Budgetary Control Flashcards
What is the definition of a Fixed budget?
A budget set prior to control period and is not changed in response to changes in activity or costs or revenues. May serve as benchmark in performance evaluation.
What is meant by the term FIXED?
- Budget is prepared on basis of estimated volume of production and estimated volume of sales.
- When actual volumes of production and sales during a control period are achieved, fixed budget is not adjusted to present new target.
What is the definition of a flexible budget?
A budget that by recognising different cost behaviour patterns, is designed to change as volume of activity changes.
What are the 5 steps in preparing a flexible budget and a flexed budget (revised and reflects actual levels achieved)?
- Determine cost behaviour patterns - fixed, variable, semi-variable.
- Fixed costs will remain constant as activity levels change.
- For non-fixed costs divide each cost by related activity.
- Split semi-variable costs into their fixed and variable components using the high low method or scattergraph method.
- Calculate budget cost allowance for each cost item as budget cost allowance- budgeted fixed cost + (number of units produced*variable cost per unit).
Name examples of Feedback control methods?
- Variance analysis
- Positive feedback
- Negative feedback
What is Feedforward Control?
Operates by comparing planned results against current (revised) forecast of what results will be. Control action is triggered by differences between anticipated and planned results.
What are some limitations of Feedback control?
It allows errors to occur.
What is Top-Down budgeting?
When budget targets are set at senior management level for the organisation as a whole and for each major department or activity within organisation.
What are the benefits to Top-down budgeting?
- Likely to be quicker
- Avoid budgetary slack and budget bias
- Utilise senior management awareness of total resource availability.
What is Bottom-up budgeting?
When budgeting process starts at a relatively low level of management
What are the advantages of Bottom-up budgeting?
- Reflect the views and expectations of managers who are closer to operations and who may therefore have a better understanding
- Morale and motivation can be improved
- Increased likelihood of achievement targets
What is Negotiated Budgeting?
In between two extremes of bottom-up and top-down budgeting is Negotiated Budgeting. Final budget is reached after much negotiation between senior and junior management. Budgeting is a bargaining process.
When is a flexible budget prepared?
At the beginning of a budget period. It is prepared for a number of levels of activity by recognising cost behavior patterns. Example of ‘what if’ analysis.
What is a FLEXEd budget?
Flexing variable costs from original budgeted levels to allowances permitted for actual volume achieved while maintaining fixed costs at original budget levels.
What is Budgetary Slack?
This is when managers may build ‘slack’ into their budgets to protect themselves against anticipated future cost cutting programmes of so that variances will be favourable.
