COM 340 Chapter Notes -Pie Chart, Cash Flow

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oussboss

16 Jan 2023

School

Walsh College of Accountancy and Business Administration

Department

COM

Course

COM 340

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Businesses of all size prepare a budget so that they can assess the past performance as well as the present conditions so that optimal way ahead can be ascertained. In the budget, the organization makes its assessment of the revenues that are to come and ascertains the expenses that can be made so that its resources suffice in meeting the expenses. This is not to say that deficit ones do not exist, but only to point out that even the deficit part has to be serviced by getting loan or investment from outside source. When the budget is to be prepared, the information from past has to be studied. The trends and flow of goods and services, as well as their cost that affects the business, can be collected and analyzed quickly if the business has opted for an electronic medium of keeping its books.

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How are budgets used for performance evaluation?

Financial budgets are normally prepared by the finance oraccounting department of a company. In small businesses, the owneris required to prepare this budget. A performance budget allowsbusinesses to plan for future expenditures. A budget, therefore,determines the amount of capital required to generate a certainlevel of sales. Businesses also adjust future expenses based on thepast budget performance. Through analyzing and reviewing thebudgets, a business will know the amount it has and identifies ifexternal financing is required.

A budget helps businesses track its spending variances. Althoughfinancial budgets are prepared on annual basis, tracking of budgetvariances is done monthly (Vitez, 2018). This tracking enablesbusinesses to understand where the funds were spent and comparewith the number of revenues generated. Anny excessive budgetvariances will require businesses to review their budgets to makesure they are accurately forecasted.

Businesses use performance reports to provide additionalinformation to the managers concerning the budget variances (Vitez,2018). This information may be either financial or non-financialinformation which may impact the budget to exceed its allowablelimits. Resource costs may cause the financial budgets to increase.Inferior resources are examples of non-financial budgets which maymake the budget to increase.

Performance evaluation requires managers to have a benchmark forthe past years will act as a guideline in future. This is normallycommunicated to managers through a budget for their responsibilitycenter. At the end of the accounting year, each center is evaluatedbased on the actual sales generated. This information will onlyappear on the performance evaluation report.

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Upscale hotels in the United States recently cut their prices by 20% in an effort to bolster dwindling occupancy rates among business travelers. A survey performed by a major research organization indicated that businesses are wary of current economic conditions and are now resorting to electronic media, such as Internet video conferencing, to transact business. Assume a companyâs budget permits it to spend $5,000 per month on either business travel or electronic media to transact business. Graphically illustrate how a 20% decline in the price of business travel would impact this companyâs budget set if the price of business travel was initially $1,000 per trip and the price of electronic media was $500 per hour. Suppose that, after the price of business travel drops, the company issues a report indicating that its marginal rate of substitution between electronic media and business travel is -1. Explain whether the company is allocating its resources efficiently, and if not, explain how the company may improve its resource allocation by increasing its business travel or increasing its usage of electronic media.

Managers may intentionally build slack into the budget

to acquire the resources they need in the event the organization implements a budget cut.
to make their performance appear better.
because they are uncertain about the future.
all of the above

COM 340 Chapter Notes -Pie Chart, Cash Flow

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