Term
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Definition
A modern organization needs an integrated, entity-wide budget.
To be effective, a budget must be based on carefully chosen standards. |
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| 2 steps of a comprehensive budget |
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Definition
| operating budget and the financial budget. |
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| encompasses the organization's operating and financial plans for a specified period; prepared before the period begins and is left unchanged. Based on only one level of expected activity (output planned at the beginning of the period). |
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Definition
| The information contained in the lower-numbered budgets are inputs to the higher-numbered budgets. For example, the production budget cannot be prepared until after completion of the sales budget. The direct materials budget and the direct labor budget cannot be prepared until after completion of the production budget. |
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Definition
| emphasis is on obtaining and using current resources |
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| budgets included within operating budget |
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Definition
Sales, production, DM, DL, manufacturing overhead, CoGS budgets.
Also contains the nonmanufacturing budget
R&D
selling and administrative budget
S&A budget includes design, marketing, distribution, customer service and administrative budgets.
Pro forma income statement |
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Definition
| emphasis on obtaining the funds needed to purchase operating assets. |
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| budgets included within financial budget |
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Definition
Capital budget (completed before operating budget is begun)
Cash budget
Projected cash disbursement schedule
Projected cash collection schedule
Pro forma balance sheet
Pro forma statements of cash flows |
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Term
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Definition
predetermined expectations about how much a unit of input, a unit of output, or a given activity should cost
not just an average of past costs but an objectively determined estimate of what a cost should be. |
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Term
| Use of standard costs in management |
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Definition
| allows the standard-cost system to alert management when the actual costs of production differ significantly from the standard. |
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Term
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Definition
| units of input per single unit of output * price per unit of input |
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Term
| ideal/theoretical/perfection/maximum efficiency standards |
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Definition
standard costs that are set for production under optimal conditions.
Often called tight standards, they can have positive behavioral implications if they motivate better employee performance, but can have negative behavioral implications if they seem unattainable. Normally, they do, and as such, are replaced with currently attainable standards. |
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Term
| currently attainable standards |
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Definition
| performance that is expected to be achieved by reasonably well-trained workers with an allowance for normal spoilage, waste, and downtime. |
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Definition
| represent possible but difficult-to-attain results. |
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Definition
| identifies, describes, and evaluates the activities and resources needed to produce a particular output; this process aids in the development of standard costs. |
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Term
| inputs and activity analysis |
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Definition
amounts and kinds of equipment, facilities, materials, and labor.
Each operation requires a unique set of inputs and preparations. Activity analysis describes what these inputs are and who performs these preparations. |
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Term
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Definition
Starting point for master budget.
Based on sales forecast
Must specify both projected unit sales and dollar revenues. |
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Definition
| which reflects recent sales trends, overall conditions, in the economy and industry, market research, activities of competitors, and credit and pricing policies. |
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Definition
follows sales budget directly; measures only units not prices
plan output, inventory levels, and necessary manufacturing activity.
Dependent upon sales budget to minimize carrying costs and obsolescence. |
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Definition
prepared after sales forecast
prepared on:
monthly or weekly basis
plans purchases
keeps inventory from being too high
units purchased, not produced |
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Term
| direct materials (DM) budget |
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Definition
Concerned with both units and input prices.
Calculates cost of RM actually used in production and total cost of RM purchased. |
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Definition
Depends on wage rates, amounts and types of production, numbers and skill levels of employees to be hired, etc.
DL cost/hr. may also include employer FICA taxes, health and life insurance, and pension contributions. |
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Term
| manufacturing overhead (MO) budget |
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Definition
Reflects nature of overhead as a mixed cost.
Var. overhead contains indirect materials, some indirect labor, variable factory operating costs.
Fixed overhead contains real estate taxes, insurance, and depreciation. |
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Term
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Definition
Combines projections for three major inputs: materials, labor, and overhead.
Affects pro forma IS.
Largest mfg. cost. |
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Term
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Definition
Combines projections for three major inputs: materials, labor, and overhead.
Affects pro forma IS.
Largest mfg. cost. |
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Term
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Definition
End of operating budget process.
Used to decide whether the budgeted activities will result in an acceptable level of income. |
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Definition
Used to decide whether the budgeted activities will result in an acceptable level of income.
Must be approved by BOD.
End of operating cycle and separate from operating budget process.
Direct input for cash budget, pro forma B/S, and statement of cash flows (SCF). |
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Term
| procedure for ranking projects |
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Definition
| according to their risk and return |
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Definition
| projects cash flows for planning and control purposes. Hence, it helps prevent not only cash emergencies but also excessive idle cash. |
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| Why is the cash budget vital? |
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Definition
| Because an organization must have an adequate supply of cash at all times. Even with plenty of other assets, an organization without an adequate supply of cash can go bankrupt. |
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Definition
| delay cash receipts and purchase discounts accelerate cash payments. |
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| projected cash collection schedule |
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Definition
| forecasts the inflows of cash from customer payments |
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Term
| cash budget as related to financial budget. What does the cash budget do? |
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Definition
key element of the financial budget.
It combines the operating budget with the cash flow schedules to produce a comprehensive statement of the sources and uses of the entity's cash flows.
Cash budget used to plan financing activities and dividend policy. |
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Term
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Definition
beginning-of-the-period B/S updated for projected changes in cash, receivables, payables, inventory, etc.
Prepared using the cash and capital budgets and the pro forma IS. |
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Definition
| classifies cash flows depending on whether they are from operating, investing, or financing activities. |
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Definition
| annual profit plan prepared for various levels of production or sales; reports operating income for each level. |
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Term
| flexible vs. static budget |
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Definition
| Flexible budget uses the same drivers as is the static budget but for different levels of production. |
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Definition
| difference between actual and expected results |
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Term
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Definition
| helps management in monitoring and measuring a company's performance |
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Definition
| occurs when actual revenues are greater than standard (budgeted) or actual costs are less than standard (budgeted). |
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Definition
| occurs when actual revenues are less than standard (budgeted) or actual costs are less than standard (budgeted). |
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| How do you analyze the company's performance with variances? |
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Definition
| To analyze the company's performance for the period, the budget variances should be subdivided into sales-volume variances and flexible budget variances. |
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Term
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Definition
| arise from inaccurate forecasting of the output sold for the period (flexible budget - static budget). |
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Term
| flexible budget variances |
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Definition
| report the differences between the actual revenues and costs for the period and the amounts that should have been earned and expended given the achieved level of production (actual results - flexible budget). |
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Term
| How is the flexible budget prepared? |
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Definition
| The flexible budget is prepared based on the actual output sold/produced during the period and on the same drivers that were used in the preparation of the master budget. |
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| When is the flexible budget prepared? |
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Definition
| The flexible budget is prepared after the end of the period when all the actual results are known. |
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