L10- Profit planning and the role of budgeting Flashcards
What is a budget?
A quantitative expression of a proposed plan of action by management for a future time period
It aids in the coordination and implementation of the plan.
What is budgeting?
The process of preparing a budget, putting the plan into action, and tracking progress
It involves planning specific actions to achieve overall business goals.
List the advantages of budgeting.
- Planning (makes people think about the future)
- Coordination and Communication
- Motivation of managers
- Control profit (and operations)
- Evaluate performance and provide benchmark for evaluation
List the disadvantages of budgeting.
- Can be time consuming
- Can be inaccurate and rigid
- Can result in biased forecasts
- “Use-it-or-lose-it” mentality
What is a master budget?
A comprehensive expression of management’s operating and financial plans, summarised in budgeted financial statements
It includes both operating and financing decisions.
What are the components of an operating budget?
- Supporting budget schedules
- Revenue budget
- Production budget in units
- Materials purchase budget
- Labour budget
- Cost of goods sold budget
- Non-manufacturing costs budget
- Budgeted P&L account
What is responsibility accounting?
A system for evaluating the performance of managers based on activities under their supervision
Define controllability in the context of responsibility accounting.
The degree of influence that a specific manager has over costs, revenues, or other items in question
A controllable cost is primarily subject to the influence of a given responsibility centre manager.
What types of responsibility centres exist?
- Cost centre
- Revenue centre
- Profit centre
- Investment centre
What is the conflict often encountered in budgeting?
Planning vs Motivation
Demanding budgets may motivate maximum performance but can be unsuitable for planning purposes.
What is the significance of variance analysis in budgeting?
To assess adverse vs. favorable variances in performance compared to the budget
Fill in the blank: A _______ is any part, segment, or sub-unit of a business that needs control.
responsibility centre
What should be excluded from a manager’s performance report in responsibility accounting?
Uncontrollable costs
What is the primary goal of budgeting?
To plan, coordinate, and control resources effectively
What are Conflicting Roles of budgeting
–Planning vs Motivation
–Planning vs Performance Motivation (Control)
Describe Planning vs Motivation
Demanding budgets that may not be achieved may be appropriate to motivate maximum performance, but they are unsuitable for planning purposes
Describe Planning vs Performance Motivation (Control)
If budgeted sales are used to evaluate the salespeople at the end of the year then salespeople have an incentive to under forecast future sales
What are the 2 types of budgeting period
–Operating Budget
–Rolling Budget
Describe Operating Budget
Once per year, the manager of each budget centre prepares a detailed budget for one year
Describe Rolling Budget
It ensures that a 12 month budget is always available by adding a quarter in the future as the quarter just ended is dropped
Define the variance (for budget)
The difference between the budgeted performance measure and an actual performance measure
Define Adverse Variance
Actual Costs are greater than the budgeted ones OR actual revenues are less than budgeted Revs
Define Favourable Variance
Actual costs are less than the budgeted ones or actual revenues are greater than budgeted ones
What are the 4 Budgeting Philosophies
–Top Down
–Bottom Up
–Incremental
–Zero-Based
Advantage and Disadvantage of top down
+Less coordination and less time consuming
-Less accurate and achievable
Advantage and Disadvantage of Bottom up
+More Accurate and Achievable
-More coordination and more time consuming
Advantage and Disadvantage of Incremental
+Less time consuming
-Might be inaccurate (future vs past)
Advantage and Disadvantage of Zero-based
+Might be more accurate
-More time consuming
Define Operating Decisions
are about the use of scarce resources
Define Financing decisions
deal with how to obtain the funds to acquire those resources.
Components of Financing Decisions
- Capital budget
- Cash budget
- Budgeted balance sheet
- Budgeted statement
of C/F
Define Cost Centre
reports only costs
Define Revenue Centre
reports only revenues
Define Profit Centre
reports revenues, expenses and net profit or net loss
Define Investment Centre
reports revenues, expenses, profit or loss and the investment used by the centre.
What is a controllable cost
is any cost that is primarily subject to the influence of a given responsibility centre manager for a given time period.
What does responsibility accounting focus on
information and knowledge, not control.
