Week 7 Flashcards
What is the role of a budget?
– Acts as a financial model that summarises future
operations
– Is often viewed as a core component of an
organisation’s strategic planning and control systems.
What is a budget?
- A budget is a financial plan for future operations
- When developing a budget, need both financial and
nonfinancial information.
What is budgeting?
- A process of developing budgets.
- Involves planning, negotiations and approvals, implementation and review.
- Provides a background to understand budgeting purposes.
What are the purposes of budgeting purposes?
- Facilitates planning (assists in implementing strategies, facilitates communication and coordination among subunits, allocation of resources within firm)
- Facilitating control (provides incentives, assists in performance evaluation, controlling of profits and operations)
Outline the budgeting cycle
- Performance planning: Sets targets for individuals, departments, divisions or entire company.
- Providing a frame of reference: Targets can be broken
down into financial and nonfinancial expectations against
which actual results will be compared - Investigating variations: Management accountants help
managers investigate variations from plans - Corrective action: If necessary, corrective action follows
- Planning again
take into account market feedback, changed conditions, and their own experiences as they begin to make plans for the next period.
What is a master budget?
- Is working document in the process
– Contains the initial plan of what the company intends
to accomplish in the budget period.
– Includes operating and financial plans for a future time
period (usually one year).
– Is summarised in a set of budgeted financial
statements.
What is the time coverage for the initial plan?
Time coverage for the initial plan
* Budgets typically have a set time period (month, quarter,
year).
– The most frequently used budget period is one year.
* This time period can be broken into sub-periods.
– E.g., one year is broken into 12 months
What are rolling budgets?
– Rolling budgets are budgets that are continually
updated by periodically adding a new period, and
dropping the period just completed.
What is a cash budget?
Shows detailed expected cash receipts
and disbursements for the budget period.
Cash balance: A cash budget indicates the months
having cash shortages and excesses.
How are budgets developed?
They are developed along responsibility lines.
What is a responsibility centre?
A part, segment, or subunit of an organisation whose
manager is accountable for a specified set of activities.
What is responsibility accounting?
- Practices of holding managers responsible for the activities and performance of their areas of the business.
- A system that measures the plans, budgets, actions and actual results of each responsibility centre
- Focuses on information sharing, not in laying blame on a particular manager (E.g., The whole organization knows what purchasing department costs, operation department costs, and total costs are.)
What type of responsibility centres are there?
- Cost - accountable for costs only
- Revenue - accountable for revenues only
- Profit - accountable for revenues and costs
- Investment - accountable for revenues, costs and invested capital used by the sub-unit to generate its profit.
What is controllability?
The degree of influence that a manager has over costs, revenues, or related items for which he or she is being held responsible.
What is a controllable cost?
any cost that is primarily subject to the influence of a given responsibility centre manager for a given time period.
True or false: Most costs can be easily controlled because they are under
the sole influence of one manager.
False, because there are so many people above the manager. They are only responsible for wat they can control.
What are the two different types of budget preparation process?
- Top-down budgeting:
Superiors (e.g., CEO) may dominate the budget process or hold subordinates (e.g., purchasing manager) accountable for events they have no control over - Bottom-up budgeting:
- Allow subordinates ( e.g., purchasing department) to develop their own initial estimates for budgeted sales, costs…. → more realistic targets
- Subordinates work hard to achieve a budget goal → more committed
What is the issue with bottom-up budgeting?
Subordinates may build ‘budgetary slack’ into their budgets:
- Underestimate revenues, overestimate costs
- Make budgeted target easily achievable
What is the issue with top-down budgeting?
Issue 1: CEO has less knowledge of purchasing than purchasing manager→ unrealistic targets
Issue 2: purchasing manager is “forced” to accept targets → lack commitment to the targets
What are some solutions when dealing with budgetary slack?
- Good benchmark data: Anchor to the reality - “If A company can achieve it, how come you can’t?”
- Rolling budgets: Anchor to the realistic targets from previous quarters for the current quarter.
- Reward management based on the subsequent accuracy
True or False: To reduce budgetary slack management may incorporate
challenging targets.
False, want to make realistic targets rather than challenging so the budgeted numbers are somewhat achieveable.
What is another name for master budget?
Static budget.
What is a con of the static budget?
It is prepared for a single level of outputs (e.g. 100,000 bottles per month in year 1).
However, a range of levels of outputs are possible when budgeting, each will have different underlying figures.
What is the solution to dealing with a range of level of outputs when budgeting?
Flexible budget as it covers a range of activity and is prepared for more than one level of output/activity.
