What is the budgeting cycle?
A continuous process throughout the year. It involves using past performance data and future expectations to plan company performance, developing the annual master budget or profit plan for the coming period, comparing actual results with planned results, investigating variances, and making necessary operational adjustments or adjustments to the budget.
What is the result of the annual profit planning process?
A full set of budgeted financial statements for the budget year, including the budgeted balance sheet, income statement, and statement of cash flows.
These statements are prepared by responsibility center and consolidated into the company-wide budgeted financial statements.
What is participative budgeting?
It involves lower-level managers in the budgeting process to increase accuracy and motivation.
This approach ensures that those responsible for fulfilling the budget are involved in its development, leading to better support and acceptance.
What are the two classifications within the Master Budget?
- The Operating Budget
- The Financial Budget
The Operating Budget: budgeted income statement and supporting budgets
The Financial Budget: capital expenditures budget, cash budget, budgeted balance sheet and statement of cash flows
What budgets are included in the Operating Budget?
- Sales Budget
- Production Budget
- Direct Materials Usage Budget
- Direct Materials Purchases Budget
- Direct Labor Usage Budget
- Manufacturing Overhead Costs Budget
- Ending Finished Goods and Direct Materials Inventories Budgets
- Budgeted Cost of Goods Manufactured
- Budgeted Cost of Goods Sold
- Nonmanufacturing Budgets
- Budgeted Income Statement
These components support the Budgeted Income Statement.
What is the role of the Capital Expenditures Budget?
It incorporates plans for long-term capital expenditures and is very important to the annual budget development.
Any capital expenditures to be made during the budget year and those begun during previous years that will affect the current year’s budget will need to be included in the budgeting process for the year.
It includes projects like property, plant, and equipment purchases. Projects planned for the upcoming budget period affect the Budgeted Balance Sheet, Income Statement, and Statement of Cash Flows.
What is the first budget to be prepared in the Operating Budget?
The Sales Budget
It is critical to develop the Sales Budget first to determine how many units need to be produced or purchased.
What factors are considered in developing the Sales Budget?
- External factors:
- Economic environment
- Consumer attitudes
- Competitors’ actions
- Industry sales
- Market share
- Internal factors:
- Current sales levels
- Pricing policies
- Credit policies
- Advertising
- Resource availability
These factors help ensure the Sales Budget is realistic and aligns with company objectives.
What is the Production Budget based on?
- Sales budget
- Production capacity
- Finished goods inventory objectives
The Production Budget determines how many units to produce and when, considering budgeted sales levels throughout the year, production capacity, and finished goods inventory objectives.
What is the calculation used to determine how many finished goods units a company needs to produce to use in developing the Production Budget?
Units needed for current period
+Ending FG units inventory
desired
——————————————
=Total units needed this period
−Beginning FG inventory in units
——————————————
=FG units to be produced or purchased this period
What is the purpose of the Production Budget?
It provides the foundation for the development of the Direct Materials Usage Budget, Direct Materials Purchases Budget, Direct Labor Usage Budget, and Manufacturing Overhead Costs Budget.
The Production Budget determines the number of units to be produced and when, which influences the requirements for materials, labor, and overhead.
What factors influence the Direct Materials Usage Budget?
- Number of units to be produced
- Number of units of direct materials allowed per unit produced
- Budgeted costs per unit of materials
The Direct Materials Usage Budget is affected by the quality of materials purchased and the efficiency of production employees.
How is the Direct Materials Purchases Budget determined?
It uses information from the Direct Materials Usage Budget but also incorporates the desired change in inventories of raw materials to determine the direct materials to be purchased during the period.
The Direct Materials Purchases Budget incorporates desired changes in raw materials inventories.
How is the Direct Labor Usage Budget developed?
It uses the units planned to be produced from the Production Budget, the number of direct labor hours allowed per unit produced, and the budgeted di-rect labor rates per hour to determine the budgeted total direct labor hours to be used and the budgeted cost of the direct labor used.
The Direct Labor Usage Budget uses direct labor standards and includes wages and other employee costs.
How is the Manufacturing Overhead Budget determined?
Information from the Production Budget and the budgeted amounts allowed of the allocation bases for overhead application (usually budgeted direct labor hours from the Direct Labor Usage Budget or budgeted machine hours) is used to calculate the predetermined overhead application rates.
