished goods units less beginning finished goods units

The budgeted balance sheet is

developed from the budgeted balance sheet for the preceding year and the budgets for the current year

Compared to budgeting, long-range planning generally has the

longer time period

sales budget

management's best estimate of sales revenue for the year

The direct labor budget and the manufacturing overhead budget are prepared directly from the

production budget

Each of the other budgets in the master budget depends on the

sales budget

The budgeted income statement

the end-product of the operating budgets

The formula for computing the direct labor budget is to multiply the direct labor cost per hour by the

total required direct labor hours

The most common budget period is a

year

The format of a cash budget is

Beginning cash balance + Cash receipts - Cash disbursements +/- Financing = Ending cash balance

lists includes only financial budgets

Budgeted balance sheet, cash budget, and the capital expenditures budget

budgets is considered to be the most important financial budget

Cash budget

an input that is needed in order to budget a service company

Determining expected billing time for each staff member

Budgeting vs Long Range Planning

Time Period involved: Usually one year or less; Usually a period of at least five years Emphasis: Focuses on achieving specific short term goals; Focuses on achieving long term goals Amount Detail: Very detailed; Less detailed

Selling and Administrative Budget

a projection of anticipated operating expenses

DL Budget

a projection of the quantity and cost of direct labor to be incurred to meet production requirement;