• Budget A detailed plan for the future that is usually expressed in formal quantitative terms. (p. 407)
• Cash budget A detailed plan showing how cash resources will be acquired and used over a specific time period. (p. 410)
• Continuous budget A 12-month budget that rolls forward one month as the current month is completed. (p. 408)
• Control The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change. (p. 407)
• Direct labor budget A detailed plan that shows the direct labor-hours required to fulfill the production budget. (p. 420)
• Direct materials budget A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. (p. 419)
• Ending finished goods inventory budget A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet. (p. 422)
• Manufacturing overhead budget A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period. (p. 421)
• Master budget A number of separate but interdependent budgets that formally lay out the companys sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet. (p. 409)
• Merchandise purchases budget A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period. (p. 418)
• Participative budget See Self-imposed budget. (p. 408)
• Perpetual budget See Continuous budget. (p. 408)
• Planning The process of establishing goals and specifying how to achieve them. (p. 407)
• Production budget A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs. (p. 417)
• Responsibility accounting A system of accountability in which managers are held responsible for those items of revenue and costand only those itemsover which they can exert significant control. The managers are held responsible for differences between budgeted and actual results. (p. 407)
• Sales budget A detailed schedule showing expected sales expressed in both dollars and units. (p. 410)
• Self-imposed budget A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement. (p. 408)
• Selling and administrative expense budget A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period. (p. 423)

Questions:

81 What is a budget? What is budgetary control?

82 Discuss some of the major benefits to be gained from budgeting.

83 What is meant by the term responsibility accounting?

84 What is a master budget? Briefly describe its contents.

85 Why is the sales forecast the starting point in budgeting?

86 As a practical matter, planning and control mean exactly the same thing. Do you agree? Explain.

87 Why is it a good idea to create a Budgeting Assumptions tab when creating a master budget in Microsoft Excel?

88 What is a self-imposed budget? What are the major advantages of self-imposed budgets? What caution must be exercised in their use?

89 How can budgeting assist a company in planning its workforce staffing levels?

810 The principal purpose of the cash budget is to see how much cash the company will have in the bank at the end of the year. Do you agree? Explain.

Chapter 11: Performance Measurement in Decentralized Organizations

Glossary:

• Balanced scorecard An integrated set of performance measures that are derived from and support the organizations strategy. (p.554)
• Cost center A business segment whose manager has control over cost but has no control over revenue or investments in operating assets. (p. 544)
• Decentralized organization An organization in which decision-making authority is not confined to a few top executives but rather is spread throughout the organization. (p. 543)
• Delivery cycle time The elapsed time from when a customer order is received until the finished goods are shipped. (p. 552)
• Economic Value Added (EVA) A concept similar to residual income in which a variety of adjustments may be made to GAAP financial statements for performance evaluation purposes. (p. 549)
• Investment center A business segment whose manager has control over cost, revenue, and investments in operating assets. (p. 544)
• Manufacturing cycle efficiency (MCE) Process (value-added) time as a percentage of throughput time. (p. 553)
• Margin Net operating income divided by sales. (p. 546)
• Net operating income Income before interest and income taxes have been deducted. (p. 545)
• Operating assets Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes. (p. 545)
• Profit center A business segment whose manager has control over cost and revenue but has no control over investments in operating assets. (p. 544)
• Residual income The net operating income that an investment center earns above the minimum required return on its operating assets. (p. 549)
• Responsibility center Any business segment whose manager has control over costs, revenues, or investments in operating assets. (p. 544)
• Return on investment (ROI) Net operating income divided by average operating assets. It also equals margin multiplied by turnover. (p. 545)
• Throughput time The elapsed time from when production is started until finished goods are shipped. (p. 552)
• Turnover Sales divided by average operating assets. (p. 546)

Questions:

111 What is meant by the term decentralization?

112 What benefits result from decentralization?

113 Distinguish between a cost center, a profit center, and an investment center.

114 What is meant by the terms margin and turnover in ROI calculations?

115 What is meant by residual income?

116 In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does the residual income approach overcome this problem?

117 What is the difference between delivery cycle time and throughput time? What four elements make up throughput time? What elements of throughput time are value-added and what elements are nonvalue-added?

118 What does a manufacturing cycle efficiency (MCE) of less than 1 mean? How would you interpret an MCE of 0.40?

119 Why do the measures used in a balanced scorecard differ from company to company?

1110 Why does the balanced scorecard include financial performance measures as well as measures of how well internal business processes are doing?