Podcast
Questions and Answers
What is the primary role of a budget in a company's strategic plan?
What is the primary role of a budget in a company's strategic plan?
- To assess employee satisfaction.
- To manage the company's day-to-day operations only.
- To determine the company's marketing strategies.
- To facilitate planning and control of activities. (correct)
What is the main difference between a top-down and bottom-up budgeting approach?
What is the main difference between a top-down and bottom-up budgeting approach?
- Top-down budgeting is more flexible than bottom-up budgeting.
- Top-down budgeting focuses on expenses, while bottom-up budgeting focuses on revenue.
- Top-down budgeting starts with upper management, while bottom-up starts with lower management. (correct)
- Top-down budgeting relies on external consultants, while bottom-up uses internal staff.
Which budgeting approach uses the previous year's budget as a starting point?
Which budgeting approach uses the previous year's budget as a starting point?
- Traditional budgeting (correct)
- Flexible budgeting
- Rolling budgeting
- Zero-based budgeting
What is the key characteristic of zero-based budgeting?
What is the key characteristic of zero-based budgeting?
How does a flexible budget differ from a static budget?
How does a flexible budget differ from a static budget?
What is a rolling budget?
What is a rolling budget?
Which budget projects both the quantity and cost materials to meet production requirements?
Which budget projects both the quantity and cost materials to meet production requirements?
Which of the following is considered an operating budget?
Which of the following is considered an operating budget?
What does a financial budget primarily depict?
What does a financial budget primarily depict?
If a company aims to maintain a specific percentage of the next quarter's material needs as ending inventory, what budget would be affected?
If a company aims to maintain a specific percentage of the next quarter's material needs as ending inventory, what budget would be affected?
What is one component of the selling and administrative expenses budget?
What is one component of the selling and administrative expenses budget?
What is the primary purpose of the cash collections schedule?
What is the primary purpose of the cash collections schedule?
Which document outlines the anticipated cash receipts and disbursements for a business over a specific time period?
Which document outlines the anticipated cash receipts and disbursements for a business over a specific time period?
If a company initially anticipates a cash deficiency but secures a short-term loan to meet its minimum cash balance requirement, which part of the cash budget will the financing activities be included in?
If a company initially anticipates a cash deficiency but secures a short-term loan to meet its minimum cash balance requirement, which part of the cash budget will the financing activities be included in?
What is the purpose of preparing a flexible budget?
What is the purpose of preparing a flexible budget?
How does the variable cost per unit behave in a preparing a flexible budget?
How does the variable cost per unit behave in a preparing a flexible budget?
Company X has fixed depreciation expenses of $10,000 monthly and insurance expenses of $2,000 monthly. How are these costs expected to behave in a flexible budget?
Company X has fixed depreciation expenses of $10,000 monthly and insurance expenses of $2,000 monthly. How are these costs expected to behave in a flexible budget?
When is a flexible budget most useful for evaluating performance?
When is a flexible budget most useful for evaluating performance?
If actual costs are higher than budgeted costs, this is referred to as what?
If actual costs are higher than budgeted costs, this is referred to as what?
A results versus budgetary variance analysis indicates that actual revenues were above budgeted revenues. What type of variance analysis does this represent?
A results versus budgetary variance analysis indicates that actual revenues were above budgeted revenues. What type of variance analysis does this represent?
A company's static budget projects sales of 10,000 units, but actual sales are 8,000 units. If actual overhead costs are then compared against this static budget, what would be a more appropriate comparison?
A company's static budget projects sales of 10,000 units, but actual sales are 8,000 units. If actual overhead costs are then compared against this static budget, what would be a more appropriate comparison?
How do managers utilize variance analysis in the budgeting process?
How do managers utilize variance analysis in the budgeting process?
What is the formula to derive production needs for the period?
What is the formula to derive production needs for the period?
Which of the the following is the proper order for a production budget?
Which of the the following is the proper order for a production budget?
A company has materials needs of 4,000 pounds in Quarter 1. Management wants inventory of 20% of the next materials of the next quarter. If the desired ending inventory of the materials is 736, what is required, in pounds, for material?
A company has materials needs of 4,000 pounds in Quarter 1. Management wants inventory of 20% of the next materials of the next quarter. If the desired ending inventory of the materials is 736, what is required, in pounds, for material?
A company operating below its maximum production capability has the opportunity to accept a one-time special order. Select the BEST per unit costs to compare to the revenue from the opportunity:
A company operating below its maximum production capability has the opportunity to accept a one-time special order. Select the BEST per unit costs to compare to the revenue from the opportunity:
If total overhead costs are $16,000 plus $8.00 per direct labor hour, what in the total overhead cost at 10,000 direct labor hours?
If total overhead costs are $16,000 plus $8.00 per direct labor hour, what in the total overhead cost at 10,000 direct labor hours?
