ACG 2071 Ch8 Budgeting Terms

3 benefits of budgeting

1. Forces managers to plan for the future

2. Communicates management’s plans & coordinates a company’s activities

3. Provides a benchmark that can be used to evaluate performance

Continuous or perpetual budget or rolling forecast

Budgets are continuously updated to that the next 12 months are always projected. Always 12 mo long.

Zero-based budget

Firms begin w/$0 & build the budget from their, justifying every dollar added to the budget

Participative or self imposed budget

Various managers are involved in the budgeting process

Advantages of participative or self imposed budget (3)

1. Everyone is involved —> including lower lvl managers —> feels more fair

2. Lower lvl workers have best knowledge for creating realistic budgets (more on the ground knowledge)

3. Managers feel more motivated to stick to budget they created

Disadvantages of participative or self imposed budget (2)

1. Budgeting process becomes time-consuming & complex

2. Managers make budget for themselves —> may build budgetary slack into budget

Budgetary slack (2)

The deliberate:

• Underestimating revenues: Looks like you made more than anticipated.

• Overestimating expenses: Looks like you end up spending less.

A budgeted pro forma INCOME STATEMENT is comprised of the ______ and the _____, which are derived from the ______.

A budgeted pro forma income statement is comprised of the sales budget and the operating expenses budget, which are derived from the operating budget.

A budgeted pro forma BALANCE SHEET is comprised of the ______ and the _____, which are derived from the ______.

A budgeted pro forma income statement is comprised of the financial/cash budget and the capital expenditures budget.

The sales budget is calculated differently depending on if the company is a _____ or a _____

The sales budget is calculated differently depending on if the company is a manufacturer or a merchandiser

A manufacturing sales budget contains:

• DM

• DL

• MOH

A merchandiser sales budget contains:

• Inventory

• Purchases

• COGS

A financial/cash budget contains:

• Cash collections or inflows

• Cash disbursements or outflows

Under the _____ or _____ budget, cash collections (____) contain: ______, _______, and _____.

Under the financial or cash budget, cash collections (inflows) contain:

• Cash collections in current period.

• Credit collections in current period.

• ALL credit from previous periods.

Under the _____ or _____ budget, cash disbursements (____) contain: ______, _______, and _____.

Under the financial or cash budget, cash disbursements (outflows) contain:

• Cash disbursements from current period.

• ALL cash disbursements from previous periods.

Cash disbursements

Amount of credit paid upfront or the portion of a credit sale paid in a given period

Cash disbursements formula

Cash disbursements = (credit paid from current period) + (credit paid from previous periods)

What are 2 examples of non-cash expenses?

1. Bad debt

2. Depreciation

Accounts receivable balance

Amount that is not collected yet by end of the period or waiting to be received.

Accounts receivable balance formula

Acc receivable bal = (% of credit sales not collected yet)(current month credit) + (% of previous credit not collected yet)(previous credit sales)

Accounts payable balance

Amount firm has left to pay back regarding purchases made on credit.