Week 8 chapter notes

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9 Jan 2011
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Chapter 10 Static and Flexible Budgets Notes
Budgeting
x budget Æ a formalized financial plan for operations of an organization for a specified future period; used to assign decision
rights to individual managers within an organization
x several objectives are met through the use of budgets:
o developing and communicating organizational strategies and goals for the entire firm, segment, division, or department
o assigning decision rights (authority to spend and responsibility for decision outcomes)
o motivating managers to plan in advance
o coordinating operating activities such as sales and production
o establishing prices for the internal transfer of goods and services
o measuring and comparing expected and actual outcomes
o monitoring actual performance and investigating variances when necessary
o motivating managers to provide appropriate estimates, meet expectations, and use resources efficiently
o re-evaluating and revising strategies and operating plans as conditions change
x decision rights Æ responsibilities and financial decision-making authority of individual managers
Budget Cycles
x budget cycle Æ series of steps used to develop and use budgets
x managers typically begin the process by revisiting and possibly revising the organizational vision and core competencies
Master Budgets
x master budget Æ comprehensive plan for an upcoming financial period, usually a year
x budgeted financial statements Æ forecasts of the future income statement, balance sheet, and cash flows, given the master budget
x operating budget Æ budget for revenues, production, and operating costs
x financial budgets Æ budget for capital expenditures, long-term financing, and cash flows
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