ACCT 303 : Study Guide: Budgeting (Chapter 5)

What is a budget?

A detailed quantitative plan for acquiring and using financial and other resources over a specific period. Helps in planning (setting goals) and control (monitoring performance).

What is the basic framework of budgeting?

Most budgets cover a one-year fiscal period, which can be divided into quarters or months.

What is a continuous (perpetual) budget?

A 12-month rolling budget that continuously updates by adding one month as another ends, ensuring constant planning and review.

What are the two key purposes of budgeting?

Planning – Setting objectives and financial goals. Control – Comparing actual results with the budget and making adjustments.

What are the two main budgeting approaches?

Top-Down Budgeting – Senior management sets the budget with little input from lower levels. Self-Imposed (Participative) Budgeting – Involves lower-level managers, improving accuracy and motivation.

What are the advantages of self-imposed budgeting?

More accurate estimates from front-line managers. Higher motivation and accountability. Encourages commitment and ownership of the budget.

What is a master budget?

A comprehensive financial plan consisting of multiple budgets that help plan and control operations.

What are the key components of a master budget?

Sales Budget, Production Budget, Direct Materials Budget, Direct Labor Budget, Manufacturing Overhead Budget, Selling & Administrative Budget, Cash Budget, Budgeted Income Statement, and Budgeted Balance Sheet.

What is a sales budget, and how is it prepared?

Estimates expected sales revenue based on projected unit sales, selling price per unit, and cash collection patterns.

How are cash collections calculated?

Companies often don’t collect all sales in the same month, for example, 70% collected in the same month and 30% collected the next month.

How do you calculate expected cash collections?

(Current Month Sales × % Collected) + (Previous Month Sales × % Collected). Example: Sales in June of $300,000, 70% collected in June is $210,000, and from May's $200,000 sales, 30% collected is $60,000, total = $270,000.

What is a production budget, and why is it important?

Determines how many units must be produced to meet sales demands and ensures enough inventory is available.

What is the formula for required production?

Required Production = (Budgeted Sales + Desired Ending Inventory) – Beginning Inventory.

Example: How many units should be produced?

Budgeted sales for May = 50,000 units, Desired ending inventory = 10,000 units, Beginning inventory = 5,000 units, Required production = (50,000 + 10,000) - 5,000 = 55,000 units.

What is a direct materials budget?

Determines how much raw material to purchase based on production needs and desired inventory levels.

What is the formula for raw materials required?

Raw Materials Required = (Materials per Unit × Units to be Produced) + Desired Ending Inventory – Beginning Inventory.

How do you calculate direct labor hours needed?

Formula: Units to be Produced × Direct Labor Hours per Unit.

Example: Production goal = 10,000 units, Labor hours per unit = 0.5 hours, Total direct labor hours = 10,000 × 0.5 = 5,000 hours.

What is included in the manufacturing overhead budget?

Variable overhead (based on production) and fixed overhead (constant expenses). Example: Variable overhead rate = $20 per labor hour, Fixed overhead cost = $50,000 per month.

What is included in the selling & administrative budget?

Variable selling costs (e.g., commissions) and fixed admin costs (e.g., rent, salaries).

What are the four sections of a cash budget?

Cash Receipts, Cash Disbursements, Cash Excess/Deficiency, and Financing.

How is the cash balance determined?

Beginning Cash + Cash Receipts – Cash Disbursements = Ending Cash.

What is the budgeted income statement?

Estimates profit based on revenue and expenses, using data from sales, production, and cash budgets.

What is the budgeted balance sheet?

Predicts financial position at the end of the budget period, including cash balance from the cash budget, accounts receivable from the sales budget, and inventory from the production budget.