chapter 14 Flashcards
budget
a quantitative expression of a proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan.
budgeting cycle
- plan performance of the organisation and its subunits
- provide a frame of reference
- investigate variations from plans. if necessary, take corrective action
- plan again, consider feedback and changed conditions
frame of reference
a set of specific expectations against which actual results can be compared
master budget
coordinates all the financial projections in the organisation’s individual budgets in a single organisation-wide set of budgets for a given time period. it embraces the impact of operating decisions and financing decisions.
strategy
describes how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives
overcoming two limitations of using past performance as a basis for judging actual results by using budgeted performance measures
- past results incorporate past miscues and substandard performance
- the future may be expected to be very different from the past
coordination
the meshing and balancing of all factors of production or service of all the departments and business functions, so that the company can meet its objectives.
communication
getting those objectives understood and accepted by all departments and functions.
zero-based budgeting (ZBB)
a budgeting approach in which all expenses are to be justified rather than assumed to be modelled based on the previous period. what is required for the upcoming period has to be though through irrespective of whether each element of cost was higher or lower than in the past.
rolling budget
a budget or plan that is always available for a specified future period by adding a month, quarter, or year in the future as the month, quarter, or year just ended is dropped. for example, there is always a 12-month budget in place.
operating budget
the budgeted profit statement and its supporting budget schedules.
financial budget
that part of the master budget that comprises the capital budget, cash budget, budgeted balance sheet, and budgeted statement of cash flows. it focuses on the impact of operations and planned capital outlays on cash.
budgeted financial statements
sometimes called pro forma statements.
padding/budgetary slack
refers to the practice of underestimating budgeted revenues in order to make budgeted targets more easily achievable.
steps of preparing an operating budget
- revenue budget
- production budget (in units)
- direct materials usage budget and direct materials purchases budget
- direct manufacturing labour budget
- manufacturing overhead budget
- closing stock budget
- cost of goods sold budget
- other (non-production) costs budget
- budgeted operating profit statement
sensitivity analysis
a ‘what-if’ technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes. it enhances the value of budgets to managers in their strategic analysis and planning.
organisational structure
an arrangement of lines of responsibility within an entity.
responsibility centre
a part, segment, or subunit of an organisation whose manager is accountable for a specified set of activities.
responsibility accounting
a system that measures the plans and actions of each responsibility centre. four major types: cost centre, revenue centre, profit centre, and investment centre.
cost centre
manager is accountable for costs only.
revenue centre
manager is accountable for revenues only.
profit centre
manager is accountable for revenues and costs.
investment centre
manager is accountable for investments, revenues, and costs.
variance
the difference between the actual results and the budgeted results. used to pinpoint fault for operating problems in responsibility accounting.
controllability
the degree of influence that a specific manager has over costs, revenues, or other items in question.
controllable cost
any cost that is primarily subject to the influence of a given manager of a given responsibility centre for a given time span.
cash budget
a schedule of expected cash receipts and disbursements. it predicts the effects on cash position at the given level of operation.
cash budget main sections
- total cash available before financing
- cash disbursements
- financing requirements depend on how the total cash available for needs compares with the total cash needed
- closing cash balance
self-liquidating cycle/working-capital cycle/cash cycle/operating cycle
the movement from cash to stock to debtors and back to cash.
