3.9 Budgets Flashcards
how is cost centres useful
help managers to collect and use cost data effectively, and having better budget control
they don’t generate revenue but contributes to the overall organization
cost centre
division of a business that has responsibility for its own operational costs- it held accountable for its departmental expenditure
examples of cost centres
administration
customer service
finance and accounts
human resources
marketing
production
3 cost centres structures
organization by function- based on different functional departments, each is a cost centre
organization by product- each product is accountable for its own costs
organization by geography- cost centre for each location
profit centre
division of a business that is responsible for both costs and revenues generated within the department- each profit centre is held accountable for the amount of profit made
costs
the outflows of money, to finance production and business activities
what is the use of operating profit centres
enables senior management to focus on strategic issues for the organization
budgeting formula
process of creating a financial plan for a companys future
functions of profit for a business
- incentive to produce
- acts as a reward for risk takers engages in business activity
- encourages invention and innovation
- profit acts as an indicator of growth or decline
- used to fund growth of a business
surpluss
revenues exceeding costs
roles of costs and profit centres MAMA
- monitering and control: using data
- autonomy: empowered to make decisions
- motivating: empowering budget holders
- accountability: held accountable for all costs incurred by the centre
limitations of using cost and profit centres
- unhealthy competition: causes unhealthy and negative competition between different departments of any organization
- loss of control: senior executives do not have so much personal knowledge of the operations of centre
- subjectivity: allocate the firms fixed costs between the various centres
- short termism: encourages managers to taka a short-term approach to their operation
budget
detailed financial plan for the future, usually involving the expected costs and revenues or a cash flow forecast
what is in a budget table
revenue
total revenues
costs
total costs
excess of revenue s over under costs
variance
the difference between the planned item of expenditure or revenue and the actual amount
actual figure- budgeted figure
favourable variance
occur when profits are higher than expected due to lower than expected costs and or higher than predicted revenues
adverse variance
occur he profits are lower than expected. this is due to costs being higher than expected and or revenue being lower than predicted
variance analysis
is management tool that compares planned and actual costs and revenues in order to improve accountability and performence
importance of budgets P-CAFE
planning- business strategy and fincancial planning
contingency planning- put money asside for emergency
accountability: limit how much money can be spent on certain business operations
financial control: enables managers to understand financial problems
efficiencies: forces business to prioritize their items of expenditure to achieve goals
