M/A - Budgeting Flashcards
What are the 4 steps of the decision framework for the budgeting process
- Identify constraint, potential issue
- Gather information
- Make a future prediction
- Implement the budget and gather feedback
Explain what the different terms are: Plan, Budget, Pro-forma, Forecast & Projection
Plan - It is the set of intended actions and expected outcomes
Budget - Financial plans or estimates, expressed in quantitative terms, to predict the most likely financial consequences of a course of action
Pro format - F/S that anticipates the result of a planned transaction to present the organization’s future financial situation
Forecast - Future-oriented financial information prepared using assumption and judgment regarding management expectation of probable economic
Projection - Future-oriented financial information prepared using assumption and judgment regarding possible future economic conditions, with a long-term horizon
- Simply the budget is the desired destination, and Rav intends to get to that point
What is the budget for Non-for profit and public sector organization
Cost structure - Profit-oriented organization, cost is engineered. Usually, the number of inputs required for a given unit of output can be determined
Spending flexibility - profit-oriented organization, budget is subject to change as economic conditions change. Managers of NPOs are aware that a change in economic conditions can dramatically affect resource
- NPO and public sector organizations follow a “revenue-first” policy
- This requires a commitment to engage in cost-cutting if necessary
- The goal of the budget committee is to facilitate the exchange of specialized knowledge and reach a consensus on key planning assumption
Budget Lapsing - occurs when funds that have not been spent by year-end do not carry over to the next year
What are the eight types of budgeting
- Traditional budget
- Priority Budget
- Top-down Budget
- Participative Budget
- Zero-based budget
- Activity budget
- Static Budget
- Flexible Budget
Explain traditionally based budgeting
- Traditional based budget - classic approach, assign an increase/ decrease % of all line item
Advan: Simple & easy to implement, little information
Disadvan: fundamentally, flawed high performing departments can be restricted of funds, damaging to the environment
Explain what priority budgeting is needed
- Requires a strong understanding of the organization and subunit of contribution to the strategic plan
Advan: more effective in helping with the organization’s strategic goals
Disadvan: Difficult for decision to be made
What is top-down and participative budgeting
Top-down Budgeting - Higher level manager impose operating target and or budget on their direct report
Advan: Simple and quick to achieve
Disadvan: does not include co-operation between higher level and lower, level managers, which can cause resentment
Participative budgeting - Top management set an overall operating target based on strategic objectives, and lower-level managers prepare their own department budget
Advan: Providing cooperation between the department
Disadvan: Can easily be manipulated by manager, being relied on by top management to make cost-effectiveness
Explain what zero-based budgeting is
- Usually takes an incremental approach to budgeting using last year’s actual or budget figures as a starting point and then adjusting them upwards or downwards
Advan: Each area of business must justify its existence and consider how performance might be improved
Disadvan: Time-consuming, benefits are difficult to quantify
What is the difference between a static and flexible budget
Static budgets - are created based on a planned level of sales and or production, and are not adjusted to actual units or activity level
Flexible budget - Adjusted automatically reflect planned cost for the actual level of activity
Benchmarking - Comparison of actual result to best practice of other division of the organization or to competitors in same industry
