Unit 13: Budgeting Flashcards
Describe top-down (authoritative) budgeting.
Top-down (authoritative) budgeting is imposed by upper management and therefore has less chance of acceptance by those on whom the budget is imposed. This approach has the advantage of ensuring consistency across functional areas. It is also far less complex and time-consuming than coordinating input from middle and lower levels.
Describe bottom-up (participative) budgeting.
Bottom-up (participative) budgeting is characterized by general guidance from the highest levels of management, followed by extensive input from middle and lower management. Because of this level of participation within the company, there is usually a greater chance of acceptance and optimal decision making. Disadvantages of participative standards setting include its time and money costs. In addition, the quality of participation is affected by the goals, values, beliefs, and expectations of those involved.
Who participates in the budget process?
Participation in the budget preparation process is up and down the organization. The budget begins with the mission statement formulated by the board of directors.
Senior management translates the mission statement into a strategic plan with measurable, realizable goals.
A budget committee/department composed of top management is formed to draft the budget calendar and budget manual. The budget committee/department also reviews and approves the departmental budgets submitted by operating managers.
Middle and lower management receive their budget instructions, draw up their departmental budgets in conformity with the guidelines, and submit them to the budget committee.
What is budgetary slack?
Budgetary slack is the excess of resources budgeted over the resources necessary to achieve organizational goals. This practice results in the underestimation of revenues and overestimation of expenses. This must be avoided if a budget is to have its desired effects.
What are standard costs?
Standard costs are predetermined expectations about how much a unit of input, a unit of output, or a given activity should cost. A standard cost is not just an average of past costs but an objectively determined estimate of what a cost should be. Standards may be based on accounting, engineering, or statistical quality control studies.
Why does an organization use standard costs in budgeting?
The use of standard costs in budgeting allows the standard-cost system to alert management when the actual costs of production differ significantly from the standard.
Describe ideal standards.
Ideal (theoretical) standards are standard costs that are set for production under optimal conditions. For this reason, they are also called perfection or maximum efficiency standards. They are based on the work of the most skilled workers, with no allowance for waste, spoilage, machine breakdowns, or other downtime.
Describe practical standards.
Practical (currently attainable) standards are defined as the performance that is expected to be achieved by reasonably well-trained workers with an allowance for normal spoilage, waste, and downtime.
What is a master budget?
The master budget, also called the comprehensive budget or annual profit plan, encompasses the organization’s operating and financial plans for a specified period (ordinarily a year or single operating cycle).
What is the difference between the operating budget and the financial budget?
In the operating budget, the emphasis is on obtaining and using current resources. In the financial budget, the emphasis is on obtaining the funds needed to purchase operating assets.
What is the first budget prepared in the master budget process?
The sales budget is the first budget prepared because sales volume affects production and purchasing levels, operating expenses, and cash flows. Thus, expectations about sales drive the entire budget process.
What is zero-based budgeting?
Zero-based budgeting (ZBB) is a budget and planning process in which each manager must justify his or her department’s entire budget every budget cycle. Under ZBB, a manager must build the budget every year from a base of zero. All expenditures must be justified regardless of variance from previous years.
Describe a continuous budget.
A continuous (rolling) budget is one that is revised on a regular (continuous) basis.
