29 Questions
What is the initial step in an ideal budget process?
Budget participants outside of top management prepare an initial budget draft
Who approves the final budget in an ideal budget process?
Top management
What approach does an ideal budget process blend together?
Participative and authoritative approaches
What perspective does top management provide in the budget approval process?
Strategic perspective
Who is involved in revising the initial budget draft in an ideal budget process?
Participants from all management levels
Why does top management play a crucial role in budget approval?
To ensure alignment with company strategy
In the text, why is it mentioned that plans in one area may impact the plans in another area?
To emphasize the importance of inter-department coordination
Why does sharing the budget with the entire department not facilitate communication and coordination according to the text?
Sharing the budget does not involve communication with other areas
What is one key aspect of successful budgeting highlighted in the text?
Top management's understanding and support
Based on the text, what role do line managers typically have in the budgeting process?
They play a crucial role and provide input into budgets
Why is it important for different areas in an organization to coordinate their activities and plans according to the text?
To avoid conflicts and inefficiencies
What does the text imply about budgets created by top management?
They are generally more successful than other budgets
What is the reason for the low rate of production during the first 2 hours of work?
Employees are still adjusting to furnace temperature
Based on the supervisor's points, how long does it take to produce 1 unit of Tool A?
30 minutes
Why did the management representative set a target of 15 units of Tool A per day per worker?
To monitor negative variance in budgets
Why is the target set by the management representative considered unrealistic?
The actual daily production will be lower than the target
How does selecting the lowest cost vendor each time affect costs over the years?
Leads to varying costs each year
What impact would decreasing the percentage of cash sales relative to credit sales have on expected cash disbursements in a cash budget?
Increase expected cash disbursements
How do cash sales and credit sales impact expected cash receipts in a cash budget?
Cash sales decrease expected cash receipts
In what way do credit sales impact the cash collections in a business?
Delay cash collections
What percentage of credit sales does Avery Manufacturing collect in the month following the sale?
20%
Which budget provides a summary of budgeted cash inflows and outflows for a specific period?
Cash budget
What sources contribute to the cash collections in December for Avery Manufacturing?
Credit sales made in November and October
What is the planned production of action figures for December?
112,575
How many bikes should Spartan Bicycles manufacture for the month of June?
14,000
What does a decrease in desired ending inventory of finished goods inventory do to the units needed to be produced?
Decreases the units needed to be produced
If the beginning inventory for December was 30,000 action figures instead of 36,300, what would be the impact on planned production?
Decreased planned production
Why is the ending inventory for May equal to the beginning inventory for June?
To maintain continuity in inventory levels
What is the impact of an increase in beginning finished goods inventory on the production budget?
Increases the units needed to be produced
Study Notes
Budgeting Process
- An ideal budget process blends elements of both authoritative (top-down) and participative (bottom-up) approaches.
- The initial budget draft is revised in an iterative process based on discussion between participants at different management levels.
- Top management reviews and approves the budget, not line managers.
Role of Top Management
- Top management's role in successful budgeting is to ensure the budget is consistent with the company's strategic direction.
- Top management approving the budget improves it because they have a better perspective.
Cash Budget
- A cash budget provides a summary of budgeted cash inflows and outflows from all sources for a given period of time.
- Cash receipts are mainly from cash sales and the collection of credit sales.
- Decreasing the percentage of cash sales relative to credit sales would decrease expected cash receipts in a cash budget.
Budgeting and Communication
- Budgeting involves setting plans for all areas of the organization.
- The budgeting process facilitates communication and coordination of organizational activities.
- Sharing budgets with other departments helps to coordinate plans and activities.
Successful Budgeting
- If top management understands and supports a finalized budget, it is more likely to be successful.
- Budgets created by top management are likely to be more successful than budgets created by line managers.
Production Budget
- A production budget is prepared based on the sales forecast and desired inventory levels.
- The target production level should be realistic and achievable.
- Unrealistic targets can result in higher negative variance from actual.
Standards in Budgeting
- Examples of standards that can be used in budgeting include the time taken to process an invoice or the time taken to produce a unit.
- These standards help to set realistic targets and prepare budgets.
Test your knowledge on the steps involved in an ideal budget process. Determine which steps are included and which ones are not part of the process.
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