MA 1 Budgeting - Big Picture Flashcards
Common types of budgets
Master budget, which includes:
- operating budget
- financing
- cash flow
- budgeted financial statements
specific purpose, such as:
- project budget
- capital budget
4 steps for creating budgets
- identify constraints, potential issues and areas of uncertainty
- gather info
- make future predictions
- implement and gather feedback
budgets allow organizations to improve planning and enhance management control in 5 ways
- predict financial consequences of plans
- compare resource requirements with available resources
- allocate constrained resources to most profitable uses
- communicate financial and operating objectives
- assign responsibility and establish control
Common form of budget manipulation
creating slack by underestimating revenues or oversetimating expenses, making results easier to achieve
Reason for manipulation (3)
- portray company in better light, to obtain financing perhaps
- appease higher-level managers who have more aggressive goals
- make it easier to achieve performance evaluation targets
Define traditional budgeting
+/-
org gets an assigned increase or decrease % across the board \+ easy to do \+ cost-efficient - can allocate resources ineffectively - can cut high performing departments
Define static budgets
+/-
created based upon planned level of sales and/or production, and not adjusted if actual units or activity levels differ.
+ allow for high-level analysis
- not accurate when actual vs estimate is different
Define flexible budgets
+/-
Flexible budgets adjusted automatically for actual level of activity
+ separates cost control from activity control
Define priority budgeting
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Resources allocated based upon their importance to the strategic plan
+ can effecitvely prioritize
- difficult to allocate sometimes
Top-down vs participative budgets
Top-down - upper management sets budget
Participative - line managers take active role in shaping their budget
Zero-based budgeting
+/-
All line items start at zero, and all expenses have to be justified
+ effective at weeding out slack
- very time-consuming and costly
Activity-based budgeting
Each actitivty is analysed then a budgeted cost per unit of actitivy is used to develop costs y function / product / service.
+ more accurate
+ helps identify resource needs
+ links budgeted costs to activity levels
Forecasting definition and use
process of predicting future financial and/or non-financial resutls based upon one or more sets of assumptions
used for strategic managements, operational planning, and budgeting