Profit planning & controlling: Budgeting Flashcards
What are budgets?
Budgets are short-term (often one-year)plans expressed (mainly as some in no. of units) in financial terms
What do budgets provide precise targets in terms of?
✓ Sales volumes/revenues
✓ Production requirements
✓ Cash receipts and payments
What are the impacts of a budget on the management cycle?
- Planning
- Implementation (directing &motivating)-budgets that are challenging but achievable sets a good target
- Measure performace (contro)-against the budget
- Comparing actual to planned performance-e.g. income less than predicted so perhaps better promotional campaign needed
What advantages does a budget have?
Allows managers to:
• Future Plan-prevents short term thinking e.g. no. of flights, prices expected for airline
• Communicate-who is responsible, what are the targets e.g. marketing activities need to achieve 20% more sales
• Evaluate performance of managers-through cost
centres e.g. based on profit
• Motivate managers-through realistic targets
• Control activities-income, expenditure, sales
• Co-ordinate activities-between departments
What is the basic framework of budgeting?
- Aim to reach a master budget made of a SOPL, SOFP and a cash budget (different to cash flow)
- To reach master budget there is a series of detail budgets- sales, production, materials
What is the budget period chosen?
- Annual operating budget may be divided into quarterly or monthly budgets
- or a continuous/perpetual period may be used- usually a twelve-month budget that rolls forward one monthas the current month is completed
What are the different budget systems?
- Top-down
* Participative
What is a top-down budget system?
- Top management–>Middle management–>Supervisor
* Top management produces the budget plan and imposed on middle managers for implementation
What is a participative budget system?
- Supervisor–>Middle Management–>Top management
* Supervisors and middle management create budget pan to be relaid to top management
What are the pros and cons of different budget systems
• Top-down:
- Imposed so no middle manager say
• Participative:
+ middle/supervisors have greater production insight so more achievable/realistic budgets
+ middle management more likely to accept
What is the budget committee?
A standing committee responsible for:
•overall policy matters relating to the budget
•coordinating the preparation i.e format of the budget
e.g. should a regional manager get the results of other regions (pressure)
What are the stages in the budgeting process?
- Communicate objectives and strategy-factors that restrict output
- Determine the factor that restricts output
- Prepare an initial set of budgets
- Negotiate budgets with line managers-get feedback
- Co-ordinate and review budgets
- Accept final set of budgets
- Review budgets on an on-going basis-e.g. new competitors, crisis
Explain the structure of the master budget
- Starts with the limiting factor of the firm e.g. sales budget
- This feeds into the production budget and the selling and admin budget
- Production budget is central to all the other budgets
- Leads to 3 main cost budgets (d. materials, d.labour, MOH) and ending stock budget
- Lots of other interconnections
Explain the sales budget
- The starting point in preparing the master budget,
* a detailed schedule showing expected sales (activity) for the coming periods expressed in units and pounds.
Explain the production budget
- Production must be adequate to meet budgeted sales and provide for sufficient ending stock-because of potential rejects or sudden upsurge in demand
- ending stock carries over as beginning stock for the next month
