Master Budget Quiz Flashcards
Budget
Detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period
Budgetary control
The use of budgets to control an organizations activities
Budget uses
Promotes coordination among subunits of a company
Summarizes planned activities
Provides a framework for judging performance
Motivates future efforts
Budgets help managers
communicate goals/directions to different departments to help satisfy customers and succeed in marketplace
Judge performance by measuring results against planned objectives and learn about potential problems
Motivates employees to achieve their goals
Operating budget
Covers a one-year period corresponding to a company’s fiscal year
Often divided into quarters of 12 months
Deals with how to best use the limited resources of an organization
Continuous budget
12-month budget that rolls over forward one month (or quarter) as the current month (or quarter) is completed
Challenges in Budgeting
Support of ALL managers is required (Lower managers have to show participation because they are more involved in the day-to-day management)
The budgeting process is time-consuming
Numerous difficulties in forecasting (business risk, unstable economy, competition)
Self-Imposed Budget (Participative)
Budget that is prepared with full cooperation and participation of managers at all levels
Should be reviewed by higher level management to prevent budgetary slack
Most companies issue broad guidelines in terms of overall profits or sales. Lower level should prepare budgets to meet those targets
Advantages of self-imposed budgets
Individuals at all levels of the organization are viewed as members of the team whose judgements are valued by top management
Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers
Motivation is generally higher when individuals participate in setting their own goals than when the goals than when the goals are imposed from above
A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self imposed budgets eliminate this excuse
Human Aspects of Budgeting
Budgetary Slack
Pressure to meet budgeted results might lead employees to engage in unethical behavior or commit fraud
Employees might also prefer to always spend their budgeted amounts, even on unnecessary items, to ensure budgets aren’t reduced for the next period
Budgetary Slack
The practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier
Stretch Targets
Targets that are challenging but achievable to focus efforts on achieving targets
Kaizen Budgeting
A practice whereby each budget process incorporates continuous improvement from past results
Budgeting and Responsibility Accounting
Managers should be held responsible for those items - and only those items - that they can actually control to a significant extent
Master Budget
Core of budgeting process
Expresses management’s operating and financial plans for a specified period
