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specifies how an organization matches its own capabilities w/ the opportunities in the market place to accomplish its objectives.


(a) The quantitative expression of a proposed plan of action by management for a specific period.

(b) An aid to coordinate what needs to be done to implement that plan


operating budget and financial budget

What are the two main components of the master budget?

the budgeted income statement and its supporting budget schedule

operating budget

consists of the capital expenditure budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows.

financial budget

expresses management's operating and financial plans for a specified period (usually a fiscal year), and it includes a set of budgeted financial statements.

master budget

A budget that is always available for a specified future period by continually adding a month, quarter, or year to the period that just ended.

rolling budget (aka continuous budget)

Nine basic steps for developing the operating budget

(1) prepare the revenue budget, (2) prepare the production budget (in units), (3)Prepare the direct materials usage budget and direct materials purchases budget, (4) Prepare the direct manufacturing labor cost budget, (5) prepare the manufacturing overhead costs budget, (6) prepare the ending inventories budget, (7) prepare the cost of goods sold budget, (8) prepare the non-manufacturing cost budget.

focuses on the budgeting cost of activities necessary to produce and sell products and services

Activity-based budgeting (ABB)

mathematical representation of the relationship among operating activities, financing activities, and other factors that affect the master budget.

Financial planning models

part, segment, or subunit of an organization whose manager is accountable for a specified set of activities

responsibility center

a system that measures the plans, budgets, actions, and actual results of each responsibility center

Responsibility accounting

shows by line item the actual result, the budgeted amount, and the variance

performance report

the difference between the actual result and the budgeted amount


the degree of influence that a specific manager has over costs, revenues, or related items for which he or she is responsible


any cost that is primarily subject to the influence of a given responsibility center manager for a given period

controllable cost

could either exclude all uncontrollable costs from a manager's performance report or segregate such costs from the controllable costs

responsibility accounting system

what often exist within companies for budgeted revenues to be overestimated and/or budgeted cost to be underestimates of the expected amounts


describes the practice of underestimating budgeted revenues, or overestimating budgeted costs, to make budgeted targets more easily achievable

budgetary slack

explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers

Kaizen budgeting

Multinational companies need to budget for ______ and _______.

foreign exchange rates; the effect of each country's tax laws.

(1) a key component of the financial budget. (2) is a schedule of expected cash receipts and disbursements.

cash budget

helps prevent unexpected cash deficiencies or idle cash, thereby keeping the cash balance in line with needs.

cash budget

budget sales (units) + target ending finished goods inventories (units) - beginning finished goods inventory (units)

budget production (units)

direct materials used in production + target ending inventory of direct materials - beginning inventory of direct materials

purchases of direct materials

a (what-if) technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes

sensitivity analysis

Cost center

the manager is accountable for cost only

revenue center

the manager is accountable for revenue only

profit center

the manager is accountable for revenues and costs

investment center

the manager is accountable for investments, revenue, and costs.

Marriott hotel is a ____ because the maintenance manager is responsible only for costs.

cost center

The salves department is a _______ because the sales manager is responsible primarily for revenues

revenue center

the hotel manager is in charge of a ______ because the manager is accountable for both revenues and costs.

profit center

the regional manager responsible for determining the amount to be invested in new hotel projects and for revenues and cost generated from these investments is in charge of a(n) ________

investment center

What are the three way variance, if properly used, can help managers implement and e valuate strategies in three ways:

early warnings, performance evaluation, and evaluation strategy

What is a significant aspect of kaizen budgeting?

It is employee suggestions.

Identifies how each product is manufactured, specifying all materials (and components), the sequence in which the materials are used, the quantity of materials in each finished unit, and the work center where the operations are performed.

bill of materials

non-manufacturing costs consist of:

product desing, marketing, and distribution costs

steps in preparing an operating budget

(1) identify the problem and uncertainties, (2) obtain information, (3) make predictions about the future, (4) make decisions by choosing among alternatives, (5) implement the decision, evaluate performance, and learn.

meshing and balancing all aspects of production or service and all departments in a company is the best way for the company to meet its goals.


making sure those goals are understood by all employees


(true/false) The preferable basis for evaluating the actual results of a cost center for the current month is the center's actual results for the same month in the preceding year.


The preferable basis for evaluating the actual results of a cost center for the current month his the center's budget for the current month.

(true/false) The financial budget component of the master budget consists of the capital expenditures budget, cash budget, operating budget, and budgeted balance sheet.


the financial budget component of the master budget consists of the capital expenditures budget, cash budget, budgeted balance sheet, and budgeted statement of cash flows.

the operating budget is the other component of the master budget.

(true/false) The usual constraint on the budgeted level of operations is the company's ability to produce products and services.


The usual constraint on the budgeted level of operations is the company's ability to sell products and services.

(true/false) The more detailed information used in activity-based budgeting vies managers additional insight into ways to better manage future costs.


(true/false) The organization structure that results if operations are divided into increasingly smaller areas of responsibility at increasingly lower levels is shaped like a pyramid with top management at the peak.


(true/false) Variances, the differences between actual results and budgeted amounts, should initially be used to fix the blame on the managers who are responsible for the variances.


When a variance occurs, the initial focus should be on which manager to ask, not which manager to blame.

(true/false) (Appendix) depreciation is excluded from the cash budget.


From the sales staff's standpoint, budgetary slack is a hedge against unexpected averse circumstances.


In formulating the operating budget, the last step is usually the preparation of the:

(a) budgeted income statement
(b) budgeted balance sheet.
(c) budgeted statement of cash flows
(d) cash budget)

(a) budgeted income statement

When used for evaluating the performance of a production department manager, performance reports in a responsibility accounting system should not:

(a) be related to the company structure
(b) include allocated fixed manufacturing overhead costs
(c) include variances between actual results and budgeted amounts of controllable costs.
(d) distinguish controllable costs from uncontrollable costs

(b) include allocated fixed manufacturing overhead costs

Performance reports prepare for successively higher management levels in a company should include

(a) less total dollars and more detail(b) less total dollars and less detail
(c) more total dollars and less detail
(d) more total dollars and more detail

(c) more total dollars and less detail

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