Budget Flashcards
Budgets can be used for
control or planning
A mission statement is a:
broad general description of the basic societal need that the organization satisfies
Answers: what business are we in
Define Goals of Organization
Endpoints that must be accomplished for the organization to fulfill its mission
Define Objectives:
Statements of specific tasks that must be accomplished if the organization is to meet its goals
Define Revenue Budget
Budget that project future sales
Becomes a planning device for marketing and sales activities
Define Expense Budgets
Found in all units within a firm and in not-for-profit and profit making organization
List the primary activities undertaken by a unit to achieve its goals and allocate a dollar amount to each
Define Operating or profit budgets
Combine revenue and expense budgets to determine the units’ profit contribution
Define Cash budgets
Forecast of how much cash the org will have on hand and how much it will need to meet expenses
Define Capital expenditure budgets
Forecasts investments in property, buildings and major equipment
Define Fixed Budget
Assumes a fixed level of sales or production
Define Variable budget
Labor, products, material and administrative expenses v ar with volume
Define Incremental budget
Allocates funds to departments according to allocations in the previous period
Two identifying characteristics of incremental budget
Funds are allocated to a department and the manger allocates from there
Incremental budget develops out of previous budget
Problems with incremental budgeting
Allocating funds to org units makes it difficult to differentiate activities within the unit
Inefficiencies tend to grow in the incremental budget because they get hidden
Define Zero-based budget
Requires managers to justify their budget request in details from scratch (prevents hidden inefficiencies)
Problems with ZBB
Increased paper work and time
Things important to the manager will have inflated benefits
Outcomes are rarely different than incremental budget
Define Forecast
Estimation of demand
Analyzes past year’s data or employing expert judgment
Forecasting for an Existing Business
Based on trend of demands in the past
Assumes similarities
Always get rid of outliers when looking for a solid average
Change in demand =
(Current year - Previous year)/ previous year
Forecasting for a New business
Market Potential: total demand in the pharmacy’s market area of those goods and services
Uses published statistics on area demand
Define Discretionary costs
Based on management decisions
Not based on a fixed, long-term commitment or on volume of items produced
Define Top Down budgeting
Budgetd amounts for the coming year are imposed of the middle and lower level of managers
Advantages to Top Down
Top knows overall economic projections
Know financial goals
Reliable info about the resources available
Enables managers to set budget targets for each department
Problems with Top Down
Lower managers are not committed to achieving budget targets
Resent their lack of involvment
Define Bottom Up Budgeting
Lower managers anticipate their department’s resource needs
List of resources needs are passed up and approved by top management
Advantages to Bottom Up
Lower managers can ID resource requirements, have info about efficiencies and opportunities in their area
Problems with Bottom Up
Estimations may be inconsistent with realistic economic projections for the industry or with company financial forecast and objectives
