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.
