6- Short-term planning the operating budget Flashcards
What are the 2 main functions of management accounting?
- Planning
- Control
What is planning?
Developing objectives and preparing budgets to achieve objectives
What is control?
Steps by management ensuring attainment of objectives involving comparison of actual with expected results
What is a budget?
A budget is a plan, quantified in monetary terms, showing the income to be generated, the costs to be incurred, and the resources to be utilised for a defined future period of time
What are 3 advantages of planning?
- Helps formulate organisational goals and objectives
- Aids identification of major strategic issues
- Assists in setting priorities for the use of scarce resources
What are 3 disadvantages of planning?
- Tendency for rigidity within an organisation
- Can dissuade management from taking advantage of new opportunities
- It may be difficult to set long-term plans in a dynamic environment
Give 3 problems when constructing budgets
- Forecasting availability of resources, prices, sales, etc
- Tendency by management to overstate expected costs (thereby allow slack)
- Interdepartmental rivalries can result in dysfunctional behaviour
What are the 4 components of a control system?
- Meaningful target or standard
- Method of comparing information to a standard
- Means to initiate control action
- Method of gathering and recording information from a system
What is a principle budget factor and how should it be treated?
Factor preventing organisation from expanding beyond a certain point. If limiting factor exists, its budget should be produced first & other budgets worked around it
What are the 3 purposes for cash budgets?
- Show expected level of utility
- Highlight periods to difficulty and allow for planning
- Provide a basis for control
What is a fixed budget?
It’s the master budget prepared before the beginning of the budget period based on budgeted volumes and cost/revenues it’s not adjusted regardless of the level of activity
What is a flexible budget?
Designed to change as volume of activity changes done by recognising behaviour of different costs
What is a flexed budget?
The use of flexible budgets referred to as ascertaining the budget cost allowance
What is incremental budgeting?
Current years budget + estimated growth or inflation
What is zero-base budgeting (ZBB)?
Starts with premise that next year’s budget is zero each item justified in its entirety before inclusion
