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23 Cards in this Set

  • Front
  • Back
Budget: Business plan in financial terms
Budgeting involves
Establishing specific goals
Executing plans to achieve goals
Periodically comparing results with goals
Objectives of Budgeting
1)establishing specific goals
2)executing plans to achieve the goals
3)periodically comparing actual results with the goals
Human Behavior
human behavior problems can arise if the budget is unachievable(too high), the budget goal is very easy to achieve(too loose), or the budget goals of the business conflict with the objectives of the employees(goal conflict)
Setting Budget Goals Too Tightly
people can become discouraged if performance expectations are set too high
Setting Budget Goals Too Loosely
it is undesirable to plan lower goals than may be possible which is called budget "padding" or budgetary slack

Slack budgets can cause employees to develop a "spend or lose it" mentality. This often occurs at the end of the budget period when actual spending is less than the budget. Employees may attempt to spend the remaining budget (purchase equipment,hire consultants, purchase supplies) in order to avoid having the budget cut next period.
Setting Conflict Budget Goals
goal conflict occurs when individuals self-interest differs from business objectives.
Continuous Budgeting
a variation of fiscal-year budgeting that maintains a 12 month projection into the future.
Zero-based budgeting
requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.
Static budget
a static budget shows the expected results of a responsibility center for only one activity level.

a disadvantage of static budgets is that they do not adjust for changes in activity levels.
Flexible Budget
flexible budgets show the expected results of a responsibility center for several activity levels.
Sales budget
the sales budget normally indicates for each product, the quantity of estimated sales and the expected unit selling price
Production Budget
the number of units to be manufactured to meet budgeted sales and inventory needs for each product

Expected units sold
+Desired units in ending inventory
-Estimated units in the beginning inventory
Total units to be produced
Direct Materials Purchases Budget
the production budget is the starting point for determining the estimated quantities of direct materials to be purchased. Multiplying these quantities by the expected unit purchase price determines the total cost of direct materials to be purchased

Materials required for production
+Desired ending materials inventory
-Estimated beginning materials inventory
Direct materials to be produced
Cost of Goods Sold Budget
the direct materials purchases budget, direct labor cost budget, and factory overhead cost budget are the starting point for preparing the cost of goods sold budget
Cash Budget
presents expected receipt(inflows) and payments(outflows) of cash for a period of time
Master budget
A master budget is a combination of budgets linked to form budgeted income statement & budgeted balance sheet.
Cost of goods sold budget
derived from the sales & production budgets, includes beginning finished goods & work in process inventories and subtracts ending finished goods & work in process inventories .
How many budgets make up the budgeted Balance Sheet?
2 budgets make up a budgeted Balance Sheet:
Cash budget projects operating cash inflows & outflows
Capital expenditures budget projects cash outflows for PPE .
Standards are performance goals
Standard costs systems
Provide a measure for performance
Allow measurement of variances from performance goals
Standards should be revised as necessary
Given: Fixed costs = $840,000; unit CM = $250 – 145 = $105
Break-even sales = $600,000 / 20 = 8,000 units

840,000 / {105 – ($250*2%)} =

When unit variable cost increased by $5, break-even units increased by 400.
Budgetary performance evaluation
compares actual performance to budget projections.
Non-financial measures
can augment financial measures for performance evaluation to avoid goal conflicts.
Inventory turnover
On-time delivery
Lapsed time order to delivery
Customer preference rankings
Response time
Product development time
Employee satisfaction
Customer complaints