Topic 4: Budgeting Flashcards
(27 cards)
Purpose of planning
- give purpose and direction
- Anticipate future events to deal with them
- Give staff purpose
- Reduce risk and costs
Purpose of budgets
1.Encourage planning
2.Co-ordinate function with organisation
3. communicate objectives
4. Provide basis for responsible accounting
5. Provides a control mechanism
6. Obtain authorisation on expenditure and action
7. motivate employees
What is “encourage planning”?
Budget force management to look ahead and set short term and long term budgets to anticipate future problems
What is “provide basis for responsible accouting”?
- Individual managers are identified with their budget centres and are made responsible for achieving budgets targets
- Target are considered within managers control, allowing delegation of responsibility
What is “communicate objectives”?
- Senior manager can use budgets to formally communicate objectives for the coming period
- Actual performance can be compared to objectives later
What is “co-ordinate functions with organisation”?
- Increase co-ordination between departments in a business from various managers
- consider relationship between various departments because each affect another
What is “Provide a control mechanism”?
Actual performance is compared with budget performance and it helps identify variance, so management can take action to correct it.
What is “Obtain authorisation for expenditure and action”?
Budgets act as a formal authorisation of future expenditure from senior management to the individuals responsible for that expenditure. If an item is in the budget and has been approved, it is implied money can be spent on it
What is “Motivate employees”?
Budget can be use as a target to motivate employees. Then continue setting higher targets
What is an objective?
Specific, attainable, measurable, consistent and relation to time target. Use to maximise profit, improve quality of service, improve environment
What are strategic objectives?
Used to determine long term policies of the business and are often done at a high level by directors
What is cost leadership?
Strategy that is about selling products more cheaply than a competitor
What is product differentiation?
Strategy to position business to be recognised as providing a product or service that is distinct from competing products. It does not require to be unique but can be exclusive
What is Operating decisions?
These focus on the efficient use of resources of resources available to the firm in the short term
What are operating budgets?
They provide all the information necessary to prepare a budgeted income statement
What is the master budget?
Integrates the budgeting from all sections of the business to show business
What is the cash method?
Income and expenses are recognised when cash is received or paid in the current period
What are financial budgets?
The remaining budgets prepared. Includes cash budget, budgeted balance sheet
What is the accrual method?
Income and expenses are recognised when they can be reliably measure and are likely to earned or incurred.
What is the cash budget?
It is based on cash accounting and shows expected cashflow, balance at end of budget period. It includes assets, liabilities, equity, revenue and expenses
How do managers avoid cash shortage?
- change plans regarding purchase of expensive NCA
- Find cheaper supplier to reduce inventory cost
- delay payment to creditors
What is not included in cash budget?
- Depreciation
- Carry amount
- credit sale
- bad debts
- doubtful debts
- accruals
- discount expense
Purpose of schedule of collectors?
Businesses work with credit sales and cash budget do not include them
What is Budgeting income statement?
Statement based on accrued accounting. It will only include predicted revenue earned and expense incurred
