Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Management Accounting 1 > Budgeting 1 (LECTURE 7) > Flashcards

Budgeting 1 (LECTURE 7) Flashcards

1
Q

BUDGETING

A

The implementation of the long-term plan for the year ahead through the development of detailed financial plans.

A budget is a financial plan covering the whole enterprise over a specific period of time and accounts for all the enterprise’s resources. It aims to allocate those resources in the most beneficial manner.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

BUDGET

A

A financial plan for implementing management decisions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

CASH BUDGET

A

A budget that aims to ensure that sufficient cash is available at all times to meet the level of operations that are outlines in all other budgets.

Objective is to identify potential cash shortfalls and also large cash surpluses. Then do something.

Needs frequent reviews, wise to do it on a weekly basis for about 6-8 week time horizons. Use some element of SENSITIVITY ANALYSIS.

Revise frequently.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

CONTINUOUS BUDGETING / ROLLING BUDGET

A

An approach to budgeting in which the annual budget is broken down into months for the first three months and into quarters for the rest of the year, with a new quarter being added as each quarter ends.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

CONTROL PROCESS

A

The process of comparing actual and planned outcomes, and responding to any deviations from the plan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

CORPORATE OBJECTIVES

A

Specific, measurable statements, often expressed in financial terms, of what the organisation as a whole wishes to achieve.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

DISCRETIONARY COSTS

A

Costs such as advertising and research where management has some discretion as to the amount it will budget.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

FEEDBACK LOOPS

A

Parts of a control system that allow for review and corrective action to ensure that actual outcomes conform with planned outcomes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

INCREMENTAL BUDGETING

A

An approach to budgeting in which existing operations and the current budgeted allowance for existing activities are taken as the starting point for preparing the next annual budget and are then adjusted for anticipated changes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

LONG-TERM PLAN / STRATEGIC PLAN

A

A top-level plan that sets out the objectives that an organisation’s future activities will be directed towards.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

MANAGEMENT BY EXCEPTION

A

A system in which a manager’s attention and effort can be concentrated on significant deviations from the expected results.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

MASTER BUDGET

A

A document that brings together and summarises all lower level budgets and which consists of a budgeted profit and loss account, a balance sheet and cash flow statement.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

MISSION

A

A statement that provides in very general terms of what the organisation does to achieve its vision, its broad purpose and reason its existence, the nature of the business(es) it is in and the customers it seeks to serve and satisfy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

UNIT OBJECTIVES

A

Specific, measurable statements, often expressed in financial terms, of what individual units within an organisation wish to achieve.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

STRATEGY

A

The courses of action that must be taken to achieve an organisation’s overall objectives.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

VISION STATEMENT

A

A statement that clarifies the beliefs and governing principles of an organisation, what it wants to be in the future or how it wants the world in which it operates to be.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

ZERO-BASED BUDGETING

A

An approach to budgeting in which projected expenditure for existing activities starts from base zero rather than last year’s budget, forcing managers to justify all budget expenditure.

Good at cutting excess costs.

Encourages questioning attitude.

Seen in public and private sector.

Expensive and time consuming.

Requires a high level of negotiating skills.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

TOP DOWN BUDGET

A

Dictatorial style; common in the smaller business; discourages initiative, and depends on the top manager’s skill.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

BOTTOM UP BUDGET

A

Recommended - allows initiative and responsibility to be shared. Facilitates participatory attitude.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Why produce budgets?

A
  • Planning
  • Co-ordination
  • Communication
  • Motivation
  • Control
  • Evaluation
  • Delegation
  • Authorisation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

CO-ORDINATION

A

In a large, divisionalised, departmentalised organisation, it is essential to co-ordinate activities for the benefit of the organisation as a whole.

There needs to be a system for ensuring everyone sticks to the aim of the firm.

Budgets demand discussion between departments to work in the firm’s best interests.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

COMMUNICATION

A

Takes place in several ways.
Top management uses the budget to communicate its strategic objectives for the budget period.

