Budget Flashcards
Budgeting
Planning future activities by establishing performance targets
Benefits of budgeting
-Reaslistic targets can be set
-Does not spend more resources than it can access
-Increase motivation for reaslistic targets
-Coordination
-Measuring and assessing performance
Limitations of budgeting
-Lack of flexibility
-Focus on the short term
-Unnecessary spending in case of underspeanding
-Training for setting budgets required
-Setting budgets for new projects is harder
Variance analysis
Calculation of differences between budgets and actual figures and reasons for the differences
Budget holder
The individual responsible for the initial setting and achievement of a budget
Features of budgeting
-Budget is not a forecast
-Budgets can be established for any part of an organisation if the outcome is measurable
-Coordination between departments when establishing budgets is essential
-Budgets are used to measure performance of managers incharge of a cost or profit centre
Delegated budgets
Budgets which junior managers have been given some authority for setting and achieving
Incremental budgeting
Using last years budget as a base and adjustments fro the following year
Zero budgeting
Sets budgets to zero and budget holders argue their case for target levels and to receive finance
Flexible budgeting
Cost budgets for each expense are allowed to vary if sales vary from budgeted levels
Favourable variance
A change from he budget that leads to higher planned profit
Adverse variance
A change from the budget that leads to lower planned profit
Causes of adverse variance
-Revenue below budget
-Raw material costs are high
-Labour costs above budget
-Over head costs high
Causes of favourable variance
-Revenue above budget
-Raw material costs are low
-Labour costs above budget
-Over head costs low
Benefits of variance analysis
-Identifying potential problems early so remedial action can be taken
-Allowing managers to concentrate their time on major problem areas
