TEST BANK managerial accounting by 5e kieso weygand ch009

Simple 30–40 2A Prepare sales, production, direct materials, direct labor, and income statement budgets.. Simple 30–40 2B Prepare sales, production, direct materials, direct labor, and i

CHAPTER 9 Budgetary Planning

ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises Exercises

A Problems

B Problems

1 Indicate the benefits of

3 Identify the budgets

that comprise the

4 Describe the sources for

preparing the budgeted

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number Description

Difficulty Level

Time Allotted (min.)

1A Prepare budgeted income statement and supporting

budgets.

Simple 30–40

2A Prepare sales, production, direct materials, direct labor,

and income statement budgets.

Simple 40–50

3A Prepare sales and production budgets and compute cost

per unit under two plans.

Moderate 30–40 4A Prepare cash budget for two months Moderate 30–40 5A Prepare purchases and income statement budgets for a

merchandiser.

Simple 30–40 6A Prepare budgeted income statement and balance sheet Complex 40–50 1B Prepare budgeted income statement and supporting

budgets.

Simple 30–40

2B Prepare sales, production, direct materials, direct labor,

and income statement budgets.

Simple 40–50

3B Prepare sales and production budgets and compute cost

per unit under two plans.

Moderate 30–40 4B Prepare cash budget for two months Moderate 30–40 5B Prepare purchases and income statement budgets for a

merchandiser.

Simple 30–40

BLOOM’S TAXONOMY TABLE

State the essentials of effe

Q9-3 Q9-5 Q9-6 Q9-7 Q9-8 E9-1

Explain the principal sec

Q9-20 BE9-9 E9-12 E9-13 E9-14 E9-15 E9-16 P9-4A P9-4B

STUDY OBJECTIVES

1 INDICATE THE BENEFITS OF BUDGETING.

2 STATE THE ESSENTIALS OF EFFECTIVE BUDGETING.

3 IDENTIFY THE BUDGETS THAT COMPRISE THE MASTER BUDGET.

4 DESCRIBE THE SOURCES FOR PREPARING THE BUDGETED INCOME STATEMENT.

5 EXPLAIN THE PRINCIPAL SECTIONS OF A CASH BUDGET.

6 INDICATE THE APPLICABILITY OF BUDGETING IN NONMANUFACTURING COMPANIES.

CHAPTER REVIEW

Budgeting Basics

1. (S.O 1) A budget is a formal written statement of management’s plans for a specified time

period, expressed in financial terms.

2. The role of accounting during the budgeting process is to (a) provide historical data on revenues,

costs, and expenses, (b) express management’s plans in financial terms, and (c) prepare periodic budget reports.

Benefits of Budgeting

3 The primary benefits of budgeting are as follows:

a. It requires all levels of management to plan ahead.

b. It provides definite objectives for evaluating performance.

c. It creates an early warning system for potential problems.

d. It facilitates the coordination of activities within the business.

e. It results in greater management awareness of the entity’s overall operations.

f. It motivates personnel throughout the organization.

Essentials of Effective Budgeting

4 (S.O 2) In order to be effective management tools, budgets must be based upon

a. A sound organizational structure in which authority and responsibility are clearly defined.

b. Research and analysis to determine the feasibility of new products, services, and operating

techniques.

c. Management acceptance which is enhanced when all levels of management participate in

the preparation of the budget, and the budget has the support of top management.

5. The most common budget period is one year A continuous twelve-month budget results from

dropping the month just ended and adding a future month The annual budget is often supplemented by monthly and quarterly budgets.

6. The responsibility for coordinating the preparation of the budget is assigned to a budget

committee The budget committee usually includes the president, treasurer, chief accountant

(controller), and management personnel from each major area of the company.

7. A budget can have a significant impact on human behavior A budget may have a strong positive

influence on a manager when

a Each level of management is invited and encouraged to participate in developing the budget.

b Criticism of a manager’s performance is tempered with advice and assistance.

8. Long-range planning involves the selection of strategies to achieve long-term goals and the

development of policies and plans to implement the strategies Long-range plans contain considerably less detail than budgets.

The Master Budget

9. (S.O 3) The master budget is a set of interrelated budgets that constitutes a plan of action for a

specified time period It is developed within the framework of a sales forecast which shows potential sales for the industry and the company’s expected share of such sales.

