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Flashcards in Budgeting and Control Deck (26)
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1

Top down budgeting

Budget set with overall corporate objectives by the senior management

2

Bottom up (participative)

Departmental objectives set by local management, given from bottom up

3

Advantages and disadvantages of bottom up

Advantage
- More realistic, as actual relevant experience
- Staff take ownership
- Greater motivation
- Saves time for senior management

Disadvantages
- Local objectives may differ from corporate objectives
- Scope for disagreement between staff
- Budgetary slack may be built in
- Budgets may be less accurate, as less experienced people creating them

4

Rolling budget


Advantages



Disadvantages

Budget establishes at the beginning of a period and constantly amended throughout
Advantage
- encouraging staff to continuous look at changing variables
- Times of uncertainty, better to be able to update information once it is known
Disadvantages
- Continually changing goals may demotivate staff
- not easily understood
- more time and effort

5

zero based budget

Advantages



Disadvantages

A budget that requires managers to justify every expenditure (including items accepted in previous periods). Managers include every possible expenditure in 'decision packages', Directors will then rank and approve the most important decision packages.
Advantages
- Responsive to changes in economic environment
- More efficient at allocating resources
- Drives managers to find cost effective improvements
- Detect inflated budgets
Disadvantages
- Time consuming to justify costs
- Need to rain managers to understand

6

Activity based budgets

Budget based off activity level and cost drivers
Advantages
- Focus on the drivers behind costs
Disadvantages
- Time consuming
- Difficult to understand

7

Incremental budgets
ADV
DIS

Current budget or actual results adjusted for inflation and possible growth
ADV
- Stable and easy to understand
-Quick
impact of changes easy to see
DIS
- no incentive to reduce costs
- encourages spending up to the budget

8

The master budget

Collates individual budgets from different departments into a consistent format used in annual accounts includes a P&L, balance sheet and cash flow.

9

Functional budget

Individual budgets for different functions (sales, production and labor)

10

Fixed budgets

Produced at the start of the year and doesn't change until the next year

11

Flexible budgets

Produced at the start of the year and include different activity levels

12

Feed-forward and Feedback control

Feed-forward system = comparing the four cast results to the budget and taking corrective action when deviating from budget (cash flow budget - noticing an issue coming up and moving cash to cover)

Feedback system = budget versus actual (variance analysis)

13

Beyond budgeting
Hope and Fraser

Criticism of budgeting:
Time consuming and expensive
May have little value to users
Does no focus on shareholder value
Rigid and prevents fast response

14

High low methods

Fixed and variable costs can be analysed using the high low method
step 1 - select highest and lowest activity levels( and their known costs)
step 2 - calculate variable cots per unit ((total cost at high activity - total cost at low activity)/(high activity in units - low activity in units))

15

Learning effect

Time taken will reduce as task is performed competitively
Y = ax^b
a = time taken for first unit
x = cumulative number of units produced
b = learning factor (log LR)/log2
LR = the learning rate as a decimal

16

Standard costs

predetermined unit cost based on anticipated levels of efficiency and price

17

Standard cost assumption types

Basic - Nothing changed since standard was set before trading
Current - Current levels will be maintained
Attainable - Assume some improvement in efficiency and cost (motivating for staff)
Ideal - assumes optimum level of cost and efficiency (unrealistic)

18

Flexing budgets

Flexing current budget for actual volume of sales

19

Material variances

Either price variance or usage variance.

Usage variances - mix + yield:
Material mix variable - input variance
Material yield variable - output variance

20

Material mix variance

Difference between the standard mix of materials and actual mix of materials, values a the standard material cost

21

Materials yield variance

Difference between the actual output from materials used and the standard output

22

Sales mix variance

Difference between standard mix and of actual sales and actual mix of sales, valued at standard contribution

23

Sales quantity variance

Difference between actual sales volume and budgeted volume valued at contribution

24

Labour variances

Planning variance for labour rate = revised hours - original budgeted hours
Operational variance for labour efficiency = actual cost - revised budget cost

25

Total quality management (TQM)

Philosophy of continuous improvement to processors (goal to eliminate waste and efficiency

26

Sales price and sales volume

Sales price variance = (new selling price - old selling price) x revised sales volume

Sales volume = (new sales volume - original sales volume) x original standard contribution per unit

Operational sales volume variance is also considered the market share variance