Chapter 32 budget Flashcards
What is a Budget
Budgets are detailed financial plans for future. Set for both sales and costs.
- Must take into account financial needs and consequences.
- Primary benefit of setting financial targets is the ability to measure the performance of each part of the organisations budget.
- Usual to have cost centres and profit centres budgets set for 12 months
7 main BENEFITS of budgets and
financial plans
PARTCM+C
1. PLANNING: realistic future target setting process
- EFFECTIVE RESOURCE ALLOCATION: ensures that
resources organisation has access to and can afford according to priorities - SETTING TARGETS TO BE ACHIEVED: allows realistic target setting and creates motivation to reach targets
- COORDINATION: budget allows for easier
coordination between different departments - MONITORING AND CONTROLLING: necessary to check that financial plans are in place even as conditions change
- MODIFYING: when plans need to be changed, it is possible to determine this with the budget
- MEASURING AND ASSESSING PERFORMANCE: Variance analysis can be used to compare performance with budget.
Variance analysis: difference between budgets and actual performance and analyzing reasons
Key Features of Budgeting
- Not a forecast»_space; Budget are plans
- Budgets are created by the budget holder
- Delegated budgets are usually completed by junior mangers
Stages for preparing the budgets
EOKF BC PSD SBC M»A
1. Establish organizational objectives for year
- Key factors and considerations must be identified by budget holder
- Budgets are coordinated
the key factor budgets prepare first (usually sales) - Sales budget prepared after discussion with sales manager in all branches and divisions of business
- Subsidiary budgets are prepared based on sales created undertaken by committee
- Master budget is prepared, including budgeted income statement and statement of financial position
- Master budget is presented to board for approval
Types of budgets
Sales budgets
Cash budget
Administration budget
Labour cost budget
Material cost budget
Selling and distribution budget
Methods of setting budgets
Incremental Budgeting: Uses last years budget as a basis and adjustments made for this year.
Does not allow for unforeseen events
Zero Budgeting: Setting budgets to zero each year and budget holders must argue case to receive finance. This justification takes time
Flexible Budgeting: Cost budgets for each expense are allowed to vary from budgeted levels. More motivating as it is more relaxed but this budget is easier to produce
Limitations of a budget
- Lack of flexibility can make them unrealistic if changes occur
- Short term focused usually 12 months
- Unnecessary spending just to make budget
- Requires extensive training for delegated budgeting
- Setting realistic budgets often difficult for completely NEW once off projects
Budget evaluation
PAARD
- Without it how would you decide where money can be spent?
- Without sales budget to base other decisions on - difficult to allocate resources
- How would you measure business
performance? - If you cannot monitor performance you cannot alter or fix a situation
- Gives responsibility and sense of direction to all departments of businesses
Variance Analysis use
- Measures differences between
budgets and actual performance throughout the year and for every department - Assists in identifying the reason for deviation
- Can alter future budget and
planning
Possible causes of unfavorable variances
- Revenue is below budget because either fewer units were sold or the SP had to be lowered due to competition
- Actual raw material costs are higher than the planned because either output was higher budgeted or the cost per unit of materials increased
- Labour costs are above budget because either wage rates were raised due to shortage of workers or labour time taken to complete the work was longer than expected
- Overhead costs are higher than budgeted, perhaps due to annual rent rise was above forecast
Possible causes of favorable variances
-Revenue is above budget due to higher than expected economic growth or a competitor closing down
- Raw material costs are lower because either output was below budget or the unit costs of the materials was below budget
- Labour costs are below budget because either lower wage rates or quicker completion of work
- Overhead costs are lower than budgeted, perhaps due to the interest rate on loans was reduced
