Operating budgets: bridging planning and control
1. A plan for using limited resources.
2. Firms budget for (1) planning, (2) coordination, and (3) control (performance evaluation and feedback).
3. Operating budgets reflect the collective expression of numerous short-term decisions that conform to the direction set by long-term plans. Financial budgets quantify the outcomes of operating budgets in summary financial statements.
4. The revenue budget. Organizations begin with the revenue budget because it is the first line on the income statement. Additionally, organizations begin with the revenue budget because revenues dictate the volume of operations which, in turn, drive many costs such as those related to materials and labor.
5. The production budget.
6. The budgets for materials, labor, and overhead.
7. Cost of goods sold = Cost of beginning finished goods inventory + cost of goods manufactured – cost of ending finished goods inventory.
8. The cash budget is important for managing a firm’s working capital. It allows companies to determine whether they will have enough money on hand to sustain projected operations.
9. (1) Inflows from operations, (2) outflows from operations, and (3) special items.
10. Because most businesses offer credit terms to their customers – as such, they receive cash a few days, weeks, or months after the sale occurs. Moreover, a firm’s credit policy affects the timing and amount of cash flows.
11. (1) Purchases of direct materials, (2) payments for labor, (3) expenditures on manufacturing overhead, and (4) outflows for marketing and administration costs.
12. Some examples include the purchase or sale of equipment, the purchase or sale of stock, and the payment of dividends.
13. A responsibility center is an organizational subunit. There are three types of responsibility centers: (1) cost centers, (2) profit centers, and (3) investment centers.
14. Top-down is more of an authoritative approach, whereas a bottom-up approach is more participative, encouraging organization-wide input into the budgeting process.
15. An incremental approach to budgeting can be useful as past trends may help with future projections. It is pragmatic, as it focuses attention on making changes to the previous year’s budget based on actual performance and new information. Finally, incremental changes are easier to justify and communicate – it is human nature to compare performance across people and periods.
16. The span of the operation often determines the need for a formal budget. It is easier to plan and keep track of what is happening if the operation is small enough. As the business expands to a point where it is difficult one person can oversee the whole operation and multiple people have to make decisions with respect to different aspects of the business, planning and coordination become necessary. Moreover, how can the owner of this expanding business ensure that all other employees making the various decisions are in fact making them as he would make them? Some control also becomes necessary! Budgets serve these purposes.
17. Yes, this is in general a true statement. Having a formal written document that different decision units commit to is the most efficient of ensuring that there is proper coordination and there is goal congruence across these units.
18. It is true that there is always likely to some deviation from what is expected. But, deviations can occur because of factors outside decision makers’ control, and there is not much one can do to avoid these chance deviations. Deviations can also occur because the organizational actions and decisions are not in line with what they were expected to do. By providing a baseline for comparison, budgets allow us to measure and analyze these deviations so that...
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