The sales budget shows 4,000 to be the volume to be shipped for month. If the business produces 5,000 units, what is the total revenue and production cost per unit, respectively?
The sales budget shows 4,000 to be the volume to be shipped for month. If the business produces 5,000 units, what is the total revenue and production cost per unit, respectively?
How does a company classify fixed costs in a manufacturing overhead budget?
How does a company classify fixed costs in a manufacturing overhead budget?
A business is preparing an operational plan for the year. Which of these is NOT part of the financial budget?
A business is preparing an operational plan for the year. Which of these is NOT part of the financial budget?
What approach can businesses use that are concerned about their financial standing or capital assets?
What approach can businesses use that are concerned about their financial standing or capital assets?
A firm with collections of 55 percent in the month of the sale and the ensuing month, which sales would impact June’s sales?
A firm with collections of 55 percent in the month of the sale and the ensuing month, which sales would impact June’s sales?
Company A's budget for the coming year includes depreciation expenses of $1 million. How is this item usually handled in the DIRECT cash budget?
Company A's budget for the coming year includes depreciation expenses of $1 million. How is this item usually handled in the DIRECT cash budget?
Which of the following characteristics do flexible budgets have?
Which of the following characteristics do flexible budgets have?
Company X initially anticipated sales of 10,000 units, but real sales are 8,000. If real overhead expenses are contrasted with a static budget, what is a better comparison that can be made?
Company X initially anticipated sales of 10,000 units, but real sales are 8,000. If real overhead expenses are contrasted with a static budget, what is a better comparison that can be made?
A favorable variance implies revenues were higher than expected - this leads to actual results that have the ability to influence decision making in a company. List any potential future actions that should be assessed:
A favorable variance implies revenues were higher than expected - this leads to actual results that have the ability to influence decision making in a company. List any potential future actions that should be assessed:
If you compare both fixed costs and variable costs across a static budget to actual financials, which budget is useful and can accurately be used for comparison?
If you compare both fixed costs and variable costs across a static budget to actual financials, which budget is useful and can accurately be used for comparison?
A business utilizes the data and is running through both the production process and the financial process, which of the following would have to be analyzed?
A business utilizes the data and is running through both the production process and the financial process, which of the following would have to be analyzed?
Flashcards
What is a Budget?
What is a Budget?
An important step in a company's strategic plan that helps reach goals by planning and controlling activities.
What is top-down budgeting?
What is top-down budgeting?
Budgeting where upper-level management sets the budget.
What is bottom-up budgeting?
What is bottom-up budgeting?
Budgeting that uses input from lower-level management.
What is traditional budgeting?
What is traditional budgeting?
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What is zero-based budgeting?
What is zero-based budgeting?
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What is a static budget?
What is a static budget?
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What is a flexible budget?
What is a flexible budget?
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What is rolling budget?
What is rolling budget?
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What is an operating budget?
What is an operating budget?
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What is a financial budget?
What is a financial budget?
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What is a sales budget?
What is a sales budget?
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What is a production budget?
What is a production budget?
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What is a direct materials budget?
What is a direct materials budget?
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What is a direct labor budget?
What is a direct labor budget?
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What is manufacturing overhead budget?
What is manufacturing overhead budget?
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What is Sales & Admin. Expense Budget?
What is Sales & Admin. Expense Budget?
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What is a budgeted income statement?
What is a budgeted income statement?
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What is a cash budget?
What is a cash budget?
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How can actual vs. budget results help?
How can actual vs. budget results help?
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What is variance analysis?
What is variance analysis?
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What is a favorable variance?
What is a favorable variance?
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What is a unfavorable variance?
What is a unfavorable variance?
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Study Notes
- An important step when initiating a company’s strategic plan involves creating a budget.
- A good budgeting system allows management to plan and control major categories of activity, such as revenue, expenses, and financing options to help a company reach its strategic goals.
Budget Formulation
- Budgets can be formulated top-down, bottom-up, traditionally, zero-based, flexibly, or using a rolling method.
- The top-down approach to budgeting starts with upper-level management.
- The bottom-up approach starts with input from lower-level management.
- Using a traditional budgeting approach, last year’s budget serves as the starting point for creating the current budget.
- In a zero-based budgeting approach, all budget numbers derive newly each year or budget cycle.
- A static budget is based on budgeted sales.
- A flexible budget is based on budgeted amounts for actual sales volume.
- Using a quarterly operating budget, the budget projects forward for four months, or one quarter.
Master Budget
- This spans areas that help plan and manage day-to-day business.
- It depicts the expectations for cash inflows and outflows.
