Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo
Principles of Accounting, Volume 2: Managerial Accounting

Summary

Principles of Accounting, Volume 2: Managerial AccountingSummary

7.1 Describe How and Why Managers Use Budgets

  • A good budgeting system assists management in reaching their goals through the planning and control of cash inflows through revenue and financing and outflows through payment and expenses.
  • There are various budgeting strategies including bottom-up, top-down, and zero-based budgeting.
  • A static budget is prepared at one level of activity, while a flexible budget allows the variable expenses to be adjusted for various levels of activity.
  • A master budget includes the subcategories of operating budgets and financial budgets.
  • A master budget is developed at the estimated level of activity.

7.2 Prepare Operating Budgets

  • The sales budget is the first budget developed, and the estimated sales in turn guide the production budget.
  • The production budget shows the quantity of goods produced for each time period and leads to computing when and how much direct material needs to be ordered, when and how much labor needs to be scheduled, and when and how much manufacturing overhead needs to be planned.
  • The sales and administrative budget plans for the nonmanufacturing expenses.
  • All operating budgets combine to develop the budgeted income statement.

7.3 Prepare Financial Budgets

  • The financial budgets include the capital asset budget and the cash budget. The cash collections schedule and cash payments schedule are computed and combined with the other budgets to develop the cash budget.
  • Information from the other budgets and the budgeted income statement are used to develop the budgeted balance sheet.

7.4 Prepare Flexible Budgets

  • A master budget and related budgets are prepared as static budgets for the estimated level of activity.
  • A flexible budget adjusts the budgets for various levels of activity and allows for the actual results to be evaluated at the actual volume of activity.

7.5 Explain How Budgets Are Used to Evaluate Goals

  • Management’s evaluations of the actual results versus the estimated budgetary results help plan for the future.
  • Favorable variances occur when sales are higher or expenses are lower than budgeted.
  • Unfavorable variances occur when sales are lower or expenses are higher than budgeted.
PreviousNext
Order a print copy
Citation/Attribution

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
Citation information

© Jul 16, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.