Chapter 4 Flashcards
Definition of a budget
Financial and/or quantitive plan of what an organisation intends to achieve for a forthcoming period
Creating a budget force is the company to plan for the future, and this, its own right is a significant benefit of preparing one
Benefits of budgeting
Crime
Control – helps to control the actual performance
Responsibility – identify who is possible for what
Integration – ensure activities of the different parts of the organisation are integrated together. This will mean good communication and coordination between departments.
Motivation – will help motivate staff within the organisation.
Evaluation, – allow evaluation of the actual results. A budget holder within an organisation will effectively be authorised to spend within the limits of the budget 
Administrative process of budgeting
Establish the budget period
Issued a budget manual – this list of stages of the budgeting process.
Appoint the budget committee, which oversees the process.
Identify the budget coordinator, who is usually an accountant, to head up the process. 
Forecasting and time series
Simple average growth – identifies the average growth and past figures, and then applies this to future forecasts
Estimates based on judgement and experience – when an individual or group of individuals with industry experience uses this to forecast for the future.
The time series (TS) a set of data observed over a period of time. An example is sales patterns by day, by week, by month, by year etc 
time series components
Trend (T) – underlying long-term movement over time in historic data.
Seasonal variation (S) – short-term periodic fluctuations in historical data.
Cyclical variation (C) long-term fluctuations caused by factors, such as economic activity or economic cycles.
Random variations (R) unpredictable fluctuations, such as an act of nature. 
The additive model
Used where the component are assumed to add together to give the time series.
The seasonal adjustments should I do zero. 
Linear regression
Finding the line of best fit between two variables
The correlation coefficient
(sometimes called the product momentum, correlation coefficient)
Indicates the strength of the relationship between the variables, how close the line of best fit is to the actual variables.
Will always be somewhere between minus one and plus one. The sign indicates the gradient of the best fit line.
If the correlation coefficient was exactly one of the variables would be on a perfect straight line. 
The coefficient of determination
R2
Indicates the proportion of change in the dependent variable (y), which is explained by the change in the independent variable (X)
Data outliers
Data that do not fit with the other results in a population
Can provide useful insights if analysed separately 
Internal sources of information for budgeting
Accounting systems (historic sales and costs)
HR records (staff pay levels)
Marketing department (potential customers, impact of advertising proposed)
Production department (output per machine)
External sources, used for budgeting
Government statistics – employment levels, demographic trends, such as age, wealth, etc, financial data, such as inflation, interest rates,
Financial press – daily information available on company & economic activity
Trade publications – detailed data and information on an individual industry, including price levels and cost behaviour.
The Internet and Big data. 
Big data and budgeting
Can help make budget estimates more accurate by providing missing data, or enabling the business to see correlations in data
Can be used to identify and/or analyse opportunities to increase revenue by improving product offerings or targeting offers to specific customers
Organisations can build a more detailed picture of their customers from multiple sources. This can impact not only expected revenue, but also the relationship between marketing expenditure and revenue.
Organisations can build a better picture of their competitors by analysing their locations, marketing approach, strategies, website, design, information from their own customers and forecasting results.
Big Data can allow trends in customer behaviour influencing revenue to be compared against an organisations own behaviour and the behaviour of competitors
Big data can help identify ways of reducing costs through process efficiencies or removing non-valuating activities.
Big data provides more reliable information about the impact of factors in the wider environment, which may generally be more difficult to determine. For example, legal political developments and exchange rate changes
Problems with Big Data
Systems need to be sufficiently sophisticated to provide appropriate information properly and also to store and analyse it.
This may require expenditure and in addition system to require regular updates.
Is the data reliable and does it fairly indicate the true situation? Veracity!
Problems with assessing data, outliers, – The greater volume of data, the more likely extreme results will occur
With so much data available, analysing what is most significant to the organisation and what impact this information will have on the organisation becomes complex and time-consuming 
