Ch 10 Summary.docx

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Accounting & Financial Management
AFM 481
Grant Russell

Chapter 10: Static and Flexible Budgets Budgeting - Budget: formalized financial plan for operations for a specified future period - Part of strategic management process - Budgets for capital expenditures & long-term financing – organizational strategies - Budgets for revenues, cost & cash flows – short term operating plans - Measure, monitor and motivate performance - Budget cycle: series of steps to develop and use budgets Master Budgets - Comprehensive plan for upcoming financial period (year) - Operating budget: plan for revenues, production and op costs - Financial budget: plan for capital expenditures, long-term financing, cash flows and short-term financing - Budgeted financial statements – forecasts of future I/S, B/S and cash flows Developing a Master Budget 1. Revenue budget 2. Production budget 3. DM budget 4. DL budget 5. Mfg overhead budget 6. Inventory & COGS budget 7. Support dept budget Budgeting in Nonmfg organizations - No inventory, direct costs are recognized as period costs (on I/S) - No calculation of inventory or DM - NFPO – budgets are the primary source of info - Provide operating info - Government – legally adopted – restrictions on spending authority Developing a Cash Budget Cash Receipts - Timing of cash receipts - Sell on account – need to forecast the time for customers to pay up Cash Disbursements - Summary of purchases & determine when they’ll be paid off - What portion of current / prior period A/P will be paid off in the current period/quarter? Short-Term Investments & Borrowings - Expected cash & ST investments balance - Desired minimum cash balance - Deficiency – how is it financed? (line of credit? – interest payments?) Budgeted Income Statement - Combine all information - Use expected tax rate (30% for example) Flexible Budgets - Static budget is a budget based on forecasts of specific volumes of production/services - Variable revenues & costs are calculated for a specific volume of operations - Flexible budget uses revenue & cost relationships – adjusts sales/costs to reflect actual volumes - Benefit: easily perform sensitivity analysis to estimate effects of deviations from budget assumptions Budgets as Performance Benchmarks Budget Variances - Difference between budgeted and actual - Favourable variance: actual revenues > budgeted - Unfavourable: actual costs > budgeted - Two reasons: actual activities did not follow plans; unanticipated increase/decrease in prices of DM or other input factors - Variance are calculated by comparing results of actual vs. static/flex budget - For flex budget, we need to adjust the # of units to match actual Budgets, Incentives, and Rewards - Budgets: used to assign decision rights to managers - Monitor performance b comparing actual to budget - Bonuses based on meeting/exceeding goals
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