Budget Flashcards
What is budgeting
A Budget sets out in detail, the short term plan and targets to achieve strategic objectives
What is the four stages budgeting?
Prepare, perform and collect, identify the variances and respond to the variances planned and actual.
What is the first stage of budgeting in detail and it’s impact on managers behaviour with example?
Prepare a budget
Prepare a budget means that a managers more likely to be prepared for any problems which may arise. Budgets promote forward thinking and the possible identification of short term problems. A shortage of production capacity may be identified beforehand. Making the discovery beforehand will give managers the opportunity to decide on what is the best solution. A managers will feel more motivated to achieve strategic as most of the problems would have been addressed. Managers may feel confident about problem solving skills if be action can be taken in advance.
Keywords: prepare in advance, forward thinking short term problems e.g shortage production capacity, the benefits of may give for manager time to come up with better solutions.
What are ideal and practical standards how do they affect a managers behaviour?
Ideal standards assume perfect condition where there’s no inefficiency due to loss of production (breakdown of machinery, employee absence. Setting a targets and short terms plan in this nature, Ultimately encourages employees to strive for more. This unrealistic assumption in the planning phase may be lead to there being more problems than anticipated causing managers to feel stressed, overworked and demotivated to come to work.
What is perform and collect information on actual performance?
Budgets can provide a system of authorization for managers to spend up to a limit.
Effective budgets allow all managers to exercise self-control. By knowing what is expected of them and what they have achieved, they can assess how well they are performing and take steps to correct matters where they are failing to achieve.
By gathering information concerning the actual performance they can use of management by exception. This approach is where senior managers can spend most of their time dealing with those staff or activities that have failed to achieve the budget (the exceptions).
Senior managers less likely to be discouraged when finding a solution as they do not have to spend too much time on those that are performing well allowing them to become more productive.
Identify variances between planned and actual performance?
Budgets can motivate managers to better performance. Having a stated task can motivate managers and staff in their performance. Simply to tell managers to do their best is not very motivating, but to define a required level of achievement is more likely to be so. Managers will be better motivated by being able to relate their role to the business’s overall objectives. Since budgets are directly derived from strategic objectives, budgeting makes this possible.
Respond to variances between the actual and planned?
Respond to variances between planned and actual performance.
They are based on incremental changes to past performance which limits performance improvements. They are more concerned with cost control than value creation. Timely variance reports can allow manages to correct the mistakes faster as they will have reliable and up to date information on how there performing. Reports on performance will need to be met in early June.
What is the difference between feed forward and feedback control
Feedback and feed forward
Feedforward control allows you to anticipate problems and feedback allows you to react to changes. Feedforward is preventative, and feedback is remedial.
Feedforward control will involve a business creating a budget then comparing the forecast of actual outcomes to identify any problems. E.g A cash budget will be compared to forecast of actual cash flow.
Explain the four main purposes of absorption costing?
Pricing and output decisions: having full cost information can help managers on making decisions to change prices on their product and service. Full costing be used to determine the number units.
Explain two main purposes of absorption coatings?
Exercising control: determining the full cost of a product or service is useful for cost control. Where the reported full cost is too high. For example when individual components of full costs may be considered for reduction. This will lead to re-engineering.
Explain the 3rd purpose of absorption costings?
Assessing the relative efficiency. Full costing allows a manager to compare carrying cost in one way to another way. For example manufacturer may compare cost of making car in one plant to another. The is will influence future locations.
Explain the 4th use of absorption costings?
Assessing performance. Profit are important to a business. To measure a profit from product and service, the sales revenue it generates should be compared with costs consumed in generating it. This can assessing past decisions and future decisions such as continuing or discontinuing products.
What the four methods of appraisal?
Accounting rate of return, payback, net present value and internal rate of return
What is the accounting rate of return?
Accounting rate of return (ARR) is method takes the average accounting operating profit that the investment will generate and expresses it as a percentage of the average investment made over the life of the project. ARR can create problems when comparing investments of different size.
ARR= Average annual operating profit/Average Investment to earn that profit x100%.
What are advantages and disadvantages of accounting rate of return?
Relates accounting profit to the investment made:
• Advantages:
The method satisfies the interests of the owners.
Easy to compare with past returns earned in the business
It is easy to calculate it considers the profit and saving of the economic life of investment.
• Disadvantages:
It ignores the timing of returns
It uses profits, not cash flow
The method does not include external factors which affecting the profitability of the project.