Individual Operating Budgets
- Sales budget
- Production budget
- Direct materials budget
- Direct labour budget
- Manufacturing overhead budget
- Sales and administrative expenses budget
- Budgeted income statement
Big Bad Bikes Sales Budget for Year Ended December 31, 2019
- Quarter 1: Expected sales of 1,000 units, 70 dollar sales, and 70,000 dollars total sales revenue
- Quarter 2: Expected sales of 1,000 units, 70 dollar sales, and 70,000 dollars total sales revenue
- Quarter 3: Expected sales of 1,500 units, 75 dollar sales, and 112,500 dollars total sales revenue
- Quarter 4: Expected sales of 2,500 units, 75 dollar sales, and 187,500 dollars total sales revenue
- Total: Expected sales of 6,000 units, 440,000 dollars total sales revenue
Navigators Inc. Sample Sales Budget for the Year Ended December 31, 20X3
- A company called Navigator sells GPS trackers for 50 dollars each.
- Navigator expects sales of 5,000 units in quarter 1 and a 5% increase each subsequent quarter for the next 8 quarters.
Big Bad Bikes Production Budget for Year Ended December 31, 2019
- Quarter 1: Expected sales of 1,000 units, 300 desired ending inventory, 0 beginning inventory, required production of 1,300 units.
- Quarter 2: Expected sales of 1,000 units, 450 desired ending inventory, 300 beginning inventory, required production of 1,150 units.
- Quarter 3: Expected sales of 1,500 units, 750 desired ending inventory, 450 beginning inventory, required production of 1,800 units.
- Quarter 4: Expected sales of 2,500 units, 1,050 desired ending inventory, 750 beginning inventory, required production of 2,800 units.
- Big Bad Bikes requires a target ending inventory of 30% of the next quarter’s sales.
Big Bad Bikes Direct Materials Budget for Year Ended December 31, 2019
- Units to be produced for Quarter 1 is 1,300, Quarter 2 is 1,150, Quarter 3 is 1,800, Quarter 4 is 2,800, and Total is 7,050.
- Direct material per unit is 3.20 pounds for each of the quarters and total.
- Total pounds needed for production for Quarter 1 is 4,160, Quarter 2 is 3,680, Quarter 3 is 5,760, Quarter 4 is 8,960, and Total is 22,560.
- The desired ending inventory for Quarter 1 is 736, Quarter 2 is 1,152, Quarter 3 is 1,792, Quarter 4 is 2,432, and Total is 2,432.
- Total material required for Quarter 1 is 4,896, Quarter 2 is 4832, Quarter 3 is 7,552, Quarter 4 is 11,392, and Total is 24,992.
- Beginning inventory for Quarter 1 is 0, Quarter 2 is 736, Quarter 3 is 1,152, Quarter 4 is 1,792, and Total is 0.
- Management’s goal is to have 20% of the next quarter’s material needs on hand as the desired ending materials inventory.
- The number of units to be produced during the first quarter of Year 2 is 1,300 (from production budget).
- Pounds of direct material required for Quarter 1 is 4,896, Quarter 2 is 4,096, Quarter 3 is 6,400, Quarter 4 is 9,600, and Total is 24,992
- Cost per pound: is 1.25 dollars across all quarters and totaling
- Total cost of direct material purchase in dollars for Quarter 1 is 6,120, Quarter 2 is 5,120, Quarter 3 is 8,000, Quarter 4 is 12,000, and Total is 31,240.
- Big Bad Bikes uses 3.2 pounds of material for each trainer it manufactures.
- Each pound of material costs 1.25 dollars
Big Bad Bikes Direct Labor Budget for Year Ended December 31, 2019
- Quarters 1: 1,300 Units. Quarters 2: 1,150 Units. Quarters 3: 1,800 Units. Quarters 4: 2,800 Units. Total: 7,050 Units.
- Direct Labor Hours per Unit: 0.75 across all Quarters and Total.
- Total Required Direct Labor Hours: Quarter 1: 975. Quarter 2: 862.50. Quarter 3: 1,350. Quarter 4: 2,100. Total: 5,287.50.
- Big Bad Bikes knows that they need 45 minutes or 0.75 hours of direct labor for each unit produced.
- Labor Cost per Hour: 20 across all Quarters
- Labor Costs: $19,500 , $17,250, $27,000, $42,000, $105,750
Big Bad Bikes Manufacturing Overhead Budget for the Year Ended December 31, 2019
- Fixed overhead costs per quarter: Supervisor salaries: 15,000 dollars; fixed maintenance salaries: 4,000 dollars; insurance: 7,000 dollars; depreciation expense: 3,000 dollars.
- Variable Overhead Costs per hour: Indirect Material: 1 dollar. Indirect Labor: 1.25 dollars. Maintenance: 0.25 dollars, Utilities: 0.50 dollars
Big Bad Bikes Allocation Rates
- Indirect material - 1 dollar per hour
- Indirect labor - 1.25 dollars per hour
- Maintenance - 0.25 dollars per hour Utilities - 0.50 dollars per hour.
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