Budgeting

Question 1

What is a financial planning and analysis system?

Answer 1

A system to track and provide data in a format useful to managers

Question 2

A Financial Planning and Analysis system includes

Answer 2

1. Planning (budgeting)
2. Measuring and Recording results
3. Evaluating performance (variance analysis)

Question 3

Purposes of budgeting

Answer 3

1. Planning
2. Facilitating communication and coordination
3. Allocating resources
4. Controlling profit and operations
5. Evaluating performance and providing incentives

Question 4

What is a master budget?

Answer 4

1. A collection of budgets: sales, operational, financing budgets
2. The principle output of a budgeting system that ties together all phases of an organization’s operations

Question 5

What is the first budget to prepare in the budgeting process?

Answer 5

Sales budget:

1. Organized by revenue source or product lines and Time.
2. Starts from the number of customers forecasted based on historical sales data which is adjusted based on internal and external factors. Also a basis to forecast ancillary revenues

Question 6

What do operational budgets do?

Answer 6

Specify how the operations will meet the demand: Based on sales budget. Every expense account on the income statement should be supported by a budget

Question 7

How are operational budgets divided?

Answer 7

1. Purchase budget (service firms) or Production and inventory budget (manufacturing firms)
2. Budget for conversion cost
3. Selling, general, and administrative budget

Question 8

What is the basis for the estimation of production budgets?

Answer 8

Shows the number of units to be produced, not sold: Sales in units + desired ending inventory = total units required. Total units required - expected beginning inventory = units to be produced

Question 9

What does a direct material budget show?

Answer 9

Shows the number of units and the cost of material to be purchased and used. Links production, purchases of raw material, and inventory

Question 10

What are conversion costs?

Answer 10

Costs of the resources to convert purchased inputs into marketable products or services.

1. Direct labor budget: The cost of salaries, wages, and benefits for personnel who make a product or service
2. Production overhead budget: The costs of production other than purchases and direct labor

Question 11

What system do we follow?

Answer 11

We follow the Uniform System of Accounts for restaurants and the lodging industry. Cost of goods sold (cost of sales) includes only food and/or beverage cost. Direct labor costs are recorded as salaries and wages and employee benefits as one of the operating expenses.

Question 12

What are Overhead, General and Administrative budgets?

Answer 12

1. Both are indirect cost
2. Overhead costs directly support revenue generating activities of the company. If the company had no business, they would have no overhead expenses
3. G&A costs support the overall management and operation of the business. A company would still have G&A even if there were no billable work.

Question 13

What are controllable expenses?

Answer 13

Cost of sales, labor
Direct operating expenses
Music and Entertainment
Marketing
Utilities
G&A
Repairs and Maintenance

Question 14

What are noncontrollable expenses?

Answer 14

Occupancy costs
Equipment leases
Depreciation and amortization
Corporate overhead
Interest expense
Other (income)/Expense

Question 15

What are key points of financing budgets?

Answer 15

Money on the record does not mean cash on hand
Cash receipts budget: Timing of collection, noncollectable accounts receivables
Cash disbursements budget: Depends on the operational budgets, timing issue
Cash budget: Summarize cash inflows and outflows

Question 16

What are the three points of budgeting for new businesses?

Answer 16

1. Start with fixed expenses, not revenues: Double your estimates for advertising, triple estimates for legal, insurance, and licensing fees, budget a salary for yourself even if you are not paying yourself
2. Forecast the revenue for a conservative case and then an aggressive case
3. Check the key ratios to make sure the projections are sound: Profitability ratios, asset management ratios, debt management ratios

Question 17

What are the accounts included in the SGandA budget?

Answer 17

Accounting
Legal
Credit card charges
Office supplies
Franchise fees
Licenses and permits
Liability and general insurance

Question 18

What are the two types of overhead budgets?

Answer 18

Direct production overhead - traceable to the unit or event

Allocated production overhead - incurred centrally within the company