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.