At more junior levels, individual managers will clearly have to interface with more senior managers to negotiate and agree budget targets and allocations.

A wider aspect of communication is that the budget is often the only time in which individual departmental managers talk to other managers outside their own department.

23
Q

MOTIVATION

A

A good budget should motivate staff to perform well.

People perform better if they have a target to aim at. The target must be ATTAINABLE.

Risk of complacency or despondency.

The benefit of a target is increased where people have a say in the setting of targets.

A good way of improving motivation is to let somebody set their own target (within limits). This will be reviewed by an individual’s line manager to ensure it is in keeping within the firm’s overall objectives and that it is sufficiently challenging.

24
Q

CONTROL

A

The budget is an integral part of a business’ control system.

Managers can use the budget to trace what belongs to an organisation and the use to which it is put.

Budgets allow management by exception.

25
Q

EVALUATION

A

Establishing a target allows us to compare actual performance with the budget.

A manger’s performance can then be evaluated according to how well they did compared to the budget.

If the managers prove themselves competent at handling a junior role, they may be rewarded with promotion.

26
Q

THE BUDGET COMMITTEE

A

Most businesses appoint one.

They oversee the budget planning process and ratify individual functional budgets, e.g. production function, sales function, marketing function, etc.

Appoint a budget officer; normally senior accounting personnel.

27
Q

ACCOUNTING STAFF

A

Essentially a technical, advisory and supporting role. They DO NOT prepare the budget.

28
Q

BUDGET MANUAL

A

Internal document, prepared by budget officer, incorporates key objectives, procedures, personnel, timetables, etc.

29
Q

Classical approach to budgeting.

A

1) Communication (typically via the budget manual).
2) Identification of the key limiting factor.
3) Preparation of the INITIAL budget.
4) Initial preparation of functional budgets.
5) Negotiation of budgets.
6) Co-ordination and review of budgets.
7) Final acceptance.
8) Ongoing review of budget in place.

30
Q

THE KEY LIMITING FACTOR / BUDGET FACTOR

A

The single issue which is going to be most responsible for limiting the activity of the firm.

In most sales profit-seeking businesses this will be SALES.

But could be materials, or labour, or machine capacity, or government quota.

31
Q

THE FIRST BUDGET

A

The key factor budget is prepared first.

Sales is the most commonplace.

Difficulty due to external variables such as customer demand, competitor activity and general economic conditions.

Should originate at the most junior level of management.

Details of preparation method in budget manual.

Incremental approaches are common.

32
Q

What is the general structure of the budget?

A 
Sales Budget
Production Budget
Materials Usage Budget
Materials Purchase Budget
Labour Budget
33
Q

NEGOTIATION

A

Review of the budget should reduce the risk of BUDGET SLACK.

A balance should be taken; arrogance on the part of senior management may be repaid with poorer performance and ultimately high job turnover, which simply benefits competitors.

A participative approach does not mean that junior managers get what they want.

targets must be challenging but realistic.

34
Q

CO-ORDINATION AND REVIEW

A

The budget officer should keep a careful watch that budgets are co-ordinated with each other to avoid wastage and delay.

As budgets progress up the functional ladder, less attention is paid to small details. Top managers are more interested in global totals.

35
Q

FINAL ACCEPTANCE

A

The MASTER BUDGET is the ultimate output. For board level ratification.

Budgeted Statement of Comprehensive Income, budgeted Statement of Financial Position, budgeted Statement of Cash Flows.

Cash budget also incorporated with this.

Global totals; different informational needs - top directors concerned with strategy.

36
Q

ONGOING REVIEW

A

Comparisons between the budget and the actual are made and sent to individual managers, who are asked to comment on the differences.

It may be necessary to FLEX the budget to reflect actual level of output.

37
Q

Describe the process of cash budgeting.

