Principles of Accounting: Chapter Twenty-One

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Chapter 21 is about budgeting. The chapter begins with an examination of the importance of budgets to planning and shaping an organization's activities. Budgets also provide a communication and feedback tool. Not to be overlooked are the human dimensions of budgeting. Budgets can be mandated or developed by participative processes. They require estimations and are subject to failings, such as deliberate introduction of slack. Budgeting is sometimes done on an incremental basis by beginning with a prior period plan, but an alternative is zero-based budgeting that requires justification of all expenditures each period.

A comprehensive budget will include many components, but generally begins with planned sales. Sales drive production budgeting, including materials, labor, and overhead. The production budget must interface with the cash budget. The entire process can culminate in budgeted financial statements. Carefully linked electronic spreadsheets prove quite helpful in budgeting, and a comprehensive illustration is shown.

The chapter concludes by discussing budget periods and cycles. Businesses might utilize a continuously updating (perpetual) budget, in lieu of a single static budget that is intended to span well into the future.

Exercises

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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Fill in the Blanks: Chapter Twenty-One

1. A ____________ budget is a formal quantitative expression of management expectations.

2. With the ____________top-down approach upper-level executives can study the interactions of lower units and determine the consistency of each unit's plans and expectations.

3. The ____________ bottom-upmethod is time consuming and expensive to administer because of increased employee involvement.

4. Intentionally overstating various anticipated costs is called budgetary ____________slack .

5. In contrast to incremental budgeting, ____________zero-based budgeting requires that each expenditure be rejustified for each budget period.

6. A ____________ masterbudget is a comprehensive set of integrated budgets that serve as the financial plan for the entire organization.

7. The ____________sales budget is probably the most important element of a master budget.

8. The ____________factory overhead budget incorporates all production costs other than direct material and direct labor.

9. In a cash budget, the ____________receipts section discloses the total cash available during the period before considering any disbursement.

10. In a cash budget the ____________financing section provides a schedule of borrowings and repayments and also discloses the related interest payment on borrowed funds.

11. A ____________continuous budget covers a one-year period, however, a new month is added as the current month is completed.

12. The preparation of budgeted financial statements is often called the preparation of ____________ pro formastatements.

13. A budgetary restriction occurring in advance of the related expenditure is often known as an ____________encumbrance.