l7 : budgeting Flashcards
what is a budget?
comprehensive financial plan which sets out expected route for achieving financial and operational goals of the firm
what are the three elements of budgeting in responsibility accounting?
- responsibility
- accountability
- controllability
how does responsibility relate to budgeting in responsibility accounting?
create responsibility centres when budgeting. eg. profit centres, revenue centres, cost centres
how does accountability relate to budgeting in responsibility accounting?
each responsibility centre must have a form of accountability and perform a function. eg. sets targets, accumulate costs & revenue, measures performace, analyse variances
how does controllability relate to budgeting in responsibility accounting?
controllability principle is applied whereby people are only responsible for what they can control. if something in budget goes wrong, only responsible for specific part.
what are the six steps in the budgeting process?
- budget committee
- choose budget period
- establish budget amounts
- negotiate budget targets
- review and agree budget
- monitor
explain the first step in the budgeting process.
budget committee :
- rules / policy dictate structure & timing (annual or monthly budget?)
- who is involved?
- who makes the final decision?
explain the second step in the budgeting process.
choose budget period :
- long enough to show effects of decisions
- short enough to permit accurate estimates
- often annual, with shorter-term breakdown
- continuous budgets keep “rolling”
- frequent revision needed
explain the third step in the budgeting process.
establish budget amounts :
- realistic & achievable
- consider effects on motivation
- recognise bargaining & participation
- regularly reviewed
what is the role of budgeting for external purposes?
- help make sense of the organisation (values & priorities, performance, financial representation, integrity)
- help set up capital market expectations
what is the role of budgeting for internal purposes?
- help achieve company objectives (translates company objectives into its divisions)
- promotes communication & coordination of activities (communicates performance targets, invites participation-motivation)
- expresses input / output relationships (reduces risk in operation)
- keeps managers informed / motivated (promotes forward & holistic thinking, provides periodic reviews of progress, awareness of what is happening)
- enables feedback control (allows evaluation of performance)
how can budgeting help with maintaining control?
- records actual performance
- can compare actual spending to expected spending
- then provide feedback / intervention based on numbers
how can budgeting be bad for motivation?
can be used to force performance improvement, may slack on quality. can lead to breakdown in corporate ethics.
what are the three elements in the master budget?
- operating budget (sales, admin, production)
- capital expenditure budget
- financial budget (cash, P/L, B/S, source & application of funds)
what is the first thing to consider when preparing a master budget?
the critical limiting factor. anything that restricts ability to maximise sales such as constraints in demand or availability of production resources.
