ADMS 2510 Lecture Notes - Income Statement
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Master budget: A summary of a company's plans in which specific targets are set for sales, production,
distribution, and financing activities; it generally culminates in a cash budget, a budgeted income statement,
and a budgeted balance sheet.
Budgets serve as both a planning tool and a control tool in organizations.
Planning involves developing objectives and preparing various budgets to achieve these objectives.
Control involves the steps taken by management to increase the likelihood that the objectives
developed at the planning stage are attained and to ensure that all parts of the organization function
in a manner consistent with organizational policies.
Bottleneck: A machine, activity, or process that limits total output because it is operating at capacity.
Responsibility accounting: A system of accountability in which managers are held responsible for those
items of revenue and cost over which they can exert significant influence-and only those items. Managers
are held responsible for differences between budgeted and actual results.
A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the
current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the
budget as each month (or quarter) comes to a close.
Participative budget: A method of preparing budgets in which managers prepare their own budget
estimates. These budget estimates are then reviewed by the manager's supervisor, and any issues are
resolved by mutual agreement, leading to a completed budget.
Budgetary slack: The difference between the revenues and expenses a manager believes can be achieved
and the amounts included in the budget. Slack will exist when revenue budgets are intentionally set below
expected levels and expense budgets are set above expected levels.
Budget committee: A group of key management personnel responsible for overall policy matters related
to the budget program, coordinating the preparation of the budget, handling disputes related to the
budget, and approving the final budget.
Stretch budget: A budget that is highly difficult to achieve. Attainment of stretch budgets often requires
considerable changes to the way task activities are performed.
Zero-base budget: A method of budgeting in which managers are required to justify all costs as if the
programs involved were being proposed for the first time.
Note: For merchandising companies the production budget is replaced by a merchandise purchases budget
and there would not be a manufacturing overhead budget.
Sales budget: A detailed schedule showing the expected sales for coming periods; these sales are typically
expressed in both dollars and units.
Cash budget: A detailed plan showing how cash resources will be acquired and used over a specified time
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