A202 Chapter 7

Three primary roles of the budget
1 planning
2 coordination
3 control
Budget
a plan for using limited resources
How do budgets effect planning?
budgets promote the use of organizational wide planning compelling managers to make the best decisions
How do budgets effect coordination?
allows for different branches of an organization to work together with one cohesive plan
How do budgets effect Control?
provides a frame of reference and a way to compare for measure of success rate
Financial Budgets
quantify the outcomes of operating budgets in summary financial statements
Operating budgets
budgets which bridge short term and long term decisions in order to achieve their goals
Master budget
a plan that presents the expected revenues, costs and profit corresponding to the expected sale volume as of the beginning of that period
Centralized Decision Making
a situation in which only one person is making all of the decisions for an organization
Decentralized Decision-Making
environments where tasks are delegated to individuals with specific skills and they make the decisions
Revenue Budget
first step in preparing a master budget. calculates expected revenue from a period
Production Budget
2nd step in Master Budget. Budget combines demand info from revenue budget with companies inventory policy
Making a Master Budget order
1 Revenue or sales
2 Production
3 Direct Labor
4 Direct Materials usage
5 Materials purchased budget
6 Manufacturing overhead
7 Variable cost of goods manufactured
8 Cash Budget
Why is the budgeting process iterative
it is iterative because many different branches of the company will rework their budgets multiple times.
Cash Budget
allows companies to determine whether they will have enough money on hand to sustain projected operations
Cash Budgets three main components
1 inflows from operations
2 outflows from operations
3 special items
Responsibility Accounting
refers to concepts surrounding decentralization
Responsibility Center
a organizational subunit.
Three Types of responsibility centers
1 Cost centers
2 Profit Centers
3 Investment Centers
Cost centers
an organizational unit that has control over the costs incurred in offering products or services. A production plant
Profit Centers
Organizational unit that has control over both revenue and cost. A region or a product line
Investment Centers
organizational unit that has control over revenues, costs, and long term investment decisions. A stand alone division
Top-Down Budgeting
Senior mangers finalize the budget with little input from lower organizational levels. One advantage of this is it is not time consuming. This is more suitable for smaller organization and centralized ones
Bottom-up budgeting
process that encourages organizational wide input in regards to a budget. this can increase employees determination to complete goals that they helped make. This can be a very time consuming process, so many firms implement a combo of both
A goal should be set at a level that is
tight but attainable. Not to easy but not to difficult.
Incremental Approach to Budgeting
the idea of using previous years budgets and changing them to meet the needs of current budgets. However this may be easy it can also lead to ratcheting and laziness in the work force