ACCT 202S 7

True or False: The Direct Materials budget should be prepared before the production requirments?

False! A direct materials budget is prepared after the production requirements have been computed.

How are cash collections for any period estimated?

1. Determining the actual cash sales in the period of the sale. 2. Determining the percent of credit sales revenue that is to be collected in the period of sale that related to the current period. 3. Determining the percent of credit sales collected for previous periods (one or more). Cash From Current Period Cash Sales + Cash From Current Period Credit Sales + Cash From Prior Period Credit Sales = Total Cash From Sales

How are cash disbursements estimated?

1. Determining the percent of purchases that will be paid for in the period of purchase. 2. The percent paid for previous periods (one or more) purchases. Cash Disbursed for Current Period Payments + Cash Disbursed for Prior Period Payments = Total Cash Disbursed for Payments

What are the two important limitations of Self-Imposed Budgeting?

1. First, lower-level managers may make suboptimal budgeting recommendations if they lack the broad strategic perspective possessed by top managers. 2. Second, self-imposed budgeting may allow lower-level managers to create too much budgetary slack. Because the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain (i.e., the manager will build slack into the budget).

Ending finished goods inventory budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet.

After completing the first five schedules, the data is used to compute the unit product costs for the units produced during the budget year. Why is this computation needed?

1. First, to help determine cost of goods sold on the budgeted income statement 2. Second, to value ending inventories on the budgeted balance sheet. The cost of unsold units is computed on the ending finished goods inventory budget.

The Direct Materials Budget includes what three units of measure?

1. It begins by defining the number of units of finished goods that need to be produced each period. 2. It then defines the quantity of raw material inputs (measured in terms such as pounds or ounces) that need to be purchased to support production. 3. It concludes by translating the quantity of raw materials to be purchased into the cost of raw materials to be purchased.

Continuous Budget (Perpetual budget)

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

Budget

A detailed plan for the future that is usually expressed in formal quantitative terms.

Cash Budget

A detailed plan showing how cash resources will be acquired and used over a specific time period.

Direct Materials Budget

A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

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.

Manufacturing overhead budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.

Direct Labor Budget

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

Merchandise purchases budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.

Selling and administrative expense budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period.

Sales budget

A detailed schedule showing expected sales expressed in both dollars and units.

Self-imposed budget (Participative budget)

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement.

Master Budget

A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet.

Responsibility accounting

A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which they can exert significant control. The managers are held responsible for differences between budgeted and actual results.

An analysis of cash must include what two things?

An estimate of cash collections An estimate of cash disbursements

What Factors Contribute to the Cash Budget?

Cash Receipts Cash Flows Cash Disbursements Timing Other Factors

What is the major source of receipts for the Cash Budget?

Cash from sales

Planning

Developing goals and preparing budgets to achieve those goals.

True or False: We should always assume that money is borrowed on the 1st day of the period and that the principal and interest payments are made on the 30th day of the period.

False! Students often incorrectly calculate the interest payments in the cash budget. To reduce your chances of making mistakes, remember that we always assume that money is borrowed on the first day of the period and that principal and interest payments are made on the last day of the period.

The first row in the _ section of the cash budget relates to projected borrowings. (In any period where a company's excess of cash available over disbursements is greater than its desired minimum cash balance, the company will not need to borrow money during that period.)

Financing Section

If the expected level of activity is appreciably below the company's current capacity, then _ costs may have to be _.

Fixed, Decreased

If the expected level of activity is greater than the company's current capacity, then _ costs may have to be _.

Fixed, Increased

What disbursements are included in the disbursements section of the cash budget?

Payments made for: Raw Materials Direct Labor Manufacturing Overhead Other Administrative Costs, Dividends, or Equipment Purchases

What order are the 10 schedules created in a Master budget?

Preparing the Master Budget 1. Set up the beginning balance sheet 2. Create a budgeting assumptions sheet a. Provides the foundation 3. Prepare the Sales Budget (Schedule 1) 4. Prepare the Production Budget (Schedule 2) 5. Prepare the Direct Materials Budget (Schedule 3) 6. Prepare the Direct Labor Budget (Schedule 4) 7. Prepare the Manufacturing Overhead Budget (Schedule 5) 8. Prepare the Ending Finished Goods Inventory Budget (Schedule 6) 9. Prepare the Selling & Administrative Expense Budget (Schedule 7) 10. Prepare a Cash Budget (Schedule 8) 11. Prepare the Budgeted Income Statement (Schedule 9) 12. Prepare the Budgeted Balance Sheet (Schedule 10)

The Cash Budget is organized into four sections:

Receipts Section Disbursements Section Cash Excess and Deficiency Section Financing Section

This shows the company's planned profit & serves as a benchmark against which subsequent company performance can be measured.

The Budgeted Income Statement

The Cash Budget draws on formation taken from all other budgets and schedules including _ (Inflows) & _ Outflows.

The Schedules of Cash Collections (Inflows) The Schedules of Cash Disbursements (Outflows)

What is one of the most important equations that you should know from the Budgeted Balance Sheet (Schedule 10)? Why?

The beginning balance in Retained Earnings plus net income minus dividends equals the ending balance in Retained Earnings. This equation highlights how the income statement and the balance sheet connect to one another. The net income from the income statement plugs into Retained Earnings on the balance sheet. This concept, which is formally referred to as articulated financial statements, is something that all business students must understand.

How do you calculate a cash excess or deficiency?

The cash receipts over cash disbursements is a cash excess or deficiency usually denoted as: Beginning Cash Add cash receipts = Total Cash Available Less Cash Disbursements = Excess (or deficiency) of cash available over disbursements

What is the Disbursements section of the Cash Budget?

The disbursements section summarizes all cash payments that are planned for the budget period. These payments include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained in their respective budgets. In addition, other cash disbursements such as equipment purchases, and dividends are listed.

Control

The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change.

What is the receipts section of the Cash Budget?

The receipts section lists all of the cash inflows, except from financing, expected during the budget period. Generally, the major source of receipts is from sales.

What is the Cash Excess/Deficiency section of the Cash Budget?

a. The cash excess or deficiency section is computed as follows: (see image) b. If a cash deficiency exists during any budget period or if there is a cash excess during any budget period that is less than the minimum required cash balance, the company will need to borrow money. c. Conversely, if there is a cash excess during any budget period that is greater than the minimum required cash balance, the company can invest the excess funds or repay principal and interest to lenders.

What is the Financing section of the Cash Budget?

a. The financing section of the cash budget details the borrowings and principal and interest repayments projected to take place during the budget period. b. To calculate borrowings and interest payments, you'll need to pay attention to the company's desired minimum cash balance and to the terms of the company's loan agreement with the bank.