The per-hour application rates multiplied by the number of hours allowed for the budgeted production for each month or quarter is the amount of manufacturing overhead budgeted for that period.
What are indirect materials?
Materials used in manufacturing that are not directly traceable to any specific product.
Examples include screws, glue, and cleaning chemicals. They are usually variable manufacturing overhead costs.
How is budgeted Cost of Goods Sold calculated for purposes of developing the budget?
Budgeted Cost of FG Inventory
+Budgeted Cost of Goods Mfd. (or Purchases for a reseller)
—————————————
=Budgeted Cost of Goods Available for Sale
−Budgeted Cost of Ending FG Inventory
—————————————
=Budgeted Cost of Goods Sold
What is indirect labor?
Labor costs not directly traceable to any specific product, such as janitorial wages.
Indirect labor is a fixed manufacturing overhead cost but can be variable in the long run.
What is the significance of the Ending Finished Goods Inventories Budget?
It is used in calculating budgeted Cost of Goods Sold.
What is absorption costing?
Under absorption costing, all manufacturing overhead costs–fixed and variable–are applied to the units produced and included in the cost of inventory. All costs of production—including the applied overhead costs— attached to each unit flow to the income statement as cost of goods sold when the units they are attached to are sold.
The use of absorption costing is required according to generally accepted accounting principles.
How are manufacturing overhead costs applied to units produced?
Using a predetermined rate, usually based on direct labor hours or machine hours as the allocation base.
In a standard cost system, overhead is applied based on the predetermined application rate and the standard amount of the allocation base allowed for the actual production.
The predetermined application rate is calculated by dividing total budgeted overhead costs by the budgeted number of hours of the allocation base allowed for the budgeted production.
How is Budgeted Cost of Goods Manufactured calculated?
Budgeted DM used
+Budgeted DL used
+Budgeted mfg. OH applied
—————————————
=Budgeted total mfg. costs
+Budgeted Beg. WIP inv.
−Budgeted End. WIP inv.
—————————————
=Budgeted COG mfd.
What budgets are included in the nonmanufacturing budgets?
- Research and Development (R&D) Budget
- Selling, Marketing and Distribution Budget
- Administrative and General Expenses Budget
- Budgets for other expenses or sources of revenue
Why do fixed costs and variable costs need to be budgeted separately?
- In the short-term, fixed costs cannot be changed, but variable costs may be changed if necessary.
- For developing flexible budgets. In a flexible budget, variable items are adjusted using actual activity while fixed items are unchanged in total.
- Budgeted variable costs are needed to determine the budgeted contribution margin from each business unit.
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A.1. Financial Statements and Reporting Basics84
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A.1. Integrated and External Reporting20
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A.2. Receivables and Inventory83
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A.2. Investments and Consolidations45
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A.2. Fixed and Intangible Assets34
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A.2. Liabilities and Equity Transactions78
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A.2. Revenue Recognition and Long-Term Contracts38
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A.2. GAAP vs IFRS and Income Measurement14
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B.1. Strategic Planning76
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B.2. Budgeting Concepts and Standard Setting49
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B.3. Forecasting and Probability45
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B.4. Budget Methodologies26
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B.5. Profit Planning and Budget Schedules35
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B.5. Cost Estimation and Budget Reporting16
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B.5. Top-Level Planning8
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C.1. Cost and Variance Measures129
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C.2. Responsibility Centers and Transfer Pricing37
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C.3. Performance Metrics42
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D.1. Cost Classifications and Costing Methods56
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D.1. Joint and Byproduct Costing28
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D.2. Costing Systems: Process, Job-Order, and Life-Cycle23
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D.3. Overhead and Cost Allocation89
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D.4. Supply Chain and Lean Management39
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D.5. Business Process Improvement and Quality45
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E.1. Corporate Governance and Internal Control Framework72
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E.1. Transaction and Safeguarding Controls37
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E.1. External Audit and Reporting25
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E.2. System and Application Controls63
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E.2. Cybersecurity and Continuity Planning36
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F.1. Information Systems and Transaction Cycles40
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F.1. Databases and ERP Systems27
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F.2. Data Governance and Management14
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F.2. Cybersecurity: Threats and Defenses19
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F.3. Tech-Enabled Finance Transformation10
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F.3. Emerging Tech: AI, Cloud, Blockchain56
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F.4. Data Analytics and Business Intelligence35
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F.4. Analytical Models and Simulation45
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F.4. Data Visualization26
