Flexed Budgets Flashcards
What are Budgets?
Budgets are statements setting out the planned performance of a business typically in a table made up of numbers. Usually these plans deal with money units (£’s/pence) but they can also consist of other measurable units e.g. units of output. Creating a budget enables an functions–337.php]organisation (like Kraft) to plan ahead and then to check on its performance against budgeted figures.
Budgeting: a cyclical planning process…
What do we think will happen (forecasts)
What do we intend to happen (aims, objectives)
How will we manage this (plans & budgets)
What did happen (actual performance)
What was the difference (variance analysis)
What have we learnt (investigating variances)
What do we think will happen (next round of planning)
Describe the organisational levels of budgets?
Budgets can exist at all levels of the organisation.
Corporate - strategic. mid or long term, 3-5 years.
Operational - business unit annual or mid term 1-2 years.
Tactical - Unit or managerial daily monthly or quarterly
What are the 3 organisational levels of budgets?
Corporate, operational, tactical
Why is it important to understand budgets?
hey are the most likely accounting mechanism that you may be exposed to in for example your placement
Objectives, plans and budgets
Identify business objectives, consider options, prepare a long-term plan based on the most appropriate option, prepare budget (short-term plan)
What is the decision-making, planning and control process?
identify business objectives, consider options, prepare a long term plan based on the most appropriate option(s), prepare short term plans (budgets), perform and collect information on actual performance, respond and collect information on actual performance, respond to divergence and exercise control, revise plans and (budgets) if necessary
What are the 4 areas of usefulness (budgets)?
Forward Planning
Co-ordination
Motivation
Control
What does Periodic/Rolling mean?
budgets can be drawn up for a fixed period or continually updated
What does periodic budget mean?
A budget prepared for a specific time period – specifically a year (which normally coincides with the financial year (or possibly an economic seasonal year) – essentially a one off exercise, changes are rare.
Emphasis monitoring
What does Continual or Rolling Budget mean?
A continually updated budget (for example a 12 month budget with a new 12th month added each time
Emphasis planning
What are the 9 Budget Setting Steps?
Establishing responsibility Communicating guidelines to relevant managers Identify key or limiting factors Prepare the budget for the limiting factor Prepare other draft budgets Review and Co-ordinate budgets Prepare master budgets Communicate budgets Monitor performance against budget
What is step 1 of the budget setting steps
Establishing Responsibility
Due to the impact budgets have on the operation of a organisation there must be authority in the setting process
Senior officer responsible (often the chief financial officer) – the budget officer, possibly a budget committee
What is step 2 of the budget setting steps?
Communicating guidelines to relevant managers
Establishing the ‘context’ within which budgets are drawn up – long term objectives, economic indicators, access to information
What is step 3 of the budget setting steps?
dentify Key or Limiting Factors
Aspects that may stop ‘maximum’ achievement of budgets – availability of capacity (plant? labour? materials?); availability of funds
What is step 4 of the budget setting steps?
Prepare the budget for the limiting factor
This is most often reflected through the Sales or Income budget, which in most circumstances is the first budget drawn up
What is step 5 of the budget setting steps?
Prepare other draft budgets
Prepare all other relevant budgets – these are usually to some degree resultant on the limiting or prime budget setting (eg Sales budget)
Top Down – normal
Bottom Up – rare in practise
What is step 6 of the budget setting steps?
Review and Co-ordinate Budgets
Ensure budgets ‘mesh’ and compliment each other – sort out anomalies and revisions – hopefully with diplomacy but if not AUTHORITY
What is step 7 of the budget setting steps?
Prepare Master Budgets
For example P&L, Balance Sheet and Cash Flow Forecasts
What is step 8 of the budget setting steps?
- Communicate budgets
Pass ‘formally’ agreed budgets to interested parties, budget holders and those responsible for achieving targets
What is step 9 of the budget setting steps?
Monitor Performance against Budget
Compare actual to budget ie the variance….
wow, phew or oops!
What are the 3 budget setting approaches?
Incremental budgeting, zero based budgeting (VBB) and Activity based budgeting (AAB)
What does incremental budgeting mean? budgeting approach
A traditional approach based on what has happened in the past with some adjustment for inflation or other influencing factors
What does Zero based budgeting (ZBB) mean? budgeting approach
Underlying philosophy – all spending needs must be justified – ie no automatic allocation of any spending budget
Bids for funds, justification of need, demonstration of value for money
What does Activity Based Budgeting (ABB) mean? budgeting approach
Taking the principle of activity based costing through to budgeting
What are the 4 significant human behavior’s for the success of budgetary control?
Motivation
Participation
Levels of Performance
Control ability
What does significance of human behavior for the success of budgetary control mean?
Budgetary control can only operate effectively if the people within the system are given adequate consideration
Motivation - significance of human behavior for the success of budgetary control
goal congruence improves morale whereby managers are encouraged to strive for the success of the budget plan.
Participation - significance of human behavior for the success of budgetary control
Managers who feel part of the budgeting process will more easily accept the compromises needed to co-ordinate various aspects of the business.
Levels of Performance - significance of human behavior for the success of budgetary control
easonably attainable budgets are more likely to be accepted by those tasked to achieve them. Stress lowers morale and leads to dysfunctional behaviour
Controllability - significance of human behavior for the success of budgetary control
esponsibility should be linked to authority and the ability to control outcomes. Reporting exemptions from the budget should promote remedial action not automatic blame.
