Budgeting & Risk and Uncertainty Flashcards
(40 cards)
What is budgeting?
Budgeting is the process of creating a plan to spend money over a period. Example: A company forecasts next year’s sales and sets expenditure limits accordingly.
What is a master budget?
A master budget is a comprehensive summary of all individual budgets. Example: It includes sales, production, and cash budgets for a manufacturing firm.
What is a sales budget?
A forecast of expected sales in units and revenue. Example: A retailer projects to sell 10,000 units at $20 each.
What is a production budget?
It shows the number of units that must be produced to meet sales and inventory needs. Example: 12,000 sales units + 1,000 ending inventory - 2,000 opening = 11,000 units to produce.
What is a cash budget?
It estimates inflows and outflows of cash over a period. Example: Helps a business ensure it has enough cash to pay wages next month.
What is a flexible budget?
A budget that adjusts based on actual activity levels. Example: A gym changes its expected costs when 200 more members join.
What is a fixed budget?
A budget created for a single level of activity and does not change. Example: Budget made for production of 10,000 units regardless of actual output.
What is zero-based budgeting (ZBB)?
ZBB starts from zero and every expense must be justified. Example: A department must explain why it needs $5,000 this year, not rely on last year’s figures.
What is incremental budgeting?
It adjusts last year’s budget by a fixed increment. Example: Increase marketing budget by 5% over last year’s spend.
What is rolling budgeting?
A continuous budget updated regularly. Example: A 12-month budget updated quarterly to reflect changes.
What is participative budgeting?
Employees at all levels contribute to setting budgets. Example: Department heads submit their own budget estimates.
What is imposed budgeting?
Top management sets the budget without employee input. Example: Head office assigns budget targets to branches.
Why is budgeting important?
It helps with planning, coordination, and control. Example: A business ensures departments don’t overspend.
What are budgetary controls?
Processes used to monitor actual performance against the budget. Example: Monthly variance reports.
What is variance analysis?
Comparing actual results with budgeted amounts to find differences. Example: Actual sales $8,000 vs budget $10,000 = $2,000 adverse variance.
What is an activity-based budget?
Budgeting based on cost drivers of activities. Example: Budget cleaning costs based on floor space.
What are the limitations of budgeting?
May become outdated, rigid, or demotivate staff. Example: Budget doesn’t reflect sudden market downturn.
What is a behavioral aspect of budgeting?
Employee reactions to budgeting, such as motivation or manipulation. Example: Managers may inflate estimates to create budgetary slack.
What is budgetary slack?
Deliberate underestimation of revenues or overestimation of costs. Example: Manager inflates cost estimates to make targets easier to meet.
How does budgeting support decision making?
It provides a financial framework for evaluating options. Example: Choose the cheaper supplier to stay within the budget.
What is risk in PM context?
Risk is the possibility that actual outcomes differ from expected outcomes. Example: A project’s cost may exceed its budget.
What is uncertainty?
When outcomes are unknown and probabilities can’t be estimated. Example: New market entry with no data history.
What are the types of risk?
Operational, financial, strategic, compliance. Example: Supply chain disruption (operational risk).
What is expected value?
Sum of all possible outcomes multiplied by their probabilities. Example: (0.6 x $100) + (0.4 x $50) = $80.
