Budgetary Control Flashcards
It shows how the cash level will change over the following months.
Cash Budget
What is the goal of the cash budget?
To provide management the information on cash surplus or shortages so that management can make decisions to finance any deficit or invest any cash surplus.
It is an example of Feedforward Control
Forecasting Cash Flow
Four Sections of a Cash Budget
- Receipts Section
- Disbursement Section
- Net Cash Excess or Deficiency
- Financing Section
Steps in Preparing a Cash Budget
- Prepare the pro-forma cash budget
- Calculate the projected sales receipts using the sales figures in the sales budget.
- Calculate the projected cash payments using the purchases figures in the production budget.
It consolidates all subsidiary budgets and is normally part of the budgeted income statement.
Master Budget
What happens when a master budget is approved?
It acts as instruction and authorization to managers to act to achieve their budgets.
What happens when a master budget is not approved?
It will be returned to the budget committee for amendment.
What is called when actual results are compared regularly with budgeted results?
Budgetary Control
It is prepared based on estimate sales and production volume during planning.
Fixed Budget
It is set before the control period and does not subsequently change in response to changes in activity or costs.
Fixed Budget
Designed at the planning stage to vary with activity levels.
Flexible Budget
Used to show different results from possible activity levels.
Flexible Budget
Designed to change as the volume of activity changes.
Flexible Budget
A revised budget that reflects the actual activity levels achieved in the budgetary period.
Flexed Budget
Formula for Budgeted Cost
BC = BFC + (No. of Units x VCPU)
BC = Budgeted Cost
BFC = Budgeted Fixed Cost
VCPU = Variable Cost Per Unit
It is the difference between the budgeted amounts and the actual costs or revenues
Variance
It is more detailed than a flexible budget variance analysis.
Standard Costing Variance Analysis
It is based on a system of budget centers.
Budgetary Control
Features of a Control System
- Hierarchy of budget centers
- Clearly identified responsibilities for achieving budget targets
- Responsibilities for revenues, costs, and use of capital
It is a system of accounting that segregates financial information according to responsibility centers.
Responsibility Accounting
Types of Responsibility Centers
Cost Centers
Revenue Centers
Profit Centers
Investment Centers
It aims to ensure that managers who take responsibility for controlling costs can control them.
Responsibility Accounting
It takes place by comparing actual results against the desired figure (budgeted figures), revealing variances between the two, and taking control where variances have occurred, whether favorable or unfavorable.
Feedback Control
What feedback is given if the variance is favorable?
Positive
What happens if there is positive feedback?
Manager is given credit for encouragement.
What feedback is given if the variance is unfavorable?
Negative
What happens if there is negative feedback?
A control action is initiated to bring future performance back on target.
Example of Feedback Control
Variance Analysis
It is a mechanism in the control system that encourages the prevention of problems.
Feedforward Control
There is a control action that anticipates what could go wrong, making sure adverse variances do not occur in the first place.
Feedforward Control
Behavioral Problems from using Control System
- Managers may not be involved in the budgeting process.
- Organization’s goals as a whole may not be congruent with the personal goals of the individual manager.
- Control is exercised at different levels by different managers.
Negative Attitudes in Preparing Budgets
Managers may…
- Feel that they are too busy to spend time budgeting
- Build slack into their budgets to protect themselves in the future so that variances will always be favorable
- Feel that a budget plan is too restricting and that they must be given more flexibility in the decisions they make
- Set their budgets for their budget center without coordinating with other budget centers
- Become conservative by planning their budgets based on past results instead of looking at opportunities and planning for new ideas
Negative Attitudes in Implementing Budgets
- Managers may put only just enough effort to achieve budget targets without achieving to beat the targets
- A formal budget may encourage rigidity and discourage flexibility
- Short-term planning in a budget can provide a myopic view and draw attention away from the long-term consequences of decisions
- Minimal communication between managers
- Managers may feel that they need to spend their budgeted allowance full
Negative Attitudes Towards the Control Information
Managers may…
- Feel they have more important work than reviewing accounting control reports
- Resent the control reports, seeing them as a system of finding fault
- Not understand accounting control reports
- Have different set of objectives or beliefs
- Not trust the reliability of the accounting control reports if there is a flaw in the system
- Receive delayed accounting control reports
- Feel they are responsible for variances that are outside their control
It is a negative attitude towards budgeting wherein the managers tend to focus on the short-term at the expense of long-term performance.
Short-termism
