MGTB03 Chapter 10 Notes
*Budgeting
-A budget is a formalized financial plan for operations of an organization for a specified future
period.
-It helps the organization coordinate the activities needed to carry out the plan.
-it reflects management's forecast of the financial effects of an organization's plans for one or more
future time periods
-It also provides a mechanism for defining the responsibilities and financial decision-making
authority, or decision rights, of individual managers
*Budget Objectives
*Budget Cycles
-A budget cycle is a series of steps that organizations follow to develop and use budgets
-Managers typically begin the process by revisiting and possibly revising the organizational vision
and core competenciesreconsider long-term strategies in light of the vision and core
competenciesthe current period's operating plans are developed…
*Master Budget
-A master budget is a comprehensive plan for an upcoming financial period, usually a year
-It reflects an organization's future operating and financing decisions and are often summarized in a
1-Tammy set of budgeted financial statements
-These statements are forecasts of the future income statement, balance sheet, and cash flows,
given an organization's sales forecasts and expenditure plans for the next period
-Master Budget=Operating Budget+Financial Budget
*The development of a master budget in a manufacturing organization
-Operating Budget: management's plan for revenues, production, and operating costs
-Financial Budget: management's plans for capital expenditures, long-term financing, and cash flows,
leading to a budgeted balance sheet and budgeted statement of cash flows
-The cash budget is part of the financial budgets
-A cash budget reflects the effects of management's plans on cash and summarizes the information
that accountants gather about the expected amounts and timing of cash receipts and
disbursements.
- The capital budget reflects long-term investment.
*Developing a Master Budget
-The master budget is developed using a set of budget assumptions, which are plans and
predictions about next period's operating activities
-Revenues are budgeted assuming a particular forecast of sales volumes and prices or assuming an
estimated percentage change from the prior year.
-Individual costs are budgeted assuming a fixed amount to be spent, as a percentage of revenues, as
a percentage change from the prior year, or on some other basis
-The process of developing a master budget becomes increasingly complex as organizations become
2-Tammy larger
-Communication can be more time-consuming because international business segments participate
in the budgeting process
*Master Budget is developed by creating individual budgets
1.Revenue Budget
2.Production Budget
3.DM Budget
4.DL Budget
5.MOH Budget
6.Inventory and CGS Budget
7.Support Department Budget
8.Budgeted Financial Statement
*Cash Budget
-A cash budget reflects the effects of management's plans on cash and summarizes information that
accountants gather about the expected amounts and timing of cash receipts and disbursements
*Operating Cash Receipt and Disbursements
-Operating cash receipts are estimated from budgeted revenues, taking into account the nature of
customer transactions
-Operating cash disbursements are estimated from the budgets for direct materials, direct labour,
manufacturing overhead, and support departments.
*Other Planned Cash Flows
-- purchasing or selling property, plant, and equipment
-- borrowing or repaying LT Debt
--Paying interest on debt
-- issuing or reseeming capital stock
--paying dividends to sharegolders
-Although the purchase or sale of property, plant, and equipment is planned in the capital budget,
the cash effects of borrowing and repaying are reflected in annual cash budgets
*Short term Borrowing or Investing
-Managers typically use short-term loans or investments to balance the cash budget, taking into
account the desired cash balance
-Short-term loans may be prearranged as a line of credit with a financial institution;
-the organization can borrow up to a specified amount as needed to cover cash shortages.
- Organizations often use excess cash to repay short-term debt, with any remainder placed in liquid
investments.
-The purpose of the cash budget is to ensure adequate levels of cash for day-to-day operations
-Prepare a Cash budget, 3 types of cash transactions are planned:
1.Cash Receipts
2.Cash Disbursements
3.Short-Term Borrowing or Investment
*Budgets as performance benchmarks
-Managers and accountants use budgets to monitor operations by comparing actual results to the
3-Tammy original budget forecasts
-These comparisons serve as benchmarks for performance and help managers and accountants
evaluate whether strategies and operations are meeting expectations
-accountants monitor budgets to improve the quality of the budgeting process over time
*Budget Variances
-Differences between budgeted and actual results
-May be favourable or unfavourable
-Favourable Variance: Actual Revenue>Budget; Actual CostsBudget; Actual Revenue
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