Accounting Chp. 9

participative budgeting

Budgeting that involves the participation of many levels of management

Realistic Standards

Budgets should reflect operating realities such as actual levels of activity, seasonal variations, efficiencies, and general economic trends

budget

a financial plan for the future that meets management's expectations and, on the basis of those expectations, allocates the use of specific resources throughout the firm

Master budget

financial plan for organization as a whole. Typically one year period and budgets are broken down quarterly

cash disbursements

lists all planned cash outlays for the period

overhead budget

shows the expected cost of all production costs other than direct materials and direct labor

ending finished goods inventory budget

supplies information needed for the balance sheet and also serves as an important input for the preparation of the cost of goods sold budget

Budgeting

-communicating firm's short term goals -coordination of firm's activities to ensure understanding -enables firms to compare actual results to budgeted results (performance evaluation)

key features of budgetary systems

-feedback on performance -monetary and nonmonetary incentives -participative budgeting -realistic standards -controllability of costs -multiple measures of performance

Summary of Budgets

-key component of planning -financial plans for future -identifying objectives and actions -set a standard for performance evaluation

budget comittee

-reviews budget -provides guidelines and budget goals -resolves differences that arise as budget is prepared -approves final budget -monitors actual performance

preparing financial budget

1. cash budget 2. budgeted balance sheet 3. budget for capital expenditures

cost of goods sold budget

A budget of the estimated direct materials, direct labor, and factory overhead consumed by sold products.

direct labour budget

A detailed plan showing labour requirements over a specified time period.

operational budget

A short-term financial plan used to coordinate the activities needed to achieve the short-term goals of the company.

Borrowings and Repayments

If a company converts its preliminary cash balance line to a cash excess (deficiency) line, it may be borrowing or repaying money. If there is a deficiency, this section shows the necessary amount to be borrowed. When excess cash is available, this section shows planned repayments, including interest expense.

Purposes of Budgeting

Shows how a firm will acquire and allocate resources to achieve its goals over a time period Helps specify how the goals are to be achieved Encourages coordination among managers and employees Serves as a motivational tool Helps evaluate progress and performance

Ending Cash Balance

The amount of cash a business has left at the end of the month

continous budget

a 12-month budget that rolls forward one month as the current month is completed

cash budget

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

production budget

a detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs

Standard Budgeting

a method for business forecasting and control in which specific expected volumes and prices per unit are used

budgeted balance sheet

a projection of financial position at the end of the budget period

financial budgets

budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals - detail the planned cash inflows and outflows and overall position

Cash Available

consists of the beginning cash balance and the expected cash receipts

controllability of costs

costs whose level a manager can influence

Merchandise purchasing budget

details how many units must be purchased to meet sales needs and to satisfy ending inventory requirements

Cash excess or deficiency

determines if the company will need to borrow money or if it will be able to repay funds previously borrowed

Sales budget

develops a sales forecast - one approach is bottom-up

budgets for performance evaluation

evaluates performance of managers - bonuses, salaries increased, and promotions are often heavily influenced

planning

looking ahead to see what actions can should be taken to realize particular goals

control

looking backward, comparing with previously planned outcomes

monetary incentives

monetary rewards used to control a manager's tendency to shirk and waste resources by tying budgetary performance to salary increases, bonuses, and promotions.

budgetary slack

occurs when managers intentionally understate expected revenues or overstate expected expenses to increase the chances of receiving favorable performance evaluations

selling and administrative expense budget

outlines planned expenditures for non-manufacturing activities

strategic plan

plots a direction for an organization's future activities and operations; it generally covers at least 5 years

multiple measures of performance

productivity, quality, and personnel development are some areas of performance that could be evaluated

Nonmonetary incentives

rewards that include job enrichment, increased responsibility and autonomy, and recognition programs.

direct materials purchases budget

tells amount and cost of raw materials to be purchased in each time period

myopic behavior

when a manager takes actions that improve budgetary performance in the short run but bring long-run harm to the firm.

Pseudoparticipation

when top management has total control of the budgeting process, allowing only superficial participation from lower-level managers.