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ACCT 240, CHP 8: MASTER BUDGETING

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Textbook solutions for this set

Fundamentals of Financial Management, Concise

Edition
10th Edition
Eugene F. Brigham, Joel Houston

777 solutions

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Terms in this set (36)

A detailed plan for the future that is usually

BUDGET
expressed in formal quantitative terms.

2 PURPOSES FOR BUDGETS Planning and control

Developing goals and preparing various budgets to

PLANNING
achieve those goals

Gathering feedback to ensure that the plan is being

CONTROL properly executed or modified as circumstances
change.

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ACCT 240, CHP 8: MASTER1)BUDGETING

Budgets communicate management's plans Study
throughout the organization.

2) Budgets force managers to think about and plan

for the future.

3) Budgeting process provides a means of allocating

resources to those parts of the organization where
they can be used most effectively.

4) Budgeting process can uncover potential

ADVANTAGES OF BUDGETING
bottlenecks before they occur.

5) Budgets coordinate the activities of the entire

organization by integrating the plans of its various
parts and ensure that everyone in the organization is
pulling in the same direction.

6) Budgets define goals and objectives that can

serve as benchmarks for evaluating subsequent
performance.

The concept that a manager should be held

RESPONSIBILITY responsible for those items, and only those items,
ACCOUNTING that the manager can actually control to a significant
extent.

That nothing falls through the cracks; that an

POINT OF RESPONSIBILITY
organization reacts quickly and appropriately to
ACCOUNTING
deviations from its plans.

A 12 month budget that rolls forward one month (or

CONTINUOUS OR PERPETUAL
quarter) as the current month (or quarter) is
BUDGET
compelted.

SELF-IMPOSED BUDGET AKA A budget that is prepared with the full cooperation
PARTICIPATIVE BUDGET and participation of managers at all levels.

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ACCT 240, CHP 8: MASTER1)BUDGETING

individuals at all levels are recognized as members
Study
of the team whose views and judgments are valued
by top management.

2) budget estimates prepared by front-line managers

are often more accurate and reliable than estimates
prepared by top managers who have less intimate
ADVANTAGES OF SELF- knowledge of markets and day-to-day operations.

IMPOSED BUDGETS 3) motivation is generally higher when individuals

participate in setting their own goals than when the
goals are imposed from above.

4) a manager who is not able to meet a budget that

has been imposed from above can always say that it
was unrealistic, which cannot be said if it was self-
imposed.

1) lower level managers may make suboptimal

budgeting recommendations if they lack the broad
LIMITATIONS OF SELF-
strategic perspective possessed by top mangers.

IMPOSED BUDGETS
2) self-imposed budgeting may allow lower-level
managers to create too much budgetary slack.

Consists of a number of separate but interdependent

budgets that formally lay out the company's sales,
MASTER BUDGET production, and financial goals. Culminates in a cash
budget, a budgeted income statement, and a
budgeted balance sheet.

First step in budgeting process is preparation of the

SALES BUDGET sales budget. A detailed schedule showing the
expected sales for the budget period.

Budget which defines how many units need to be

produced during the budget period. Used to
PRODUCTION BUDGET
determine the direct materials, direct labor, and
MOH budgets.

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ACCT 240, CHP 8: MASTER

ENDING FINISHED ... BUDGETING Study
GOODS INVENTORY
BUDGET

A detailed plan showing how cash resources will be

CASH BUDGET
acquired and used.

Provides an estimate of net income for the budget

period and it relies on info from the sales budget,
ending finished goods inventory budget, selling &
BUDGETED INCOME
admin expense budget, and cash budget. It shows
STATEMENT
the company's planned profit and serves as a
benchmark against which subsequent company
performance can be measured.

Final schedule of the master budget; estimates a

BALANCE SHEET BUDGET company's asset,s liability, and stockholders' equity at
the end of a budget period.

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ACCT 240, CHP 8: MASTER1)BUDGETING

how much sales revenue will we earn?
Study
2) how much cash will we collect from customers?

3) how much raw material will we need to purchase?

4) how much manufacturing cost (including direct

materials, direct labor, and MOH) will we incur?

5) how much cash will we pay to our suppliers and

our direct labrorers, and how much will we pay for
manufacturing overhead resources?

10 KEY QUESTIONS TO A 6) what is the total cost that will be transferred from
MANUFACTURING MASTER finished goods inventory to COGS?

BUDGET 7) how much selling and admin expense will we incur

and how much cash will we pay related to those
expenses?

8) how much money will we borrow from or repay to

lenders - including interest?

9) how much net operating income will we earn?

10) what will our balance sheet look like at the end of
the budget period?

1) sales budget

2) production budget

3) direct materials budget

4) direct labor budget

THE BUDGETS WITHIN A 5) MOH budget

MASTER BUDGET 6) selling & admin expense budget

7) ending finished goods inventory budget

8) cash budget

9) budgeted income statement

10) budgeted balance sheet

Budgeted unit sales + desired units of ending finished

PRODUCTION BUDGET
goods inventory = total needs, less units of beginning
FORMULATION
finished goods inventory = required production units

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ACCT 240, CHP 8: MASTERBudget

BUDGETING
in merchandising companies showing the
Study

MERCHANDISE PURCHASES amount of goods to be purchased from suppliers

BUDGET during the period. The equivalent of production

budget in a manufacturing company.

Budgeted COGS + desired ending inventory = total

MERCHANDISE PURCHASE
needs - beginning merchandise inventory = required
BUDGET FORMULATION
purchases

Prepared after production requirements have been

DIRECT MATERIALS BUDGET computed and details the raw materials required to
fulfill the production budget.

DIRECT MATERIALS
COMPUTATION

Shows the direct labor-hours required to satisfy the

DIRECT LABOR BUDGET production budget. The first line of this budget
consists of the required production for each quarter.

MANUFACTURING OVERHEAD Lists all costs of production other than direct

BUDGET materials and labor.

ENDING FINISHED GOODS The computation of cost of unsold units in inventory.

INVENTORY BUDGET

Lists the budgeted expenses for areas other than

SELLING AND manufacturing. In a large organization, this budget
ADMINISTRATIVE EXPENSE would be a compilation of many smaller, individual
BUDGET budgets for various departments relating to selling
and admin.

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ACCT 240, CHP 8: MASTER1)BUDGETING

Receipts section
Study
2) Disbursement section

4 SECTIONS OF CASH BUDGET

3) Cash excess or deficiency section

4) Financing section

Lists all of the cash inflows (except from financing)

RECEIPTS SECTION
expected during the budget period.

Summarizes all cash payments that are planned for

DISBURSEMENTS SECTION
the budget period.

Beginning cash balance + cash receipts = total cash

CASH EXCESS/DEFICIENCY
available - cash disbursements = excess/deficiency of
SECTION
cash available over disbursements

Details the borrowings and principal and interest

repayments projected to take place during the
budget period. To calculate, pay attention to the
FINANCING SECTION company's desired minimum cash balance and to the
terms of the company's loan agreement with the
lender. Remember to add in any cash deficiencies
into required borrowings.

SELLING & ADMINISTRATIVE

EXPENSE BUDGET

BUDGETED BALANCE SHEET

FORMAT

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