Module 4 : Budgeting Flashcards
Budget
- is the quantitative expression of a company’s action plan for a future/specific period
- aid to cordinate what needs to be done to implement the plan
Purpose of a budget
- Coordination of activities
- Stimulation of plans
- Authorization of actions (state, non-profit, organizations)
1) –> planning
2) Communication
- Motivation
- Controlling
- Performance judgement
3) –> target setting
What does the budget cover ?
both financial and non-financial aspects of the action plan and serves as a company’s roadmap for a specific period.
Translation of Strategy into Operational Planning
Strategy –> Long run Planning (Strategic plan) –> Long run Budget
Short run Planning (operating plan) –> short run Budget
page 7
Consequences of Budgeting
- expansion
-reduction
Budgetin - cycle (3 Steps)
step 1: analyse company past performance and market feedback, and try to anticipate future changes to derive a budget for the next period.
step 2 : Plans are broken down and divided among the individual divisions of a company
–> Frame of Reference: Specific financial and non- financial expectations that subordinate managers use to compare actual results
Step 3: Controllers support management in analyzing deviations from plans –> corrective actions
Master budget
is an expression of a managements operating and financial plans for a specified period – usually a fiscal year
--> quantification of the managers qualitative goals for a period.
Master budegt contains two types, which ones ?
Operating and Financial Budget
Operating Budget
deal with the best possible use of an organization’s limited resources
Financial Budget
deal with fundraising for the acquisition of resources
Planning Variants (3 types)
- Top Down Planning
- Bottom Up Planning
- Countercurrent
Budget Types (Budget according to planning rhythm)
- Principle of the subsequent planing
- Principle of rolling planning
Functions and Benefits of Budgeting
- Coordination and Communication
- Framework for judging performance
and facilitating learning - Motivation
Problems with sales forecasts (page 30)
- Seasonal fluctuation in sales
-Unpredictability of general economic developments
-Success of advertising
campaigns - Quality of sales staff
Behavioral aspects (Problem with sales forecast)
- Unethical behavior when creating the budget
-Strengthen departmental thinking
-Inappropriate replacement of leadership with financial figures (budgets)
Cost and benefits (Problem with sales forecast)
- Time and resource intensive creation
-Lack of flexibility due to fixed plans /
budgets
-Waste of resources (due to fixed cost budget)
Other challenges (Problem with sales forecast)
- Production capacity
-Pricing policy
Budgeting and Responsibility Accounting
voir graphique page 31
Responsibility center :
-Each manager, regardless of level, is in charge of a responsibility center
- A responsibility center is a part, segment, or subunit of an organization whose manager is
accountable for a specified set of activities - Responsibility accounting is a system that measures the plans, budgets, actions, and actual results of each responsibility center
Budgetary slack
is the practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve
Stretch targets
are challenging but achievable levels of expected performance, intended to create a little discomfort
Kaizen budgeting
explicitly incorporates continuous improvement anticipated during the budget period in the budget numbers
long run budgeting
strategic plan –> more than a year
Short run budgeting
a year or shorter than a year
Top Down Planning
the planning process starts at the top levels of the organization (executives or senior management) and cascades downward
Bottom-Up Planning
bottom-up planning starts at the operational level, with employees or teams who are closest to the action providing input and suggestions for the plan
Countercurrent Planning
This is a hybrid approach that combines elements of both top-down and bottom-up planning. Senior management sets the overall strategic objectives, while lower levels of the organization contribute their insights and feedback.
Principle of Subsequent Planning
the budget is created for a fixed period, typically a year, and remains unchanged throughout that period.
Principle of Rolling Planning
Rolling planning involves continuously updating the budget at regular intervals (e.g., monthly or quarterly)
four types of responsibility center
- Cost center: accountable for costs only
-Profit center: accountable for revenues and costs
- Revenue center: accountable for revenues only
-Investment center: accountable for investments, revenues, and costs
Human aspects of budgeting
-budget slack
-strech targets
-kaizen budget
