set of interrelated budgets that constitute a plan of action for a specific period of time
Direct Materials, Direct Labor, and Manufacturing Overhead
Sub-budgets in a Production Budget and in what order?
Selling and administrative budget
Cash Receipts/Disbursement Budget
Budgeted income statement
Budgeted balance sheet
Which budget do all of the rest of the budgets depend on?
a budgetary approach that starts with input from lower-level mangers and works upward so that managers at all levels participate
This budget shows the units to produce to meet anticipated sales
Budged Sales + Desired Ending Finished Goods - Beginning Finished Goods
Required Production Units =
Direct Materials Budget
This budget shows both the quantity and cost of direct materials to be pruchased
DM required for production + desired ending dm - beginning dm
Required DM Units to be purchased =
Direct Labor Budget
This budget contain the quantity and cost of DL necessary to meet production requirements
Units to be Produced x DL time/unit x DL Cost/hr
Total Direct Labor Costs =
This budget shows anticipated cash flows. Is prepared on a monthly basis
A projection of budget data at one level of activity
A projection of budget data for various levels of activity
A responsibility center that incurs costs and also generates revenues
A responsibility center that incurs costs, generates revenues, and has control over decisions regarding the assets available for use.
Control of operations is delegated to many managers throughout the organization
A cost over which a manager has control
planned expenses - actual expenses
Actual expense > planned expense
Unfavorable variance =
Actual expense < planned expense
Favorable variance =
Controllable Margin / Average operating assets
Return On Investment (ROI) =
Minimum rate of return
The rate at which a division can cover its costs and earn a profit.
The income that remains after subtracting from the controllable margin the minimum rate of return on a company's average operating assets.
Controllable margin - (minimum rate of return x average operating assets)
Residual Income =
Predetermined unit costs which companies use as measures of performance
AQ x (AP-SP)
Materials Price Variance (MPV)=
SP x (AQ-SQ)
Materials Quantity Variance (MQV)=
MPV + MQV or (AQ x AP) - (SQ x SP)
Total Materials Variance (TMV)=
AH x (AR-SR)
Labor Price Variance (LPV)=
SR x (AH-SH)
Labor Quantity Variance (LQV)=
LPV + LQV or (AH x AR) - (SH x SR)
Total Labor Variance (TLV)=
Units produced x Amount of dm needed/unit
Units produced x amount of dl hours needed/unit
Estimated Overhead Costs / Expected Annual Operating Activity
Predetermined Overhead Rate=
Incorporates both financial and non-financial measures to evaluate a company's performance
The process of making decision about long-term projects that often involve large sums of capital.
A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.
Cost of Capital Investment / Net annual Cash Flow
Cash Payback Period (even cash flow)=
Subtract total of year before breakeven from initial investment and divide by year after break even. Add to value to prior year
Cash Payback Period (uneven cash flow)=
Annual Rate of Return
The determination of the profitability of a capital expenditure, computed by divided expected annual net income by the average investment.
Average Income Effect / Average Investment
Annual Rate of Return =
(Initial Investment + Salvage) / 2
Average Investment =
Sum of all net cash inflows / number of years OR annual net cash inflow
Average Income Effect =
Net Present Value
The difference the results when the original capital is subtracted from the discounted net cash flows
PV of net cash inflows - Capital Investment
A method of comparing alternative projects that takes into account both the size of the investment and its discounted future net cash flows.
PV of Net cash flows / Initial Investment
Profitability Index =
Internal Rate of Return
The interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows.
Annuity (or net cash inflow x (factor)
PV of annuity (or initial investment)=