lecture 7a other budgets Flashcards
What is the top down budget?
It is management setting the main budget against the strategy of the business, little discussion about how targets are set
What is the bottom-up budget?
Is built up from detail provided by each manager responsible for a budget with targets being agreed by all involved
What is a limiting factor?
the constraint that will limit a business’ growth in the following year e.g expected level of sales often determines how a business should start to plan its operations
What is a master budget?
the overall business financial plan made up of a budgeted statement of profit or loss, cash budget and budgeted statement of financial position
What is a functional budget?
the individual departmental budget e.g sales, production and finance departments
What is an incremental budget/ how is it calculated?
calculated by taking the previous year’s actual figures and adjusting for such changes as price inflation
What is a zero-based budget?
starts from first principles and calculates every number from scratch
What is a variance?
difference between budget and actual sales or expenditure
What is a favourable variance?
occurs when sales value is more or expenditure is less than budgeted so profit is higher than budgeted
What is an unfavourable budget?
occurs when sales value is less, or expenditure is greater, than budgeted which will result in profit lower than budgeted
What is a price variance formula?
(actual price-budget) x actual sales volume
What is the volume variance formula?
(actual volume-budgeted) x budgeted selling price
What are the 5 functions of a budget?
Planning
Co-ordinating activities (with different departments)
Communicating plans
Motivating managers (absolute/ideal) (attainable/ realistic)
Controlling activities
Evaluating performance of managers
What are the 4 steps of the budgeting process?
- Construct the budget (use limiting factors to start e.g demand/ capacity)
- Co-ordinate the budget (bring mini budgets together to make master budget)
- Implement the budget (commit resources)
- Control and review (measure performance against target)
How do you calculate the sales revenue?
Selling Price per Unit × Number of Units Sold
What are the 5 important budgets
Sales revenue budget
Production budget
Labour budget
Materials usage budget
Production cost budget
What needs to be covered in the production budget?
Required Production = Sales Volume + Desired Closing Stock − Opening Stock
What needs to be calculated in the labour budget?
Labour Hours Required = Output Units × Labour Hours per Unit
Labour Cost = Labour Hours × Labour Rate per Hour
What needs to be calculated in the material usage budget?
Materials Required = Output Units × Material per Unit
Material Cost = Materials Required × Cost per Unit
What needs to be calculated in the production cost budget?
Total Production Cost = Material Cost + Labour Cost + Fixed Overheads
What is in production cost budget?
Output
Material cost
Labour cost
Fixed overheads
What happens to the fixed overhead?
needs to be divided quarterly
What are the 3 performance evaluation styles identified by Hopwood (1972)?
Budget-Constrained (BC)
Profit-Conscious (PC)
Non-Accounting (NA)
What characterizes the budget-constrained (BC) style of evaluation?
Evaluation is based strictly on staying within budget short-term; exceeding budget = unfavourable evaluation, regardless of context.
What defines the profit-conscious (PC) style?
Budgets are targets, but flexibility is allowed. Overspending may be acceptable if it leads to future profit.
What defines the non-accounting (NA) style?
Accounting data is of minor importance in performance evaluation.
What is a cost centre?
A part of the business where the main responsibility is controlling costs; highly centralised.
What is a profit centre?
A unit responsible for both revenue and cost targets, thus accountable for profits. (can overspend if brings in more revenue)
What is an investment centre?
A unit with responsibility over profit and capital investment decisions (e.g. its own long-term budgets).
What are benefits & drawbacks of cost centres (CCs)?
✅ Consistency
✅ Avoids maverick behaviour
✅ Accountability
❌ Inflexibility
❌ Senior managers overburdened
❌ Limits middle manager development
❌ Over-reliance on budgets
What are benefits & drawbacks of profit centres (PCs)?
✅ Motivation & job satisfaction
❌ Culture change is difficult
❌ Autonomy hard to sell to “Theory X” staff
What are benefits & drawbacks of investment centres (ICs)?
✅ Middle managers develop
✅ Faster decision-making
❌ Hard to find skilled, strategic thinkers
❌ Goal alignment issues
❌ Duplication of functions (e.g. R&D)
