3.9 Budgets Flashcards
profit centers
department in a business that generates both revenues and expenditures
cost centers
department in a business that generates costs, but no revenue
ways to organise profit centers and cost centers
- function
- product
- geography
financial role of profit and cost centers
- see better the performance of different parts of the business
- managers see the information and construct budgets with greater accuracy
motivational role of profit and cost centers
- provide employees with a greater sense of autonomy over budgets
(autoonomy improves motivation) - better sense on how to allocate funds
- greater efficiency and problem-solving
organisational role of profit and cost centers
- can make better decisions about future strategy and where to invest
- can devote more time, money, and energy to build on the profit successed of certain departments or units
- knowing the relative performance of the different parts of the business informs decision-making
budget
financial plan for a defined period of time
helps the planning, control, coordination and monitoring of expenditure
purpose of a budget
outline the financial resources available for achieving the objectives of that part of the business
short-term budgets
monthly for instance
budgets are usually set over a period of a year or for the duration of a project
two types of budgets
- short-term
- coordinated
coordinated budgets
departmental budgets set after the business’s corporate objectives have been arranged
feed into a centralised budget for the whole business
different ways to decide the size of a budget
- usually based on their budgets for previous years
- zero-based budgeting
zero-based budgeting
- departments bid for how much money they need for the year (explaining what they need the money for)
format of a budget order
income
- sales revenue
- interest earned
total income
costs
- salaries and wages
- materials
- rent
- advertising
- electricity
total costs
net income
variance analysis
compares a business’s budgeted sales revenue and costs with the actual figures over a period of time
favourable variance
when actual budget situation is better than the forecast
- actual costs are lower than the budgeted costs
- actual income is higher than the budgeted income
adverse variance
when the actual budget situation is worse bthan the forecast
- actual costs are higher than the budgeted costs
- actual income is lower than the budgeted income
no variance
actual budget was the same as the forecasted budget
when the actual budget situation is worse than the forecast
adverse variance
when the actual budget situation is better than the forecast
favourable variance
actual budget situation was the same as the forecasted budget.
no variance
variance for income in a budget for cost center
no variance
benefits of budgeting
- planning
- control
- coordination
- communication
- motivation
- measuring performance
budgeting benefit: planning
- refines long-term plans
- assist management in planning for the future
budgeting benefit: control
- control business activities
better decision making
budgeting benefit: measuring performance
- performance of a department or manager may be evaluated by measuring their ability to stay within the budget
budgeting benefit: motivation
- good budget can motivate department managers to perform within the overall business objective and help them stay within budget
- however, managers can be demotivated if they don’t have sufficient funds
budgeting benefits: communication
- budgets can communicate to different departments how much they are expected to spend in order to achieve their objectives
budgeting benefits: coordination
- relationship between departments to ensure departmental plans are integrated