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7.6: Summary and Key Terms

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    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

    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

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