Budgeting Flashcards
what is a budget
a quantitative expression of a plan of action prepared in advance of the period to which it relates
reasons for budgeting:
- Planning
- Controlling costs
- Co-ordination (working towards same goal)
- Communication
- Motivation
- Evaluation
- Authorisation
- Resource allocation
elements of the budgetary process
- long term objectives
- budget committee (don’t make budget)
- budget manual
- limiting factor (principle budget factor)
limiting factor (principle budget factor)
- Stops you from reaching budget
- eg if sales is limiting facotr than sales budget must be produced first
what is on a budget manual
- budget process
- organisation chart
- budget timetable
- proformas
- account codes
- key assumptions
- budget officer
what is the budget committee
- Don’t make the budget
- responsible for communication policy guidelines to the people who prepare the budget and for setting and approving budget
final stages of budget processing:
- Initial budgets are prepared
- Initial budgets are reviews and integrated into the complete budget system
- Master budget is prepared
- Comparisons between budget and actual results (variance analysis)
what is a functional budget?
budget of income and/or expenditure which applies to a particular function
sales budget
sales budget= sales volume x selling price per unit
production budget
how much you want to manufacture
sales budget + closing inventory - opening inventory
two types of material budget
- usage budget
- purchases budget
material usage budget=
production budget x standard material per unit
labour budget=
production budget x time per unit
what is the master budget and what does it comprise of:
Budget into which all the subsidiary budgets are consolidated
Compromise:
- budgeted profit and loss account
- budgeted balance sheet
- budgeted cash flow statement
what is a cash budget
detailed budget of estimated cash inflows and outflows incorporating both revenue and capital items
what is sensitive analysis?
one change in assumption can change a budget
forecast equation
y= a + bx
y = total cost
a = fixed cost
b = variable cost
x = no of units/activity
high low method
- Pick highest and lowest levels of activity
- Calculate variable cost - Change cost/change units
- Find fixed cost
- Calculate expected cost
linear regression
using all data sets when deriving equation of a straight line
advantages and disadvantages of linear regression
ADV - all data points taken into account
DIS - regression assumes historical behaviour of the data continues into the foreseeable future. Predictions only reliable if there is a significant correlation between the data
coefficient of determination
r^2
- how much of the variation in the dependant variable is explained by the variation of the independent variable
limitations of correlation
- correlation doesnt mean causation
- correlation and causality are not the same thing
what is a time series
a set of values for some variable (eg monthly sales) which varies with time
components of a time series
- Basic trend
- Cyclic variation - economic cycles of booms and slumps
- Season variations
- Residual variations - irregular/random fluctuations usually causes by specific factors to time series
what is a moving average
set of calculations used to smooth out the variations in a time series to identify a trend
two types of seasonal variation
- additive model
- multiplicative model
characteristics of big data
- volume
- velocity
- variety (structured/unstructured data)
- veracity (clean free from bias)
data analytics
process of collecting, organising and analysing large sets of data to generate trends and other information to aid decision making
data mining
process of sorting through data to identify patterns and relationships betweens different items, usually with the help of statistical algorithms
structured data
data that can be contained within a field of data record or file
unstructured data
data that is not easily contained within structured data fields, such as pictures, videos webpages, PDF files, emails or blogs
big data benefits
- drives innovation
- helps create a competitive advantage
- improves productivity
big data limitations
- difficult to convert into useful information
- lack of skilled people
- data security and protection issues
what is artificial intelligence?
the use of computers to do tasks which are thought to require human intelligence
machine learning
computers do things rather than follow pre-programmed rules. Eg find patterns in data and use models to make predictions
top down budget
a budget is set without allowing the ultimate budget holder to have the opportunity to participate in the budgeting process. Also called imposed budget or non participative
bottom up budget
budget holders have the opportunity to participate in setting their own budgets. Also called participative budget
types of budget
- continuous/rolling budget
- incremental budget
- zero based budget
continuous/rolling budget
prepared a year ahead and is updated regularly by adding a further accounting period
incremental budget
uses the previous periods budget as a starting point and then adds increments as it sees necessary
zero based budget
starts the budgeting process from zero because it does not take anything for granted
beyond budgeting
the idea that companies need to move beyond budgeting because of the inherent flaws in budgeting
difference between budgeting and forecasting
- prediction of what is likely to happen in the future given a set of circumstances
- budget - quantified plan of what the organisation intends should happen in the future
selection bias
sample selection does not represent population
self selection bias
when individuals select themselves
observer bias
researcher allows their assumptions to influence the observation
omitted variable bias
key data is not included in the analysis
cognitive bias
the presentation of data may be misleading
confirmation bias
people can see data that confirms their beliefs and ignore other items
survivorship bias
the sample contains only items that survived a previous event
