FNC 1 Chapter 21

What benefits should a company expect to obtain fro developing a budget?
* it requires managers to plan how to increase sales and how to cut costs
* Promotes coordination and communication with employees
* Provides a benchmark that motivates employees and helps managers evaluate how well employees contributed to the sales growth and cost-efficiency goals.
In what order should managers prepare the components of the master budget?
Begin with the operating budget.
* Start with the sales budget, which feeds into all other budgets.
* The sales and ending inventory budgets determine the purchases and cost of goods sold budget.
* The sales, cost of goods sold, and operating expense budgets determine the budgeted income statement.
Next, prepare the capital expenditures budget, Finally, prepare the financial budget.
* The cash budget provides the ending cash balance for the budgeted balance sheet and the details for the budgeted statement of cash flows.
What extra steps should a company take given the uncertainty of Internet-based sales forecasts?
Prepare a sensitivity analysis and project budgeted results at different sales levels.
How does Amazon.com compute budgeted purchases?
Beginning Inventory + Purchases – Ending Inventory = Cost of goods sold
Purchases = Cost of goods sold + Ending Inventory – Beginning Inventory
What kind of a responsibility center does each manager supervise?
Cost Center: The manager is responsible for costs.
Revenue Center: The manager is responsible for revenues.
Profit Center: the manager is responsible for both revenues and costs and therefore, profits.
Investment Center: The manager is responsible for revenues, costs, and the amount of the investment required to earn the income.
How should Amazon.com evalute managers?
Compare actual performance with the budget for the manager’s responsibility center. Management by exception focuses on large differences between budgeted and actual results.
Budgeted Income Statement
Projects operating income for a period.
Capital Expenditures Budget
A company’s plan for purchases of property, plant, equipment, and other long-term assets.
Cash Budget
Details how the business expects to go from the beginning cash balance to the desired ending balance to the desired ending balance. Also called the statement of budgeted cash receipts and payments.
Financial Budget
The cash budget (cash inflows and outflows), the budgeted period-end balance sheet and the budgeted statement of cash flows.
Management by Exception
Directs management’s attention to important differences between actual and budgeted amounts.
Master Budget
The set of budgeted financial statements and supporting schedules for the entire organization, includes the operating budget, the capital expenditures budget, and the financial budget.
Operating Budget
Projects sales revenue, cost of goods sold and operating, expenses, leading to the budgeted income statement that projects operating income for the period.
Responsibility Accounting
A system for evaluation the performance of each responsibility center and its manager.
Responsibility Center
A part or subunit of an organization whose manager is accountable for specific activities.