Accounting: Chapter 9

(a) a formal written statement of management's plans for a specified future time period, expressed in financial terms. (b) aids management in planning because it represents the primary method of commu-nicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance.

(1) It requires all levels of management to plan ahead and to formalize goals on a recurring basis.(2) It provides definite objectives for evaluating performance at each level of responsibility. (3) It creates an early warning system for potential problems, so that management can make changes before things get out of hand. (4) It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. (5) It results in greater management awareness of the entity's overall operations and the impact of external factors such as economic trends. (6) It motivates personnel throughout the organization to meet planned objectives.

Should be long enough to provide an attainable goal under normal business conditions. The budget period should minimize the impact of seasonal and cyclical business fluctuations, but it should not be so long that reliable estimates are impossible. The most common budget period is one year.

Involves the use of a "bottom-to-top" approach, which requires input from lower level management during the budgeting process so as to involve employees from various levels and areas within the company. Benefits: lower-level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower-level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. Disadvantage: it takes more time, and thus costs more and it may enable managers to game the system through such practices as budgetary slack.

The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals. Managers may have an incentive to create budgetary slack in order to increase the likelihood of receiving a bonus, or decrease the likelihood of losing their job.

A master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. The master budget is developed within the framework of a sales forecast.

The sales budget is the starting point in preparing the master budget. An inaccurate sales budget may adversely affect net income. An overly optimistic sales budget may result in excessive inventories and a very conservative sales budget may lead to inventory shortages.

It enables disciplinary action to be taken at every level of responsibility

is the primary method of communication agreed upon objectives throughout an organization

top down budgeting

longer time period

management's best estimate of sales revenue for the year

desired ending finished goods units less beginning finished goods units

10,700

total required direct labor hours

capital expenditure budget

the end product of the operating budgets

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

Beginning Cash Balance + Cash Receipts - Cash Disbursements +/- Financing = Ending Cash Balance

$78,000

Both a and b

begin the budgeting process by budgeting expenditures rather than receipts