10. There are two classes of budgets in the master budget.

a. Operating budgets are the individual budgets that result in the preparation of the budgeted

income statement.

b. Financial budgets focus primarily on the cash resources needed to fund expected

operations and planned capital expenditures.

11. The sales budget is the first budget prepared It is derived from the sales forecast, and it

represents management’s best estimate of sales revenue for the budget period It is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price.

12. The production budget shows the units that must be produced to meet anticipated sales It is

derived from the budgeted sales units plus the desired ending finished goods units less the beginning finished goods units.

13. The direct materials budget shows both the quantity and cost of direct materials to be

purchased It is derived from the direct materials units required for production plus the desired ending direct materials units less the beginning direct materials units.

14. The direct labor budget shows the quantity (hours) and cost of direct labor necessary to meet

production requirements The direct labor budget is critical in maintaining a labor force that can meet expected levels of production.

15. The manufacturing overhead budget shows the expected manufacturing overhead costs The

selling and administrative expense budget is a projection of anticipated operating expenses.

Both budgets distinguish between fixed and variable costs.

Budgeted Income Statement

16. (S.O 4) The budgeted income statement is the important end-product in preparing operating

budgets This budget indicates the expected profitability of operations and it provides a basis for evaluating company performance.

a The budget is prepared from the budgets described in review points 11-15.

b For example, to find cost of goods sold, it is necessary to determine the total unit cost of a finished product using the direct materials, direct labor, and manufacturing overhead budgets.

Cash Budget

17. (S.O 5) The cash budget shows anticipated cash flows It contains three sections (cash

receipts, cash disbursements, and financing) and the beginning and ending cash balances Data for preparing this budget are obtained from the other budgets.

18. The budgeted balance sheet is a projection of financial position at the end of the budget period.

It is developed from the budgeted balance sheet for the preceding year and the budgets for the current year.

Budgeting in Nonmanufacturing Companies

19 (S.O 6) The major differences in the master budget of a merchandiser and a manufacturing

company are that a merchandiser (a) uses a merchandise purchases budget instead of a

production budget and (b) does not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead).

20 In service enterprises, the critical factor in budgeting is coordinating professional staff needs with

anticipated services Budget data for service revenue may be obtained from expected output or expected input.

21. In the budget process for not-for-profit organizations, the emphasis is on cash flows rather than

on a revenue and expense basis For governmental units, the budget must be strictly followed and overspending is often illegal.

LECTURE OUTLINE

1 Planning is the process of establishing enterprise-wide objectives

2 A budget is a formal written statement of management’s plans for aspecified future time period, expressed in financial terms

3 Accounting information makes major contributions to the budgetingprocess

Use ILLUSTRATION 9-1 to discuss the benefits of budgeting Point out that even

though the budget process is procedural, it has behavioral implications that couldhave a positive or negative effect on the accomplishment of company goals

1 It requires all levels of management to plan ahead and to formalize goals

5 It results in greater management awareness of the entity’s overall tions and the impact on operations of external factors, such as economictrends.

opera-6 It motivates personnel throughout the organization to meet plannedobjectives

1 The essentials of effective budgeting are (a) sound organizationalstructure, (b) research and analysis, and (c) acceptance by all levels ofmanagement

a Effective budgeting depends on a sound organizational structure

In such a structure, authority and responsibility for all phases ofoperations are clearly defined

b Budgets based on research and analysis should result in realisticgoals that will contribute to the growth and profitability of a company

c The effectiveness of a budget program is directly related to itsacceptance by all levels of management

1 A budget may be prepared for any period of time Various factors influencethe length of the budget period

a The type of budget

b The nature of the organization

c The need for periodic appraisal

d Prevailing business conditions

2 The budget period should be long enough to provide an attainable goalunder normal business conditions and should minimize the impact ofseasonal or cyclical fluctuations.

