Profit Planning, Activity-Based Budgeting, and e-Budgeting
ANSWERS TO REVIEW QUESTIONS
A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time. The master budget includes the following parts: sales budget, operational budgets (including a production budget, inventory budgets, a labor budget, an overhead budget, a selling and administrative expense budget, and a cash budget), and budgeted financial statements (including a budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows).
A budget facilitates communication and coordination by making each manager throughout the organization aware of the plans made by other managers. The budgeting process pulls together the plans of each manager in the organization.
An example of using the budget to allocate resources in a university is found in the area of research funds and grants. Universities typically have a limited amount of research-support resources that must be allocated among the various colleges and divisions within the university. This allocation process often takes place within the context of the budgeting process.
The flowchart on the following page depicts the components of the master budget for a service station.
General economic trends are important in forecasting sales in the airline industry. The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air.
Operational budgets specify how an organization's operations will be carried out to meet the demand for its goods and services. The operational budgets prepared in a hospital would include a labor budget showing the number of professional personnel of various types required to carry out the hospital's mission, an overhead budget listing planned expenditures for such costs as utilities and maintenance, and a cash budget showing planned cash receipts and disbursements.
Flowchart for Review Question 9-4
7. Application of activity-based costing to the budgeting process yields activity-based budgeting (ABB). Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities necessary to produce these products and services are determined. Finally the resources needed to perform the specified activities are determined. ABB differs from traditional budgeting in the emphasis that it places on activities and its use of activity-based costing data in the budgeting process.
8. E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this approach the information needed to construct a budget is gathered via the Internet from individuals and subunits located throughout the enterprise. The Internet also is used to disseminate the resulting budget schedules and information to authorized users throughout the enterprise.
The city of New York could use budgeting for planning purposes in many ways. For example, the city's personnel budget would be important in planning for required employees in the police and fire departments. The city's capital budget would be used in planning for the replacement of the city's vehicles, computers, administrative buildings, and traffic control equipment. The city's cash budget would be important in planning for cash receipts and disbursements. It is important for any organization, including a municipal government, to make sure that it has enough cash on hand to meet its cash needs at all times.
10. The budget director, or chief budget officer, specifies the process by which budget data will be gathered, collects the information, and prepares the master budget. To communicate budget procedures and...
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