7.6: Summary and Key Terms

Section Summaries

7.1 Describe How and Why Managers Use Budgets

• A good budgeting system assists management in reaching their goals through the planning and control of cash inflows through revenue and financing and outflows through payment and expenses.
• There are various budgeting strategies including bottom-up, top-down, and zero-based budgeting.
• A static budget is prepared at one level of activity, while a flexible budget allows the variable expenses to be adjusted for various levels of activity.
• A master budget includes the subcategories of operating budgets and financial budgets.
• A master budget is developed at the estimated level of activity.

7.2 Prepare Operating Budgets

• The sales budget is the first budget developed, and the estimated sales in turn guide the production budget.
• The production budget shows the quantity of goods produced for each time period and leads to computing when and how much direct material needs to be ordered, when and how much labor needs to be scheduled, and when and how much manufacturing overhead needs to be planned.
• The sales and administrative budget plans for the nonmanufacturing expenses.
• All operating budgets combine to develop the budgeted income statement.

7.3 Prepare Financial Budgets

• The financial budgets include the capital asset budget and the cash budget. The cash collections schedule and cash payments schedule are computed and combined with the other budgets to develop the cash budget.
• Information from the other budgets and the budgeted income statement are used to develop the budgeted balance sheet.

7.4 Prepare Flexible Budgets

• A master budget and related budgets are prepared as static budgets for the estimated level of activity.
• A flexible budget adjusts the budgets for various levels of activity and allows for the actual results to be evaluated at the actual volume of activity.

7.5 Explain How Budgets Are Used to Evaluate Goals

• Management’s evaluations of the actual results versus the estimated budgetary results help plan for the future.
• Favorable variances occur when sales are higher or expenses are lower than budgeted.
• Unfavorable variances occur when sales are lower or expenses are higher than budgeted.

Key Terms

budget

quantitative plan estimating when and how much cash or other resources will be received and how the cash or other resources will be used

budgeted balance sheet

estimated assets, liabilities, and equities that the company would have at the end of the year if their performance were to meet its expectations

budgeted income statement

statement similar to a traditional income statement except it contains budgeted data

capital asset budget

budget showing the organization’s plans to invest in long-term assets

cash budget

combined budget of all cash inflows and outflows of the organization

cash collections schedule

schedule showing when cash will be received from customers

cash payments schedule

schedule showing when cash will be used to pay for direct material purchases

direct labor budget

budget based on the production budget used to ensure the proper amount of staff is available for production and that there is money available to pay for the labor

direct materials budget

budget combining the production budget with the direct material per unit to ensure the proper quantity of direct materials is available when needed for production

financial budget

category of budgeting that details estimates for cash inflows and outflows through planned operations and changes capital investments of assets, liabilities, and equities

flexible budget

budget based on different levels of activity

manufacturing overhead budget

budget including the remainder of the production costs not covered by the direct materials and direct labor budgets

master budget

overall budget that includes the operating and financial budgets

operating budget

category of budgeting that helps managers plan and manage production, order materials, schedule direct labor, and monitor overhead expenses

production budget

budget showing the number of units that need to be produced for each period based on sales estimates and required inventory levels

rolling budget

budget that is continuously updated by adding an additional budget period at the end of the current budget period

sales budget

budget showing the expected sales in units and the sales price for the budget period

selling and administrative expense budget

budget showing the variable and fixed expenses estimated to be incurred in all areas other than production

static budget

budget prepared for a single level of activity for a given period

zero-based budgeting

budget that begins with zero dollars and then includes in the budget only revenue and expenses that can be supported or justified

Contributors and Attributions

• Template:ContribManagerialAccountingOpenStax