accounting ch 22 +23

budget

cost plan used to meet finical goals

• allocate limited recourses

• plan for income targets

• distribute surplus funds

why do companies use budgets

plan ahead

set objectives

early warning system

coordinate activities

motivate employees

downsides of budgeting

time consuming

limits flexibility

focuses on numbers not qualitative goals

can create competition between departments

budgets rely on

• Sales data (forecasts or historical)

• Cost data (from departments)

buget structure

• budgets ≠ reality

• Variances will occur (budget vs actual)

Sales Budget

Sales Revenue=Units Sold×Selling Price

Production Budget

Required production = Expected sales + Desired ending inventory - Beginning inventory

what do I need total - what I already have

cash budget

Ending Cash=Beginning Cash+Cash Receipts−Cash Disbursements±Financing

inventory

Ending Inventory=Beginning Inventory+Production−Sales

desired ending inventory

Desired Ending Inventory=%×Next Period Sales

flexible budget

Total Cost=(Variable Cost per Unit×Activity Level)+Fixed Costs

variable cost

change with activity

fixed cost

stay the same

static budget

one activity level

does not adjust for actual production

used for → fixed costs simple comparisons

if production changes

flexible buget

variance

Variance=Actual Results−Budgeted Results

• positive - costs higher than expected

• negative - costs lower than expected

mangers focus on

only fix what stands out

• large variance

• important areas

• trends over time

cost center

controls costs

• maintenance department

profit center

controls revenue and costs

• store

investment center

controls profit investment and assets

evaluated on ROI

• bank branch