8: Budgeting
- Page ID
- 65740
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- This page outlines the knowledge, reasoning, and skill targets for budgeting concepts. It covers definitions of budget-related terms, understanding different budget types, and variance analyses. It details skills in preparing various budgets, budgeted financial statements, and analyzing performance reports. The emphasis is on the critical role of budgeting in business operations and financial management.
- 8.2: Types of Costs
- This page explains product costs, which are expenses associated with creating a product, and include direct materials, labor, and manufacturing overhead, recorded as cost of goods sold upon sale. It contrasts these with period costs, unrelated to production, which are recorded when incurred. The page also distinguishes between direct costs, traceable to specific units or departments, and indirect costs, which cover broader expenses like overhead and salaries.
- 8.3: Responsibility Accounting in Management
- This page discusses responsibility accounting, which tracks financial data related to individual managers' responsibilities and focuses on controllable items for performance evaluation. It highlights the importance of separating controllable from uncontrollable items and necessitates a defined organizational structure.
- 8.4: Responsibility Reports
- This page discusses responsibility accounting, which produces varying detail reports for management levels; lower-level managers get detailed reports while upper-level managers receive summaries. The management by exception principle allows higher management to focus on significant discrepancies. Timely reporting aids in trend identification and corrective actions. Companies may report either controllable items or all costs, with a focus on budget variances to help address performance issues.
- 8.5: Responsibility Centers
- This page explains company segments based on function or product lines organized into departments like marketing and finance. It describes responsibility centers, which include expense centers (incurring costs), profit centers (managing revenues and expenses), and investment centers (focused on return on investment). Evaluating these centers involves aligning performance metrics with characteristics and managerial authority for effective oversight and accountability.
- 8.6: Investment Center Analysis
- This page discusses Return on Investment (ROI) and Residual Income (RI) as metrics for evaluating segment performance in companies. ROI measures income as a percentage of investment for fair comparisons, while RI focuses on income exceeding required returns, supporting effective managerial decisions. The text emphasizes that both metrics can beneficially influence company performance, but managers must consider broader economic conditions.
- 8.7: Segmented Income Statements
- This page discusses segmental analysis, emphasizing key cost concepts like variable and fixed costs, direct and indirect costs, and segment net income. It highlights the differentiation between traceable direct costs and allocated indirect costs affecting performance evaluation. Companies typically adopt a contribution margin format for internal reporting, prioritizing revenues and direct expenses while addressing indirect costs through allocation.
- 8.8: Accounting in the Headlines
- This page discusses Whole Foods Market's $20 million national advertising campaign launched in 2014 to enhance brand visibility across its 381 stores, which generate $13 billion in annual sales. The campaign aims to improve overall store performance, although individual store segments may not see direct financial impacts from the ad costs.
- 8.9: Transfer Pricing
- This page discusses transfer prices, artificial prices set for transactions between company divisions. They act as revenue for the selling segment and costs for the buying segment, influencing profit evaluations and managerial decisions. Transfer prices can be derived from market prices, production costs, or negotiated agreements, encouraging alignment with overall company interests.
- 8.10: Balanced Scorecard
- This page discusses the balanced scorecard, a performance management tool that aligns organizational strategies with stakeholder objectives across financial, customer, process, and innovation dimensions. It promotes a balance among diverse interests of stakeholders, including employees and shareholders. Companies like Ben & Jerry's and Johnson & Johnson exemplify this by integrating social performance with financial metrics.
- 8.12: Glossary
- This page offers a glossary of budgeting terms essential for financial planning and management. It covers key concepts such as different types of budgets (master, responsibility, capital), budgeting processes, budget variances, cash budgets, fixed and variable costs, flexible operating budgets, just-in-time inventory, and participatory budgeting.
- 8.13: Chapter 7- Exercises
- This page covers various aspects of business budgeting, including short-answer questions and exercises on budgeting purposes, variance definitions, and types of budgets. It features practical tasks on creating sales and production budgets, flexible budgets, and cash budgets for different companies, alongside ethical considerations.