The Cash Budget Must Be Prepared Before You Can Complete It

The cash budget must be prepared before you can complete the A. raw materials purchases budget. ...

Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer.

1. The cash budget must be prepared before you can complete the:

  • A. Raw materials purchases budget
  • B. Production budget
  • C. Schedule of cash disbursements
  • D. Budgeted balance sheet

Use the following information to answer this question. Werber Clinic uses client visits as its measure of activity. During January, the clinic budgeted for 2,700 client visits, but its actual level of activity was 2,730 client visits.

The clinic has provided the following data concerning the formulas used in its budgeting and its actual results for January:

Data used in budgeting:

  • Fixed element
  • Variable element per month per client-visit
  • Revenue ____-____ $33.60
  • Personnel expenses $22,100 $8.70
  • Medical supplies 1,100 6.60
  • Occupancy expenses 5,600 1.60
  • Administrative expenses 3,700 0.40
  • Total expenses $32,500 $17.30

Actual results for January:

  • Revenue $93,408
  • Personnel expenses $46,251
  • Medical supplies $19,348
  • Occupancy expenses $9,508
  • Administrative expenses $4,000

The activity variance for personnel expenses in January would be closest to:

  • A. $261 Favorable
  • B. $661 Favorable
  • C. $661 Unfavorable
  • D. $261 Unfavorable

Paper For Above instruction

The preparation and effective use of budgets are fundamental aspects of financial planning and control in organizations. Among the various types of budgets, the cash budget holds significant importance because it provides a detailed forecast of cash inflows and outflows, ensuring that an organization maintains sufficient liquidity to meet its obligations. This necessity leads to the understanding that the cash budget must be prepared before other budgets, such as the raw materials purchases budget, the production budget, or the budgeted balance sheet, can be accurately completed. Specifically, the cash budget informs the organization about its available cash resources, influencing decisions on inventory purchases, production levels, and financing options.

In the practical setting of healthcare, like the Werber Clinic's scenario, budgeting involves analyzing activity levels, revenues, and expenses. The clinic's activity variance analysis for personnel expenses highlights how actual performance compares with budgeted figures, considering the activity level changes. When actual client visits exceed the budgeted visits, personnel expenses can be adjusted proportionally. The activity variance measures the impact of this activity change on expenses, isolating it from efficiency or price variances. In the Werber Clinic example, the activity variance for personnel expenses is calculated by determining the variable element per client visit and then multiplying it by the difference between actual and budgeted visits (30 visits), leading to a variance estimate close to $261 favorable or unfavorable depending on the calculation details.

The production budget is another essential component of the master budget, describing the number of units that must be produced to meet sales goals and inventory policies. The production budget takes into account the sales forecast and desired ending inventory. For example, in the case of the company planning to sell 22,000 units of Product WZ in June, the calculation involves the beginning inventory, ending inventory, and sales to derive the number of units to produce, which determines the direct labor hours and costs. This budget ensures synchronization between sales targets and operational capacity, ultimately affecting cost management and resource allocation.

Managerial performance assessment often involves calculating return on investment (ROI). An increase in net operating income or a reduction in expenses typically enhances ROI, assuming other factors remain constant. Conversely, an increase in operating assets without a proportional increase in income can lead to a decline or no change in ROI. Therefore, an increase in operating assets without a corresponding increase in net income would not result in a higher ROI, highlighting the importance of efficient asset utilization.

The clinic scenarios further underscore the importance of flexible budgets, which adapt to actual activity levels to provide accurate variance analysis. For example, the medical supplies variance involves comparing actual costs to flexible budget costs based on actual activity levels. Similarly, personnel and spending variances are used to identify areas of overspending or efficiency gains. The detailed variance analysis enables managers to pinpoint specific causes of deviations from budget and implement corrective actions, promoting cost control and operational efficiency.

Budgets such as the manufacturing overhead budget are prepared by considering fixed and variable components. For instance, in Charade Company’s case, calculating the total factory overhead per direct-labor hour involves summing the variable overhead rate and the fixed factory overhead allocated per hour, factoring in depreciation expenses. Accurate budgeting in manufacturing enhances cost management, competitiveness, and profit margins.

Analyzing company performance metrics, such as sales, net operating income, and asset turnover, reveals insights into operational efficiency. For example, the company’s asset turnover ratio is calculated by dividing sales by average operating assets, providing a measure of how effectively assets generate revenue. Similarly, variances in standard costs for raw materials and labor help identify areas for cost control and process improvement.

Overall, robust budgeting practices support strategic decision-making by providing detailed financial forecasts, variance analyses, and performance metrics. These practices foster organizational agility, improve financial discipline, and contribute to long-term value creation for stakeholders.

References

  • Anthony, R. N., & Govindarajan, V. (2014). Principles of Management Accounting. McGraw-Hill Education.
  • Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson Education.
  • Hilton, R. W., & Platt, D. E. (2016). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson Education.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting. Wiley.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Shim, J. K., & Siegel, J. G. (2017). Budgeting Basics and Beyond. John Wiley & Sons.
  • Libby, T., & Libby, R. (2010). Financial Accounting. McGraw-Hill Education.

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