Setting Budgets Flashcards
(31 cards)
What are the 7 steps of the planning and control cycle?
- identify objectives
- identify potential strategies - position audit
- evaluate each
- choose course of action
- implement long term plan in form of annual budget
- measure actual results and compare
- respond to divergences
Budget
- quantitative statement for defined period of time
- may include planned revenues, assets, expenses, liabilities, cash flows
- facilitates planning
What are the objectives of a budgetary planning system?
PRIME
Planning- forces to plan ahead in detail
Responsibility - clarifies what can control
Integration and co-ordination- between departments
Motivation- employees behaviour affected
Evaluation & Control - compare actual performance to targets
Responsibility Centres
- function or department that is headed by manger who has direct responsibility for its performance
Responsibility Accounting
system of accounting that segregated revenue and costs into areas of personal responsibility
- in order to monitor/assess performance of each part of organisation
What are managers of responsibility centres held accountable for?
- for costs which they have control over/influence
- otherwise motivation would be low if judged on things they can’t control
- often these are the short term costs
Controllable Cost
- cost that can be controlled
- typically by cost, profit or investment centre manager
- discretionary fixed costs are included- promotional, R&D, training, consultancy
Non- controllable costs
- often include expenses due to inflation
- often committed fixed costs long term - machinery, depreciation, rent, salaries
Budget Period
- time that budget is for
- commonly accounting year
- usually split into months or 13 4-week periods
Budget Manual
- collection of instructions governing budgetary process
- not contain actual figures but how will operate
- management accountant prepares
- objective
- organisational structure
Budget Commitee
- coordinating body in prep and admin
- MD chairs
- budget officer - accountant
- every part of organisation represented
What is the budget preparation timetable?
- communicate budget policy and guidelines - long term plan
- determine limiting factor
- prep the budget for limiting factor- primary
- initial prep of budgets all feeding from primary
- negotiation with superiors
- incorporated into each other once approved
- Reviewed for inconsistencies
- final acceptance- master budget
- budget review
Principal Budget Factor
- factor that restricts output/performance
- key budget factor
- limiting budget factor
- usually sales demand
others
- availability of raw materials
- labour supply available
- machine capacity
- cash availability
Master Budget
- consists of budgeted statement of P/L, FP & Cash budget prepared
Functional Budget
- for various functions/departments
- include production, marketing, sales, personnel, purchasing, R&D budgets
Asset Expenditure
- results in acquisition of NCA or improvement in earning capacity
Expenses expenditure
either incurred for
- purpose of trade
- maintain existing earning capacity of NCA
Capital Income
- proceeds from sale of NCA
- P/L on this sale included in P/L statement
Revenue Income
- sale of trading assets
- interest and dividends received from investments
Financing Transactions
- raising additional capital
- raising/repaying loans
Asset Expenditure Budgets
- often involves large sums of money
- recurring/minor NCA purchases - annual allowance for
- major must be appraised carefully and thought about in long term plans
- ensure purchase is worthwhile
Cash Budget
- detailed budget of cash inflows & outflows incorporating both asset & expense items
Cash Receipts - sales, loan
Cash Payments- purchases, wages, O/Hs, NCA
Net Cash Flow
Open Bal
Close Bal
Cash Effect
- where cash received or paid may be delayed from when purchase or sale made
b/fwd bal
Sales/Purchases on credit
c/fwd bal
Cash Received/Paid
What can cash budgets help highlight?
- cash surpluses or shortages expected
- plans can then be made to deal with these
- invest surpluses and provide for shortages
