CH 6: Master Budgets

plan created with a distinct understanding that resources in limited supply are to be used judiciously

budget

What does SMARTER stand for

Specific
Measurable
Achievable
Relevant
Time-Bound
Evaluate
Readjust

What are the four types of budgets

Rolling
Zero Based
Imposed
Participative

A budget wherein the budget period is continually updated so that it always shows forecast numbers for a set future time interval

Rolling Budget

A budget that is created from scratch (or “zero”), with each number requiring justification for its inclusion

Zero Based Budget

What is the equation for the zero based budget

inflows=outflows

A mandated, top-down budget, created and approved by top executives and enacted throughout the organization

Imposed Budget

A budget created by managers throughout the organization who are the most knowledgeable about the factors impacting their immediate operations

Participative Budget

The intentional overstating of budgeted expenses or understating of budgeted revenues to achieve targets more easily; also known as padding the budget

budgetary slack

An expression that, in a business context, refers to spending all the funds allocated in a budget to avoid being granted fewer funds the next year

use it or lose it

A comprehensive, organization-wide plan used to coordinate a company’s goals and objectives and to allocate resources for the upcoming year (or operating period)

master budget

What part of the strategic plan does the master budget fall under

measures and targets

Decision-making authority that resides within a narrow scope at the highest levels of a firm.

Centralizatoin

The freedom of managers at all levels to make binding decisions without needing approval from top management.

Decentralization

Participative budgets are more common within ___ organizations

Decentralized

An independent unit within a larger corporation, such as a territory, circuit, division, segment, branch, office, department, station, program, or center; also called subunit

business unit

Reflects how much influence a person exercises over an outcome

controllability

A business unit, or subunit, organized according to its focus, or area of control.

Responsibility center

What are the 4 types of responsibility centers

Cost
Revenue
Profit
Investment

An organizational unit responsible for selecting which assets to use to generate a target return and how to wisely reinvest subsequent returns

investment center

An organizational unit responsible for simultaneously generating revenues and maintaining expenses

profit center

Empowerment to make decisions; denoted by position or rank

authority

What three characteristics do all units need to do well in a business

Authority
Responsibility
Accountability

A duty that an employee assumes for task completion within a given job description and skill level, as assigned by managers

responsibility

Exists when employees must answer or “account” for the job they’ve done, with related positive or negative outcomes

accountability

Meaning “for the sake of form”; often refers to budgeted financial statements, depicting a predicted future outcome, and made with the best information available at the time

pro forma

Budget comprised of the plans and schedules that result in the budgeted (pro forma) income statement

operating budget

Where is the impact of a sales forecast seen in the income statement?

Sales
COGS
SG&A exp

Where is the impact of a sales forecast seen in the balance sheet

AR
Cash

Budgeted sales revenue=

Budgeted sales volume * Budgeted selling price

A business agreement allowing a customer to purchase goods and pay at a later date

trade credit

The sales forecast flows into the production budget, which flows into the:

DM, DL, and MOH budgets

Where are the effects of the production budget seen on the income statement?

COGS

Where is the effects of the production budget seen on the Balance Sheet

FG Inv

Budgeted units to be produced=

Budgeted sales volume+ target end FG inv - Beg FG inv

A planned buffer of ending FG Inventory that enables a company to continue selling when actual demand exceeds the sales forecast

safety stock

Where is the effects of the DM purchases budget seen on the income statement

COGS

Where is the effects of the DM purchases budget seen on the balance sheet

DM inv
AP
Cash

Budgeted quantity of DM to be purchased=

(Budgeted units to be produced * Budgeted quantity needed per unit) + Target end DM inv - Beg DM Inv

Work for which compensation is paid per unit of output to incentivize productivity

piecework

What are the balance sheet impacts of the MOH Budget?

AP
Cash
Accum Dep

Budgeted COGS=

Budgeted Beg FG inv + Budgeted COGM - Budgeted end FG Inv

Budgeted COGM=

Bud cost of DM used + Budge DL cost + Bud MOH cost + Beg WIP inv - End WIP inv

What is included in non operating expenses?

interest expense, income tax expense

The budget comprising a company’s plans and schedules, which results in the budgeted (pro forma) balance sheet

financial budget

The sum of cash sales plus cash collections from accounts receivable

cash receipts

Budgeted Cash Balance=

Beg Cash Bal + Cash Receipts - Cash Disbursements + Proceeds from borrowing - Borrowing repayments - interest payments

What are the complexities for retailers (3)

Sales returns and discounts
Purchase returns and discounts
Seasonality