M7 Outline

University of Maryland, Baltimore County **We aren't endorsed by this school
ECON 122
Oct 26, 2023
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M7: Master Budgets 1. Why Do Managers Use Budgets? a. Budgeting Objectives i. Budget - financial plan that serves as the overarching guide when we are developing goals and strategies b. Budgeting Benefits - budgets help the company to stay on track with their plan to achieve their goals i. Planning - the company must set a goal and formalize a plan for achieving that goal ii. Coordination and Communication - in order to establish and maintain the plan, all management must communicate and be on the same page iii. Benchmarking - this is where we stop to compare our actual results to our budgeted results to see where we are in terms of meeting our goals c. Budgeting Procedures i. Participative budget (bottom-up ) - this is when everyone in the company is given a chance to have input when creating the budget (although this may be more difficult than a top down mentality, it can be more effective in the long run when employees feel as though their opinions matter) d. Budgeting and Human Behavior i. Managers must be on board and motivated to follow the plan in order to motivate others to follow as well ii. Managers must also get employees involved in the budgeting process so that they can see how following the plan helps the employee out in the long run (potential of bonuses, additional vacation time, etc.) iii. Managers should create a participative budget (bottom-up) so that the employees feel that goals are realistic and achievable 2. What Are the Different Types of Budgets? a. Strategic and Operational Budgets i. Strategic budget - long-term plan to meet the long-term goals of the company (i.e. long-term plan may be to open up an additional store location) ii. Operational budget - short-term plan to meet the short-term goals of the company (i.e. a short-term plan may be to increase company sale for the quarter) iii. Continuous budget - a running operational budget that keeps a rolling window of time, such as a year (as one month passes, another month is budgeted for at the end) b. Static and Flexible Budgets i. Static budget - budget prepared at one level of sales volume (prepared based on budgeted prices and one sales projection in units) ii. Flexible budget - budget prepared at multiple levels of sales volume (prepared based on budgeted prices and multiple sales projections in units) c. Master Budgets - set of budgeted schedules that lead to the creation of a set of budgeted financial statements (must be prepared in the order listed below)
Master Budget Components: 3. How Are Operating Budgets Prepared for a Manufacturing Company? a. (Step 1) - Sales Budget - estimates total sales revenue given budgeted units and selling price per unit
b. (Step 2) - Production Budget - uses the total sales from the sales budget to calculate the production needs for current quarter sale and desired ending balances to house in storage Budgeted units to be sold + Desired units in ending inventory = Total units needed - Units in beginning inventory = Budgeted units to be produced ** desired ending inventory % is always given (in this example it is 20% of next month's sales)
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