A

-Flows should be divided by inflows and outflows, and split into components. Components may be split down into smaller categories.

Forecasts often have items in them with different levels of certainty. There will be certain flows, those that are forecastable to some extent and those that are less predictable.

The cash manager will need to identify sources of information for the forecast. These may include:

  • Last years actual cash flows
  • Sale projections
  • Purchase projections
  • Accounts payable and receivable data
  • Investment plans including acquisition
38
Q

How can cash deficits sometimes be resolved?

A

By altering the timing of payments and receipts.

  • Bringing receipts forward
  • Delaying payments
39
Q

Headings for cash budget. (example)

A 
Month
Cash Sales
Credit Sales
Share Issue
TOTAL INFLOW
Payments to suppliers
Wages
Other Expenses
Tax
Fixed Asset Purchase
Loan Repayment
Overdraft Interest
TOTAL OUTFLOW
NET CASH FLOW
Balance at start of month
Balance at end of month
40
Q

Cash vs. profit

A

Both are vital but their importance varies according to the time scale.

There is not much point raising cash unless it is going to be used to generate profit.

41
Q

OBSOLESCENCE

A

A key issue in budgeting for 12 months.
Leads to a lack of respect for the budget, even to completely ignoring it.

Can be obviated by the continuous/rolling budget.

42
Q

Procedure of zero-based budgeting.

A

1) Define decision packages.
2) Evaluate and rank all alternative packages.
3) Implement the chosen package- any funds remaining can then be devoted to alternative programmes.

43
Q

Advantage of incremental budgets.

A

Still useful where the environment is stable.

Cheaper, due to speed and simplicity.

Information already available.

Easy to understand by non-financial managers.

44
Q

Disadvantage of incremental budgets.

A

Builds on wasteful wasteful practices of prior years.

Encourages spending up to the budget limit (poor behaviour).

Ignores cost drivers.

Unsuitable in dynamic environments.

Encourages budget slack.

45
Q

BUDGETARY SLACK

A

Is the deliberate under-estimation of budgeted revenue or over-estimation of budgeted expenses.

Standard solutions include; staff rotation, ZBB, higher targets, non financial performance measures.

46
Q

HUMAN BEHAVIOUR

A

Weakest link in the budget process.

47
Q

PASSING BUDGET ALLOCATIONS

A

Refers to a situation where a manager tries to pass on costs from their department onto other departments.

Objective is to keep costs down in their department.

difficult to cure, but justifies the existence of clear lines of demarcation.

48
Q

BUDGET CONSTRAINED STYLE

A

Refers to a situation where little or nothing gets done unless it’s in the budget.

So it can lead to ignoring other, essential aspects of business, such as delivery times, quality, innovation etc.

49
Q

What variances should managers be accountable for?

A

OPERATIONAL VARIANCES

50
Q

FLEXIBLE BUDGETING

A

Incorporate a range of budget totals, based on differing levels of activity.

51
Q

Cash Budget Format

A 
Month
INCOME
Sales
Grant (e.g.)
Investment proceeds (e.g.)
EXPENDITURE
Materials
Labour
Fixed Overheads
Machinery

Opening Balance
Balance for Month
Closing Balance

52
Q

Flexible Budget Format

A

Activity Level
Labour Hours
Production

Sales income
Labour
Materials
Supervisor Salaries
Fixed Overhead
Total Expenditure
Profit
53
Q

Functional Budget Format

A

SALES BUDGET (volume and value)
Sales Volume
Sales Price (£)
Sales Value

PRODUCTION BUDGET (volume)
Sales Requirement
Closing Inventory
Finished Goods Requirement
Less; Opening Inventory
Production Requirement
RAW MATERIALS BUDGET
Production Requirement
Raw materials needed 
Raw materials price/kg
Raw materials expense (£)

LABOUR BUDGET
Production requirement
Labour hours x labour rate
Labour cost (£)

Management Accounting 1 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions