Budgeting Flashcards
What is a budget and what is it used for?
Detailed plan for the acquisition and use of resources over a time period.
Used for Income, Expense and Capital (monetary)
Used for Production, Labour and Material Usage (non-monetary)
What are the 6 purposes of a budget?
PLANNING of operations
CO-ORDINATE activities
COMMUNICATE to various managers
MOTIVATE managers to achieve targets
CONTROL activities
EVALUATE managers performance
What are the components of a typical budget?
Master budget includes
Budgeted P/L statement
Budgeted SFP
Cash budget
What are the three factors in organising a budget?
1 The Budget Committee - key executives who advise the budget director, though final approval rests with the directors.
2 Accounting staff - providing information, supporting and consolidating budget
3 The Budget Manual - prepared by accountant, and details roles and objectives of budget and the timetable.
What are the 8 stages to a budget?
1 Budget policy communicated 2 Principal budget factor determined 3 Sales budget prepared 4 Initial preparation of other budgets 5 Negotiation with higher management 6 Co-ordination and review of budgets 7 Budgets accepted 8 Ongoing review
What is the principal budget factor?
Factor that limits the activities of the organisation, usually sales demand for most companies.
What are the components of the master budget?
1 Sales budget
2 Production budget
Functional Budgets:
1 Materials budgets
2 Labour budget
3 Overhead budget
What makes the principal budget factor difficult to forecast?
Sales demand depends on external factors such as economic conditions, competitors and promotions.
Forecasts are based on:
Judgement
Statistics
Past information
Other factors could be production capacity, finance, availability of labour or materials. Attempts should be made to identify and remove the limiting factor.
What are the advantages of bottom-up (participative) budgeting?
More likely for managers to accept targets
Local knowledge
Involves managers in process and motivates them
What are the advantages of top-down (imposed) budgeting?
Doesn’t take up the time of lower management, allowing them to focus on day-to-day operations
More specialist knowledge to produce budget
Reduces budgetary slack
What is budgetary slack?
Padding the budget by setting lower targets intentionally by underestimating revenue or overestimating costs. Slack is the difference between a realistic target and the projection.
How challenging should budgets be?
Employees are motivated by targets, but if it goes beyond a certain level it has a negative effect on performance.
Challenging budgets with possible, but unlikely, goals are best.
What are the advantages of incremental budgets?
Quick and easy to do
Useful if historical figures are reliable and business is efficient
Makes allowances for growth, inflation, and cost savings
What are the disadvantages of incremental budgets?
Problems are carried forward year on year
Managers may ‘use up’ their budget at the end of the year so they don’t have it reduced afterwards
Encourages slack as padded budgets carried forward
What is zero based budgeting?
Establishing plans with an assumption of no activity and justifying each program.
Stages:
Identify and justify each activity, its need and cost.
Describe each activity in a decision package
Ranking these packages in order of priority
The allocation of resources according to the ranking.
