Chapter 10 Review This includes formulas and other important notes for this chapter

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University of Waterloo
Accounting & Financial Management
AFM 102
Tony Atkinson

Capacity related costs are fixed, and are based on the projected volume of product going to be produced The budgeting process: - determines the planned level of most flexible costs and discretionary spending ( which support and enhance performance potential ) - serve as a control for managers within the business units of org - relationship between planning and control - reflect the quantitative terms of how to allocate the financial resources based on planned activities and short-run obejetices Budget: is a quantitative expression of the money inflows and outflows that reveal whether a financial plan will meet organizational objectives - reflect how well unit managers understand org goals , and senior managers could help fix misperceptions about the goals - used to communicate short-term goals - serves to coordinate many activities - help anticipate potential problems Budgeting: is the process of preparing budgets Budgeting involves forecasting the demand for four types of resources over different time periods: 1. Flexible resources that create variable costs 2. Intermediate-term capacity resources that create capacity-related costs 3. Resources that, in the intermediate and long run enhance the potential of the organization’s strategy 4. Long-term capacity resources that create capacity-related costs Master Budget  Operating budgets - summarize the level of activities such as sales, purchasing, and production  Financial budgets - identify the expected financial consequences of the activities summarized in the operating budgets Operating Budgets • Sales plan - identifies the planned level of sales for each product • Capital spending plan - specifies the long-term capital investments that must be paid in the current budget period to meet activity objectives • Production plan - schedules all required production • Materials purchasing plan - schedules all required purchasing activities Monthly Production Capacity are determined by 1- Short term Flexible resources 2- Intermediate term capacity resources 3- Long term capacity resources (committed) Factors that drive planning 1- Demand ( sales plan ) 2- The capacity level 3- Production output quantity Formulas - Production = minimum ( total demand , production capacity of each resource ) - Net cash flow = Cash inflow – Cash outflow - Ending cash = net operating cash flow + opening cash +- effects of financial operations - Cash outflow = units of flexible resource purchased x prince per unit of flexible resource - Budgeted amount = standard price per unit x budgeted quantity - Actual amount = actual price per unit x actual quantity - First level variance = Actual costs – budgeted costs favorable if negative , unfavorable if positive - Flexible Budget: take standard costs with actual volume - Pl
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