BU247 Chapter Notes - Chapter 7: Sensitivity Analysis, Financial Institution, Cash Flow Statement

137 views11 pages
School
Department
Course
BU247 Chapter 7: Using Budgets for Planning and Coordination
Determining the Levels of Capacity-Related and Flexible Resources
-Variable Costs: Costs that varied with activity level in the firm
-Fixed/Capacity-Related Costs: Costs that didn’t change with changes in activity level
For decisions affecting short term, firm’s fixed costs are considered given and fixed
-Budgeting Process: Determines the planned level of most variable costs
-Budgeting includes discretionary spending, such as for machine maintenance, R&D,
advertising, and employee training  don’t supply firm with capacity to produce, but provide
support for organization’s strategy by enhancing its performance potential
-Once authorized, discretionary spending budgets are committed or fixed, so they don’t vary
with levels of production or service
The Budgeting Process
The Roles of Budgets and Budgeting
-Budgets are central part of design and operation of management accounting systems
Identify organization
objectives and short-term
goals
Planning
Develop long-term strategy
and short-term plans
Develop master budget
Measure and assess
performance against budget
Control
Re-evaluate objectives, goals,
strategy, and plans
-Budgets in organizations reflect in quantitative terms how to allocate financial resources to
each part of an organization based on planned activities and short-run objectives
-Budget is a quantitative expression of the planned money inflows and outflows that reveals
whether the current operating or business plan will meet organization’s financial objectives
-Budgets provide way to communicate the organization’s short-term goals to employees
-Asking organization unit managers to undertake budgeting activities can accomplish 2 things:
1. Reflect how well unit managers understand the organization’s goals, so they can align
their activities and spending priorities with these goals
2. Provide an opportunity for the organization’s senior partners to correct misperceptions
about organization’s goals
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 11 pages and 3 million more documents.

Already have an account? Log in
-Budgeting is a tool that promotes coordination of the organization’s activities and helps
identify coordination problems
-Budgeting reflects cash cycle and provides info to help organization plan borrowing needed to
finance the inventory buildup early in cash cycle
Inventory
-Raw materials
-Work in process
-Finished goods
Sales
Investment Collection
-Budget helps to anticipate potential problems and can serve as a tool to help provide solutions
to these problems
The Elements of Budgeting
-Budgeting involves forecasting demand for 4 types of resources over diff. time periods
-Flexible resources that create variable costs: Acquired or disposed in short term (e.g. lumber,
glue)
-Intermediate-term capacity resources that create fixed costs: E.g. forecasting the need for
rental storage space that might be contracted on a quarterly, semi-annual, or annual basis
-Resources that, in the intermediate and long run, enhance potential of the organization’s
strategy: Discretionary expenditures (e.g. R&D, employee training, maintenance of capacity
resources, advertising, and promotion); don’t provide capacity or vary with level of
organizational activity
-Long-term capacity resources that create fixed costs: E.g. new fabrication facility for a
computer chip manufacturer, which might take several years to plan and used for 10 years
-2 major types of budgets make up master budget:
1. Operating Budget: Summarize level of activities such as sales, purchasing, and
production
2. Financial Budget: Balance sheets, income statements, and cash flow statements;
identify expected financial consequences of activities summarized in operating budgets
Behavioural Considerations in Budgeting
-Game playing inherent in budgeting process:
Budget planners solicit information from managers or employees who are in best
position to know performance potential (sales, production, potential, costs)
Information incorporated into budget used later to evaluate actual performance
Creates incentive for managers to misrepresent info – gaming the budgeting process
-To avoid potential for managers to misrepresent info, proposed tWhat info managers provide
not to be used to evaluate performance
Budget Components
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 11 pages and 3 million more documents.

Already have an account? Log in
-Dashed lines from expected financial results show how estimated financial consequences from
organization’s tentative budgets can influence organization’s plans and objectives
-Dashed lines indicate that planners compare projected financial results with organization’s
financial goals
-Infeasible budgets (if organization doesn’t have capacity to produce/sell planned level of
output) or financial unacceptable (proposal plan doesn’t yield desired target level of profits)
-Budgeting process describes acquisition, production, selling, and logistical activities performed
during budget period
-Planners usually present expected/projected financial results in 3 forms: Statement of
expected cash flows, Projected balance sheet, or Projected income statement
-Pro Forma Financial Statement: Provided in advance
Operating Budgets
-Operating budgets typically consist of 6 operating plans:
1. The sales plan identifies planned level of sales for each product
2. The capital spending plan specifies the long-term capital investments (e.g. PPE), that
must be made to meet activity level objectives
3. Production plan schedules required production
4. Materials purchasing plan schedules required purchasing activities
5. The labour hiring and training plan specifies number of people the organization must
hire or release to achieve its activity level objectives and based on those numbers, the
needed hiring, training, and counselling out policies requirements
6. Administrative and discretionary spending plan includes administration, staffing, R&D,
and advertising
-Operating budgets specify expected resource requirements of selling, capital spending,
manufacturing, purchasing, labour management, and administrative activities during budget
period
-Use plans to guide and coordinate level of activities during budget period
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 11 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Bu247 chapter 7: using budgets for planning and coordination. Determining the levels of capacity-related and flexible resources. Variable costs: costs that varied with activity level in the firm. Fixed/capacity-related costs: costs that didn"t change with changes in activity level. For decisions affecting short term, firm"s fixed costs are considered given and fixed. Budgeting process: determines the planned level of most variable costs. Budgeting includes discretionary spending, such as for machine maintenance, r&d, advertising, and employee training don"t supply firm with capacity to produce, but provide support for organization"s strategy by enhancing its performance potential. Once authorized, discretionary spending budgets are committed or fixed, so they don"t vary with levels of production or service. Budgets are central part of design and operation of management accounting systems. Budgets in organizations reflect in quantitative terms how to allocate financial resources to each part of an organization based on planned activities and short-run objectives.

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
Booster Classes
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
Booster Classes