BUAD 6100 Chapter 23

Brainard Corporation's budgeted sales for the upcoming quarter are $400,000. Its supporting budgets and schedules show a beginning finished goods inventory of $15,000, budgeted cost of goods manufactured of $185,000, and a projected ending finished goods inventory of $25,000. Its selling and administrative budget projects expenses of $148,000, its budgeted interest expense is $7,000, and its tax rate averages 40%. 1. The company's budgeted gross profit for the upcoming quarter is ___ 2. The company's budgeted income before taxes for the upcoming quarter is ___ 3. The company's budgeted income taxes for the upcoming quarter are ___ 4. The company's budgeted net income for the upcoming quarter is ___

$225,000, $70,000, $28,000, $42,000

Shaub Corporation made the following budget cost estimates for the upcoming month: Direct Labor = $10 per unit Direct Materials = $20 per unit Variable Manufacturing Overhead = $5 per unit Variable Selling and Administrative Costs = $12 per unit Fixed Manufacturing Overhead = $100,000 per month Fixed Selling and Administrative Costs = $250,000 1. The variable costs necessary to prepare a production budget total ___ per unit. 2. The fixed costs necessary to prepare a production budget total ___ per month.

$35, $100,000

steps to prepate a master budget

1.Prepare a sales forecast. 2.Prepare budgets for production, manufacturing costs, and operating expenses. 3.Prepare a budgeted income statement. 4.Prepare a cash budget. 5.Prepare a budgeted balance sheet

Which of the following statements is/are true regarding the behavioral approach of establishing budgetary amounts?

Budgetary amounts should be set at reasonably achievable levels. Managers will be motivated to perform if they view the budget as a fair basis for evaluating a responsibility center's performance.

The Behavioral Approach

Budgeted amounts are set at reasonable and achievable levels, the underlying idea is that managers will be most highly motivated if they view the budget as a fair basis for evaluating a responsibility center's performance

Which of the following statements are true about budgets?

Budgeting is an essential step in financial planning. Budgets are formal written plans for achieving financial goals. Budgets play an important role in controlling costs.

Which of the following are benefits of the budgeting process?

Effective coordination among departments and other operating units. Enhanced management awareness of the external economic environment. Unambiguous assignments of decision-making responsibilities. Objective measures of performance evaluation.

master budget

Operating budgets Sales budget Production budgets (including units to produce, direct materials, direct labor, overhead) Cost of goods manufactured and sold budget Selling and administrative expense budget (marketing, administrative expenses, research and development) Cash budget Financial budgets (budgeted income statement, budgeted balance sheet, budgeted cash flows statement, capital expenditures budget)

Chapter 23

Operational Budgeting

rolling budgeting

a new quarter or month is added to the end of the budget as the current quarter or month ends so the budget always covers the upcoming 12 months, stabilizes planning horizon, managers continously review the budget

A flexible budget is useful when ___ levels of activity differ substantially from budgeted levels

actual

NTI will likely use the master budgeting process for evaluating management performance by comparing budgeted amounts to ___ performance

actual

For a manufacturing company, ___ is the average time period between the purchase of raw materials and the conversion of those materials into cash

an operating cycle

The two prevailing philosophies for establishing budgetary amounts are the ___ apppraoch and the ___ approach

behavioral, total quality management

Which of the budgeted financial statements is generally prepared last?

budgeted balance sheet

A cash budget must be prepared prior to the preparation of

budgeted balance sheets

cash budget estimates

budgeted disbursements for payables, prepayments, debt service, and taxes & cash receipts from collection of receivables

Which of the following estimates are included in a cash budget?

budgeted tax payments budgeted debt service payments budgeted payables distributions budgeted prepayments

flexible budget

can be adjusted easily to show budgeted revenue, costs, and cash flows at different levesl of activity (a new budget can be prepared quickly if something changes)

Different types of budgets cover different time periods. For instance, capital Blank 1 Blank 1 capital , Correct Unavailable expenditures Blank 2 Blank 2 expenditures , Correct Unavailable budgets may cover a decade or more, whereas operating Blank 3 Blank 3 operating , Correct Unavailable budgets generally cover a fiscal year or less

capital expenditures, operating

screenshot

cash: cash budget accounts receivable: budgeted accounts receivable and collections budget direct materials inventory: production budget (direct materials schedule) finished goods inventory: budgeted cost of goods manufactured and sold budget prepayments: prepayments budget notes payable: debt service budger other payabbles: current payables budget income taxes payable: income tax budget retained earnings: budgeted income statement

budget

comprehensive financial plan setting forth the expected route for achieving the financial and operational goals of an organization

Which of the following manufacturing cost estimates are necessary to prepare a production budget?

direct material costs fixed manufacturing overhead direct labor costs variable manufacturing overhead

in addition to including budgeted quarterly income as an increase to total stockholders' equity in the budgeted balance sheet, budgeted ___ declared during the quarter would be included as a decrease to total equity in the budgeted balance sheet

dividends

benefits of budgeting

enhanced management responsibility, assignment of decision-making responsibilities, coordination of activities, performance evaluation

budgeted income statements are based on

estimates from sales budget, cogs busget, and selling/admin expenses budget

Total Quality Management Approach

every individual and segment of the organization should strive for improvement constantly, the entire organization is committed to the goal of completely eliminating inefficiency and non-value-added activities, the organization strives to achieve perfection across its entire value chain

expenses that do not require an outlay of cash

expenses that result from the expiration of prepaid items (such as insurance policies) and the depreciation of plant assets

True or false: The preparation of a cash flow forecast is generally the first step taken in the master budgeting process

false

True or false: Unlike large organizations, very small businesses rarely benefit from preparing formal written plans for their future operations

false

The budgeting process is often referred to as financial ___ because of its forward-looking focus

forecasting

managers must also make estimates related to

interest expense and income taxes

An operating cycle reflects the amount of time that cash is tied up in ___ and accounts ___ before converting back to cash

inventories, receivable

the master budgeting process helped NTI to better understand why it was profit rich, yet cash poor. In particular, the process gave the company advanced warning that excessive cash was being tied up in ___ and ___

inventories, receivables

A company that is profit rich, yet cash poor can experience

negative operating cash flow. profitability measures that exceed industry averages. liquidity measures that fall short of industry averages

Elements of a master budget that are internal working budgets used primarily by managers, such as sales budgets and production budgets, are commonly referred to as ___ budgets

operating

Budgets provide a yardstick by which management's ___ can be measured and evaluated

performance

a ___ compares budgeted amounts with actual performance and quantifies on a line-by-line basis the amounts by which actual amounts were over or under budgeted amounts

performance report

Being profit rich, yet cash poor is often attributed to

rapid growth

Elements of a master budget that are organized by responsibility center are generally referred to as ___ budgets

responsibility

Most organizations use a ___ budget approach, whereby a new quarter or month is added to the end of the budget as the current quarter or month draws to a close

rolling

Which element of a master budget is always prepared first?

sales budget

The master budgeting process helped NTI to coordinate the activities of its production department to better meet the needs of its ___ department. It also helped the company's ___ department better coordinate material acquisitions activities with the demands of the production department.

sales, purchasing

Two basic philosophies for setting budget amounts

the behavioral approach (more widely used) and the total quality management approach

true or false: The selling and administrative expense budget is indirectly reflected in the budgeted balance sheet through the following accounts: Cash, Retained Earnings, Prepayments, and Other Current Payables

true

the budget period

typically one fiscal year, divided into quarters, should be long enough to show the effect of management policies but short enough so that estimates can be made with reasonable accuracy