Budgeting Flashcards
What is a budget?
A budget is a detailed plan for the acquisition and use of financial and other resources over a specified time period.
- Usually in monetary terms
- also other quantitative terms such as production units and labour hours
Reasons for producing budgets
- To aid the PLANNING of actual operations
- To CO-ORDINATE the activities of the organisation
- To COMMUNICATE plans to various responsibility centre managers
- To ASSIGN RESPONSIBILITY
- To MOTIVATE managers
- To CONTROL activities
- To EVALUATE performance
What are the three types of budget?
Functional, Cash and Master
What is a functional budget?
Income and Expenses e.g. sales, production, direct material, direct labour, production overhead, selling and distribution overhead
What is a master budget?
Statement of profit or loss, Statement of financial position, cash flow
Why is the sales budget usually produced first?
As sales demand is usually the PRINCIPLE BUDGET FACTOR (limiting factor)
How challenging should a budget be?
Challenging enough that it will motivate employees because a target exists (as budget target made more difficult employee performance will increase) however, beyond a certain level of difficulty budget target will appear impossible to achieve and performance will decline.
Challenging budgets are possible but unlikely.
For achievement need a budget that has the most positive motivational effect on employees’ performance.
What is top-down budgeting?
Senior managers produce a budget for the whole firm and then it’s split into budgets for individual responsibility centres
What is bottom-up budgeting?
Junior managers each produce a budget for their responsibility centre and these are all combined to produce a budget for the whole firm
Advantages of top-down budgeting
- QUICKER and therefore CHEAPER to prepare
- Senior employees are MORE LIKELY TO HAVE SKILLS REQUIRED to produce budgets
- Senior employees will have a BETTER VIEW OF ORGANISATION AS A WHOLE
- AVOIDS THE PROBLEM of lower level employees attempting to SET BUDGETS THAT ARE EASY to achieve
Advantages of bottom-up budgeting
- Lower level employees are more likely to ACCEPT THE TARGETS set and be COMMITTED to meeting them
- Lower level employees will have BETTER KNOWLEDGE of the operating environment
- The MOTIVATION of lower level employees is likely to be increased
What is budgetary slack/ padding?
Intentionally underestimating revenues or overestimating costs (setting easy targets).
The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called BUDGETARY SLACK.
Why does budgetary slack happen?
If the budget is being used for performance evaluation, it will make the sale managers actual performance look better
What is zero-based budgeting?
An alternative to the traditional INCREMENTAL BUDGETING approach, where the budget figures start from the base zero.
A system of establishing financial plans beginning with an assumption of no activity and JUSTIFYING each program or activity level.
What is incremental budgeting?
The current budget is taken as the starting point for next year’s budget. Therefore it is only the CHANGES in the budget that must be justified.
