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Kinney 8e_SM Ch08

Kinney 8e_SM Ch08 - Chapter 8 1 THE MASTER BUDGET QUESTIONS...

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Chapter 8 THE MASTER BUDGET QUESTIONS 1. Budgeting translates goals and objectives into the resources, activities, and arrangements needed to accomplish those goals and objectives. That information is extended to assign activities and allocate resources to departments that, and personnel who, are responsible for execution of the budget. 2. The strategic plan defines an organization’s basic purposes and goals. As such, the strategic plan identifies the internal and external key variables that will largely determine the organization’s success. Internally, consideration must be given to resource availability, core competencies, product development, and product life cycles. Some external factors to be considered include the local and global economy, competitor actions, technology trends, raw material availability, outsourcing possibilities, and legislative and political climates. The long-term and short-term information generated from the strategic plan influences the financial goals and objectives that underlie the budgeting process. 3. Longer term (strategic) plans contain insufficient detail to direct a business. Although strategic plans provide general direction for a business, they are too vague to provide guidance on a day-to-day basis. Consequently, shorter term (tactical) plans are compiled to implement the strategic plans for a specific period. Tactical plans are prepared with greater attention to current organizational and environmental constraints (current market, material, and labor conditions). Also, roles of specific middle- and lower-level managers can be indicated in the detailed short- term plans. 4. The budget represents the cornerstone for a company’s management planning system. Budgeting originates with strategic planning and utilizes goals, objectives, and forecasts in developing plans for production, revenues, costs, cash flows, and resource procurement. As goals are implemented and programs/products are developed, management needs information about various alternatives so they can be evaluated. When a specific plan of action is determined, the budget becomes management’s master plan. The budget provides a basis against which management can compare actual with forecasted outcomes. If the plan is “off-track,” the budget-to-actual comparison can be viewed as a control indicator to management as to where changes (if they are possible) need to be made. Without formal planning, there can be little control. 5. An operating budget presents units expected to be sold or used by a company and the price/costs associated with those units. Sales, 1
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Chapter 8 production, and purchasing budgets are operating budgets. Results from the operating budgets are input sources for financial budgets. Financial budgets detail the funds to be generated or used during the budget period (cash budget and capital expenditure budget). For example, the sales figures in the (operating) sales budget affect the cash collections/receipts portion of the (financial) cash budget. Both types of budgets are needed
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