Budgeting Process

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Questions and Answers

What is the primary method of communicating agreed-upon objectives throughout an organization?

  • Budgeting (correct)
  • Performance evaluation
  • Financial reporting
  • Managerial accounting

What is the responsibility of accountants in the budgeting process?

  • Formulating future budgets
  • Evaluating budget performance
  • Presenting management's budgeting goals in financial terms (correct)
  • Implementing budgeting goals

What is a primary benefit of budgeting?

  • Improving financial reporting
  • Evaluating employee performance
  • Controlling costs
  • Requiring all levels of management to plan ahead (correct)

What is a key aspect of the budgeting process?

<p>Historical accounting data (A)</p> Signup and view all the answers

Who is responsible for the budget and its administration?

<p>Management (A)</p> Signup and view all the answers

What is a budget, according to the text?

<p>A formal written statement of management's plans for a specified future time period (C)</p> Signup and view all the answers

What is the primary role of management in the budgeting process?

<p>To plan and set goals and objectives (B)</p> Signup and view all the answers

What is a key benefit of participative budgeting?

<p>Greater employee motivation and commitment (D)</p> Signup and view all the answers

How does budgeting affect human behavior?

<p>It leads to greater motivation and commitment (A)</p> Signup and view all the answers

What is a key component of the master budget?

<p>All of the above (D)</p> Signup and view all the answers

What is the purpose of a budgeted income statement?

<p>To predict profitability (C)</p> Signup and view all the answers

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Study Notes

The Budgeting Process

  • Base budget goals on past performance by collecting data from organizational units and developing a budget within a framework of a sales forecast.
  • A sales forecast shows potential industry sales and the company's expected share.
  • Factors considered in sales forecasting include:
    • General economic conditions
    • Industry trends
    • Market research studies
    • Anticipated advertising and promotion
    • Previous market share
    • Price changes
    • Technological developments

Budgeting and Human Behavior

  • Participative budgeting involves each level of management participating in the budgeting process.
  • Advantages of participative budgeting include:
    • More accurate budget estimates due to lower-level managers' detailed knowledge of their area.
    • Tendency to perceive the process as fair due to involvement of lower-level management.
  • Disadvantages of participative budgeting include:
    • Time-consuming and costly process.
    • Can foster budgetary "gaming" through budgetary slack.

Budgeting and Long-Range Planning

  • Three basic differences between budgeting and long-range planning:
    • Time period involved (budgeting is short-term, usually one year, while long-range planning is at least five years).
    • Emphasis (budgeting is short-term, while long-range planning is long-term).
    • Detail presented (budgeting is more detailed, while long-range planning is more general).

Budgeting Terminology

  • Master budget: a set of interrelated budgets that constitutes a plan of action for a specified time period.
  • Long-range planning: identifies long-term goals, selects strategies to achieve these goals, and develops policies and plans to implement the strategies.

Effective Budgeting

  • Essentials of effective budgeting include:
    • Management acceptance
    • Research and analysis
    • Sound organizational structure
  • Budget: a formal written statement of management's plans for a specified future time period, expressed in financial terms.
  • Primary benefits of budgeting include:
    • Requires all levels of management to plan ahead.
    • Promotes efficiency and control.

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