MGTB03 Chapter 10 Notes from Textbook

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 competenciesreconsider long-term strategies in light of the vision and core competenciesthe 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