Module 7 Flashcards
What is a budget?
A budget is a detailed plan for acquisition and use of financial and other resources over a specified time period
What is the purpose of budgeting?
Budgeting is for planning and controlling
- Planning involves developing goals and preparing various budgets to achieve those goals
- Controlling is steps taken by managers to seek to ensure that the plan is being followed. Feedback is important, else it is a waste of time
A good budgeting system must provide for both planning and controlling
Good planning without effective control is a waste of time and effort
What are some advantages of budgeting?
Budgeting aids in defining goals and objectives of organization.
It serve as benchmarks for organizational goals.
It serves as a means of allocating resources (projects).
It uncover potential bottlenecks before they occur.
What are the 2 approaches to budgeting?
Self-imposed budget
- This is a budget that people or departments create and control by themselves. They decide how to plan and spend their money without needing approval from others. It gives them freedom to manage their own finances.
Participatory budget
- This type of budget is created by a group of people working together. Instead of one person or department deciding, a community or team collaborates on how to use resources. It’s done openly, so everyone involved knows where the money is going, making the process more fair and democratic
What types of budgets are there?
Operating budets
- This is a budget created for a one-year period.
- It’s usually broken down into smaller periods, like months or quarters.
- For the first three months (first quarter), each month has its own detailed budget. The rest of the year is grouped into larger, quarterly summaries.
Continuous or rolling budgets
- This budget always covers the next 12 months.
- As each month ends, a new month is added to keep it a full 12-month plan.
- This way, the budget is always up to date and can adjust to changes.
Strategic budgeting
- This is a long-term budget that looks beyond just one year.
- The goal is to support the organization’s big-picture plans and future goals.
- It helps the organization think about where they want to be in a few years and plan accordingly.
Master budget
- The master budget is like a big, final budget that combines all the smaller budgets from different parts of a company.
- The master budget consists of operating budgets and cash budgets.
- The master budget has 8 budgets bringing together everything needed for the company’s overall financial plan
Cash budget
- The cash budget is a plan for managing cash inflows and outflows over a set period.
What are the types of budgets in master budget?
Sales budget
Production budget
Direct materials budget
Direct labour bugdet
Manufacturing overhead budget
Selling and administrative expense budget
Ending inventory budget (COGS budget)
What is a budget income statement?
A projected income statement based on all the operating budgets, showing the expected profitability of the organization for the budget period
It estimates total revenues, expenses, and net income.
What is a budgeted balance sheet?
A forecast of the organization’s financial position at the end of the budget period. It includes projections of assets, liabilities, and equity.
What is a business segment?
A segment is a part of an organization and its an activity of an organization
When looking at the visibility of a business segment, what types are there?
Centralized Organizations:
- In a centralized structure, decisions are made mostly at the top by a few people.
- Because of this, individual business segments (like departments or divisions) have less visibility and independence.
Decentralized Organizations:
- In a decentralized structure, authority is spread out, and managers in different segments have more decision-making power.
- Here, segments are more visible, as managers have control over their areas. They are responsible for managing costs, ensuring their segment’s profitability, and preparing their own profit and loss statements.
- This structure allows each segment to operate more independently, making it easier to track how each part of the business is performing.
Distributed Organizations:
- In distributed organizations, decision-making and responsibilities are even more spread out, often at a very local or team level.
- Each segment or team operates autonomously, with high visibility and independence.
- This setup supports flexibility, innovation, and quick decision-making across the organization, as each team or unit manages itself without needing approval from higher levels.
Ctegorize the business segments
Cost centers
o The manager has control over cost
o The manager has no control over revenue
o The manager has no control over investment
o The managers here evaluates cost performance and cost variance
Profit centers
o The manager has control over cost
o The manager has control over revenue
o The manager has no control over investment
o The manager compares targeted profit with the actual profit
Investment centers
o The manager has control over cost
o The manager has control over revenue
o The manager has control over investments
o Investment centers are evaluated on return on investment and residual income.
What is the performance of the investment center measured on?
Measured by Return on investment (RoI) or residual income (RI).
How do we improve RoI?
- Increase sales
- Reduce expenses
- Reduce assets
