Chapter 30 (budgets) Flashcards
what is a Budget?
A budget is a detailed financial plan for the future.
Advantages of setting budgets?
1.Planning:
The budgetary process makes managers consider future plans carefully so that realistic targets can be set.
2.Effective allocation of resources:
Budgets can be an effective way of making sure that the business does not spend more resources than it has access to.
3.Setting targets to be achieved:
Research shows that most people work better if they have a realisable target at which to aim.
4.Co-ordination:
Discussion over the allocation of resources to different departments and division requires coordination between these departments.
5.Monitoring and controlling:
Plans cannot be ignored once in place. There is a need to check regularly that the objective is still within reach.
6.Modifying:
If there is evidence to suggest that the objective cannot be reached and that the budget is unrealistic, then either the plan or the way of working towards it must be changed.
7.Assessing performance:
Once the budgeted period has ended, variance analysis will be used to compare actual performance with the original budgets.
what is a Budget holder?
A budget holder is the individual responsible for the
initial setting and achievement of a budget.
what is a Variance analysis?
Variance analysis means calculating differences between budgets and actual performance, and analysing reasons for such differences.
what is a Delegated budget?
Delegated budgets means giving delegated authority over the setting and achievement of budgets to junior managers.
what is an Incremental budget?
Incremental budgeting uses last year’s budget as a basis and an adjustment for the coming year.
what is Zero budgeting?
Zero budgeting means setting budgets to zero each year and budget holders have to argue their case to receive any finance.
what is Flexible budgeting?
Flexible budgeting means cost budgets for each expense are allowed to vary if sales or production vary from budgeted levels.
Potential limitations of budgeting are?
1.Lack of flexibility:
If budgets are set with no flexibility built into them, then sudden and unexpected changes in the external environment can make them very unrealistic.
2.Focused on the short term:
Budgets tend to be set for the relatively short term – for example, the next 12 months. Managers may take a short-term decision to stay within budget that may not be in the best long-term interests of the business.
3.May lead to unnecessary spending:
When the end of the budgeting period approaches and managers realise that they have under-spent their budgets, unnecessary spending decisions might be made so that the same level of budget can be justified next year.
4.Training needs must be met:
Setting and keeping to budgets is not easy and all managers with delegated responsibility for budgets will need extensive training in this role.
5.Setting budgets for new projects:
When a major new project is being undertaken, perhaps a one-off building scheme such as a large bridge or tunnel, setting unrealistic budgets may be difficult and frequent revisions in the budgets might be necessary.
