ACCT 303 : Study Guide: Budgeting (Chapter 5)

Flashcards – Chapter 5: Budgeting

Budgeting Basics

Front:

What is a budget?

Back:

• 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).

Front:

What is the basic framework of budgeting?

Back:

• Most budgets cover a one-year fiscal period.

• Can be divided into quarters or months.

Front:

What is a continuous (perpetual) budget?

Back:

• A 12-month rolling budget that continuously updates by adding one month as another ends.

• Ensures constant planning and review.

Front:

What are the two key purposes of budgeting?

Back:

1. Planning – Setting objectives and financial goals.

2. Control – Comparing actual results with the budget and making adjustments.

Types of Budgets

Front:

What are the two main budgeting approaches?

Back:

1. Top-Down Budgeting – Senior management sets the budget with little input from lower levels.

2. Self-Imposed (Participative) Budgeting – Involves lower-level managers, improving accuracy and motivation.

Front:

What are the advantages of self-imposed budgeting?

Back:

• More accurate estimates from front-line managers.

• Higher motivation and accountability.

• Encourages commitment and ownership of the budget.

Front:

What is a master budget?

Back:

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

Master Budget Components

Front:

What are the key components of a master budget?

Back:

1. Sales Budget – Forecasts revenue.

2. Production Budget – Determines units to produce.

3. Direct Materials Budget – Plans material purchases.

4. Direct Labor Budget – Estimates labor needs.

5. Manufacturing Overhead Budget – Estimates indirect costs.

6. Selling & Administrative Budget – Covers operating expenses.

7. Cash Budget – Forecasts cash inflows and outflows.

8. Budgeted Income Statement – Projects profit.

9. Budgeted Balance Sheet – Forecasts financial position.

Sales Budget & Cash Collections

Front:

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

Back:

• Estimates expected sales revenue.

• Based on:

  • Projected unit sales.

  • Selling price per unit.

  • Cash collection patterns.

Front:

How are cash collections calculated?

Back:

• Companies often don’t collect all sales in the same month.

• Example:

  • 70% collected in the same month.

  • 30% collected the next month.

Front:

How do you calculate expected cash collections?

Back:

Formula:
(Current Month Sales × % Collected) + (Previous Month Sales × % Collected)

Example:

• Sales in June = $300,000

• 70% collected in June = $210,000

• 30% collected from May's $200,000 sales = $60,000

• Total Cash Collected in June = $270,000

Production Budget

Front:

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

Back:

• Determines how many units must be produced to meet sales demands.

• Ensures enough inventory is available.

Front:

What is the formula for required production?

Back:

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

Front:

Example: How many units should be produced?

Back:

• 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

Direct Materials Budget

Front:

What is a direct materials budget?

Back:

• Determines how much raw material to purchase.

• Based on production needs and desired inventory levels.

Front:

What is the formula for raw materials required?

Back:

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

Direct Labor Budget

Front:

How do you calculate direct labor hours needed?

Back:

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

Manufacturing Overhead Budget

Front:

What is included in the manufacturing overhead budget?

Back:

• Variable overhead (based on production).

• Fixed overhead (constant expenses).

• Example:

  • Variable overhead rate = $20 per labor hour

  • Fixed overhead cost = $50,000 per month

Selling & Administrative Expense Budget

Front:

What is included in the selling & administrative budget?

Back:

• Variable selling costs (e.g., commissions).

• Fixed admin costs (e.g., rent, salaries).

Cash Budget

Front:

What are the four sections of a cash budget?

Back:

1. Cash Receipts – Expected inflows (e.g., sales collections).

2. Cash Disbursements – Expected outflows (e.g., wages, purchases).

3. Cash Excess/Deficiency – Determines if borrowing is needed.

4. Financing – Borrowing & repayment plans.

Front:

How is the cash balance determined?

Back:

Formula:
Beginning Cash + Cash Receipts – Cash Disbursements = Ending Cash

Budgeted Financial Statements

Front:

What is the budgeted income statement?

Back:

• Estimates profit based on revenue and expenses.

• Uses data from sales, production, and cash budgets.

Front:

What is the budgeted balance sheet?

Back:

• Predicts financial position at the end of the budget period.

• Includes:

  • Cash balance from the cash budget.

  • Accounts receivable from sales budget.

  • Inventory from the production budget.