Accounting Principles II – Budgets - Quick Guides | Accounting

Preview (10 of 36 Pages)

100%

Accounting Principles II – Budgets - Page 1 preview image

Loading page ...

Study GuideAccounting Principles II–Budgets1.Introduction to BudgetsWhat Is a Budget?Abudgetis an important part of a company’s planning process. It helps management decide howresources will be used in the near future. While companies also makelong-range plansthat look fiveto ten years ahead, budgets focus on theshort term.Most budgets are prepared for a12-month period. This allows businesses to plan their income,expenses, and cash needs for the coming year in a structured way.1.Rolling Budgets: Planning That Keeps MovingSome companies use a special type of budget called arolling budget. Instead of staying fixed for theentire year, a rolling budget isupdated regularly, usually every quarter.Here’s how it works:•At the end of each quarter, thethree months that just ended are removed.•Anew three-month period is addedto the end of the budget.•This keeps the budget looking12 months into the future at all times.Because of this system, managers must constantly look ahead andanticipate changes, such asshifts in sales, costs, or economic conditions.

Accounting Principles II – Budgets - Page 2 preview image

Loading page ...

Study GuidePurpose of the image:•The image visually shows how arolling budget works over three different 12-monthbudget periods.•Each column represents a full12-month budget(Budget 1, Budget 2, Budget 3).•The quarters (Q1, Q2, Q3, Q4) shift forward over time.•This helps students clearly see how old quarters are dropped and new ones are added.This visual support makes the rolling budget concept easier to understand.What Is a Master Budget?Themaster budgetis the complete set of budgets used by a company. It brings together allindividual budgets to prepare the company’sbudgeted financial statements.Think of the master budget as abig picture planthat combines many smaller plans.2.Main Components of the Master BudgetDifferent textbooks may organize budgets in slightly different ways, but the key components aregenerally the same:

Accounting Principles II – Budgets - Page 3 preview image

Loading page ...

Study Guide1.Operating Budgets○Focus onrevenues and expenses○Include budgets such as sales, production, and operating costs2.Capital Expenditures Budget○Plans forlong-term investments○Includes purchases of equipment, buildings, or other major assets3.Cash Budget○Trackscash inflows and outflows○Helps ensure the company has enough cash to operate smoothly4.Budgeted Financial Statements○Budgeted Income Statement○Budgeted Balance Sheet○Budgeted Cash Flow StatementThese statements show what the companyexpects its financial position to beif the budget plansare followed.2.Operating BudgetsOperating budgets show how a business plans itsday-to-day operationsfor a future period. Thesebudgets help managers plan sales, production, costs, and expenses in an organized way.The main operating budgets include:•Sales budget•Production budget•Manufacturing cost budgets (materials, labor, and overhead)

Accounting Principles II – Budgets - Page 4 preview image

Loading page ...

Study Guide•Selling expenses budget•General and administrative expenses budgetEach budget builds on the one before it, so they must be prepared in the correct order.1. Sales BudgetThesales budgetis the starting point of the entire budgeting process. Every other budget dependson it.It shows:•How many units the company expects to sell•The selling price per unitBecause so many other budgets rely on sales estimates, managers must agree on these numbersfirst. This can take time because sales forecasts affect production, staffing, and costs.Pickup Trucks Company ExampleThe Pickup Trucks Company makes toy pickup trucks. For the year 20X1, it expects to:•Sell100,000 units•Charge$15 per unitSales are planned on aquarterly basisso the company can track performance throughout the yearinstead of waiting until year-end.

Accounting Principles II – Budgets - Page 5 preview image

Loading page ...

Study GuideNote: Many companies also preparemonthly sales budgetsto monitor performance morefrequently.2. Manufacturing CostsBefore calculating manufacturing costs, the company must first knowhow many units it needs toproduce. This information comes from theproduction budget.3. Production BudgetTheproduction budgetshows the number of units that must be produced to meet sales needs andinventory requirements.To prepare a production budget, the company must know:1.Expected sales2.Required ending inventory3.Beginning inventoryFor quarterly budgets, this information is neededfor each quarter.

Accounting Principles II – Budgets - Page 6 preview image

Loading page ...

Study GuideInventory Policy UsedThe Pickup Trucks Company requires:•15% of next quarter’s salesto be available as ending inventory•2,250 unitsin beginning inventory at the start of the year•A10% increase in Quarter 1 salescompared to last yearUsing these assumptions, the company calculates how many units must be produced each quarter.4. Direct Materials BudgetThedirect materials budgetshows how much raw material the company must purchase to supportproduction.This budget uses:•Units to be produced (from the production budget)•Required ending raw materials inventory

Accounting Principles II – Budgets - Page 7 preview image

Loading page ...

Study Guide•Beginning raw materials inventory•Cost per unit of materialPickup Trucks Company ExampleEach toy pickup truck requires:•5 tires(4 wheels + 1 spare)•Cost per tire: $0.50The company requires10% of next quarter’s production needsto be kept as ending raw materialsinventory.After adjusting for beginning and ending inventory, the company determines:•501,890 tiresmust be purchased•Total cost: $250,945

Accounting Principles II – Budgets - Page 8 preview image

Loading page ...

Study GuideThis same process is repeated for any other raw materials used in production.5. Direct Labor BudgetThedirect labor budgetshows:•Total labor hours needed•Cost of laborAssumptions•Each pickup truck requires0.5 labor hours•Labor cost is$14 per hourUsing the production total of100,225 units:•Total labor hours needed =50,113 hours•Total direct labor cost =$701,575The labor budget is also broken down by quarter.

Accounting Principles II – Budgets - Page 9 preview image

Loading page ...

Study Guide6. Manufacturing Overhead BudgetThemanufacturing overhead budgetincludes all production costs that arenot direct materials ordirect labor.Costs are separated into:•Variable overhead costs(change with production)•Fixed overhead costs(remain constant)This separation is important because the company uses apredetermined overhead rate.Overhead Cost AssumptionsVariable costs per unit:•Indirect materials: $0.50

Accounting Principles II – Budgets - Page 10 preview image

Loading page ...

Study Guide•Indirect labor: $1.00•Maintenance: $0.75Fixed costs per year:•Depreciation: $12,000•Supervisory salaries: $24,000•Property taxes and insurance: $21,000

Preview Mode

This document has 36 pages. Sign in to access the full document!

Report

Accounting Principles II – Budgets

Study Now!

Document Details

Related Documents

Accounting Principles II – Traditional Cost Systems

Accounting Principles II – Statement of Cash Flows

Accounting Principles II – Partnerships

Accounting Principles II – Managerial and Cost Accounting Concepts

Accounting Principles II – Long-Term Liabilities

Accounting Principles II – Investments

Accounting Principles II – Incremental Analysis

Accounting Principles II – Flexible Budgets and Standard Costs

Accounting Principles II – Financial Statement Analysis

Accounting Principles II – Current Liabilities

Company

Explore

Study Tools