3 The most common budget period is one year

Use ILLUSTRATION 9-2 to give an overview of the budgeting process and

identify those who are responsible for coordinating its preparation

1 The budget is developed within the framework of a sales forecast thatshows potential sales for the industry and the company’s expected share

of such sales Sales forecasting involves a consideration of various factors:

a General economic conditions

b Industry trends

c Market research studies

d Anticipated advertising and promotion

e Previous market share

4 A budget can have a significant impact on human behavior.

a A budget may inspire a manager to higher levels of performance

b A budget may discourage additional effort and pull down the morale

of a manager

c In developing the budget, each level of management should beinvited to participate The overall goal is to reach agreement on abudget that the managers consider fair and achievable, but whichalso meets the corporate goals set by top management

1 Budgeting and long-range planning are not the same

a One important difference is the time period involved; long-rangeplanning usually encompasses a period of at least five years

b A second significant difference is in emphasis; long-range planningidentifies long-term goals, selects strategies to achieve those goals,and develops policies and plans to implement the strategies Manage-ment also considers anticipated trends in the economic and politicalenvironment and how the company should cope with them

c The final difference pertains to the amount of detail presented.Long-range plans contain considerably less detail than budgetsbecause the data in long-range plans are intended more for a review

of progress toward long-term goals than as a basis of control forachieving specific results

2 The primary objective of long-range planning is to develop the beststrategy to maximize the company’s performance over an extendedfuture period

G The Master Budget.

1 The master budget is a set of interrelated budgets that constitutes a plan

of action for a specified time period

Use ILLUSTRATION 9-3 to describe the components of the master budget Point

out that the individual budgets making up the master budget are prepared in anordered sequence The information developed in one individual budget serves asinput in preparing other budgets Budgeting is an interrelated process

2 Sales Budget: The sales budget is the starting point in preparing themaster budget

a Each of the other budgets depends on the sales budget

b The sales budget is derived from the sales forecast and it representsmanagement’s best estimate of sales revenue for the budget period

3 Production Budget: The production budget shows the units that must beproduced to meet anticipated sales

a Production requirements are determined from the following formula:Budgeted Sales Units + Desired Ending Finished Goods Units –Beginning Finished Goods Units = Required Production Units

ILLUSTRATION 9-4 provides a production requirements formula and illustrates

the preparation of a production budget

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4 Direct Materials: The direct materials budget shows both the quantityand cost of direct materials to be purchased.

a The quantities of direct materials are derived from the followingformula: Direct Materials Units Required for Production + DesiredEnding Direct Materials Units – Beginning Direct Materials Units =Required Direct Materials Units to be Purchased

ILLUSTRATION 9-5 provides a formula for direct materials quantities and

illustrates the preparation of a direct materials budget

b The desired ending inventory is a key component in the budgetingprocess; inadequate inventories could result in temporary shutdowns

b The direct labor budget is also used in preparing the budgeted cost

of goods sold and the cash budget

6 Manufacturing Overhead: The manufacturing overhead budget showsthe expected variable and fixed manufacturing overhead costs for thebudget period

7 Selling and Administrative Expense: The selling and administrative expensebudget projects anticipated selling and administrative expenses for thebudget period This budget classifies expenses as either variable or fixed.This budget is also used in preparing the budgeted income statementand the cash budget

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8 Budgeted Income Statement: The budgeted income statement is theimportant end-product of the operating budgets.

a This budget indicates the expected profitability of operations for thebudget period

b The budgeted income statement provides the basis for evaluatingcompany performance

9 Cash Budget: The cash budget shows anticipated cash flows

a Because cash is so vital, this budget is often considered to be themost important financial budget

b The cash budget contains three sections:

(1) Cash receipts

(2) Cash disbursements

(3) Financing

ILLUSTRATION 9-6 provides a format for preparing a cash budget Point out that a

cash budget is prepared for a period of time, such as a month, a quarter, a year

c Companies obtain data for preparing the cash budget from otherbudgets and from information provided by management

d A cash budget contributes to more effective cash management Itshows managers when additional financing is necessary well beforethe actual need arises and it indicates when excess cash is availablefor investments or other purposes

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H Budgeting in Nonmanufacturing Companies.

1 Budgets are also used by:

a If a firm is overstaffed, several problems may result:

(1) Labor costs will be disproportionately high

(2) Profits will be lower because of the additional salaries

(3) Staff turnover may increase because of lack of challengingwork

b If a service enterprise is understaffed, it may loose revenue becauseexisting and prospective client needs for service cannot be met.Also, professional staff may seek other jobs because of excessivework loads