The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines |
|---|---|
| The master budget summarizes the financial projections of all the company’s budgets. It expresses management’s operating and financing plans—the formalized outline of the company’s financial objectives and how they will be attained. Budgets are tools that, by themselves, are neither good nor bad. Budgets are useful when administered skillfully. |
| Budgets should be prepared when their expected benefits exceed their expected costs. There are four key advantages of budgets: (1) they compel strategic analysis and planning, (2) they promote coordination and communication among subunits of the company, (3) they provide a framework for judging performance and facilitating learning, and (4) they motivate managers and other employees. The challenges are the time-consuming back-and-forth debates between senior and subordinate managers to set budgets. |
| The operating budget is the budgeted income statement and its supporting budget schedules. The starting point for the operating budget is generally the revenues budget. The following supporting schedules are derived from the activities needed to support the revenues budget: production budget, direct materials usage budget, direct materials purchases budget, direct manufacturing labor cost budget, manufacturing overhead costs budget, ending inventories budget, cost of goods sold budget, and R&D/product design, marketing, distribution, and customer-service budgets. |
| Managers can use financial planning models—-mathematical statements of the relationships among operating activities, financing activities, and other factors that affect the budget. These models make it possible for managers to conduct a what-if (sensitivity) analysis of the risks that changes in the original predicted data or changes in underlying assumptions would have on the master budget and to develop plans to respond to changed conditions. |
| A responsibility center is a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. Four types of responsibility centers are cost centers, revenue centers, profit centers, and investment centers. Responsibility accounting systems are useful because they measure the plans, budgets, actions, and actual results of each responsibility center. Controllable costs are costs primarily subject to the influence of a given responsibility center manager for a given time period. Performance reports of responsibility center managers often include costs, revenues, and investments that the managers cannot control. Responsibility accounting associates financial items with managers on the basis of which manager has the most knowledge and information about specific items, regardless of the manager’s ability to exercise full control. |
| The administration of budgets requires education, participation, persuasion, and intelligent interpretation. When wisely administered, budgets create commitment, accountability, and honest communication among employees and can be used as the basis for continuous improvement efforts. When badly managed, budgeting can lead to game-playing and budgetary slack—the practice of making budget targets more easily achievable. |
| Budgeting is a valuable tool for multinational companies but is challenging because of the uncertainties posed by operating in multiple countries. In addition to budgeting in different currencies, managers in multinational companies also need to budget for foreign exchange rates and consider the political, legal, tax, and economic environments of the different countries in which they operate. In times of high uncertainty, managers use budgets to help the organization learn and adapt to its circumstances rather than to evaluate performance. |